Money: A User’s Guide

Copyright

4th Estate

An imprint of HarperCollinsPublishers

1 London Bridge Street

London SE1 9GF

www.4thEstate.co.uk

This eBook first published in Great Britain by 4th Estate in 2018

Copyright © Laura Whateley 2018

Laura Whateley asserts the moral right to be identified as the author of this work

A catalogue record for this book is available from the British Library

The information in this book is for general guidance only and is not legal advice. If you need more details on your rights or legal advice about what action to take, please see an advisor or solicitor. Please note that neither HarperCollins nor the Author offer investment advice. All financial investments carry risk. You should therefore seek independent financial advice before making any investment.

All rights reserved under International and Pan-American Copyright Conventions. By payment of the required fees, you have been granted the non-exclusive, non-transferable right to access and read the text of this e-book on-screen. No part of this text may be reproduced, transmitted, down-loaded, decompiled, reverse engineered, or stored in or introduced into any information storage and retrieval system, in any form or by any means, whether electronic or mechanical, now known or hereinafter invented, without the express written permission of HarperCollins

Source ISBN: 9780008308315

Ebook Edition © August 2018 ISBN: 9780008308322

Version: 2018-08-24

Dedication

To Mum and Dad

Contents

Cover

Title Page

Copyright

Dedication

Introduction

PART ONE

1. The housing crisis and how to rent well

2. How to buy a home

3. The debt you are in and how to handle it

4. How to budget

5. Where to save

6. How to invest in the stock market

7. Everything you need to know about pensions

8. Everything you need to know about tax

9. Understand your bills and insurance

PART TWO

10. Money and love

11. Money and wellbeing

PART THREE

12. Ethical Finance

Thanks

About the Author

About the Publisher

INTRODUCTION

This is a little guide that I could have really done with ten years ago, when I was twenty-three, and fresh off a First Great Western into London, one of the world’s most expensive cities, ready to start my first full-time job as the global economy crashed. Here I address the things I wish I had known about money earlier (the younger you start saving the more time your money has to grow) but was too embarrassed to ask. I assumed everybody else already had it nailed. Turns out that most did not, and still don’t, whatever their seeming competency at being an adult.

My aim is to make sense to those of you who write yourselves off as bad with money, the way I once did and often still do, as you stare down the barrel of your overdraft. It does not have to always be this way. Anyway, what does being bad with money even mean? Failing to check your bank balance regularly and not putting enough in a pension? Or putting so much in your pension that you haven’t had a holiday since 2005? Who is to judge?

Here is a secret: everyone is ‘bad’ with their money sometimes, some people are just better at styling it out and not letting on, some are rich enough that they can keep it well hidden. We are psychologically programmed to make poor financial decisions. There’s a whole Nobel-prize-winning area of academia, known as behavioural economics, to describe how. And because no one likes talking about money, and no two people agree on what it is for, whether it is better to spend it or to save it (clue, there is no right answer), the myth that others know what they are doing is rarely exposed.

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So read on if you have ever wanted to know, what actually is an ISA? What tax do I pay and why? How much should I be saving towards retirement? Should I be investing any money, and if so, how? Should I pay off my student loan? How do mortgages work? What are the best budgeting apps? How do I split money with my other half fairly, and can I ever afford to buy a home, bring up a child, or be the kind of person at ease in small-plate restaurants? What stupid mistakes am I making with my money, and how can I stop it making me feel so crap about myself?

Get through this in an afternoon, and you should know a lot more than you did this morning. I can guarantee that if you follow at least a couple of tips in this book you will have already reimbursed the cover price.

But first, a bit about me, us feckless ‘millennials’, and where we are at.

Please note that I use the term ‘millennial’ reluctantly. It is a word that has come to make me itchy, a crude catch-all for the 14 million or so very different people born between the early 1980s and the year 2000, some of whom are now parents of teenagers, your boss, your lawyer, your surgeon, or your favourite novelist.

In September 2008 I went for an interview for a role as editorial assistant on the Money section at The Times, the optimistic move of a young graduate not yet grown into the full self-doubt phase. The night before, I’d been up late Wikipeding ‘what is a mortgage?’

