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Easy Money Book

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Chapt£r 1

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As you read these pages you may well still be at school or college, and the thought
of sticking around any longer than you have to sounds as appealing as a night out
with Michael Barrymore. But whether you leave after GCSEs, or if you stay on
through A- levels, at some stage you will have to consider what you will do, once
you are nudged out of the nest that we call school. However you choose to go
about it, we all eventually have to learn how to flap our financial wings.

And that means, ultimately, you will need your own money, unless you happen to
be Paris Hilton, in which case you merely need a camcorder and a trust fund. So
that’s the nuts and bolts of this book – pounds and pence – what’s it all about,
where can you get it, and what should you do with it when you’ve got some. If
your wallet or purse is as empty as Paris Hilton’s head, with only tumbleweed
blowing through it, read on:

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HOW TO GET THE MOST OUT OF THIS BOOK

Each chapter can be read on its own. You will find that there are lots of practical
tips to help teach you about how to get the most out of your finances. You might
feel that not all of the information is relevant to you at this stage; in time this will
change.
Try and put into practice what is suggested in the following chapters. The amounts
of money that you start with don’t matter; what is more important is learning good
financial habits now, that you can use for the rest of your life.

At this stage you basically have Training

three positive options, aside from
lounging on the couch watching
Hollyoaks (which is not a long term
career strategy). These are:
- Get a job
- Arrange training
- Go for further education
Training is when someone individual or
a company takes you under their wing
and teaches you a certain skill through
regular practice and instruction. For
instance you can spend four years
learning how to be a high voltage
electrician and the next forty trying not
to get electrocuted.

Get a Job Further Education

Sounds the simplest option of the three
but it’s not as easy as all that. You
may well have already had a Saturday
job, or paper round, but your next job
will need to be better paid if it is to
support you, and keep you in kebabs
and PS3 games as you enter adult life
- especially if you choose to move out
of your parents’ home and start life on
your own.
Further Education is the method of
getting more knowledge into that brain
of yours, leading to more specific skills
– for instance, a history degree at
university may lead ultimately to a career
in law. Again, it’s really down to skills
you show at around the age of 15-16,
and where your school qualifications
are leading you. It’s generally assumed
that further education will improve job
opportunities and salary potential later
in life (salary is what you will be paid,
not something you put in salad, which
is something entirely different – do try
to remember this to avoid any future
embarrassment).

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B£FOR£ TAKING YOUR N£XT
ST£PS….
Start to think about what you like
doing, what skills and abilities naturally
come to you, that you feel you may
be able to exploit. Maybe you excel
at writing, or physical activity – some
people have a gift for numbers, some
for words… a few lucky ones for both.
Think about how you could direct your
skills towards a career, and what jobs
may get your foot of the first step of the
ladder that will take you up through the
rest of your career.
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WRITING YOUR CV
Put everything down on a piece of
paper, neatly typed up, including
your personal information, skills,
qualifications and interests. This is
called a Curriculum Vitae or C.V. An
example is included below. It is loaded
with the ammunition you’ll need to get
that job.

Remember, there’s no rush – this is the

rest of your life we’re talking about so
you have a while to get it right – like
Rachel in Friends, your first job in fashion
may well be tidying coat hangers in a
cupboard and making cups of tea. But
it is all valuable experience and may
well lead to a job in Bloomingdales and
a marriage to Brad Pitt. In Manchester,
they used to say your only way off the
estate was through music or football.
Manchester, like all other cities, has
much more on offer than that.

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CURRICULUM VITAE – X XXXXX

31st March 2008

PERSONAL DETAILS

Name Date of birth:

Home Address: Telephone (Home):
XXXXXXXX Telephone (Mobile):
XXXXXXXX E-Mail:
XXXXXXXX

EDUCATION, QUALIFICATIONS & AWARDS

GCSE’s

AS Levels

A Levels

University

CAREER HISTORY

Date from – to

LEISURE INTERESTS

ACHIEVEMENTS

AWARDS & PRIZES

OTHER INFORMATION

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Once you’ve thought about what you might be good at, set about finding
the job. There are seven particular avenues you should consider:
1) Your school, college or university
careers service; Often overlooked
by those more interested in messing
around behind-the-bike-shed, the
careers staff are skilled and can be very
helpful guiding you forwards.
2) The paper; Check the jobs section in
both the local and national newspapers.
Some, such as the Guardian, have
different jobs offered on different days
– Monday for media, Wednesday for
academic etc
3) Your own research; Write off
speculatively to companies you think
may be interested in some of your skills
and abilities. Don’t be disheartened if
progress is slow. You can often get an
“in” by offering to give your time free,
or for expenses. This is called work
experience and can often lead to more
work within that company or affiliated
companies.
4) The Job Centre; Once rather
depressing places, like Albert Square
on a Tuesday night, these have been
brightened up and re-branded as funky
things like Job Centre Plus. They can
be extremely helpful for advice and
opportunities, even if you are merely
looking for something temporary.
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5) Job Agencies; Private firms such as
Manpower and Office Angels will find
jobs for you, either on a permanent
basis, or “temp” (temporary) work, if
you want to be more flexible. Call to
make an appointment to discuss your
abilities and what you are capable of
doing – for instance, office-based work
may require a certain typing speed;
factory work may need you to have
trained on certain machines.
6) Headhunting; Don’t worry; this has
nothing to do with cannibalism or signing
up for a job as someone’s dinner. Later
in life, when you have evolved a certain
level in your profession, a headhunter
may contact you with an offer that’s too
good to refuse… a better-paid job with
another company, perhaps a rival. This
can be controversial but can often yield
fabulous results.
7) Job websites; Go on-line for sites
such as www.fish4jobs.co.uk or
www.connexions.com, which may
host your CV, and tailor your skills
towards certain employers looking for
people such as yourself
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Interviews

Start off by composing your CV, and applying for the jobs you like with a
covering letter. If you are called for interview, dress smartly in a suit or skirt
where appropriate, and research that company, to be able to ask knowledgeable
questions about the operation when prompted. Above all, relax, and try to
appear confident, and in control of the situation.

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01 -TRAINING &

If the thought of getting a job just now fills you with dread… if you are one of
those people for whom work is a four-letter word… and instead would prefer
to stay within education or train for further skills, you have several options.

Prevailing logic runs that if you do spend more time training or become a
“professional” or “skilled” person, your employment and earning potential is
better in the long term. Of course, people find their own way through their
careers, but certainly if you want to be a doctor or lawyer, and you want to roll
in a pimped-up Benz, your learning days are not yet over, young Jedi.

Training:
After leaving school, you have many
choices in training. For example,
you can join an employer on an
apprenticeship programme and learn a
skilled trade, such as an electrician or
plumber.
hoped at school or college, you may
want to look into such classes yourself,
even night classes, to bulk up your CV
and employability. However, most jobs
will involve some element of training
whether formal or otherwise.

This sort of training is often done “on
the job” while working - the employer
helping you learn what is needed for that
particular trade on a day-to-day basis.
In other words, you will be picking the
job up as you go along, and will start
earning immediately, although the initial
years of an apprenticeship usually
involve low pay. The apprenticeship
may also include some college-based
learning, often on a day release basis,
to give you the theoretical side of the
trade, as well as the practical.
Alternatively, some sixteen year olds
go straight to college on a vocational
training program for a career of their
choice. Vocational means the training
will relate directly to a profession,
such as catering or hairdressing. After
you finish the course, you are then
skilled enough to head straight into
employment using the qualifications
gained at college. Many employers
will already have evolved relationships
with certain colleges and gaining
employment may then be smoother.

As well as apprenticeships there are

many different types of training courses
such as computer (ICT) training courses
that individuals can opt to take part in
with or without the help of an employer.
If you haven’t done as well as you

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Info
WHERE TO FIND COURSES

If you are interested in finding out more about training then you should start
looking at the following places;

- Learn Direct
- Local colleges
- Universities
- Learning and Skills Council

The general information telephone lines will be able to direct you to the right
people to speak to.

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£DUCATION:
If you’ve demonstrated strong
academic ability, and have already
earned yourself a swag bag of good
GCSE results you may well want to
consider further education in years 13
and 14, either at your present school or
other academic institution, studying for
AS and A level qualifications. Usually
you’ll pick your strongest four or five
subjects and begin to narrow the focus
of your studies, for instance towards
the arts or sciences, depending on
whether you want to be Tom Cruise or
Albert Einstein.
If you do well at A level the door
then opens to Higher Education… at
University. In your last year at school
you’ll need to apply via the UCAS
system (University College Admission
Service) to several of your favourite
Universities for entry to a course you
would like to go on.
Each university course has an
admissions tutor who will either call
you for an interview (see earlier point)
or make ‘conditional offers’ to selected
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students who are then guaranteed a
place on the course, provided they
achieve the A level grades stipulated in
the conditional offer.
Don’t worry; if you don’t get the grades
you need, you may still get a place
through the clearing system, where
unallocated places are given away. If
you are worried about not making your
grades, then ask your teachers about
the clearing system and how it might
affect you.
Students studying for a degree
at University are referred to as
undergraduates. University is perceived
to be a positive experience by most
that undertake degrees - a time of
learning, but also socialising and
development of your personality and
general interests. Degrees are graded
in order of merit - 1st Class Honours if
you’ve had your head down, 2(1) Class
Honours if you’ve worked when you
had to, 2(2) Class Honours if you went
out a lot, 3rd Class Honours if you rarely
came home and an Ordinary Degree if
you forgot to turn up at all.
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CHOOSING A UNIVERSITY

Go and visit a few Universities during open days or during your school holidays.
It is very important to see the places, where you might decide to live for several
years. You might prefer a big city university or a campus-based institution. You
might want to go to a University with excellent sport facilities or, should you be
doing really rather well, want to go to Oxford or Cambridge (together known as
Oxbridge).

Whatever the case the UK has one of the best set of Universities in the world, so
your choice will be catered for.

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Having completed their degree, most
new graduates (people with degrees)
then seek employment, looking for the
graduate posts offering the employment
and cash that their three-year effort
warrants. There is a lot of competition
for these jobs and this can be a
disillusioning – suddenly the class of
degree awarded can be very important.
For example, some employers will only
accept students who have achieved
at least a 2(1) standard although the
majority of students achieve a 2(2)
degree. The university you attend can
also be important – check the league
tables to see how well your institution
is rated; Type “university league tables”
into Google to find the latest results.
As a graduate in a graduate post, the
majority of people then enjoy a fairly
steady career path.
Some brainiacs are gluttons for
punishment and opt for a further
period of study known as postgraduate
education. A postgraduate degree is
a second degree you might do after
your undergraduate degree. There are
two common types of postgraduate
degree, which are:
- Masters Degrees, which usually
lasts a year or two.
- A Doctorate or PhD, which lasts
three and is the pinnacle of the
education system.
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Many students now feel that, as
many of their peers have degrees,
further education to their further
education is needed, to separate
them from the pack, if a highly prized
professional vocation is desired.
Some careers require a further period
of training usually accompanied by
more examinations after leaving
University. For example, if you wanted
to train and become a lawyer you would
generally need A levels, a law degree
and to complete a further period of
training and examinations after leaving
University and joining a legal practice
as a trainee solicitor. For doctors the
training is on going, up until your 30s,
when you are usually made consultant.
Some companies offer graduate posts,
taking you on at a fairly junior level and
training you up within the company.
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SHOW YOUR SKILLS IN OTHER
AREAS
The government is aiming for about
50% of the UK population to achieve
higher education at University. As
this is a lot more than it once was,
a degree is perhaps not as unique
anymore, and you will have to have
other things on your CV, such as work
experience, to gain employment.
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02 - QUALIFICATIONS
Your qualifications are your results
from all your academic endeavours
and will be included on your C.V.
when you set about going for your
dream job. Certain jobs will require
specific qualifications, or evidence
of specific training. For instance, no
one is going to let you near a crane
until you have been trained to use
it; qualified accountants must show
evidence of continual learning (often
termed “continuing professional
development”) and if you would like
a career as a teacher, you will need
to train towards teacher training
college, or by transferring your
degree into a teaching qualification
by studying the one year P.G.C.E.
qualification (Post Graduate
Certificate of Education). The good
news is that once you have passed
these qualifications, they can sit
safe and sound on your C.V. for the
rest of your career.
As well as academic qualifications,
professional certification demonstrates
your ability to practice your profession
at a certain level. For example, there
are a number of professional bodies
for accountants in the U.K. including
Chartered Accountants (ACA or FCA)
and Chartered Certified Accountants
(ACCA or FCCA) who will grade your
competence and seniority. Equally
there are bodies for everything from
medicine to electric engineering.
Each time you get a new professional
qualification, you will be able to put
letters after your name. Throughout the
course of your career you’ll find you
accumulate more letters than the Post
Office could cope with: B.A., M.A., PhD,
T.W.I.T... - Even though your business
card will need to be a foot long, your
career path, in both the private and
public sector will depend on collecting
these letters like swimming badges.

Info
CHARTERED INSITUTES

A Chartered Institute is an organisation, which has been granted a Royal Charter

by the Queen. Essentially this is the Royal seal or approval. In professional terms
there are institutions which oversee the professional standards of the area they
are responsible for. For example the Institute of Chartered Accountants in England
and Wales oversees the qualification and registration of chartered accountants.

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03 - ANNUAL

Your earnings: income… remuneration… dosh (or whatever you call it).
Basically this is the bottom line – what you’re going to get paid for climbing
into your suit five days a week and going to work for “the man”.

Info
THE MINIMUM WAGE

In this country we have a minimum wage. This is the lowest, legal amount that
someone can earn an hour for paid work. Since October 2007 the amounts have
been;

£5.52 per hour for workers aged 22 years and older

£4.60 per hour for workers aged 18-21
£3.40 per hour for all workers under the age of 18, but not of compulsory school
age.

If you have a job you must make sure you are paid at least this amount, as it is
illegal to be paid any less than this

Climbing up from that point, the sky is literally the limit – in the city of London top
businessmen can make a million a year in bonuses alone. In the middle is the
average earnings, dependent on what sector you are in - the private sector or the
public sector; the manufacturing sector or financial sector etc. In other words,
you won’t be paid the same as a bus driver as you will for running the Bank of
England.

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Stat
KNOW YOUR EARNINGS POTENTIAL

As you get older knowing your earnings potential will become more and more.
This will affect decisions you make and what you are able to do with your life. It
might seem a long way off, but now is the time to start thinking about your future
career. A good place to start research future job choices is to look for the average
earnings of the type of role you might like. This can be easily found on the Internet.
As you will find some jobs pay much, much better than others. The better you do
at school, then the more choices you will have.

Some examples of average earnings for different jobs are:

Teacher’s - £32,000 per year,

Manufacturing workers - £24,960 per year
GP’s - £106,000 per year
Supermarket check-out staff - £11,000 per year.

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04 - CONTRACTS OF

An employer is the person who’s matters. These rights and obligations

going to give you the job and pay
your wages – the boss, the main
man. You will more than likely start
your career as an employee, until
such point as you work your way up
through the company and becoming
an employer yourself. For example
if you went to a supermarket to get
a job, it would be up to the employer
whether or not to employ you. One
day you may be the person making
that decision.
Contracts give certain rights and
obligations to both employer and
employee. The obvious one is that
you have right to be paid for the work
you do. Equally, your employer has a
right to give reasonable instructions for
you to work at your job and to expect
a certain level of work. Other rights
will involve holidays, sick pay and such
are known as contractual terms and
will be laid out for you to read before
you sign your life away on the dotted
line.
Express terms in an employment
contract are those that are agreed
between you and your employer
and ought by law to be contained in
writing. Implied contractual terms
are generally accepted to be fair and
good practice, made with the employer
by a trade union or staff association.
If a contract between an employee
and an employer is broken (breach
of contract) it may have some severe
consequences. Equally, if your
employer breaks his part of the bargain
(for instance discriminating against you
on racial grounds), you will have the
right to sue.

