This piece first appeared in Reader's Digest in October 2001
The text here may not be identical to the published text
Malcolm Dunn is, on his own admission, very well paid. But he has just cancelled plans to buy a second car and he and his wife Suzanne are re-thinking plans to send 3-year-old Sophie to a private pre-prep school. Malcolm has a good job as a manager in an advertising sales department in one of the UK’s leading financial publications. The magazine is very successful but he sees signs which frighten him.
"The volume of advertising is one of the weathervanes of the economy, when companies face difficulties advertising is one of the first things that goes. Revenues have been falling since April. They are all cutting back, even the banks. Financial advertising is in as deep a recession as it was in 1991."
Malcolm’s pay, which he admits is more than twice average earnings, depends partly on bonuses related to sales targets. But this year they have vanished as advertising revenues have fallen, cutting his income by more than a fifth. So, along with the car and the smart private school, the second holiday for this year has been cancelled.
"We’ve been lucky, I’ve not had to budget terribly hard in the past but now we are reviewing everything. I am in the process of buying a new house, we started that six months ago when things looked good. But if it was not so close – we move in a couple of weeks – I would have cancelled that too because our mortgage payments will be a lot bigger than I would like. Fortunately, because of the work I do and the people I talk to, I have always kept my other debts down. I pay off my credit cards in full each month. And I always have saved. I have a company pension but I also put £100 a month into AVCs and I would only cut back on this if absolutely necessary. When I got a bonus I would put it into savings. That used to be into the stock market. But more recently I just put them into a savings account. I believe cash is the safest place at the moment."
So Sophie will have to be told they cannot go to Florida next year – a nice cottage in England will do. And Malcolm will carry on getting public transport to work so Suzanne can drive to the supermarket – and look for that inexpensive nursery school.
Malcolm sees his business as a straw in the wind of the economic climate that may soon chill us all. "Yes I am afraid the rest of the economy could well follow. Jobs will be cut, spending will fall. It is a vicious downward spiral" More and more economists agree – they fear that a global recession is not just a possibility, it is on its way. Normally, year after year the world gets richer, growing as billions of people work hard to make and do things. But sometimes, in some places, the economy shrinks – we make and do less than we did – and when that happens for six months it is called a recession. It happened in Japan recently. Now the big fear is that the United States of America may follow as its economy slows down rapidly, despite six cuts in interest rates in 2001. If it does, the shockwaves will spread around the world. Britain may have the fourth biggest economy on earth, but if America sneezes, it won’t be a cold we catch. Pneumonia will put us in bed for months.
Already growth in the whole UK economy has fallen well below its expected levels. More worrying is that manufacturing industry is actually shrinking – remember they are the ones who actually make things. For many people it is not just their bonuses that are at risk – their job may go. In one three month period this year around 300,000 jobs were lost in the worldwide telecoms industry alone. In the UK manufacturing, tourism, and hi-tech industries alike are all laying people off. And as Malcolm knows from his investments, the value of companies on the London stock market, which not long ago fell to their lowest for nearly three years, languishes well below the heady heights it reached at the start the 2000.
No individual can prevent recession. But there are things we can do to protect ourselves if the worst happens. The good news is these are sensible things to do anyway. So you won’t look foolish if the fears are unfounded. But if they are not, you will help keep you and your family safe.
Britain groans under the level of personal debt. Loans, credit cards, and overdrafts amount to around £3000 for every adult in the country – and that excludes mortgages. The amount borrowed on credit cards alone has soared by 50% since 1997. In many ways there is nothing wrong with debt – the economy depends on us wanting things now and borrowing to get them. As long as the payments are within your budget, debt is fine. But what if you lose your job? You might get another easily. But if the experts are right, soon there will be fewer jobs – and more people chasing them.
Donna Bradshaw is a director of Fiona Price and Partners and like every good financial advisor debt is top for her. "Number one, get out of debt. Especially high debts on credit cards and bank borrowing".
If you cannot pay it off, plan to get rid of it over a period of time. The most expensive debt is easy to find. Store cards are the worst with interest rates up to 30%. Cut them up and pay them off. If you have Visa or Mastercard debts, start bringing them down. For example, if you have £1000 debt on a Barclaycard, interest rate 18.9% a year, and you just pay the requested minimum 3% per month or £5, it will take you more than 13 years to pay it off at a cost of £848 in interest. But if you double those payments your debt will disappear in less than 5 years and you will only pay £292 in interest. Quadruple them and the debt will disappear in barely two years. Slightly more trouble is changing to a cheaper card – aim for interest of 10% or less. But that is not an excuse to borrow more money!
Bank loans and hire purchase or credit agreements are more difficult. There are usually penalties if you pay them off early. So stick to the repayment schedules and avoid the temptation of taking out any more.
