Splurging at Christmas will cost in the New Year
THE IRISH NEWS - 3RD DECEMBER 2002
If Iron Chancellor Gordon Brown busts borrowing plans for the current year by £9 billion and promises £100 billion worth of loans over the next five years, what hope is there for big spenders who struggle to keep their personal finances in trim?
Jennet Vass, senior economist at the Council of Mortgage Lenders said: “The risk of a bumpier ride continues to increase – and nothing the Chancellor said reduces that risk.”
As the UK’s economy wobbles for the first time in years, households are in hock to the tune of £800 billion – a 12-fold increase in the past 20 years, including £647 billion in mortgages and £153 billion on consumer credit. Even before the Chancellor’s speech, surveys indicated that the UK plans another splurge this Christmas.
Financial services provider Goldfish predicts we will spend an average £696 on Christmas presents in the next few weeks – against an average £159 which each of us has set aside to cover Yuletide expenses.
Morgan Stanley surveyed 2,000 credit card holders and predicts the damage will be slightly less; we’ll spend about £375 each on Christmas, it says, and another £101 at the January sales.
So the message is clear: the Chancellor’s ‘wobble’ arrives at a sensitive financial moment in many households, with millions of consumers protected only by the value of their bricks and mortar.
Most already face a substantial hit to weekly budgets when national insurance contributions (NIC’s) rise by one per cent from the beginning of the new financial year at the start of April 2203: employees on £30,000 a year will see take home pay cut by more than £250 a year, and higher rate taxpayers on £50,000 will be more than £500 a year worse off.
Some are already battening down the hatches: The Savings in Britain survey last week from Lloyds Banks says that only 3.5 per cent of us are regular savers. But over the last six months, more than a third of us managed to increase our savings and nearly half the population expects to increase savings over the next six months.
Although the Chancellor refuses to acknowledge that his plans could be blown off course, he admits the UK is not immune to global economic trends. It’s a pretty safe bet that 2003 will be tougher and more challenging to personal finances than 2002. The housing boom is ending, while the high street spending boom is increasingly kept afloat by cut prices and discount sales.
Here’s a checklist to surviving tougher times:
Build a nest egg: Lloyds Bank survey claims that London savers put aside £332 a month, against a national average of £241.
Anybody with three months take-home pay safely set aside has more flexibility – and less hassle – in an emergency. With interest rates so low, there is little need for much more than this in cash – but the suddenness of the last big crash in 1989 was a reminder that savings must be in place before the crunch comes.
Try to get debts down – even if it means cheaper Christmas presents or postponing holidays and new cars. At the end of the second quarter of 2002, the Bank of England warned of “total lending for consumption of more than 10 per cent of personal disposable income, close to the peak reached in 1989.”
Competition has driven personal rates unusually low but most borrowers pay double figure percentage rates and some unauthorised over-drafts cost more than 30 per cent.
Interest rates could rise if doubts intensify about government strategy.
Get housing costs under control: bricks and mortar has been a one way path to riches for so long that we have forgotten the problems when values at last start to fall, or if income shrinks suddenly.
IFA Promotion, representing financial advisors, has produced a guide against housing market uncertainty – covering topics like how to manage mortgage payments should rates rise, remortgaging, renting a room, cutting costs, downsizing, negative equity, and where to get expert and impartial advice.
Assuming that house prices – at best – plateau for some time, it may no longer make sense to buy homes larger than you really need; the government this week announced a new valuation of private homes from 2005, to generate a huge boost in council tax bills from 2007.
Get mortgage payment protection insurance policy in place – to cover monthly mortgage repayments if circumstances change drastically.
Most homebuyers want cover to pay the mortgage in the event of unemployment – but lenders often lock them into much more expensive policies covering accident, sickness and unemployment.
Simon Burgess of independent brokers Burgesses provides unemployment cover on a £500 per month mortgage repayment for just £12.25 per month – which pays up on day one of unemployment.
Too many policies from the lenders only pay up after 60 days. But Burgesses says Hinckley & Rugby Building Society, at least, gives customers a fair deal on mortgage payment protection insurance.
Time to buy shares? Some believe it is, because the market is down about 30 per cent on its peak of 6,930 on 30th December 1999. But it is perfectly possible that 2003 will be the fourth successive year in which share prices fall, particularly if next year brings war and more terrorist atrocities.
The ISA season, allowing investments up to £7,000 before 5th April next year in cash, bonds or shares which are subsequently free of tax on all future income or capital growth, usually lifts off in January.
In 2003, it may be the year to play safe – by investing £3,000 in a mini cash ISA and the rest in a corporate bond fund where income is tax free.
Time to buy a pension? Probably not, bearing in mind the Equitable Life fiasco, the dismal failure of the cut price stakeholder pensions for workers on lower wages and the recent Panorama TV programme showing zilch public confidence in the whole concept.
Until government plans for pensions become clearer, it might make sense to keep long-term savings in more flexible ISAs and bonds. Nationwide launched a three-year fixed rate bond yesterday at five per cent gross (4.75 per cent net) to reward long-term members.