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UNDERSTANDING EMPLOYMENT CONTRACTS

Employment contracts should be consistent with the rights you have in law, such
as the right for female employees to be treated equally with male employees, the
right to equal pay for doing the same job, and the right to do your job without your
boss forcing you to wear a plant pot on your head.

You and your employer can agree whatever other terms you want to be in the
contract, over and above these basic rights. If there is any confusion - for instance
in the case of music publishing should you be the next Greenday - consult a
solicitor, as some people take advantage of youth to gain their signature on unfair
contracts

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WORK£D £XAMPL£ – CONT£NTS OF A TYPICAL £MPLOYM£NT

CONTRACT

A typical written Contract of Employment will include:

- Names of you and your employer - Maternity / paternity leave

- Title of the job - Joining of pension scheme

- Where the job is based - Notice (length of time) you are

- Date of work to start
- Hours of work
- Amount of pay / overtime / bonus
- How often you are paid, i.e.
weekly or monthly.
entitled to if dismissed
- Confidentiality
- How much warning you must give
the employer if you want to leave
the job
- Disciplinary procedures

- Holiday leave / pay - Dismissal procedures

- Sick pay - Grievance procedures

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MAKE SURE YOU CHECK FOR ATTACHED TERMS

Not all the express contractual terms may be in one document – perhaps more
detail may be in a separate written statement of main terms and conditions, in an
office manual, in letters sent by your employer, or announcements on an office
notice board. Make sure you’re aware of all the details of what you are signing up
to. Ask your prospective employer to provide all the information for you.

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KEEP A RECORD OF ALL COMMUNICATION WITH A NEW EMPLOYER

Sometime you might not get a written contract. If this happens make sure you
keep a note of everything said between you and your employer and ideally have
a witness to that, in case there is any dispute. Be assured though, a contract of
employment will always exist between an employee and employer. It may not
be written but a contract will still exist. As soon as someone starts paying you
to do something, that very exchange forms the basis of a contract and you are
protected under the Law.

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R£DUNDANCY:
Redundancy refers to the employer
ending your role at the company,
perhaps because orders have dried
up, or else the money to pay you has.
The good news is that contractually,
your employer will need to follow strict
legal procedures to ensure that the
redundancy is fair. For example, they
must consult with their staff to select
people fairly for redundancy and not
because of their football affiliations,
otherwise redundancies will be treated
as unfair dismissal and the employee
would be entitled to compensation.
Sometimes redundancies are
“voluntary”, especially as money may
be offered to ease the blow.
DISMISSAL:
In other words this means getting the
elbow, the old heave ho, getting your
marching orders. In more grown up
terms, it means the termination of a
contract of employment. This means
that someone has been sacked or told
to transfer to another job. There can
be many reasons why an employer
may dismiss an employee including
gross neglect, persistent absence or
continually coming into work dressed
only in a pair of clown’s trousers and
braces and promptly pushing a pie into
your boss’ face. Then, in the words of
Alan Sugar… you’re fired!
In any case, at first you should try to
sort out this matter formally by following
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the grievance procedure outlined in the
Contract of Employment. If it doesn’t
work you have the right to take the
employer to an Industrial Tribunal,
similar to a Court hearing.
NOT B£ING ABL£ TO WORK
THROUGH ILL H£ALTH:
Sick pay is the money you’ll get from
your firm when you are genuinely forced
to take time off work through ill health.
Some employers pay employees in
full for a certain length of time, others
have a down-grading scale, whereas
others only pay the minimum required
by law - statutory sick pay. In these
circumstances an employee may have
to rely on state benefits if they have
insufficient money to live on. If you
are self-employed you will need to
sort this out yourself, and some self-
employed people will have their own
private insurance policies to cover
them for such an event
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05 - S£LF-

As opposed to getting a job and
becoming an employee, some people
prefer to employ themselves, and
become self-employed. In other
words, instead of getting a job as an
electrician, you may decide to set up
on your own plumbing business and
become your own boss.
It all sounds a little dry but the pert
bottom line is that if you are confident
that you can capitalise on your abilities,
self-employment can give a level of
control, freedom and satisfaction that
straight employment rarely does.

Equally, if you’re working for, say, a

plumbing company, you need to make
sure you are actually employed by that
company, because that will affect your
employment rights and tax situation,
such as redundancy pay and holiday
pay. An employer may call someone
self-employed or a ‘casual worker’
when that person is legally their
employee. Sometimes employers do
this so they can avoid having to pay tax
and national insurance, and basically
get out of their responsibilities to you,
as an employee.
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LEARN TO SAVE
Saving money is, of course, a lot less
fun than spending it, but if you are
able to squirrel some of your earnings
away, it will always help cushion any
blows in the future. Even if you set
up a direct debit of £10 a week into a
savings account... every little helps.

If your employer provides you with

work and also controls the work you
do, it generally means you are an
employee. How you are paid may also
help determine whether you are a self-
employed person or an employee. If you
are paid at regular intervals rather than
being paid when the job is done, that
basically means you are an employee.
Equally, to truly be self-employed you
need to have three or more clients
of your own, rather than constantly
working for the same person.

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CONCLUSION
From the moment your nan gives or
puts a shilling in for your piggy bank for
doing that “I’m a little tea-pot” dance,
until the moment you cash your first
paycheck you will be earning money.
Better than that you will actually be
able to spend your wages.

As you enter adult life you are going to

need money, for anything from rent to
rehab. Earning money, for yourself, for
doing an honest day’s toil, will always
feel rewarding as you learn to support
yourself, and fund yourself, through
life.

To lead a happy life, do your best at

whatever you do. For some this will
mean getting excellent grades at
school, for others it will mean practising
an instrument or sport or learning a set
of skills. There are lots of people and
organisations out there that can help
you meet your goals. You just need to
be clear on what it is you want. What
you do in your life is totally up to you.
Make sure that you are the type of
person who takes conscious decisions

Now that you have finished this chapter,

it would be worth taking a break, before
starting the next one. Think about what
you want from life and this help you
better understand the relevance of the
coming pages.

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02. Borrowing

Chapt£r 2
Borrowing
Borrowing money essentially means asking for a loan and promising to
pay it back. Undoubtedly you will have already borrowed money from a
financial institution in your early years. That financial institution is called
“Your Parents”. There are many advantages of borrowing money from the
B.O.M.A.D. (Bank of Mum And Dad) - principally that the usual interest rate
they will expect back will be 0%, and indeed they may even drip-feed you
pocket money for doing not a lot, apart from the occasional bout of extreme
hoovering or advanced hedge trimming. Unfortunately, unless you become
a Premiership footballer, this will be the last time you will be given money for
doing very little. In the future, they really will want it back. Plus interest.

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 02. Borrowing

Info
LOANS

There are two parts to any loan. These are the “capital” and the “interest”.

The capital is the amount you borrow. You can use this for whatever you like or
according to the conditions of the loan.

The interest is the amount you pay back on top of the loan for the privilege of
borrowing the money. The total interest you pay back is determined by the interest
rate (an agreed %, when you take the loan out) and repayment period (the amount
of time you agree to repay the loan in).

S£CUR£D AND UNS£CUR£D

BORROWING:
As opposed to loans from your parents,
in your adult life when you borrow
money will need to “secure” it against
one of your biggest assets – usually
your house or car – and not what you
perceive to be your biggest assets,
which may be your hairstyle or 50cent
impression. This is called secured
borrowing.
usually be higher than a secured loan
– for instance, the credit rating of the
borrower is a vital factor.
This will often be the first form of
borrowing you will encounter in adult
life, in the form of such things as a
credit card, personal loan or student
overdraft.

If you fail to keep up your repayments,

the lender can then take (re)possession
of that asset and that ain’t pretty.
A slightly more costly way of getting
cash is called unsecured borrowing.
This is a loan or amount of credit given
to you when you need some extra
money - for instance around Christmas,
for furniture or to do up your house -
but has not been secured by the lender.
The interest rate charged will depend
on a number of factors but because of
the perceived risk by the lender, it will
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TRY TO AVOID DEBT
Where possible avoid debt. When you
turn 18 or head to University banks
and other companies will start to offer
you all sorts of loans. They will market
their products to you aggressively.
Remember the debt always has to be
repaid. It is far better to live off what
you can afford.

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02. Borrowing

Info
£XAMPL£S OF UNS£CUR£D
LOANS:

CREDIT RATINGS AND CREDIT FAMILY & FRI£NDS:

REFERENCE AGENCIES
Your credit rating (sometimes called
your credit history) is the record of
borrowing. This information is collected
by credit reference agencies, such as
Experian or Equifax, and is sold to
money lenders, like banks or credit
card companies. If you have borrowed
money and repaid it as agreed then
you will have a healthy credit rating.
If however you have borrowed money
and you have failed to repay it or have
missed payments then this can affect
your credit rating.
Keeping a good credit rating (by
borrowing sensibly and always
repaying) is important because you will
come to rely on it later in life, especially
when you want to buy a house
Don’t laugh – friends and family are
very often important sources of finance,
with parents increasingly helping their
kids through university and getting on
the property ladder. For example,
if a person wants to buy a house for
£120,000, but cannot find all of the
£6,000 deposit needed, they may ask
their close family members, such as
their mum or dad, if they will lend them
some of the money.
Unless we’re talking about a certain
family from Sicily, your family is usually
more lenient and easy to deal with, and
may be able to give you a longer amount
of time to repay the loan. However you
should not see this as a reason to take
advantage, as money matters are often
the root cause of the collapse of family
and other relationships.

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ALWAYS MAINTAIN HEALTHY RELATIONSHIPS WITH FAMILY AND
FRIENDS WHEN IT COMES TO MONEY

Borrowing money from your friends and family (or even lending it to them, if you
have it!) can be problematic. Disagreements over money are some of the most
common sources of friction between friends and family. Always make sure you
are open and upfront in any financial dealings you have. If you have any problems,
then let the people you have borrowed money from know. They will be more
understanding, if given advance warning.

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P£RSONAL LOANS:
The basic bottom line of borrowing.
You may be bum-sore from sitting on
packing crates and feel it’s time to go
and buy a super-bling 3-piece suite,
but need help to pay. Unsecured
personal loans from banks and the like
are not dissimilar in how they operate
to secured personal loans highlighted
above.
However, as no security is offered, the
interest rates are usually higher and
such loans are often difficult for people
with a poor credit rating to obtain.
CR£DIT CARDS:
Ah yes, our cute little plastic friends
who sit so innocently in our wallets and
purses, whispering… use me to buy
those Nikes, that way you’re not really
paying for them at all. Well, here’s
the news, folks – you are paying for
it, plus interest. And if you’ve been a
little carefree, the monthly bill can often
come around fast, and promptly bite
you on the posterior.
Credit cards are, in fact, simply another
example of unsecured borrowing.
Careless use of credit cards have led
to a massive increase in the number of
young people facing serious financial
difficulty, and is one of the simplest
ways to hit that slippery slope.
The topic is therefore covered in greater
detail in Chapter Five.
02. Borrowing
CATALOGU£S:
These usually weigh about as much as a
house brick and often end up propping
up the end of a wonky table. However,
many people prefer shopping this way,
using the comfort of their own home
to make their choices, for example
from the pages of the Littlewoods, JD
Sports or Next catalogues. This form
of retailing is often referred to as ‘home
shopping’ (and if you need that concept
defined to you further, you need your
brain examining). The customer selects
items from the catalogue, orders them
by phone or from an agent who calls
round, and the items are delivered by
courier.
The customer is given a long period
of time, sometimes up to one year for
larger purchases, to pay for the goods,
a process known as hire purchase,
because you have in effect hired the
goods until they are fully paid for.
Sometimes companies’ offer their
products interest-free, sometimes
products appear to be interest free but
a quick shuffle on Dad’s calculator and
you’ll realise your new Nikes would
actually have been cheaper if you paid
up-front in cash from another store.
And be warned… if you miss payments
the goods can be seized just as quick
as you got them in the first place.
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02. Borrowing
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ALWAYS CHECK THE INTEREST
RATE
If you do ever take out a loan, credit
card or store card make sure you
always know what the interest rate is as
a rule of thumb an interest rate above
10% interest is generally regarded as
being expensive.
S£CUR£D BORROWING:
Later in life, when you have moved
through your financial education from
pocket money to credit cards, you will
undoubtedly be in a position to move
onto secured borrowing.
Secured borrowing is typically the
type of loan that you’ll need to buy a
major asset with - for example, a car
or a house. As the loan is secured
against the subject of the purchase,
there are few financial risks for the
lender – bottom line, if you don’t
make your payments and continually
“default”, you’ll find the bank will want
your house or car back, which they’ll
probably then flog at auction, so they
can recover what they can from their
loan. Generally speaking, lenders
are therefore able to offer better terms
on secured loans, because they’ve
got something secured and thus
something up their sleeve if something
goes wrong.
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These are all potential sources for
business capital. By doing this you
become your own bank, giving some
sort of control over your own future
but you will need to be realistic when
thinking about how to pay this money
back, and also face up to the possible
consequences if it goes avocado-
shaped. For example, using credit
cards is a very expensive way of
raising money as the interest rates
can be extortinate - you would be far
better taking a loan from the insurance
company against the value of any life
insurance policy you hold with them.
However, this would mean the policy
would provide less funds to provide for
your family on your death.
Examples of secured loans include:
Mortgages
Hire purchase loans
Car loans
Home owner loans

1) MORTGAG£S
Mortgages are the most common form
of secured loan that you are likely to
come across. When you come to buy a
house it will be more than likely that you
will need to borrow money from a bank
or building society to pay for it. This is
called a mortgage and will probably be
the largest loan you will ever take out.
2) HIR£ PURCHAS£ LOANS
Hire purchase, otherwise known
as HP (don’t confuse this with the
condiment or you’ll spend six grand
on brown sauce), is the term for a form
of payment where, instead of paying
for the product up front, you can take
it home, and pay it off in instalments
over a period or a year or so. Basically
the contract allows the buyer to ‘hire’
the goods for a monthly rent. After the
final monthly payment has been made
the ‘hirer’ becomes the legal owner of
the goods – in other words, the booty
is yours.
3) CAR LOANS
So you see yourself driving a pimped
up Smart car, but the pennies in
your piggybank will only stretch to a
skateboard. Well, car loans are loans
from your bank or building society
specifically for the purpose of buying
something involving wheels, as people
appreciate cars and bikes cost more
than most people can afford.
02. Borrowing
The lender will decide whether to loan
you the cash based on your previous
history with them, and whether you’ve
been a good boy or girl in terms of
previous loans (the bank will have their
own rating system for this). The loan is
secured on the vehicle and if you don’t
keep up with the monthly repayments,
you can enjoy the sight of your wheels
being towed away over the horizon.
4) HOM£OWN£R LOANS
Your house will probably be the biggest
asset you will acquire during your life,
unless you go shopping with Posh
Spice on Rodeo Drive. And you can
borrow money against it, even if you
already have a mortgage. These
secured loans are often referred to as
‘homeowner loans’ and you’ll often see
them advertised on TV by the likes of
Carol Vorderman.
The loan is a ‘second legal charge’ on
the property - in other words, if you lose
your house, the mortgage company
gets first dibs on the proceeds, and
then the loan will be sorted out with
whatever remains. Unfortunately
you may have noticed someone does
not figure in that equation. You, the
previous owner. Yep, you are on your
ear, son.
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02. Borrowing

Watch
ALWAYS BE AWARE OF THE TERMS OF YOUR LOAN

The rate of interest is often lower on a home owner loan, as lenders have some
security. In effect, you have thrown your house keys onto the table.