The timing of this interview, the beginning of my career so far, was significant, though I didn’t see how at the time. Two weeks earlier the world’s fourth-largest investment bank, Lehman Brothers, had collapsed. The headline on the front page of The Times on the day of my interview was alarming: ‘the eye of the storm’, with a photograph of black clouds gathering over the White House. The introduction read:

The financial system lurched closer to a catastrophic breakdown last night after the US Congress dramatically rejected a bailout plan designed to restore confidence to paralysed banks. Wall Street suffered one of its worst days in history.

In 24 hours five banks across the West, including Britain’s Bradford & Bingley, had to be rescued to avoid insolvency … the Dow Jones industrial average of shares dived almost 800 points, losing 7 per cent of its value. It was the worst one-day points fall and the worst percentage fall since Black Monday in 1987.

I had little understanding of what all this meant (‘Dow Jones industrial average’, eh?). Nor many of the increasingly panicked headlines that followed over the next few weeks: ‘World takes fright’ … ‘The scramble to sell: £2.7 trillion wiped off the global value of shares’ … ‘Banks nationalized’ … ‘Slump pushes jobless towards 2 million’.

I would learn, as I explained hopefully to my new editors. They, unbelievably, took me on. A money journalist is one of those things, like Tupperware and condoms, that you need more of in a recession.

Exactly a decade later, still writing for The Times about consumer affairs, now helping readers with their financial woes and blunders as the consumer champion known as ‘Troubleshooter’, I see how much those few weeks changed the world, not least for those of us who received our first pay cheques in the period since the financial crisis took hold.

Lots has improved, as I’ll explain through this book. Banks are desperate to win back our trust, and technology has created countless new opportunities to make it easier to manage money well. But there has been a lasting difficult legacy, especially for those, such as my sister, who are a few years younger than me. Most under-thirties, however diligent, will never be able to buy a decent-sized home in a great part of an exciting British city on their salary alone, especially not while their incomes are reduced by student loans for decades and they are simultaneously trying to save enough into a pension to afford their heating bills when they reach ninety.

Jobs are insecure, wages static. Many, whatever their age, now work longer hours in smaller teams of staff, doing more for relatively less money than their seniors ever did at the same age. The spectre lingers of another recession and a further round of redundancies.

This is coupled with navigating the money-related dilemmas that come as part and parcel of growing up, whatever generation you were born into: how to become financially independent from your parents, how to work out money with your friends without being consumed by status anxiety, how to provide both for yourself and for your family, how to earn more and spend less without missing out on the things that make you happy and life worth living.

I also believe our ability to feel good about money is diminished by the fact that the financial services world loves to obfuscate. A lot of companies make their profit by exploiting our ignorance of how their products really work, maybe cynically, or maybe just because they too overestimate how financially competent their clients really are.

There is a move towards greater transparency, but there is a long way to go. Meanwhile the paralysing choice of financial products out there grows into a dizzying, offputting blur of numbers, percentages and jargon. There are, as I detail in my chapter on household bills, now about half a million subtly different mobile and broadband deals available to ‘choose’ from. Going to the pub is better by far than boring yourself to tears trawling moneysupermarket.com, and everyone who advertises on the site knows it.

The following chapters are a compilation of advice and tips I have picked up about personal finance since the credit crunch and since my student days, inspired by making my own myriad money mistakes while observing and writing about the traps that Times readers have fallen into.

IMPORTANT DISCLAIMER: I am very much not a financial adviser. The only post-school exams I passed involved words (apart from a first-year university statistics and maths resit that continues to give me stress dreams). I’m just a journalist. None of this book constitutes official, legally watertight, financial advice. What it offers are observations and suggestions formed by speaking to real qualified experts, researchers and proper financial advisers about how to avoid common errors.

Even so, I hope this information will help equip you with enough money basics to feel more confident about your own situation and whether or not you can improve it. I hope it will offer a glimpse into how to make better, more informed, more ethical choices, and how to avoid being mugged off by your bank and your mobile-phone network, which will save you far more money than cutting back on a few brunches ever can.

Good luck! If I can do it, so can you. Seriously.

Who this book is for, and how to read it

To state the obvious, the best advice on how to manage your money varies depending on how much of it you have and what stage of life you are at. This presents a dilemma when writing a shortish book. I had to make some decisions about who to address, what to include and what to leave out. I have chosen to focus on advice that I think is most practical for people under the age of forty, who have probably borrowed money to study, and who are earning enough to pay tax and rent a home privately, possibly working out whether or not they can afford to buy their first place.

