Family finances - Ask the Experts video transcript
Paying off debt as a graduate
Sarah: We've got a question from Lewis in the audience, who asks, for a graduate leaving university – how would the panel suggest the best ways to pay back any loans or credit card payments? So not your student loan, which will be taken from your salary, but overdrafts, loans, credit cards. Alvin, what's the best way to start trying to pay them back when you're in your first job?
Alvin: I would always try to pay back the thing with the highest interest rate, because it's dragging you down the most! Organise them from highest interest rate to lowest interest rates and focus on that top one and get it paid off as soon as you can.
Owen: So I think there often is a good argument for consolidating your debt, I think it very much depends on what interest rates are applying to the debts that you have – and whether you can reduce therefore your overall interest burden. There's also of course an issue about your personal cash flow. So there can be a real benefit in consolidating into a single payment which may therefore be able to spread out your borrowings over a period that better fits the rest of the things that you have to spend.
Clare: Don't forget that your student overdraft – although it's probably got a 0% interest free period that will probably last for two or three years after you've graduated, at the end of that time, it will shoot up probably to about 16-17%, so you also need to begin chipping away at that because if you don't and you still have an overdraft of £3K, and suddenly you're being charged 17% on it, you know - that's a big difference between gradually paying that off during the interest free period – so that it's much smaller, if not totally eradicated by the time you will lose those graduate terms on the account.
Owen: I think sound budgeting is really important. And that's an easy thing to talk about – not necessarily an easy thing to do. And there are some really good tools online – so most of the banks will provide you with a budgeting tool as part of your current account. But there are lots of other online options.
Tracey: There's lots of debt advice charities out there. And people think they can only ring them up when they're in real problems with their debt, but actually they'd much prefer people to ring up when they're not – when they just have a query and they can sort their debts out, rather than you get into a mess later on.
Owen: Always look very carefully as well at the way in which you're borrowing and whether that's fit for purpose for you. So if, for example, you have an outstanding balance on your credit card and it's turned into long term borrowing, that's going to be very expensive and it's not the way in which you should be borrowing money over the long term.
How to control the cost of living
Sarah: Carly Becker from London has says, when it comes to household costs, I would love some tips on where to cut back first and which outgoings I should prioritise. Clare, what should she be prioritising?
Clare: Well I think obviously for a lot of households, the last few years have been really tough with the economic downturn and stuff, and I think – what we find is that people feel that they've already made lots of cutbacks but it's their bills that they don't bother looking at because it's a bit boring, it's a bit time-consuming, but as a result they end up paying hundreds, if not thousands of pounds a year more than they need to in a lot of cases. So obviously the priorities are paying your mortgage or your rent to keep the roof above your head, but things like – it sounds simple – but gas and electricity – you know, we've seen prices rocket over the last few years, but over 60% of households have never changed their energy provider. And when your insurance is up for renewal – rather than just accepting the renewal quote that comes from your existing insurer, have a look around to see if anyone can beat it, because they probably can.
Alvin: Some bills you have no control over – but those you can, be creative – come up with a new model – come up with a challenge for yourself and therefore you may discover that you have a way that's unique to you to help keep the effects of inflation or price growth out of your life.
Owen: So actually, when you take the time – and I think we should all do it regularly – to have a look at where you're spending your money and the extent to which you can get drawn in to big brands rather than own brands when you go into the supermarket and that kind of thing can actually make a huge difference when you add it up.
Sarah: Just actually seeing where your money goes?
Sarah: You'll learn a lot from looking at that.
Clare: And having cash rather than paying by a debit card can make a difference, because – you know – two pounds here, five pounds for your lunch and your coffee – you don't notice it but if it's actually – you're taking out £50 at the start of the week, you notice it decreasing much more. You're much more aware of it than if you're just sort of handing your card over every time you spend.
Owen: And on that, the earlier you start educating your children about the fact that money is limited, and getting them into a mindset of thinking that some of their money is for saving and some of their money is for spending is a fantastic discipline.
Helping your children move out
Sarah: We've got a question from Jo in the audience who says "my children have returned home after university, and I want to help them to move out, how can I encourage them to save when they are very comfortable living at home?" How do you persuade children it's time to fly the nest?
Owen: So I guess they're only very comfortable at home if you allow them to be very comfortable at home and I would say if your children come back after education and they are earning money and they don't have to give any of it as a contribution to household bills then they are learning nothing about the reality of the world and the future for them. So I think the first thing that you have to do, but within reasonable confines, is to start helping them understand that they need to budget and make a contribution to the bill.
Alvin: I was raised in a household where at age 18 there was no staying home. From the day you were born until the day you hit 18 my mother made it clear you were moving out of her house at 18, there was no choice. Don't make it too comfortable for them. And, you can give them a deadline, you can say "I'll help you for x period of time, but at that period of time, as soon as you get a full time job, as soon as you are earning a certain amount of money, you need to stand on your own two feet"
Tracey: So as well as saying OK I must charge young people rent, actually break it down so how much do the different things cost so what would a market rate be, how much would an ironing service and a washing service usually be costing you? How much money do you spend on food? Actually, working those things out is a really good education in terms of putting together a reasonable budget going forward. They still need to be contributing and if you're in a position to do so, you might save some or all of that contribution so that you then give it them back when they are ready to move home or when you're in a situation of desperately wanting them to encourage them to leave home so they at least do have a rental deposit or something to put towards their next property.