This can be a very major disadvantage as there is the chance your home could be
repossessed and you’ll end up on your mate’s couch or else back on the bottom
bunk you last slept in when you were 16. This fact is usually contained in the very
fast technical spiel they spin out right at the end of the TV adverts. Before you
decide to take out a homeowner loan, think very seriously about would happen if
you cannot make the repayments. Figure out a monthly budget to make sure you
can repay the loan.

CONSOLIDATION LOANS
Another type of secured, personal the repayment schedule for the new
loan is a consolidation loan. If you loan is longer than for the original
have taken out several loans or credit debts, it is likely to cost you a lot more
cards you might take out one single in actual interest in the long run. There
loan to pay off all the others. This is a may also be a large arrangement fee.
consolidation loan. But for some folk in a real struggle, this
may be one way to manage their debt
Again, these are heavily TV-advertised problem.
these days, capitalising on the fact
that many young people have already
got themselves into a right pickle with
credit cards, overdrafts and loans,
and may prefer to bundle it into one
loan and, effectively, have one person
chasing you instead of three.

Many companies can offer a lower

interest rate than you are paying, some
even offer to negotiate with your debtors
to try to reduce your debt. However,
here’s the payback catch (you knew
there’d be one, didn’t you?): because

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 02. Borrowing

WORK£D £XAMPL£ OF A CONSOLIDATION LOAN

You might find that you have taken out the following loans;

1) A personal loan, which you still owe £2,500, with an interest rate of 11%

2) A car loan, which you still owe £4,500, with an interest rate of 7.5%

3) A credit card, which you have an outstanding balance of £1,500, with an

interest rate of 21%

4) A credit card, which you have an outstanding balance of £1,500, with an

interest rate of 19.5%

In total you owe £10,000 at an average interest rate of 12.2%

If you were to take out a consolidation loan you could borrow one new loan of
£10,000 at an interest rate of say 9%. You can use the capital of this loan to pay
off your old debts. The advantage now is that you have only one loan at a lower
rate of interest, than the combined rates of the old four loans. This means your
borrowing has become a lot cheaper!

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02. Borrowing

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SOME POINTS TO CONSIDER BEFORE TAKING A
CONSOLIDATION LOAN

Before entering into a consolidated loan take advice from one of the free advisory
services such as the Government’s Consumer Credit Counselling Service, or Pay
plan, which is funded by the credit industry. Equally, try to approach your debtors
– your bank etc – and explain to them you’ve got yourself into a fix and see what
can be done. Despite the appeal, nothing will be gained from filing credit card
statements, unopened, under “bin” and burying your head in the sand. Always
keep the channels of communication open – the bank will always prefer to hear
from you, no matter what the news.

BUSIN£SS LOANS
Instead of working for “the man”,
some people chose to utilise their own
abilities and, in effect, give themselves
a job. If you are self-employed you can
apply for a business loan whether you
are a sole trader, partnership or limited
company (these are the most common
types of start-up company). You can
use the cash to actually set up the
business, based on the business plan,
or to help fund business expansion.

The bank or other financial institution

will consider whether it is a good idea
to lend the money. For example, if you
have a good track record of making
profits, or if you’ve never defaulted on
a loan. If you’re business plan is for a
company selling sand in Saudi Arabia,
you are unlikely to get the cash.

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CONCLUSION
Don’t worry – very few people, whether employed or self-employed, are able to
get through their lives without borrowing money in some form or other. Even large
companies and banks borrow money; so it’s perfectly normal to need a little help
here or there, when your budget has gone up the spout.

Equally, people feel buying a home is a very sound financial move but at the end of
the day, this is merely another means of borrowing money. On the one hand you
may have a house worth £500,000; on the other you may owe the bank £450,000
for the privilege. So who really owns the house when all’s said and done?

Your financial dealings will involve cash flying in and out of various accounts, and
all banks accept you will need to borrow money from time to time – it’s all part of
the evolution of the financial world. Above all it is important to keep a cool head
when borrowing money. Always do the maths to work out what you will have to
repay and that you can afford to do this.

If you remember nothing else in this chapter, remember not to borrow more
than you can afford to repay. If you stick to this basic rule your life will be much
happier.

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03. Saving

Chapt£r 3
SAVING
Ah yes, the most sensible thing you can do with your cash aside from knitting
it into a neat scarf, or else betting the lot on the odds of Elvis Presley flying a
UFO into the Loch Ness Monster’s head. No kidding - you can actually make
that bet, and the odds are better than winning the National Lottery. Go figure
or, as our American cousins might say… you do the math!

The variety of ways to part you from your cash are endless. When you start
earning money, as detailed in Chapter 1, the general idea is that your income
for the work you do will be higher than your weekly expenses. As suggested,
it’s best to draw up a budget detailing income and fixed outgoings, such as
rent, food, travel etc. Whatever’s left after you’ve paid all that out is your
disposable income, and as well as disposing some of it in the local chip shop,
it is also an extremely good idea for you to start stashing some of this away,
as savings. Because of the interest the bank will pay you for the honour of
looking after your money, this pile will increase – plus, it may not be so easy
for you to lay your paws on it and blow it all on bonkers Elvis-related bets
and cod fritters.

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SAVE 10% OF YOUR INCOME
You are probably at an age now where you will have some form of income. This
might come from your parents or a part time job you have. A really useful tip is
to try to learn to save 1/10th of your income. Once you have learned to do this, it
becomes a habit. You will be amazed at how quickly your savings will add up. If
you want to be rich one day, then this little piece of advice could take you a long
way to achieving this goal.

When the evening news comes on and
the chap behind the desk starts talking
about Bank of England interest rates,
don’t switch off because this will affect
the rate of interest you will ultimately
be paid on these savings. If you have
a mortgage and owe money based on
those interest rates, it is bad news if
they go up. Conversely, if you’re saving
your pennies, it’s good news, because
your little pile will be piled a little higher.
Sometimes you need interest rates to
be low; sometimes you need them to
be high; sometimes it feels like you
can never win. If you’ve done well with
the interest on your savings, proceed
immediately to your local confectioners
and buy a big box of choccies for a
mate with a big mortgage,because he
is not going to be in a good mood at
all.
So, the point of saving is not boring
and miserly, it just means your money
will accrue (build up) for your future.
Then, when you need it for something
really big, like a car, holiday or deposit
on an exotic tortoise, you can tap into
those savings and find they will be
worth more than the sum that you have
put in. For many people, it’s simply a
comfort to know that money is there, if
they need it for a rainy day.
Putting money away for a rainy day is
something you will be aware of from
your days dropping pennies into your
piggy bank (and then smashing it open
about a day later when you realise the
new Beano has come out and you
already need those pennies back). Of
course the piggy bank offers no interest
rates… in other words, you’ll get the
same number of pennies as you put
in (as long as your pesky kid brother
hasn’t figured how to lever some out
with some Bluetac and a piece of
string). Some people are happy to
keep that philosophy, only later in life
they don’t bother with a piggy bank,
they just shove it in a shoe-box and
hide it under their bed, or save with the
local Christmas fund.
However you’re already reading this
book, so we know you’re wiser than
that. Most people with spare cash
appreciate the value of putting it into
a bank, building society or one of the
other methods explained here. Then
you can kick back and relax, as your
money works for you. Easy money!

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03. Saving

COMPOUND INTER£ST:
Compound interest can at first seem to be a bit confusing but once you have
grasped how it works, this really is the key to your future financial success.

Compound interest is interest which is applied both to the principal (capital) of

the loan and accumulated interest of prior period.

For example if you put £100 into a savings account at an annual interest rate
of 10% after three years saving the calculation will look like:

Interest Rate Balance at Balance at

Year start of year Calculation end of year

1 10% £100 £100 + (£100 * 10%) £110

= £110

£110 + (£110 * 10%)

2 10% £110 £121
= £121

£121 + (£121 * 10%)

3 10% £121 £133.10
= £133.10

So at the end of three years your money would be worth £133.10.

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 03. Saving

TYP£S OF SAVING:
There are many different forms of
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savings, beyond piggy banks and INVESTING
stuffing it in your mattress. These
include: When you have saved up some money
you will want to start thinking about
- Bank and Building Society Deposit investing. This might still be someway
- Accounts off but remember the following tips:
- National Savings
1) Invest with caution, only take risks
- Individual Savings Accounts
once you understand more about what
- Equities you are investing in.
- Bonds
- Commodities 2) Seek advice from professionals and
- Pensions more experienced investors.

Remember, saving is simply an easy 3) Always do your own research. The

way to make your money make more Internet is a particularly useful tool for
money. What you need to consider this.
are things like: what amount of money
you can afford to save and how long
you will be able to do without it. These
factors will direct the method in which
you can save, and what will work best
for you.

Depending on what you want to see

your money doing, we will consider
each of the saving types in turn:

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03. Saving

BANK AND BUILDING SOCI£TY
D£POSIT ACCOUNTS:
When it comes to saving, your first
step into the financial world will be
to set up a current account with
a bank or building society or other
financial institution (even supermarkets
like Tesco are now offering financial
services, so you can pop in for a bag of
frozen peas and a pension!)
If you’re a student, this is an especially
good move, as most of the banks offer
enticements to sign up, such as rail
cards and record tokens. Bear in mind
that this is a big step. Although people
tend to move banks more frequently
these days, many will stick with the
same bank through education and
employment.
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GET AN ACCOUNT WITH THE
BEST INTEREST RATE
One thing to bear in mind is that
your average high street bank will
not necessarily have the best interest
rates on offer. But, if you want ease
of access, convenience and a flexible
place to save, this is one of the first
places you should look. Remember
– the interest rate will depend on the
amount you can put in, and how long
you can leave it there, so if you’re going
to need to dip in quite frequently, a
simple savings account is a good bet.

As well as a current account, your

bank etc may also offer you the choice
to establish a deposit account, or
savings account. A deposit account
is an essential building block of
good financial planning. As detailed,
whether for an unexpected household
bill, or sudden tax demand, a readily
accessible emergency fund makes
very good sense. Also, because it is a
secure cash fund, it can also
earn you a very good rate of interest.

You can arrange to feed money into

that savings account as soon as you
are paid, so you don’t even miss it.
Even if it’s £10 a week, it will all help
and will slowly build into a nice pile.
You can arrange this with your bank
by a regular arrangement, or standing
order.

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 03. Saving

For many people in search of a

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deposit-based savings account, the
best bet is to check out the options LEAVING YOUR MONEY IN ONE
at a building society. Traditionally PLACE FOR LONGER WILL
building societies offered better rates. GET YOU A HIGHER RATE OF
Some institutions, including the Co-op INTEREST
Bank, also have an ethical dimension in
terms of where they invest your money, Usually, the longer you are prepared
and that may also be something you to wait to make withdrawals from your
will want to consider. account, the better interest rate you
will get. If you can leave it there for a
Building Societies offer a wide variety year, say, you will get a much better
of different savings products. These interest rate.
can range from instant access
accounts through to higher interest
accounts where you need to give a
certain period of notice before being
able to withdraw cash without incurring
interest penalties. In other words, you
can’t just call them up because you’ve
run out of money in the chip shop, you
need to plan ahead and try to figure
out in advance when you’ll need the
money.

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SHOP AROUND FOR A BANK ACCOUNT

Deposit accounts come in all shapes and sizes, so it pays to do some research
before deciding which one to take. Take an afternoon stroll along your local high
street and call in to inquire about what they have on offer, and what their rates
of interest are (make sure that you clearly examine and scrutinise the terms and
conditions).

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03. Saving
NATIONAL SAVINGS:
The National Savings and Investments
was founded in 1861, as the Post
Office Savings Bank. The aim of
the bank was to allow your average
person a way to save, and also to
provide the government with access
to that cash, to do whatever bonkers
scheme they had up their sleeve. The
bank’s name later changed to National
Savings Bank and later to National
Savings and Investments (NS&I).
Easy Money Stat
The NS&I manages around £72
billion in savings (some 10% of the
UK savings market). This accounts
for 17% of the UK’s national debt – in
other words, a shed load of cash.
As funds from the NS&I are a relatively
cheap source of government borrowing,
the bank sets interest rates to attract
savers and so the feeling on the street
is that the Post Office is a safe and
secure place to keep your money.
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NATIONAL SAVINGS PRODUCTS:
It’s like going to Footlocker and
choosing a new pair of trainers... make
the same choices when it comes to
your cash because if you play the game
right, you’ll be buying two pairs instead
of one. For instance, NS&I offers a
wide range of savings and investment
products, such as tax free saving
certificates, tax free savings accounts
(ISAs), fixed rate, fixed term bonds
and also income replacement bonds.
Most of these tend to be tax-free and
income generating products – much
more efficient things to do with your
money than betting on Elvis or opening
a shop selling chocolate-covered fish
and chips.
Because it’s a government gig, a
unique selling point of NS&I products is
a 100% guarantee by the Treasury for
any deposits, savings or investments
placed with NS&I. So you’ll never have
to worry with your cash disappearing
in a puff of smoke, as you may do if
you get your fingers burnt on the stock
market. Bottom line – Gordon Brown
says he’s got it locked up safe and who
wouldn’t trust a politician?
The most popular of all the products is
the premium bond. Introduced in 1957
they quickly became very popular. You
can own up to £30,000 in Premium
Bonds - currently sold in multiples of
ten, with a value of £1 per bond and a
minimum purchase of £100 bonds.
 03. Saving

Stat
Around 23 million people own premium
bonds, about one third of the whole
population of 58 million of us fellow
Brits. You might even become on of
these people one day, so keep an eye
out for information about them.
Think of them as a less goofy National
Lottery. The holder of the Premium
Bonds doesn’t receive any interest but
instead has each bond entered into a
monthly prize draw, so technically the
more you have, the better the chances.
The machine that generates random
numbers for the draw is called ERNIE
(a very 1950’s name), which stands
for Electronic Random Number
Indicator Equipment. There are two
large prizes of one million pounds,
with several smaller prizes from £50 to
£100,000. All prizes won are tax-free.
The odds of winning a prize is 24,000
to 1, which is one helluva lot better than
the National Lottery, which is reputedly
14,000,000 to 1.
INDIVIDUAL SAVINGS ACCOUNTS
(ISA):
An ISA is a government-approved
savings scheme, which allows
individuals to save around £7,000 each
year. The main benefit is that you don’t
pay any tax on the income or increase
in the value of the investment, which is
a good deal really – you already paid
tax on your income before you saved
it, so it’s a real bonus to get all of the
benefit safe and sound in your sky
rocket. And as you can put in £7K each
year, that’s often more than enough for
most people trying to save.
ISAs can be purchased from a variety
of providers:
- Banks and Building Societies
- National Savings and Investments
- Financial Advisers
- Supermarkets and retailers (the likes
of Tesco, who now offer their own
ISAs)

You are statistically more likely to be

killed in an accident involving a fridge
than win the National Lottery. If you are
so shocked you have won the Lottery
that you pass out and pull a fridge
down on top of you, well that’s truly
bad luck!