Most of the advice applies to the whole of the UK, but in some cases laws and processes – such as how to buy a house – differ slightly in Scotland, Northern Ireland and Wales. If you don’t live in England and are in doubt, please check.

There are also things I mention that change year by year – tax allowances, for example, a company’s financial products, or government policy – which may mean that some of what I say here falls out of date. I have written with figures, laws and product recommendations true of autumn 2018.

I write appreciating with respect that there are millions of people in the UK who have to manage on minimum wages, and rely on benefits and food banks. There are millions of Brits who could not fathom having enough cash to invest in the stock market, or contemplate buying their own home in an area of their choosing. I have also carried out research for this book by chatting to some baby boomers and some pensioners who, just like those under forty, said they could really do with tips on how to save more and spend less. So while this book may appeal most to a younger, wealthier-than-average demographic, I hope people of all ages and financial means may find something that helps them in here, whether it is to understand how to get a better deal on your energy, get help to cope with unmanageable debt, decide whether or not you should make a will, or pick the most suitable bank account.

The book has three parts. You can read it in order, or pick out any chapter – they each stand alone – to get some advice on a particular topic that is relevant or concerning to you, such as how to understand your pension.

In PART ONE I go through the areas of personal finance that I think are most relevant to the under-forties, starting with housing and borrowing, through to how to budget, where to put aside savings for your short- and long-term future, and how to understand and reduce both your household bills and the amount of tax you are paying.

In PART TWO I look at how money makes us feel about ourselves and our relationships, offer some advice gathered from counsellors about how to deal with our emotions around money, as well as some practical tips on how to split it while cohabiting. I detail how to manage money if you feel that it is making you unhappy, or exacerbating an existing mental-health condition.

If you read most of the chapters in sequence you should have enough of a grasp of your finances by the end of Part Two to decide whether you want to do something better with them, not just to make yourself richer, but with consideration for wider society.

PART THREE looks at the growing, and important, shift towards arranging our personal finances ethically, from checking the source of the energy you use, to where to invest your pension, in a way that is mindful of its impact on the environment and other people. Being good with your money is not just about making more of it.

Where better to start than with the generation-defining money issue for anyone under forty: where the hell can we afford to live? If arctic rolls and the threat of nuclear war shaped those that came of age in the Seventies, so the Noughties kids have had the Spice Girls, MSN Messenger and a housing crisis.

In November 2017 the estate agent Strutt & Parker (which sells what I would consider to be largely unaffordable properties: a £525,000 cottage in a hamlet outside Totnes, Devon; a £25 million house in Notting Hill, London) issued a report that blew up on Twitter about how first-time buyer couples should be able to save the average £33,000 needed for a UK house deposit, or the insane £64,000 needed for a London house deposit, within just five years by cutting down on six ‘luxuries’.

Some of the numbers: give up one night out a week and save £6,000 annually (that assumes you spend £115 a week on one night out) and £2,640 a year on takeaways (£50 a week!). Make rather than buy sandwiches for another £2,576 (£49.50 a week, but you should still eat lunch over the next five years, and bread is not normally free) and eliminate £832 a year on lottery tickets (£16 a week. Anyone?).

Even after finding that, having given up excessive expenditure that you are unlikely to be making, you are still short if buying in London, here comes the kicker:

‘Those lucky enough to have family that can help will receive an [additional] average of £29,400 towards their goal.’

Whichever way you want to spin it, however much money you think us under-thirty-fives are wasting on Deliveroo, the statistics are tough to argue away. Average house prices have far outstripped average earnings across the UK, which makes it way more expensive than it used to be to buy a house in every part of the country.

In the South East, where, still, many of the most prestigious and lucrative graduate jobs are to be found, it is particularly bad, with London house prices 15.7 times higher than average incomes for people between the ages of twenty-five and thirty-four, according to a report from February 2018 by the think tank the Institute for Fiscal Studies (IFS). Across Great Britain as a whole nearly 40 per cent of twenty-five to thirty-five year olds face a house price to income ratio of at least 10.

A separate report by the Office of National Statistics (ONS) found that in 2017 the price of a home in London was 13 times the wages of full-time workers aged twenty-two to twenty-nine, in 1999 it was 3.9 times the then average salaries. Even in the North East they are 5.5 times, up from 2.46 in 1999.

Bear in mind, as outlined in chapter 2, my guide to whether or not you can afford to buy. You are unlikely to be able to borrow more than four or five times your salary in a mortgage.