The biggest debt for most of us is our mortgage. Not all independent financial advisers say get rid of it. Amanda Davidson, director of Holden Meehan, says do what you can. "I like reducing debt. A mortgage is expensive. If you pay off the mortgage, first you own your home and that is a liberation. Even if you can only afford to pay off some of it, do that but keep your repayments the same and that will reduce the period of the loan."
The same applies if you change your lender to reduce the payments – keep the payments the same and get that debt down. Ray Boulger of mortgage advisers John Charcol says it is easy to get a better deal.
"If you want to know what your payments will be you can fix your mortgage for three to five years at well under 6%. Cheaper still are the rates that offer a discount on standard rates for up to 5 years. Make sure any new mortgage is flexible – you can make overpayments when you have some spare cash and some let you pay a bit less if you are in difficulties."
If you have not already changed lender, then with a £50,000 debt you may be able to save £1000 a year by switching mortgages. And act soon – some lenders are already keeping the best deals for new borrowers, not for those who swap.
Once you have your debt under control think about saving. Donna Bradshaw says "We always recommend setting up a cash reserve. It should be around three months normal expenditure, more if you are self-employed. And then look at your pension. That is the core investment."
You can earn more than 5% a year on your cash, and if you have not used up your ISA allowance you can put up to £3000 in a cash ISA earning interest tax-free, with no penalties if you have to take the money out.
Putting money into a pension is a better deal than ever. First, charges have come down to 1% of your savings a year or less. Second, you get full tax relief, so there is a present from the Chancellor in every pound you save. Third, your employer may contribute too. If so, turning down a pension is like saying no to a pay rise. Altogether you can put in up to 15% of your earnings into a company scheme – slightly more if you are only paying into a stakeholder or personal pension. Though, like Malcolm, not many people manage that much, preferring to spread their savings into other, more flexible schemes as well.
Malcolm has understandably lost faith in his shares after seeing the way that stock market values have fallen over the last 18 months. But not everyone agrees that shares should be avoided. Diane Hay of the share ownership promotion group ProShare says don’t be afraid of the stock-market.
"Prices are very low and it is a good time to be buying shares with money you can forget about for a few years. No-one knows when the market will rise. But if you put money in a bit each month, if prices rise the money you put in first looks good value. And if they fall you can get more shares for the same money. Experts call it pound cost averaging. I call it buy little and often."
Amanda Davidson agrees "If you are looking to invest over five or more years then the stock market is the place. Filter your money in slowly, not in a lump-sum. And I would not go into a tracker, which follows an index of a lot of shares, I would pick a good fund manager."
Alan Warner, boss of financial planners Douglas Deakin Young, says pick your stocks carefully "When the market turns it will go suddenly. There are some very cautious unit trusts. And if you want to be really cautious, corporate bonds are producing reasonable guaranteed returns with little risk"
Of course if you have money in the stock-market don’t take it out now – you are almost bound to have losses.
Not everyone has savings, and debt can be hard to pay off. But we all spend. And everyone can do that more sensibly. Malcolm is concentrating on the big things. But anyone can save small amounts. For example, make a sandwich for lunch instead of buying one. That can save you £1 a day or more which is £20 a month you can save. And it can stop you spending your lunch hour shopping – which will save even more.
Another useful tip is to keep a track of what you spend. Do not wait for the bank account to frighten you when it arrives at the start of each month. If you bank online you can keep track of your money more easily. And if you do all your accounts on your computer too, that gives you real control over what you spend and what you save.
And remember, just about reasonably modern computer can do this work. So do not be tempted to upgrade to a flat-screen monitor and a Pentium 4 chip? Ask if a DVD player is essential? And will your car last another year?
The car is the biggest expense for most families. So not buying a second one will save Malcolm a lot of money. Buying a new car is a quick way to lose a fortune. The Automobile Association says the average car loses a quarter of its value in the first twelve months. Some can lose even more.
A Peugeot 1.6 litre hatchback will cost £11,665 new. A year later after 10,000 miles it is worth £4000 less. But after the second year, it has only lost another £1000. The lesson according to the AA’s technical expert Dave May is to let someone else take that first year hit.
"I'm giving up my company car because of the hefty tax charges, so I’m looking for a car myself now. I am going for a low-mileage, 12-month-old vehicle. My advice? Buy the youngest second-hand car you can get your hands on – and haggle hard!"
Amanda Davidson, who drives an ancient BMW to save money, says if you live in a city it can be cheaper to take taxis for short journeys and hire a car for the days you really need one. But for her, the real saving begins in the kitchen.
"Takeaways are so expensive – even fish and chips is £5 each. Marks & Spencer ready made meals? Cut them out! Do your own cooking. It’s better and cheaper."
Donna Bradshaw is purer still. "I don’t spend it if I can’t afford it. Much as I love something and want it, if I can’t pay for it I save up. I look on buying something as a treat. And remember, you don’t need 20 pairs of black shoes – five will do!"