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03. Saving

SUBSCRIPTION LIMITS:
The tax year ends on April 5th each year,
after the Chancellor of the Exchequer
has got up in the House of Commons
to explain how many pennies there
are in the country’s piggy bank. By
this date you will be allowed to put the
maximum into your ISA for the previous
12 months, which is why you may see
TV and billboard ads reminding you can
top up your ISA to the approved limit.
In the March 2007 Budget, the
Chancellor of the Exchequer announced
that the amount you can save in your
ISA in one year was to be increased.
As of writing this book a total annual
allowance of £7,200 may be invested:
Cash: up to £3600
Stocks and shares: £7,200
It is not possible to transfer your cash
between a cash ISA and a maxi ISA
The transfer has to be done between
plan managers - the people who look
after your investment. In other words,
you can’t take the money out of your
ISA, and then go down the street to
put it into another one... it has to be
transferred properly. Be prepared, this
can be a tortuous process, as some
institutions seem reluctant to make
this process as smooth as you might
imagine.
Transfer of an ISA from the current
tax year must be for the full amount
invested in that year. You can move
some of your money, but that can only
be with money in there from previous
tax years.

There are still a few restrictions affecting

which type of ISA may be opened, and
the amount of the investment. For
example, UK residents over the age of
sixteen can invest in an ISA, but those
under the age of 18 can only invest in
a cash ISA, rather than the more topsy-
turvy world of stocks and shares.
You can transfer ISAs from one
provider to another, and many
investors check the financial pages
(the weekend broadsheets usually
have a supplement... you will probably
find them hidden beneath sports and
fashion) or check on-line, to see which
institution is offering the best rates for
the next financial year. However there
are several points to be aware of:

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 03. Saving

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SETTING UP AN ISA

ISAs are the most complicated topic we have dealt with so far, but once you have
one, they are remarkably easy to understand.

As mentioned before, the easiest thing to do when creating an ISA is to set up a

standing order to come out of your current account a few days after you are paid
each month. Decide how much you can afford to save, set up the payment, then
forget about it until your annual statement arrives, which should give you a nice
surprise.

Also, take the three points mentioned above into consideration, if you are planning
to open up an Individual Savings Account, and think you may be moving that
money around.

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03. Saving

£QUITI£S: (Stocks and Shares)

An Investment Bank

It approaches To sell a percentage

of its value in

A company needs
money to grow and To sell a percentage
does not want to of its value in shares.
borrow it

Who now either own

a percentage of the Which are sold through
company and get paid a “Public Offering” to
an annual dividend Individual and
Institutional
shareholders

Or sell to other investors in

The Stock Market

Equities are also known as stocks
and shares. They are essentially the
financial building blocks of a company
– just as 100 pennies make a pound, the
value of a company is down to value of
the shares in it. You can trade in these
shares, as though buying penny chews
from a shop, only that shop would
be called the Stock Exchange and a
stockbroker the sales assistant.
Buying shares is really all down to
your attitude to risk. Do you tend to
like risky behaviour? Remember – the
value of shares can go down as well as
up – play the stock market right and
you can make a packet; wrong... you
lose the lot. If you don’t like risk, or
are risk averse, you’re better off with
steady savings accounts. However, if
you like a flutter read on:

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 03. Saving

In financial markets, stocks and shares However shares in private companies

are the capital raised by a company
through the issue of the shares in the
business. In other words the owner of
a company may decide to split its value
into a hundred separate units, and sell
each one off to raise cash. The person
or organisation that holds shares is
called a shareholder (pretty obvious
really... this money business really is
easy, isn’t it!). Add the value of all of
those shares up together and you get
the value of the company - its market
capitalisation.
cannot be traded on the open market,
but may be bought and sold privately.
This means that if your company is
a PLC, it may be open to a hostile
takeover, with an interested party
buying up everyone else’s shares until
they own the majority, and thus the
company. With private companies
it’s more difficult. In football terms,
it’s basically the difference between
Arsenal and Manchester Utd, which is
essentially why Arsenal isn’t owned by
a Yank with a weird beard. Yet.

You may think it’s a bit weird for

companies to sell themselves off
in chunks, like cannibals eating
themselves, but they do this to raise
equity capital – cash, in other words –
to splash on the future of the company
- developing new products, expanding
the operation, or buying up other
companies. All of this strengthens
the company’s balance sheet, makes
them look more attractive to the stock
market and other investors and keeps
the process of expansion going. And
don’t worry – they’ll usually keep the
majority of shares within the ownership
of Directors, so as an individual
investor you will only have a real say
at the Annual General Meeting of
shareholders (AGM).

Shares in listed companies on the

stock exchange, usually known as
Public Limited Companies (PLCs) can
be traded on an open stock market.

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03. Saving
BONDS:
To do this they Issue
A company or
Government wants
to borrow money
Either keep the bond
until it matures and earn
the interest from it
who
Or sell it to other
investors in
The Bond Market
Roger Moore... Sean Connery...
Daniel Craig... these are all Bonds.
However, there are many different
types of financial Bonds, which are
more long-term, secure ways of saving
money (but couldn’t save the world and
then make love to a beautiful woman).
These include the following:
CORPORAT£ BONDS:
A corporate bond is issued by a
corporation or company. Again, these
investments are usually more of a long-
term concern, and you can’t get at
your cash for a year or so, known as a
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Bonds - Bonds Have an agreed
“Maturity date”, which is the date
at which the borrower agrees to
repay the money. Each bond has
two parts, these are:
1) The Principal - This is the
amount borrowed.
2) The coupon - This is the
agreed annual interest rate.
To individuals or corporations
date of maturity. A company will issue
corporate bonds as a way of raising
money for corporate objectives, which
may include expanding the business,
acquiring another company, or building
a secret base within a hollowed out
volcano on a secret island. Interest is
usually paid on the bond on a quarterly
basis (every three months). Corporate
bonds are generally seen as having a
higher risk than the government bonds
below, but again it’s all down to your
attitude to risk. Weigh up the health of
the company and how strong you think
it is, or how likely to go under.
 03. Saving

GOV£RNM£NT GILTS:
A government bond is issued by a As well as individuals, gilts are held
national government, usually in the by numerous organisations, including
country’s own currency (if you’ve been pension funds as part of their
hiding under a rock for the last 16 years, investment plans. This is because they
in our case that would be pounds, or are seeking a secure, risk-free home
Sterling). Bonds issued by national for their money, and this is a gilt-edged
governments in foreign currencies are chance to make some money for the
usually referred to as sovereign bonds. future.
Government bonds are viewed as risk-
free bonds – at the end of the day if the
government can’t pay you, they can
always raise taxes or simply print more
money! However, it has happened
from time to time – for instance Russia
in 1998 – with the so-called “rouble
crisis”, although this is very rare.

In the UK, government bonds are often

known as gilts – loan securities with
fixed interest rates. The gilt market
goes back... way back... to the creation
of the Bank Of England and the British
National Debt in the year of 1694.
Since 1998 they’ve been issued by the
UK Debt Management Office (DMO) on
behalf of HM Treasury.
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All credit rating agencies - such as
Standards, Poors and Moodys - award BUYING BONDS
what is known as triple-A rating (AAA)
to UK government debt. This is the Bonds (Corporate Bonds and
highest rating possible and simply Government Gilts) can be bought
means that you’re bolted on to get through a broker or and Independent
your cash back, on maturity. You may Financial Adviser (IFA). You can find
have heard the term “gilt-edged”, for these in the yellow pages or on the
instance for a Beckham free-kick from Internet. On their websites they usually
just outside the box,. The phrase tell you about the kinds of bonds they
comes from here. sell.

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03. Saving

COMMODITI£S:
Essentially, commodities are...
resources that we use. Some examples
of commodities are oil... coffee... iron
ore... crude oil... ethanol... sugar...
aluminium... rice... wheat... silver....
gold. And people are quite prepared
to trade their stuff for other stuff - or for
cash - and that’s something you can
join in with as an investor.

Commodities are quite easy to trade.

They can be physically delivered, and
also stored for reasonable period of time
– as opposed to stocks or shares, you
can actually imagine what a bar of gold
or barrel of oil looks like. The price of
your commodity will be determined by
the market (just as you might imagine
bartering at a cattle market) and you
can buy small and sell big, if you know
your crude oil from your crude jokes.

If you want to trade commodities,

you can do so directly on one of the
trading exchanges for that particular
commodity. You may find it easier to put
money into specialist investment funds
that trade directly in the commodity
you like. Alternatively your stockbroker
can help you buy equity in a company
trading in a specific commodity. For
example, you may want to get into oil,
and all of a sudden you’re interested
in global politics and the factors that
affect the price of a barrel of crude.

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 03. Saving

CONCLUSION:
As your career progresses, each job However, you inevitably will need to
move should bring greater financial know this stuff. Even now, you could cut
reward. As soon as you feel you have a couple of kebabs out of your weekly
some surplus cash, think about the diet. The money you save could easily
options detailed in this chapter, or else go into something more productive.
approach a financial advisor (either via Put it into a savings account, or even
your bank or an independent financial open an ISA... then sit back and watch
advisor) for some advice. As in life, your fortune grow!
the rule is to hedge your bets and keep
your options open. If you spread your If you do nothing else, try saving 10%
money around - perhaps in property, of your income for six months. See
longer-term secure savings and more how much you have at the end. More
risky investments - you have the best than that; see if not spending that
of all worlds. money, limits you in any way. You will
be surprised that you will still be able
We talked about compound interest in to enjoy life just as much, even though
this chapter. Grasping how this works you are starting to show a little financial
and, more importantly, how it can intelligence.
work for you, will be one of the most
important financial lessons you ever
learn. If you are reading this book, it is a
fair bet that you have a long life ahead
of you. When you get a bit older it is
more than likely that you will be able
to save £1,000 a year for 25 years at
an interest rate of 10% your savings
will be worth £119,016.47. Imagine
what will happen if you can save a bit
more, or are able to get a better rate of
interest.....

Now you own what men who wear pin-

stripe suits and read pink newspapers
would call... an investment portfolio.

You may be laughing as you read this

thinking... yeah right, at the moment I
can’t even keep myself in kebabs, so
leave it out with all this savings talk.

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04. Banking

Chapt£r 4
BANKING
Ah yes, the bank - der duh duh (ominous music) - that somewhat daunting
building on the high street. This is the place where your bank manager lives -
the person who takes the place of your parents in deciding how much money
you can have and what you can do with it.

Banking is something you are going to have to deal with... and probably very
soon. For many years it was assumed these buildings were dark flea pits full
of compulsive bankers, but in the noughties banks have opened themselves
up to appear more airy, modern and architecturally welcoming - where you
can chat to another human being without being separated by six inches of
bullet-proof glass.

Like them or loathe them, you are going to spend the rest of your life in and
out of banks because that’s where your cash will be, you will inevitably want
to get your paws on it. So, this chapter will focus on banks and the various
dealings you will have with them, as they steer your financial well-being
through education, employment and, ultimately, retirement.

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Your bog standard bank account is
called a current account. These fellas
are available from any of the major high
street banks (as well as other financial
organisations such as some building
societies) and are the bedrock of your
financial dealings. This is your everyday
account – your wages go in, your bills
go out - and what’s left is all yours.
Most current accounts require that
a regular amount of money is paid
into the account - usually from your
salary, or earnings as a self-employed
business person. In the olden days,
folk had to visit the bank’s premises
to carry out their transactions (or swap
the “promissory note” for the “pound”
of gold it represented) but in this age
of i-Pods and Facebook we are lucky
enough to have the Automatic Teller
Machine... or cashpoint... or cash
machine in the Hard-Fi song... or ATM
if you’re American or into acronyms.
Equally, we have telephone banking
(where you get to call somewhere on
the other side of the planet who has
no idea what you’re talking about) and
online banking (where you input your
password and watch some hacker in
the Maldives drain your account like
the bathwater after your Sunday soak).
We joke, of course – these modern
evolutions in banking have forever
changed the way that current accounts
are managed, and the relationship
between the account holder and by the
bank. And that’s mainly for positive.
04. Banking
Some of the main things you’ll have
to deal with in running your account
effectively are:
INT£R£ST RAT£S
Interest rates... perhaps an oxymoron
in that up until now you haven’t rated
them as very interesting at all? Well,
how does the concept of free money
grab you?
A bank will invariably pay interest on
your account if you keep it in credit
from month to month, so think about
how much you may have left over after
regular outgoings, and check what rate
of interest your bank will pay on current
accounts. Also, your bank will allow
you to move money from your current
account to a savings account, where it
can sit pretty and earn better rates for
you. You can shift cash around on a
casual, or “ad hoc” basis (particularly
easy to do online); set aside a certain
amount to automatically shift each
month; or even request that any funds
over a certain amount are automatically
transferred - or swept - into another
account, to earn more interest.
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04. Banking
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A SAVINGS ACCOUNT IS BETTER
FOR YOUR MONEY
If you have managed to save
successfully make sure you keep your
money in a savings account rather than
a current account. Savings accounts
receive much higher rates of interest.
TRANSACTION CHARG£S
Transactions go both ways (naughty
things). Items paid into your account
are called credits (wages, birthday
money from Aunty Nora), items that
are paid out are called debits (direct
debits, cheques, cash withdrawals
for emergency kebabs. Charges
are sometimes imposed on these
transactions - bank charges – and these
can vary from one account to another.
With current accounts, the usual things
to watch out for are overdraft charges
for going into the red or, in other words,
being a naughty little chap or chapess
and spending more money than you’ve
got. If you stay in credit, then you are
in the black. On the whole, banks don’t
charge for individual transactions on
personal current accounts, but if you
are self-employed, you will have to set
up a business account, where you will
not only be charged for taking money
out of the account, but for the privilege
of putting money into it. Go figure!
Banks are usually more forgiving
towards students and will waive their
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normal transactions charges whilst you
are still at uni. Ahhh, isn’t that nice of
them? Well, yes and no. The reasoning
is that they want to keep your business
after graduation, when the prevailing
logic suggests you will be earning a
decent whack in your chosen career
and they can cream off their slice.
OV£RDRAFT F££S & CHARG£S
Overdrafts are sometimes necessary,
when you need the bank to cut you
a little slack for spending more than
you have and, in essence, to provide
a sink fund. This is particularly the
case for students, in a cruel world of
expensive books and rapidly inflating
kebab prices. Of course the banks do
OK out of the deal as well: Instead of
paying you interest for being in credit,
they charge you interest for being in
debit. Pretty neat, eh... you owe them
money and you will owe them a little
bit more, each and every day you are
overdrawn.
The rate you get charged is down to the
rate that bank imposes, which is why it’s
worth checking out beforehand. Also,
additional charges may be levied, which
can be particularly punishing if you go
overdrawn, or indeed over your agreed
overdraft limit, without informing your
bank beforehand. These charges may
involve one-off fines for unauthorised
borrowing; or a fee for every transaction
that increases an overdraft; or monthly
‘overdraft management’ fees when
you’re in the red. Another kick in the

fiscal knackers is that if you exceed an
agreed overdraft by a penny, the bank
will charge the (higher) unauthorised
borrowing rate on the full amount - for
example, if you are £251 overdrawn but
your limit is £250, you’ll pay the higher
rate of interest on all £251, not just the
extra pound. Banks will often impose
these charges without warning, and
the first you’ll know of it will be when
your monthly statement lands on the
doormat, you scream, pull your hair
out and give the cat a good kick up the
backside. If the bank does take time
to write you, they will probably charge
you around £18 for the pleasure as
well. And of course, each charge just
puts you more in the red.
04. Banking
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PENALTY CHARGES
If you know you have been charged
more than £12 in fines for exceeding
your overdraft, use the following link to
try to recoup these costs: Visit www.
moneysavingexpert.com and print the
standard letter.
Guess what? Customers have recently
got a little annoyed by all this activity
and have started to push back, citing
the opinion that the fines are way
out of proportion to the crime. In
response, the banks claim that their
charges reflect the increased cost of
administering excess overdrafts. But
you might guess they would say that
really, wouldn’t they. In reality, thanks
to computerised processes, the cost is
minimal, so some people feel the banks
are profiteering on their customer’s
slip-ups.
Well, is this a David vs Goliath battle
between the lowly customer and
mighty global financial institutions?
Perhaps not. First, the Office of Fair
Trading agreed some of these charges
are unfair and when this was tested in
the courts, the courts agreed. People
have been writing to their banks to
request this money back and, in most
cases, they are winning.
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04. Banking

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DEALING WITH BANKS

Bottom line advice? Simple - always try to keep an eye on your account, and if you
are likely to go in the red, try to transfer some money from another source or else
contact your bank to explain, and see if they will increase your overdraft facility,
perhaps temporarily. Some accounts also offer an interest-free buffer overdraft, so
if you regularly slip into the red, choose an account that won’t overcharge you for
it. A little forward planning should help you avoid a flurry of charges hitting your
account. The most important thing is not to bury your head in the sand like an
ostrich! Open your bank statements, and if there is a problem, your bank would
much prefer you contact them to discuss it, rather than ignore the situation.