Whenever such statistics appear in the press there follows the same reductive, crabby response: ‘Whilst house ownership has collapsed the stag/hen do market in Marbella or Prague has soared,’ one man wrote on thetimes.co.uk. But there was another comment on the coverage of the IFS report that sums it up for me, from someone who says she bought a modest semi in the South East in the 1970s.

It cost £11,500 and I saved a £2,000 deposit (lived with parents), and got a £10,000 mortgage (three times my salary).

I earned around the national average wage, and the house was around four times the national average wage. I drove an Austin 1100 which cost £100 and expired a year later. A bit of a struggle, but not too bad.

Similar houses in the same estate are now selling for 15 times the average wage. The cheapest flat in my area is seven to eight times the average wage. That’s the problem. For sure iPhones, £3 lattes, and holidays don’t help, but they are not the fundamental issue.

FYI, if you went on fifty-two lavish £500 stag or hen dos (sympathies), one every weekend for a whole year, you would have spent £26,000. A typical 20 per cent house deposit in London is now more than £80,000, according to Nationwide Building Society.

With that in mind it makes sense to start any advice on housing with some tips on how to rent well. A third of those born between 1981 and 2000 will be tenants for the rest of their lives, according to the think tank the Resolution Foundation.

I will then move on in chapter 2 to help you work out whether or not you can afford to buy a home, and if you can, how to sort out your credit score, and get yourself the best mortgage possible.

The majority of perma-tenants will be so because they cannot raise a housing deposit big enough to buy close to where they work. I think it is worth stressing, though, that for some people renting is not a result of being unable to buy, but a positive lifestyle decision and a better way of spending, or saving, their salary.

The rental market is riddled with problems, shyster letting agents and landlords promoting property that is not fit for human habitation. Moving constantly between rental properties can be horrendous, as is not knowing when you are going to be booted out or when your rent is going to be raised. Such uncertainty is damaging to mental and physical health, children’s schooling, general morale, your confused cat and your wilting pot plants. All the same, for some tenants spending income on rent offers a better, more flexible, sociable way of existing than tying themselves to a hefty mortgage and a resulting nine-to-five grind for the rest of their days. Maybe you don’t want to carry the responsibility of fixing a leaking roof.

So: you are renting, out of necessity or out of choice. How do you make the best of it?

How to rent a place and lessen the chances of getting ripped off

Should you rent from a letting agent, or a landlord?

When renting privately you will either do so direct from a landlord or through a letting agency. There are pros and cons of each. Going direct to a landlord helps keep fees down, and you may not have to submit to a credit check. Rents can be cheaper because landlords are not paying someone else to find and check tenants for them. I am also convinced that letting agents play a large part in encouraging landlords to raise rents. Cut out the middleman and you may charm your landlord into wanting to hang on to you without charging more. Reliable tenants are assets.

Sites such as Open Rent, No Agent and Homerenter match up tenants and landlords direct, though you may have to pay some low fees if a landlord wants to see a reference.

Going through a letting agent might help if you need repairs doing, when the agent can negotiate with your landlord on your behalf. You also have more consumer protection by signing up to rent through a letting agency. Agents must be part of a redress scheme, such as the Property Ombudsman (TPO), The Property Redress Scheme, and Ombudsman Services: Property. You can turn to these organizations for help with any disputes you may have with your landlord or agent. Check an agent’s membership before you commit.

The massive downside to letting agents is fees. For years letting agents have been making an absolute packet out of charging rip-off fees for it’s hardly clear what – ‘admin’, ‘renewal’, ‘referencing’. The housing charity Shelter says the average letting-agent fees are £200, but has seen cases where tenants are charged £700 before they have paid any deposit. The good news is that the government is to outlaw fees for granting or renewing a tenancy in England and Wales, so by 2019 they should no longer exist (they are already banned in Scotland). Agents will only be able to charge for the rent, a refundable holding deposit and security deposit, and any ‘default fees’, which are penalties in the event that a tenant breaches a clause in their tenancy agreement.

There is concern, however, that agents might exploit this loophole to charge really unreasonable default fees for silly breaches. Shelter has seen people fined for leaving a jar of peanut butter in the cupboard, or failing to remove dust from skirting boards (£3 per skirting board), or totally over-the-top fees for replacing something missing from the inventory, like £100 for a new loo seat when you can buy one for £12.50 in the shops. If you are in this situation, challenge it.