MONTHLY F££S £FFICI£NCY & S£RVICE

Because of the success of customers
claiming back excess charges, banks
are looking at other ways of clawing this
money back - the main one being the
unwelcome return of monthly fees for
current accounts. First Direct recently
announced that it was introducing a
£10 monthly charge for people who
don’t deposit at least £1,500 into
their current account each month, or
maintain at least a £1,500 balance all
month, or have another First Direct
product. It remains to be seen whether
other banks will follow this lead.
Do you remember the “Chance” card
in Monopoly that reads “Bank error in
your favour, collect £200”? That would
indeed be a wonderful world – but in
reality, when a bank error favours you,
it’s usually down to you to spot it and
raise the issue with them and ask for
compensation. Obviously the world
would be a wonderfully fluffy place if
the bank picked up on such mistakes
themselves - this is really down to their
efficiency and service.
If service is important to you, make
this one of your top criteria. Equally,
consider their ethical record and
decide if you are comfortable with
that institution looking after your hard
earned cash.

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BANK STAT£M£NTS
This is the list of your monthly
transactions, which will drop through
your letterbox, where upon you will
start to pull all your hair out and the cat
will leg it over the fence.
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CHECK YOUR BANK
STATEMENTS
Always take time to go through your
bank statements to check for mistakes
and get a good idea of where you’re
up to with your finances. This is a
really useful habit to get into on a
monthly basis. Save your statements
somewhere as well. It is always a good
idea to keep decent financial records.
Some banks offer online statements,
going back several months, while
others only offer the current month’s
transactions. For business accounts,
some banks reduce their charges if you
can do without monthly paper bills. On-
line statements can really help if you
need to chase a record of a payment,
so consider this when choosing your
bank.
04. Banking
HOW TO OP£N A BANK ACCOUNT
Right then - now you’ve read the
information above, it’s time to take
a stroll down your high street, check
what’s on offer and choose your
poison. People choose their bank for
many different reasons – perhaps it is
the bank your family has banked with
for generations, perhaps you like the
ethical orientation of a bank like the
Co-Op, or perhaps you’re The Queen
and will only bank with a very famous
bank called Couts of London (afternoon
mam!)
As an exercise, imagine you’re a
student heading to your new town and
are bamboozled by the various freebies
on offer (NUS card...travel card... sock
suspenders). Well don’t worry, great
unwashed one, simply kick back with
a kebab and put The Smiths on the
stereo, because here at Easy Money,
we have even done that legwork for
you. Following is a brief summary of the
main features of current bank accounts
targeted at the student market by four
well-known high street banks (please
note, rules for overseas students may
be slightly different):
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04. Banking

WHAT IS R£QUIR£D TO OP£N AN

ACCOUNT
When opening a bank account the
following items are normally needed:
Proof of Identity
A passport is the only form of ID
accepted by Nat West - European
Union national ID cards will not be
accepted.

Evidence of student status

Acceptable proof of student status
is also required. This should be: the
acceptance letter from the university,
confirming your name, course, and the
start and end date of the course; or a
university letter signed and stamped
by the college, confirming your name,
enrolment and dates of study.

Evidence of address
For students in halls of residence
this will be the tenancy agreement
or alternatively, a signed university
letter with the college stamp that
states the student has been allocated
accommodation through the university.
Students in private accommodation
have to provide a utility bill (gas,
electric, water or telephone landline
only) containing name and address.

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WHAT BANKS CAN OFF£R
In the following section we provide
some of the specific offers of some
of the UK’s most used banks. This
information was correct as of writing
this book, but it is important that you
visit the bank’s website to confirm the
latest offers.
Natwest
www.natwest.com top of your finances online.
Nat West Bank has a step account,
which offers a solo card for buying
things by card, and internet banking.
The solo card can be used at cash
point machines for withdrawing money
and in some shops. The step account
has no overdraft or borrowing facilities
and no chequebook.
HSBC
www.hsbc.co.uk
HSBC offers a current account, a solo
card and a big sloppy snog behind the
chip shop (OK, maybe not the last one).
The solo card can be used at cashpoint
machines, and some shops (but not as
many as maestro). This type of account
offers no overdraft or borrowing
facilities and no chequebook.
04. Banking
Lloyds TSB Bank
www.lloydstsb.com
Lloyds TSB offer a bank account with
online banking, telephone banking
and a cashpoint card (the catch is
that they can only be used at Lloyds
cash point machines). You don’t get a
chequebook and there’s no overdraft
facility, so draw up a survival budget.
You get quarterly bank statements,
which means you will have to keep on
BARCLAYS BANK
www.barclays.com
Two types of bank account are
offered:
A cash card account. This is a basic
bank account with a cashpoint card
and the usual direct debit and standing
order facilities but no chequebook or
overdraft facility.
A Visa debit card account. This
operates like a Maestro card to make
payments in shops, or to withdraw
cash, but students should be warned
that additional conditions apply, such
as a minimum balance of £2,000 in the
account at all times. A chequebook
can also be requested but guess what
– more additional conditions apply.
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04. Banking
PAYM£NT OF BILLS
Your telephone bill lands on your
doormat, but it’s not due to be paid for
two weeks. What do you do? Hope
your mum will sort it out? Perhaps
make it into a sail boat or fashion a
nice new scarf? Here at Easy Money
we suggest the easiest thing to do is to
pay it, but the means to pay are varied,
including going to the bank, writing a
cheque or by electronic transfer direct
from your account.
Basically – are you the sort of person
who is organised enough to cope
with the financial admin of your life,
or would you prefer things to happen
automatically? These days, most bills
can be paid by standing order or direct
debit, so you won’t need to worry
about it. It’s like having a secretary
sort your diary out for you. Here’s the
difference:
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STANDING ORD£R
A standing order (SO) is an instruction
you give your bank to pay a set amount
at regular intervals to another account.
The instruction is sometimes known as
a banker’s order. The essential element
is that you create the payment, which
has to be a fixed amount for regular
outgoings such as rent, mortgage or
other fixed regular payments. Because
the standing order is a fixed amount,
they’re not usually suitable for paying
variable bills such as credit cards, or
gas and electricity bills.
A standing order can be set up to run
for a set period of time, or indefinitely.
They can be cancelled at any time at
your request.
DIR£CT D£BIT
A direct debit (DD) is an alternative
to a standing order, the principal
difference being that the recipient of
the cash makes their own arrangement
with your bank, and you agree to give
authority to whatever they ask for.
This flexibility means direct debits are
much more suited to paying bills of
varying amounts – if that phone bill
drops onto your doormat you can rest
easy, knowing that whatever it is, the
payment will be made automatically.
The DD scheme is carefully regulated
and those companies that you give
authority must abide by a strict code
of conduct for example, to refund
immediately any monies wrongly taken
from your account. Some people prefer

to have more control over such bills
and check each one; others prefer the
ease of knowing all bills will get paid,
and they won’t be chased with nasty
little red ones.
With direct debits, bear in mind
that they have to be set up with the
company you’re paying so, although
you can cancel them by contacting
your bank, you also need to contact
the payee company to notify them of
alternative arrangements.
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USE DIRECT DEBITS
You will soon be responsible for all
your bills. If you set up Direct Debits for
your utility bills, such as gas, electricity
and phone, it means you don’t have
to spend time dealing with them when
they arrive. Also, companies often give
discounts on your bill for arranging it
this way.
04. Banking
OTH£R M£THODS OF PAYM£NT:
CHEQUES
Cheques are people who live in the
Czech Republic and also those pieces
of paper you see people sign and rip
out of a book, like raffle tickets. These
are particularly beloved of students
who, for some reason, try to pay for
things like bus tickets with them.
Some people prefer to pay their
household bills by cheque - at the
same time keeping paper tabs on
what’s going out of the account. All
bank current accounts (including online
accounts) issue chequebooks to their
account holders. To use them: when
a bill arrives, make out a cheque to the
company (the proper name will be on
the statement) and post it off, making
sure it will arrive by the date stipulated
on the bill. This is especially important
if you’re using it to pay off a credit card,
because interest may accrue for each
day you’re late.
A cheque book also means you don’t
have to carry money around, and
combined with a cheque guarantee
card, allows you to pay for goods and
services up to a certain value, say
£250, when you’re out shopping. A
cheque guarantee card is often the
same as the debit/maestro card issued
by your bank. This means the bank will
guarantee your cheques to a certain
amount, so they should definitely be
accepted by shops and the like.
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04. Banking
D£BIT CARDS
Many people nowadays pay for their
shopping with their debit card, rather
than spending time writing out cheques
(although you always seem to find
yourself behind the person in the queue
at Tescos who is doing precisely that...
this person is probably a student).
Flashing the plastic is a far more
convenient way of paying for stuff,
especially now most cards use ‘CHIP
and PIN’ technology for security
purposes i.e. you are asked to enter
your four digit PIN number at the till
point. This card is also the one that you
will use to draw cash from cashpoints,
which helps, as you’ll probably need
to remember PIN numbers for a billion
other things as well.
It is also possible to pay for goods and
services using a credit card but this
subject is covered in detail in Chapter
Five.
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PAYING MON£Y INTO YOUR
ACCOUNT
Most bank current accounts (including
online ones) issue you with a paying-
in book, so that you can pay cash
or cheques into your account at the
branch. However, the most important
cash going into your account will
undoubtedly be your wages from your
employer for the honest graft you do
on their behalf. Most employers now
make that payment by direct transfer
into their employee’s bank accounts, so
the digits will magically appear without
you having to do anything. This will
often drop on a Friday.
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MANAGING YOUR BANK
ACCOUNT
Always try to keep a positive balance
in your account. This will mean you do
not go unnecessarily overdrawn. Also
make sure that money is regularly paid
into your account. If you manage to
do both of these suggestions then you
will have a good credit score and your
bank manager is likely to be a lot more
friendly towards you!

SWITCHING BANKS
In theory, it’s quite easy to switch banks
in the UK, if you are unhappy with your
present one. Indeed, in contrast to
the past, some people change banks
and building societies like underwear,
depending on what services they offer
and how they feel they’ve been treated.
It’s certainly easier than it used to be.
First step is to contact the bank you
want to move to, and they should really
do the rest. On demand, your old bank
has to hand over all the necessary
information about direct debits and
standing orders within three days. The
new bank then sends you the details so
you can verify their accuracy and then
it’s all systems go.
The new bank will possibly offer
incentives for you to switch, and may
help the switch with a free overdraft
facility while the changeover occurs.
04. Banking
For most people the transfer is smooth,
although it may take a few weeks for all
the new cards, chequebooks, PINs and
online passwords to filter through. Of
course some banks are reluctant to let
their cash cows... sorry, customers...
go, and occasionally will make it
difficult for them to leave by delaying
the handing over of information, or
perhaps weeping and clinging onto
your trousers as you try to exit the
branch.
However, most banks subscribe to the
British Bankers’ Association Banking
Code, so if your own bank subscribes
to the Code and fails to comply, then
you’ve got them over a barrel. You
can also take any complaints to the
Financial Ombudsman Service and get
heavy with them, instead of the other
way round.
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04. Banking

CONCLUSION
Who you choose to handle your money
will be one of the most crucial financial
decisions you will have to make, and
you should make it carefully, consulting
friends and family to gather their
experiences. Having said that, the
traditional route was for this relationship
to carry you through the various stages
of your financial evolution, with a solid
relationship developing with your bank
of choice. Once-upon-a-time, you
would have a relationship with the bank
manager at your bank who, over the
years, would evolve an understanding
of your finances. Now, the relationship
is much more remote.

The modern model is for banks to rely

more on call centres, online banking and
customer service operatives in branch,
rather than giving you one particular
point of contact. Just as the institutions
seem to be distancing themselves
from their customers, equally those
customers are losing their loyalty with
their bank, preferring to switch financial
provider throughout their lives, perhaps
when moving city or moving from
academia to employment.

The banks compete with each other

through special offers and promotions.
You can take advantage of this to
improve your own finances. As with
everything – keep up with the financial
news and take your choice!

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 05. Cr£dit Cards

Chapt£r 5
CR£DIT
They look so pretty and innocent, don’t they? Those small plastic cards, the
size of your average business card, that live all snug in your wallet or purse
and, as we have said, whisper, convincingly, “use me... use me” every time
you see something you really can’t afford.

Putting it on credit... flashing the plastic... whatever you want to call it... it
seems so easy. Yep, and it’s also the easiest way for you to get into trouble in
your financial life. Be warned... it may seem that you’re getting stuff for free,
but in reality those flexible friends are more than willing to climb out of your
back pocket and bite you hard on the backside.

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05. Cr£dit Cards

Watch
When you reach the age of 18 you will become eligible to own a credit card. Be
warned though, credit card companies market their cards extremely aggressively.
They will make all sorts of offers to you, to get you signed up.

Credit cards are an extremely expensive form of borrowing, so you should only
take one if you are confident you can pay the balance off really quickly.

If you’re still brave enough to read on,

then take deep breaths and here goes:
Essentially, credit cards are plastic
cards that allow you, the cardholder, to
buy stuff “on credit”... in other words,
to pay it off sometime in the future. The
catch is that there will be interest to pay,
which means that you will undoubtedly
end up paying more in the long run.

Info
1966 - a good year for Bobby Moore,
Beatlemania and Barclays, the first UK
bank to introduce a credit card. Back
then, a credit card acted like a charge
card - any balance on the account
had to be paid off in full. And the
maximum credit limit was a whopping
£100! Nowadays, the competition
between credit card providers is
very aggressive, which has created a
fragmented market, with a huge range
of cards of all manner of colours and
permutations, and credit limits to suit
all types of individuals. Whether you’re
Roman Abramovich or Dot Cotton,
there will probably be one for you.

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 05. Cr£dit Cards

£asy TIP DOWNSIDE OF CR£DIT CARDS

KEEP CREDIT CARD
BORROWING TO A MINIMUM
Wise owls pay off their credit card bill
in full each month. And, if you are
organised in this way, credit cards
can be a very helpful way of paying
for things over the month. Potentially
you won’t have to pay for the stuff
for anything up to sixty days after the
purchase date.
Of course you don’t have to pay the full
balance off, you merely have to pay off
a specified minimum amount (usually
around three per cent of the account
balance) or anything over that. It’s
down to you and the strength of your
financial organisation.
So where is the catch? Well, so far it’s
been the good news. The bad news
is that if you can’t afford to pay your
bill in full, our old friend “interest”
comes back to haunt us, and card
providers will apply interest from the
date of the actual purchase, not your
statement date. And of course it’s in
the credit company’s interest for you to
stay in debt, so they can keep making
their money by adding on interest.
Strangely, they want you to owe them
money... and this is the tip of a slope
so slippery it’s as though it were waxed
with honey!
The payback for doing you the favour of
stumping the cash up front is that their
rates of interest on credit card debt can
be high - even on the most competitive
cards - when compared to the Bank of
England base rate (currently 5.75%).

WORK£D £XAMPLE, SOM£ CR£DIT CARD CHARG£S

As of writing this book some of the best offers for credit cards were. Rates change
frequently, but this table gives you an idea of what to look for:

Credit card Typical APR

Barclaycard Platinum Credit Card 14.9%

Virgin Money Credit Card 15.9%
Mint Credit Card 14.9%
Egg Credit Card 16.9%
MBNA Credit Card 15.9%
Halifax One Credit Card 15.9%

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05. Cr£dit Cards
Be aware though that store cards
(credit cards for use in a particular
shop) typically charge interest with
an APR (Annual Percentage Rate) of
around 25-30% (see later in chapter
for full definition of APR). There are
even card providers who charge 60%
annual interest, usually to borrowers
with poor credit histories - those who
have previously defaulted on other
borrowings and are therefore seen as
a risk. To put that into perspective - if
you blow a grand on your first clapped
out old banger and don’t make any
payments, after a year you will owe
£1600.
BEN£FITS OF CR£DIT CARDS
Well, it certainly can be a convenient
way to buy expensive things without
taking a wad of cash out with you. And
of course some people are organised
enough to put something on their credit
card, knowing that they will have the
cash stored to pay for it at the end of
the month. Also, debt on credit cards
is usually unsecured – in other words
you don’t have to risk anything against
it, like your house or car. Having said
that, if you have made a right mess
of your finances (in proper terms, you
have a poor credit history), some banks
will want you to stump something up
as security, to be offered any kind of
credit. And you will have to prove you
are a good little boy or girl before those
restrictions are lifted.
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Another benefit of our little credit
card chums (which a lot of people are
unaware of) is the legal rights it gives
you, the purchaser. As opposed to
debit cards or charge cards, whenever
you use a credit card to buy owt,
consumer law means that you have a
contract with both the trader and the
card provider, and both have equal
responsibility if anything goes tit’s up
(the legislation is limited to stuff worth
between £100 and £30,000, so it’s no
use to the likes of Posh Spice).
This can be very useful in situations
where, for example, the goods are
damaged, or the company supplying
the goods goes bust before you’ve
even got your grubby hands on the
booty. In effect, you are insured against
such situations, because you paid with
your credit card.
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ALWAYS CHECK THE TERMS
AND CONDITIONS
Always check the Terms & Conditions
issued with each card, to see what
restrictions there are regarding any of
the benefits on offer. As with most
financial dealings... always check the
small print. For example check to see
if you get price or purchase protection.
Get your microscope out!
 05. Cr£dit Cards

APPLYING FOR A CR£DIT CARD

Ask at your bank, check the papers or
ask your friends for advice on the good
ones, then prepare to fill out some
forms.
Before the bank will give you your
credit card, they will check two main
sources of information to see whether
they like you enough start you off on the
perilous world of credit. These are: the
personal details you filled out in your
application form and the information
about your credit history, held by credit
reference agencies. Known as a
credit rating, this is really an indication
of your financial well-being – see it as
getting a financial health check from
the doctor.
The processing of the card application
can take some time, so take some deep
breaths and start ticking boxes. Once
the application has been approved,
the card will usually arrive via the post,
although sometimes you may have
to pick it up at the bank. A Personal
Identification Number, or PIN, will be
sent separately and you will need to
memorise that number, as you will
be asked for it when buying things.
Before using the card for the first time
you will need to activate the new card,
usually by calling the bank. Then put it
in your wallet and treat it with the care
you would a Ming vase!

Info
CREDIT REFERENCE AGENCIES

Although we have already shown you this infobox, it is worth repeating here. The
information of your borrowing record is collected by credit reference agencies,
such as Experian or Equifax, and is sold to money lenders, like banks or credit
card companies. If you have borrowed money and repaid it as agreed then you will
have a healthy credit rating. If however you have borrowed money and you have
failed to repay it or have missed payments then this can affect your credit rating.

Keeping a good credit rating (by borrowing sensibly and always repaying) is
important because you will come to rely on it later in life, especially when you want
to buy a house.

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05. Cr£dit Cards
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WATCH YOUR SPENDING WITH
YOUR NEW CREDIT CARD
Be careful of buying too many things
on your brand new, virgin-white credit
card during the introductory interest-
free period - otherwise you could find
it costing a lot more than you had
bargained for. Also, take care to check
out the terms and conditions that will
apply to your account before signing
up with a new card provider.
TYP£S OF CARDS
There are different types of credit
cards. These include:
1) Standard Credit Cards
The most common type of credit cards.
Your bog standard credit card, this will
be issued to you by your bank or other
financial company, and will carry their
logo and design, as well as that of the
two big credit formats – Mastercard
and Visa.
2) Gold / Platinum Credit Cards
The Cristal of credit cards, these bling-
tastic beauties are targeted at more
affluent (richer) consumers, which
means – with the greatest respect – you
probably don’t have to concern yourself
with them just yet. Although interest
rates are much the same as standard
credit cards, these will have minimum
annual income requirements – in other
words you’ll have to be earning at least
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£20,000 before they’ll even look at you.
And even then it will probably be down
their nose.
3) Balance Transfer / Low Interest
Credit Cards
Such is the competition for your cash
that providers now offer a tempting
array of ways for you to manage the debt
built up on their card (or, as increasingly
is the case... cards). You may have see
such “balance transfer” credit cards
advertised on the TV – they allow you
to transfer a balance from another card
with a high rate of interest, to one with
a low (or 0%) interest rate.
Low interest credit cards often offer
one of two deals: a lower fixed rate of
interest, or a low introductory interest
rate that transfers back to a higher
rate after a limited period of time. For
example, a company may advertise an
interest free period of, say, six months
or a year, for any balances you transfer
to them from your current provider.
They may also offer you 0% interest on
any new purchases you make for that
period.
B£ CAR£FUL, ALWAYS K££P YOUR
PIN NUMB£R SAF£
Don’t write it down anywhere or share
it with anyone. The last thing you want
to do is to finance the spending spree
of some tea leaf (thief).

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Transferring balances can be a good
way to keep your credit card debt
at the same level, as you will take
advantage of the 0% rate. This gives
you more time to pay it off and to work
the balance back down to zero.
Perhaps not surprisingly, the 0%
companies are not angels sent from the
heavens – they are hoping you won’t
have paid off the balance by the time
their free period expires, which means
they can start clobbering you with their
interest and make money out of you.
4) Credit Cards with Rewards
Programs
Some companies aim to entice business
by offering rewards – such as discount
or cash back offers - for purchases you
make with their credit card. Reward
cards are usually aimed at people with a
better-than-average credit history and,
as they can be expensive to administer,
companies often charge an annual fee
for owning them.
Common rewards include:
Store discounts for a specific retail
store
Entertainment rewards
Discounts at petrol stations
Airline miles
Cash Back
05. Cr£dit Cards
5) Affinity Cards
This type of card is for people who
want to demonstrate their loyalty,
with an organisation - often one that
plays an important role in their lives.
For example, some people choose to
have a card relating to their favourite
football club, charity or university (the
University of Manchester credit card is
presently administered by MBNA). For
each card taken out, the club or charity
receives an instant donation from the
specific credit card company who
issued the card. In addition, they earn
more money each time the cardholder
uses the card (they’ll get more, the
more you spend).
6) Store Cards
Store-based credit cards are offered
by department stores and other retail
outlets, such as Marks & Spencer and
Tesco. You’ll often see them marketed
while you’re out getting your fruit...
pants... and fruity pants. Alternatively,
a helpful sales person may ring up your
purchase and whisper “you know what,
if you take out one of our store cards,
you’ll get 10% off these fruity pants”.
Other incentives, or offers, are also
involved. For instance, using a Tesco
credit card on your monthly purchases
will win you club card points at Tesco,
just the same as buying your groceries
there.
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05. Cr£dit Cards

INT£R£ST RAT£S
Watch Just the same as with your bank
account, an interest rate is the charge
for effectively borrowing the money
BEWARE OF STORE CARDS
on your credit card, detailed as a
percentage. The most important thing
Remember that the interest rates for
to get your head around is that interest
store cards can be extremely high,
on credit cards is ‘compounded’. And
which makes any purchases made with
no, that’s not a good thing.
them more expensive. Lots of people
can get into financial difficulty through
misuse of store cards. They can find
they spend too much on them and are
not able to pay back the balance. The
longer the debt is left then the more it
grows. Avoid this mistake yourself.

CR£DIT CARD PROVID£RS

How long’s a piece of string? There are endless credit card providers, all of varying
quality. Here are some you may have heard of:

HSBC Egg

Morgan Stanley CitiBank

Goldfish American Express

Capital One Barclays

Virgin Money Cahoot

Mint Natwest

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 05. Cr£dit Cards

WORK£D £XAMPL£, COMPOUND INT£R£ST WH£N BORROWING

You’ve got a balance of £200 on a loan that is due to be repaid at the end of three
years, and there is an interest rate of 10% on that loan. You may think you would
owe the 10%, or simply £20, but if that interest is compounded, your final amount
repaid will actually be... drum roll, please... £266.20.

How? Here’s how:

Year Original Balance New Balance with Interest

1st £200 £200 = £220
2nd £220 £220 = £242
3rd £242 £242 = 266.20

So with compounded interest you pay interest on the initial amount, PLUS the
interest that is growing, or accruing, over the term of the loan.

ANNUAL P£RC£NTAG£ RAT£

(APR)
OK, we promised we would explain
this little bugger and we are nothing if
not true to our word. The APR is the
true annual rate of interest charged,
which varies from a straight interest
percentage. This reflects the fact
that on most credit cards, monthly
repayments are being made to reduce
the capital balance outstanding.

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05. Cr£dit Cards

WORK£D £XAMPL£:

You’ve not been bad – just a little “not good” – and find yourself with a £10,000
balance on a credit card. Let’s take the statement from January 1st, and imagine
an annual interest rate of 15%. If you are good, and repay at a rate of £200
per month on the 20th of every month, then the true rate would equate to 15%,
imagining the lender charged interest on a daily basis.
(There’s usually a but, isn’t there? And here it is:)
BUT, lenders usually charge interest based on the last statement date, in this
case is the 1st of the month. So the credit card company will charge interest in
January as follows:

£10,000 @ 15% interest x 365 = £127.40

31

However, in so doing they haven’t taken into account the repayment of £200 you
made on January 20th. If they had done, those pesky bank types, they would
have calculated the interest as follows:

£10,000 ×15% × 20/365 = £82.19

£ 9,800 ×15% × 11/365 = £44.30 + 82.19 =
Total £126.49

So, over the period of a year the true interest rate that you’ll pay that way is clearly
greater than 15%. Guess which ones the banks use? Correct – you’re catching
on, young pin-striped Jedi.

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Credit cards
Some personal loans are even worse
than credit cards in this respect, in that
lenders will charge interest based on
the initial amount of borrowing. For
example, if you had your eye on a
very special disco-dancing parrot that
cost £3000 (I know, expensive... but
you should see this bird’s moves!)... if
you borrowed that over two years at a
flat rate of 10%, in an ideal world you
would repay £150 per month for 24
months, giving a total interest charge
of £600. However, if you calculated the
APR on this, it would wind up being
double that of 10%. And that is one
expensive parrot.
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CHECK THE APR
By law, lenders must calculate the APR
and inform us lowly borrowers so we’re
all in the loop and all cards are on the
table. This is usually the small print
at the bottom of a TV ad, or the mad
speed-reading of the actor at the end
of a radio ad. Always make sure you
know the APR.
05. Cr£dit Cards
R£PAYM£NT T£RMS
Guess what? You can’t just go about
willy-nilly buying disco parrots and
fruity pants with no consequence... at
some stage you have to pay the money
back. The repayment terms are the
rules by which the card company
would like this done, stated in their
terms and conditions. Of course you
can pay the whole thing off if you like
(which is ideal) but usually there will be
a minimum monthly payment, around
3% of the outstanding balance.
Of course all companies will ultimately
want their cash back, but it’s worth
asking around to see how aggressive
the company will get, firstly in adding
on interest and charges, and also in
coming after you for the cash. Bottom
line – if you fail to make at least the
minimum repayment, there will be
repercussions - and the bank is likely to
have more muscle to enforce this than
you have to avoid it.
Be warned - consequences will begin
with additional fees and charges, move
up through debt collectors and bailiffs,
and will ultimately wind up with County
Court Judgements (CCJs).
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05. Cr£dit Cards
COUNTY COURT JUDG£M£NT
Don’t panic just yet – this is the worse
case scenario, but is worth detailing
because (as reported in the recent
media) so many young people are
getting into credit card debt. The first
stage in the court process is a County
Court Claim Form, also known as a
Summons. This details the amount of
money you owe and will ask you to reply
with details of their financial situation.
You then need to work out how much
you can afford (2p a year isn’t usually
an option) and make them an offer they
can’t refuse. Presuming they don’t,
the Court will issue the County Court
Judgement, stating the arrangement of
how to pay.
If your offer of 2p per annum is not
accepted, or you haven’t even got it
together to reply within the time set out
in the Summons, you will be issued with
a County Court Judgement anyway, to
pay the amount decided by the Court,
which may be more than you can afford.
So best advice is to contact them and
create a line of communication.
If you fail to keep to that payment
schedule and default on the County
Court Judgement, the credit card
company can pull additional strokes
such as:
1) Giving orders to bailiffs to remove
goods from your home. In other
words, there’ll be a knock at your
door and before you can say “SONY
hi-definition”, your flat screen will be
out the door and you’ll have to watch
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the football through the window at
Dixon’s.
2) Contacting your employer to arrange
to have the debt paid direct from
your wages (called an Attachment of
Earnings). Apart from being a pain,
this can also be embarrassing for you
and your employer.
3) Requesting your bankruptcy. If you
are made bankrupt it has long-term
implications if you ever want to buy a
house, start a business or borrow so
much as a fiver ever again.
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WHAT TO DO IF YOU HAVE
FINANCIAL PROBLEMS
If you are struggling financially, talk to
your credit card lender to explain your
situation, and see if they will help make
your monthly payment more affordable
– perhaps they will extend your
repayment period. Be careful however,
as this will obviously mean it takes
longer to pay the debt off, and you will
ultimately be paying more interest in
the long run. If you fall into debt, do
whatever you can to pay it off pronto,
even if it means living on cardboard
and water. It will hurt, but it’s ultimately
better than sliding deeper into debt.
That ain’t much fun at all.
 05. Cr£dit Cards

CR£DIT HISTORY The credit reference agencies will

Your credit history is basically a record
of how well you’re doing with your
banking, in terms of repaying loans,
credit card bills and other debts, used
as a guide by anyone considering
offering you any more cash. Just as a
university will need to see your CV to
decide on the contents of your brain, a
bank will want to assure themselves of
the contents of your wallet.
continually update your status as you
move through your financial life, for
instance buying a car, or applying for a
mortgage. The financial institutions you
deal with will make monthly updates to
the agencies to detail how up-to-date
with the payments you are, and this will
feed into your credit rating.

When you file an application for credit £asy TIP

(for example a bank, store or credit
card company) your details will be
forwarded to an independent credit
rating agency. The two main rating
agencies in the UK are Equifax and
Experian, who will rate you depending
on these factors and also your hairstyle
(OK, perhaps not the last one) and will
fire back your credit rating (sometimes
called a credit score) so that company
can decide whether they want to lend
you anymore cash, or authorise that
new credit card.
KEEP A HEALTHY CREDIT
RATING
As you get older your credit rating
will get more and more important and
will influence a lot of the decisions
you make as an adult. Read the next
section carefully to pick up some hints
on how you can keep your personal
credit rating as healthy as possible

A simple score, this is used by folk like

credit card companies to decide on
your ability and willingness to pay the
debt. This can help determine whether
to extend the credit and what the APR
should be in your case. Sometimes,
the less money you have, the higher the
risk lending you more, and therefore the
higher the APR. In other words, it will
cost you more to borrow money than
people who have a lot in the first place.
Kooky, eh?

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05. Cr£dit Cards

HOW A CR£DIT RATING IS

D£T£RMINED Credit Inquires
Credit ratings are determined differently The amount of inquiries made on your
by individual companies (remember, as credit file can also impact on your
detailed your hairstyle isn’t that crucial). credit rating. A large number of recent
However, the issues are usually the inquiries may have an adverse impact
same and these may include: on the score because the agency will
want to know why so many people are
Payment Record inquiring about you and, essentially,
If you’ve got a poor payment record, what the blinkin’ eck is going on. In
for instance in repaying your credit other words this activity can look a bit
card (tut tut!), you will have a lower suspicious.
credit rating
The Freedom of Information Act means
Control of Debt that you yourself are, of course, entirely
This is determined by how much debt free to check your own credit rating.
you have. Lenders do not want see that
their borrowers are living beyond their
means. Finance experts estimate that
your credit and other debt (excluding
your mortgage) should not exceed
15% of your net income (after tax). Do
a simple spreadsheet and calculate
how much debt you can afford, using
this model.

Signs of Responsibility and Stability

Are you unstable? Have your previous
few addresses included such high
class addresses as: mate’s couch or
park bench? Well, rating agencies look
at things such as the length of time you
have lived in your present home and
been in your current job. For them,
rather like a prospective wife sizing
you up, they are indicators of financial
stability. Most will focus on the last
three years. From the age of 18 always
make sure you are on the Electoral
Register. You can do this through your
local council.

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 05. Cr£dit Cards

CONCLUSION
Used properly, credit cards can be
an incredibly helpful way to assist
with your month-to-month household
finances. Just treat them with the
utmost respect and look after them as
you would a family pet – they are not
just for Christmas!
Also remember - it’s a total pain in the
ass if you lose them or they are stolen,
especially if they are then used. If
they do go missing, inform your bank
immediately to cancel them. Some
banks also offer insurance in case
they go missing. Equally, fraud is big
business these days so be careful
where you use them – look after
your statements and guard your pin
number.
seek advice from the Citizen’s Advice
Bureau or Debt Advisory Service (www.
debtadvisorycentre.co.uk).
So, get out there and flash plastic... just
make sure you have the money to back
up your purchases. Otherwise, when
your credit card statement arrives you’ll
see you’ve spent the transfer budget of
Manchester Utd on rare parrots, and
even rarer fruit-themed pants. And
now you have to find the money to pay
for them. If you can’t, the expense will
sit there on your statement, and those
parrots and pants are costing you much
more money each month.

Above all you must always be careful

with the number of credit cards you
get and the amount you borrow.
The credit slope is slippery, and it’s
hard to climb back up once you’ve
slid down. As detailed in this chapter,
when you start out on your financial life
and are given exciting things like bank
accounts, overdrafts and credit cards,
the temptation to slap something on
the plastic - whether you can afford it
or not - can often be too tempting to
pass up. Young people have run up
record debt in this way, and the best
advice is to confront the situation head
on, and as soon as possible. If you
have run up credit card bills, the first
point of call is the credit card company,
to see what can be done. You can also

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Chapt£r 6
MORTGAG£S
Think about it – unless you’re going to buy a football club - buying a house
is the most significant investment you will make, and will probably have the
most impact on your financial well-being. As you will probably be living there
a while, the price of your house is likely to rise - the balance between what
you paid for it and what it’s now worth being your little nest egg, or equity.
Your house is an incredibly important purchase, and should be considered
extremely carefully.

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WORK£D £XAMPL£:

About equity - showing what happens when a house price goes up.

Danger of negative equity - showing the reserve.

Purchase price: £100,000

Deposit: £10,000
Mortgage: £90,000
Valuation of the property at date of purchase: £100,000

So at the time of purchase the equity in the house (difference between value of
the house and the amount of mortgage outstanding) is £10,000. This is what you
expect really provided the price you pay for the house is equal to it’s value at the
date of purchase.

Ten years later when you come to sell the house it is valued at £130,000. At the
same time the mortgage has reduced to £85,000 and so the equity has gone up
to £45,000.

But if you wanted to sell the house after two years and at that time house prices
had fallen the valuation might only be £80,000. Lets say the mortgage was £
89,000 then you would have negative equity of £9,000. In other words you still
owe more than the house is now worth.

In general terms the longer you own the house the less likely it is that you will be
in the position of having negative equity. This is because over a long period of
time house prices usually go up and don’t forget you will have repaid part of the
mortgage unless you have an interest only mortgage (see below).

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We have left these little buggers until
last because, put simply, this is the
most important loan you will secure,
will take the longest time to pay back
and require the most research.
It may seem a long way off right now,
when you may still be living at home,
but we bet living with your folks
(“while you live under my roof you’ll
obey my rules”... sound familiar?) isn’t
half as much fun as it was when you
were seven years old and half as big.
Equally, you may be in your first rented
flat and this all seems like fantasy talk.
But getting your foot on the property
ladder as quickly as possible should
be a priority, especially as house prices
continue to rise.
Put simply, the average house price
in the U.K. is tipped to top £300,000
soon, and it’s unlikely you have that
sort of money stashed under the bed
to pay for it.
Instead, a bank or building society will
step in with a mortgage - a special kind
of secured loan in which the guarantee
is your property... your house... your
gaff. To get a mortgage most lenders
will require that you put down a deposit
to get the loan. The value of the deposit
is normally calculated against the value
of the house you want to buy. For
example a 10% deposit on a house
worth £100,000 will mean that you
will need a £10,000 and a £90,000
mortgage. Saving for a deposit is one
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AIM TO BUY A HOUSE!
Invest in bricks and mortar, and your
long-term financial future may well be
secured.
of the most challenging things first
time buyers of property find to do. But
now that you have read this book, you
should be able to make a start on this
today!!!
Having given you the cash for your
dream home, the lender will then take
a ‘first legal charge’ over the property,
which means that if you don’t keep up
your repayment to them then guess
what... that’s right... you hand over the
keys. This will require the bank seeking
court permission to evict the borrower
(in other words you), repossessing
the house and selling it to the highest
bidder. None of which sounds like a
whole heap of fun. Meanwhile you
move your possessions to a high class
dustbin, in a popular suburb of the
gutter.
Like the saying goes: an Englishman’s
home is his castle. Once you buy a
property it gives you some stability that
you may not have felt whilst renting,
 06. Mortgag£s

and a sudden, newfound interest in

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make-over programmes and previously
boring stores like Ikea and B&Q, as you
START SAVING TODAY
set about feathering your nest.
Owning your own house, will give you
a great deal of independence and will
This is not always the case elsewhere
allow you to do all sorts of things with
– on the continent, for instance,
your life. Now that you are reading
many prefer to rent their place. But
this book, you are old enough to start
in countries where the demand for
thinking about how you could achieve
home ownership is the highest, strong
this goal.
mortgage markets have developed -
for example, the UK and the USA, and
Set yourself a target of how much
Spain (although judging from recent
money you want to save over the next
accounts most of their property has
5 years. For example you might think
been bought by Brits anyway!).
that you could save £8,000 over 5
years. If this is the case write a plan for
how you intend to meet this goal.

Watch Traditionally, mortgages were only

really offered by Building Societies
(such as Britannia or Nationwide), who
Although banks will kindly inform
utilised their members saving deposits
you that the value of your home may
to offer mortgages to borrowers.
go down as well as up (house prices
dropped markedly in 1991, for instance,
As with the recent Northern Rock
leaving many with houses worth less
situation – the building society would
than they paid, or in negative equity),
take the money their savers deposited,
the recent trend has been upwards,
and then lend that back out for
with many people profiting from the
mortgages, pocketing the difference
equity in their property. Having said
in interest. More recently, banks and
that remember not to put all your eggs
other financial institutions have got
in one basket and rely on your home
in on the act and nowadays, a vast
for your future financial plans – as with
number of lenders compete to win a
all these things it’s best to maintain a
share of the mortgage market.
range of investments.

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At first it can be bewildering when
trying to figure it all out, but to break
down what’s available, read on,
Macduff (or simply read on, if you’re
not into Shakespeare or, in fact, called
Macduff):
Capital and Interest Mortgages:
Up until about 40 years ago, this
was really the only type of mortgage
available to UK homebuyers. A sum
of money (the ‘capital’) is borrowed
to buy a house and this is repaid at an
agreed interest rate (the ‘interest’) with
a series of monthly payments, usually
spread over a term of 25 years. Usually
the early years go towards the interest
charges then, as time progresses, an
increasing amount goes to reducing
the actual capital outstanding, until it’s
completely paid off.
WORK£D £XAMPL£:
10% or £10,000 deposit - monthly
repayments over 25 years.
If the lenders interest rate at the time
you buy the house is 5.99% then over
25 years the monthly payment will
be £579
This is a true interest rate or APR
(remember APR from Chapter 5?) or
6.2%
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DO YOUR RESEARCH WHEN YOU
COME TO CHOOSE A MORTGAGE
Now that you have made it this far
through Easy Money, you should be
pretty used to this next piece of advice.
When you are ready to get a house do
your research on the best deals out
there. In particular use the Internet and
mortgage comparison websites. These
are extremely easy to find.
You should also look at the websites
of estate agents in the area you want
to buy, to get a feel for the prices of
houses. This does not take long and will
perhaps be one of the most valuable
things you ever do.
Each year of that term, the lender
will adjust the monthly payment to
ensure that any changes in interest
rates during the year do not alter the
original repayment term. Isn’t that nice
of them? 25 years later and bingo,
the place is all yours and probably
worth a pretty packet too, so you can
either sell it, buy a smaller place and
keep the rest (called downsizing) or
else sell it and move to the Bahamas.
If you’ve ever wondered why your
parents seem to have a few quid, this
is probably why. Again, it’s far off stuff,
but you’re better off armed with all the
financial information early on, with the
knowledge to make the right financial

decisions as you progress through your
life. And the fact that you’re reading
this book gives you a head start.
Interest Only Mortgages:
We’ll not spend too long on this because
taking out a mortgage without having
a definite plan as to when the money
borrowed is going to be repaid is not
really suitable for most people. This
type of mortgage is quite popular with
investors in property who are looking to
minimise their monthly outgoings in the
first few years of owning the property
until the rental income they recieve
increases.
06. Mortgag£s
Endowment Mortgages:
For many years Endowments were a
popular form of saving in many house-
holds. The idea? You save a certain
amount of cash each month with a
financial institution who invest it
in shares etc, for a set number of
years. At the end of this time, you
get a cheque for the cash you’ve put
in, plus interest. But don’t get con-
fused – if someone tells you they’re
very well endowed, they may well be
talking about something else.
Approximately 40 years ago some in-
stitutions figured it would be a neat
idea to promote “endowment based
mortgages” as an alternative to the
traditional capital and interest method.
Seems simple – just pay the interest on
your mortgage (so the actual amount
you borrowed stays the same) but - ha
ha... here’s the clever bit - at the same
time, take out an endowment savings
plan. After 25 years, the endowment
matures and boom – you pay off the
original mortgage, with a chunky lump-
sum for you to stick in your sky rocket
for your retirement – enough to buy
all the pipes and slippers you’ll ever
need.
One problem (drat and darnation... why
does there always have to be a prob-
lem?) - what if the endowment didn’t do
as well as hoped? What if it turned out
you weren’t all well-endowed as you
thought you were, if the stock market
didn’t perform as well as you thought
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06. Mortgag£s
and, after 25 years, the amount you got
back didn’t cover one pair of slippers,
never mind the mortgage owed.
Well the answer is you will be left with
having to find the shortfall from another
lender or alternative source, such as
your life savings – not the best thing
when you are approaching retirement.
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Betting on the stock market can be
risky when set against something as
important as your mortgage and this
is indeed what has happened to many
people, leaving homeowners with a
remaining debt to be repaid from other
sources. Guess what? People aren’t
that keen on endowment mortgages
anymore.
Use spare money you have to invest in
the stock market, not money you rely
on for your home.
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The good news is that, as many people
felt they were initially given bad advice,
or mis-sold endowment policies, the
rules have been tightened up by the
Financial Services Authority (FSA)
which means you are unlikely to be
given duff advice in the future.
Flexible Mortgages:
Financial affairs used to be quite rigid
and controlled. In the noughties, people
wanted more flexibility in their finances
and these mortgages offer elasticity in
monthly repayment requirements. For
example there may be flexibility to:
- Make overpayments (don’t laugh,
some people are keen to pay of their
mortgage before the usual 25 years)
- To redraw (take back) any previous
overpayments.
- To underpay (pay less than the normal
amount).
- To take a payment holiday and stop
repayments for a period, typically 3 to
12 months.
As flexible as a pilates instructor, these
features are useful for self-employed
borrowers, or for others with a varied
income.

WH£R£ TO G£T YOURS£LF A
MORTGAG£:
OK, so you like to sound of owning
a piece of real estate and claiming a
piece of British land for yourself. Well,
there are many places you can obtain
a mortgage – a simple stroll down any
high street will reveal these, but other
lenders may be found on-line or in the
financial pages of the papers. Some of
the most common high street providers
are:
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GET USED TO THE MANY
DIFFERENT TYPES OF
MORTGAGE THAT EXIST
Remember that there are many
different types of mortgage. Before
you commit to a mortgage make sure
you understand exactly what you are
signing up to. Use the Internet for
research.
Something to be aware of in particular is
that traditional mortgage arrangements
usually impose additional charges if
payments are not made exactly on time
or in the correct amount.
06. Mortgag£s
Nationwide
Nat West
Yorkshire
Woolwich
HSBC
Royal Bank Of Scotland
Abbey National
Bradford & Bingley
Halifax and many more
Think seriously before you go - and
try not to walk dressed in a pair of
Bermuda shorts barking “lend us
£500,000 whydontcha” to the nearest
teller. The potential lender will want to
assure themselves that you are able to
meet your mortgage payments, and
other financial commitments, which
is why you will usually have to be
employed for a number of years and
earning a certain wad of cash or, if self-
employed, able to show three years
accounts.
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A CHECKLIST TO HELP YOU GET A MORTGAGE

Before even approaching a lender, here’s a handy checklist for you to bear
in mind:

- Save a deposit

- Check your credit rating at Experian

- Use the internet to check the deals on offer from different lenders depending on
your deposit (if you have a 10% deposit then you will find there are many more
deals available to you than if you only have a 5% deposit)

- Check how much you can borrow (usually four times your income or three times
if a couple are buying)

- Look into any special deals such as first time buyer offers, shared ownership
schemes or key workers schemes (e.g. teachers and nurses are eligible for a
new government scheme where you only need to find 75% of the purchase price
initially with the option to buy the remaining 25% at some time in the future)

- Most importantly, make sure you are able to repay whatever you borrow. Draw
up a budget of your outgoings as though you had just moved into the property
and compare this to your income. To live comfortably your mortgage, other loan
or credit card repayments and other fixed monthly outgoings such as council tax,
insurance, water rates, gas, electric, telephone should not be more than 50% of
your net income.

- Make sure you have a reasonable employment record - your lender will want
confirmation of your income from your employer. Also remember that overtime or
bonuses will only be partly taken into account by many lenders.

- Make sure you can prove who you are - lenders have to check on your status and
will want to see a copy of your passport or driving licence and evidence of where
you are currently living such as a utility bill

- If you are self employed some lenders will want to see at least two years accounts
showing how your business has performed

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WORK OUT HOW MUCH YOU CAN
AFFORD TO BORROW
To decide how much you can afford to
borrow here’s a little sum you can figure
out: Make a list of all your monthly
outgoings but leave out anything
that would not continue if you had a
mortgage, like rent etc. Look at your
monthly income after tax and deduct
those existing expenditures to give you
your ‘disposable’ income. Calculate
20 percent of this figure and find out
what monthly amount this will allow for
your mortgage.
BUYING A HOUS£:
Buying a house can usually be a long
process; below we explain how this
process typically works in a step by
step guide:
1) Figure out how much you can afford
to borrow – do the maths and be
realistic, as you don’t want to struggle
later
2) Find a mortgage provider
3) Decide on the sort of mortgage you
want
4) Calculate how much the lender is
prepared to lend you
06. Mortgag£s
5) Agree a mortgage in principal, and
obtain a mortgage certificate. This
means the lender has agreed to lend
you up to a certain amount of money.
You now need to find a property up to
this value.
6) Start house hunting! The fun bit
– out there is your dream flat or house,
just waiting for you
7) Fall in love with your ideal bachelor
loft, two-up-two down or country
estate
8) Make an offer for your desired
property (and hopefully get this
accepted)
9) Find and appoint a solicitor
10) Contact the lender to commence
the formal mortgage process
11) Get a survey and valuation done on
the property
12) Agree contract terms with the
seller
13) Exchange contracts and pay a
deposit to the seller
14) Arrange insurance, utility suppliers
and removal firm etc.
15) Finish the final paperwork
16) Complete the purchase, move in,
and plan your house warming party.
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LOAN AS A % OF HOUS£ VALU£:
An important aspect of arranging a
mortgage is the proportion of loan to
value (LTV). For example, if you are
purchasing a place with a value of
£150,000, and need £135,000, then...
hmmm.. let me add that up... yep, that
would be a 90% loan. Banks will want
to know how much they have to lend,
and what you will be putting down
yourself as a deposit.
Of course the purchase price is not
always be the same as the market
value. The surveyor acting for the
lender may only value the house at
£140,000 although the house seller or
vendor would only accept an offer of
£150,000. The sales price is usually
called the asking price. You may be
able to use your best Del Boy skills to
bargain the vendor down to below the
market price – most sellers expect to
come down a little bit.
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SAVE AS LARGE A DEPOSIT AS
YOU CAN
The more you can afford to put down,
when buying a house, the better in
the long-term (as you are only paying
a mortgage on the rest). You will also
find better mortgage options open up
to you.
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INT£R£ST RAT£S:
The nuts and bolts of the mortgage
is the “interest rate”. Yes, that old
chestnut again. You will have heard
your folks talk about these mystical
things, which usually appear at the end
of the TV news, just as you get up to
turn the thing off and make yourself a
brew.
Unbelievably, as soon as you purchase
a place, you too will become interested
in the Bank of England’s monthly
pronouncement on whether interest
rates (the ‘Base Rate’) have gone
up, down, or stayed the same. The
movement of the Base Rate will then
affect your payment (unless you have
fixed it... see below). But of course,
since you have poured over the
previous pages of this book, you will
be well up on this anyway!
The lending industry has evolved
tremendously, developing all manner of
loans, and you can now choose from a
wide and wonderful variety of interest
arrangements, including the following:
Standard variable rate
Fixed rate
Capped rate
Discounted variable rate
Tracker rate
Don’t worry – the good news is that
your mortgage provider or mortgage
broker (a person who sifts through all
the mortgages on offer) will help talk

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BETTER PRICE FOR YOUR
CHOSEN PROPERTY
Use such bargaining tools as any
building or decorating work that may
be needed, the fact that there are a
lot of similar places in the same area
cheaper, or the fact that there’s no
place to park your monster truck.
Bottom line is to box clever – you want
to get it for as cheap as possible and,
conversely, when you come to sell it, to
get as much. It’s a little game adults
tend to play with one another.
you through these options, and advise
of the best one for you, relaxing the
strain on your brain. But this book is
here to wise you up on such matters,
so for ammunition, here’s the low-down
on each one:
Standard variable rate mortgages:
A standard variable rate mortgage is the
general rate of interest that each lender
uses as a bog standard guide. Usually
these are the most expensive option
for you, the borrower and you’ll be able
to do a lot better if you shop around.
The standard variable rate is linked
to the interest rate at which in turn is
closely linked to the Bank of England
base rate - typically standard variable
rates are 1% to 2% over the base rate,
06. Mortgag£s
so whenever you hear that the Bank
of England has cut interest rates by a
quarter of a percentage point, it means
Christmas has come early.
WORK£D £XAMPL£, A STANDARD
VARIABL£ RAT£ MORTGAG£
Remember the above example of a
Capital Interest mortgage?
£100,000 valued house - 10% or
£10,000 deposit - monthly repayments
over 25 years of £579
Well, this example used a standard
variable interest rate which at the time
of buying the house was 5.99%.
With this type of mortgage, if the
interest rate changes the lender will
write to you and tell you what the new
monthly payment will be to make sure
that the loan is still paid off over the
original 25 year term.
Fixed Rate Mortgages:
Like it says on the tin, the interest rate
is fixed for a period of time. Usually this
is anything up to five years, after which
the interest rate reverts to the lender’s
standard variable rate, at which point
you’ll want to get on the good foot and
skidaddle to another deal, either with
your existing lender or a new one.
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WORK£D £XAMPL£ – FIX£D RAT£
TIP MORTGAG£S

RE-MORTGAGING

If you remember in Chapter 5, we

talked about using balance transfers
to get the better credit card deals, well
re-mortgaging is the same principle
but applied to your house. As a home-
owner you might decide to change
your mortgage provider to get a better
rate of interest. This is something to
look into more, once you have actually
made that first purchase!

The good side of fixed-rate mortgages

is that you’ll at least know exactly what
you’re paying each month, which can
help when you’re figuring out your
monthly finances. The downside is that
you’ll probably have to pay a slightly
higher interest rate for the privilege.

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Capped rate mortgages:
These aren’t rates in flat hats, rather
ones where a borrower pays interest at
a rate that is capped – in other words,
there is a ceiling on how much you’ll
pay, even if interest rates increase
significantly.
WORK£D £XAMPL£– CAPP£D
RAT£ MORTGAG£S
For example, if the standard variable
rate is 6.5% and the agreed cap is
7.0%, then even if rates rise to 8.0%
the maximum you’ll pay is 7.0%. The
borrower also continues to benefit from
any rate falls - if the lender reduces its
standard variable rate to 5.0%, the
capped borrower will then enjoy this
lower rate and chuckle heartily into his
breakfast coco pops.
Like all mortgage deals, capped rate
deals run for a set period of time.
However, because you gain from rate
reductions, the capped rate is likely to
be higher than any fixed rate deal. Also,
as with fixed rates, capped rates are
beneficial for people on tight budgets,
because you can ensure your monthly
payments don’t rise too much.
06. Mortgag£s
Repayment periods and early
repayment charges:
The longer you take to pay off a
mortgage, the more money you’ll pay
overall, in terms of that pesky interest
thingy. Another recent innovation has
been the introduction of significantly
longer-term mortgages, even up to
50 years, to make them affordable to
young people in a difficult housing
market. The problem with this is (apart
from the fact it’s petrifying – can you
imagine what you’ll be up to in 50 years
time?) is that, although you’ll pay less
each month, it will cost you more in the
long run.
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TRY TO PAY OFF YOUR
MORTGAGE AS QUICKLY AS
POSSIBLE
A rule of thumb is that you should
opt for the shortest possible period
for repaying your mortgage, whilst
ensuring that you can make the monthly
repayments very comfortably. Do what
you can, when you can to reduce the
balance with lump sum payments,
where and when you can afford them.
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06. Mortgag£s

Mortgage Arrangement Fees:

While some lenders charge an
administration fee, others may charge
an arrangement fee. If that sounds like
the same thing, well hold onto your
horses because some lovely institutions
charge both. These fees are charged to
cover administration and the reserving
of funds for mortgages.
These fees can be paid separately
in advance, added to the mortgage
(which will increase the cost over the
term) or be deducted from the value of
the loan that the lender is prepared to
- The value of the property involved.
- The complexity of the matter or any
difficulties encountered in dealing
with the transaction and the number
of parties concerned (as in, the
people buying your place and their
circumstances... this is known as a
‘chain’).
- The time spent on the work, (known
as ‘conveyancing’).

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advance. Such fees have increased
hugely in recent years, and are also a
way for lenders to claw money back on
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seemingly good deals and to capitalise
ALWAYS GET WRITTEN QUOTES
on the people who regularly re-
FOR ANY WORK
mortgage. As with all such matters, do
the math but, as opposed to previous
Any estimates you get should be in
generations, regularly re-mortgaging is
writing and state whether it includes
not seen as a handicap, but a way the
VAT. It should also include details of
cash-savvy can make the best out of
the costs that the solicitor will have to
the home and the equity within it.
pay out on your behalf such as search
fees and stamp duty and other such
Legal and Valuation fees:
fun stuff. A solicitor will often ask you
Legal and Valuation fees are charged
to pay these external costs in advance
by your solicitor for completing the
of the transaction being completed.
deal, when buying your house. All fees
charged by solicitors should be fair and
reasonable. Although you may treat that Stamp duty is a government tax. Yep,
statement with the same credence as another one. As of writing this book you
one involving flying pigs, solicitors are only have to pay it if you spend more
regulated by The Law Society. Ahead than £125,000 on a property, although
of starting the work, a solicitor should these days (and especially in London)
estimate how much their fees will cost that will probably get you a shoebox.
and inform you accordingly. Notebooks And a damp one at that. Some areas
out - factors to be considered include: (usually those undergoing economic

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 06. Mortgag£s

WORK£D £XAMPL£, STAMP DUTY

regeneration, referred to as brownfield
sites) do not attract any stamp duty,
whatever the purchase price. The
amount of stamp duty that you have
to pay is a percentage of the purchase
price based on the following bands:
1% for properties between £125,001
and £300,000
3% for properties between £300,001
and £600,000
For example, if you buy a gaff for
£150,000, you would pay £1,500 in
stamp duty. It’s worth bearing in mind
that if you happen to be bling enough
to afford a place over £350,000, the
stamp duty will be payable on the whole
amount, not merely the difference.
Stamp duty is based purely on the value
of the building, not anything within it.

4% for properties over £600,001

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ALWAYS READ THE MORTGAGE
TERMS AND CONDITIONS

Always read the Terms and Conditions

when signing up to a mortgage. By
Law the mortgage provider is required
to give you a summary sheet of all
charges, which will tell you of any
penalties for switching mortgage.

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VALUATIONS AND
VALUATION F££S:
The valuation is the amount that the
property is worth. Before a bank will offer
a mortgage on a property, they’ll have
to satisfy themselves that the property
is a suitable security for the monies to
be advanced. In other words, it’s got
to be worth the cash. To do this, they
request a valuation by an independent
third party - usually a surveyor. The
valuation fee is the amount charged to
conduct the valuation of the property
and yep, you’ll be paying for it.
Because valuation is based on opinion
the borrower is able to choose from
three valuation options.
option as it involves a rigorous inspection
of the property and provides assurance
that any significant problems will be
discovered, in addition to assessing
the property’s value. If there’s a mouse
living behind the skirting boards, these
guys will find him.
Here is an example of some typical
valuation fees:
Value of House Fee
Up to £100,000 £250
From £100,001 to £150,000 £300

1) These start with a basic butcher’s From £150,001 to £200,000 £350

around the property by the valuer.

From £200,001 to £250,000 £400

2) A second type of valuation is what
is often termed a homebuyers report
- as well as providing guidance on From £250,001 to £350,000 £450
the property’s value, this report offers
a more comprehensive check on the
condition of the property and should
reveal any serious structural problems
or other major faults. If you’ve just seen
the Tom Hanks movie The Money Pit,
you may want to go down this route.

3) The most comprehensive and

thorough check of the property is a
full detailed inspection carried out by
a qualified surveyor who is a member
of the Royal Institute of Chartered
Surveyors. This is the most expensive

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Info
HOME INFORMATION PACKS

In 2007 the Government brought in HIPs (‘Home Information Packs’), and that
doesn’t mean the bit between your leg and your belly. Home Information Packs
have placed the responsibility on the vendor to provide a report of the state of
the home, in terms of its general condition, searches, title documents and fuel
economy via an Energy Performance Certificate. This will mean there is less need
for the purchaser – that’s you if you’re selling – to do the legwork. The idea is that
they may detect any snags earlier and allow more sales to go through, but they
haven’t been universally popular - perhaps not surprisingly - especially amongst
people selling their houses.

If you decide to get out of the mortgage CONCLUSION:

deal you are linked into, it can cost you
big style (for instance 5% of the balance
due) in early redemption penalties and
charges. Such a move should therefore
be carefully considered, unless you
have a standard variable rates, where
this is not usually the case.
Of course you may have to get out,
if you are selling your house, or you
simply want a better deal with a
different lender, in which case you will
need to weigh up the pros and cons.
The lender will look more favourably on
you if you re-mortgage with them, or
keep your mortgage with the new place
you buy (or port it).
Put simply, your mortgage will be one
of the most complex of all your financial
relationships, putting Paul and Heather
Mills McCartney’s to shame. On
the downside, if your circumstances
change, you may find yourself unable
to meet the repayments and that’s not a
good path to go down. On the upside,
play your cards right, and your home
may well be your biggest investment,
providing for you in later life when
your kids have flown the roost and you
down-size. If your home is secure, it
can make the rest of your finances, and
indeed your life, seem a doddle.

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