Owen: It is really hard isn't it, because these are our little darlings and we have always looked after them and cosseted them so it's a really tough thing to do and that's why I think you have to remind yourself that you're doing it for their long-term benefit. I really think that's very important.
Alvin: And I think, we forget, they will figure it out! Children are creative, young adults have minds, if they are presented with a situation they will find a solution sometimes we have to trust that ability for them to find the solution rather than us as parents solving the problem for them.
Teaching your children about finances
Sarah: Now Cliff from the audience here, asks us "in this modern age, when young people live for today how can you educate them to save for their future, especially when credit is so easily available and bankruptcy has become a modern buzzword?" Alvin, that's one for you, how can we encourage children to save for the future when they're having a good time?
Alvin: As a parent, impart to your child the importance of prioritizing, knowing the difference between want and need, learning about delayed gratification, and you have to always have them set goals. Setting goals, learning how to set a goal and reach it, is part of financial education.
Tracey: Really important for parents to bolster those good habits, talk about money, practice, make it firm, make it a game, budgeting, buying things in the supermarket, however you want to play it, but make sure we're talking about money all the way from when children are very small and we'll build those good habits for life.
Alvin: Don't be afraid to let your children fail. If they miss a goal, they come up short, they run out of money, don't always put the money in the account. Let them experience the failure; talk to them about the failure, what lessons they have learnt from the failure. They will survive.
Family finances and tax-free savings
Sarah: There have been changes to ISAs and the ways, the amounts you can save, what impact does it have on family finances?
Owen: So the main thing to say here is the access to tax efficient savings has increased significantly so it has gone up to £15,000 with effect from this year so I think for parents who are able to save for the long term whether for their children's education or for example, to help their children with a deposit on their first home, it's a really good development actually.
Clare: A cash ISA is like any other savings account the difference being that you aren't taxed on the interest that you earn in that. The first thing is to not be afraid of the word ISA and see it as a benefit. From July, you'll be able to put the full amount, so up to £15,000 a year in cash or in stocks and shares. And you can also move it between the two. It makes things a lot more flexible because you begin to reduce the risk of the money within your ISAs without losing the tax efficiency of it.
So the thing with investing is it's all to do with your time horizon and if you start investing for your child's education from birth or from when they're very young you can afford to take more risk because you've got the time to ride the ups and downs of the stock market.
Family finances and consolidating savings
Sarah: We've got questions still coming in on Twitter and social media and anyway. Sophie asks us "I've got a few different savings accounts I seemed to have accumulated over the years, should I consolidate these, is there any point?"
Tracey: I think look at the rates that you're getting, because often you'll be tempted by some really good introductory rates on savings vehicles that you may have completely forgotten and they are just not there anymore. And take advantage of the new guidelines around ISAs as well, if you can put more money in this year and you can transfer something into a tax-free savings vehicle and it's going to give you a better interest rate then do so.
Owen: I think the key thing about consolidating your savings is, that by putting them all into one bundle then you are putting them in the same position. That might be a position of instant accessibility, it might be a position where your time and money are for a fixed period and therefore whatever you do needs to fit with your budget, to come back to that, and it needs to fit with your cash flow. And also you've always got to think about how prudent you actually need to be because life is full of surprises.
Alvin: I think every year you need to sit down and do a personal balance sheet. Everybody needs to do this to see what your assets are this, to see how much your home has changed, your savings account has changed, your ISAs, to look at your liabilities. And then find out what your net worth is, whether it's negative or becoming positive. Therefore, you start to look at each of these components and you will start to see where you need to make changes in those so you are making the best decision for your long-term financial future. So that you can see where you stand on an annual basis, and sometimes, they'll be surprises there. A checking account or a savings account that you have isn't paying that much because the introductory period has run out – you need to move that money.
Owen: The other thing I would add is that an awful lot of savings products that are available for consumers work on a tiered basis. Therefore the interest rate that people can get paid on savings goes up when they reach certain benchmarks and therefore that's also worth taking into account if you've got lots of small savings accounts that might be at the bottom tier, that putting them together or even putting some of them together will actually increase the rate of interest that you could get.
How to maximise your savings
Alvin: During a time when interest rates are very low you need to look at other areas where you may be able to add an investment element to your portfolio. Investing does involve risk however that risk varies from relatively low to relatively high. A lot of people I know have taken money out of savings and used it to buy property especially around London because property growth but then you have the other problems of property maintenance. So you're putting your money into something that you may have a higher return but you have the maintenance. I think everybody needs to think from savings to other types of investment, how can I diversify without adding substantially to my costs but also giving myself opportunity for a better return.
Tracey: I think the main thing is to shop around, make sure as we've said, about the introductory period, so if they have expired, it is a good idea to check once a year, the rate of return that you're getting. Look online at some of the comparison sites for example, go and speak to a range of banks and building societies and other people offering savings vehicles and make sure you are comfortable with how quickly you can get at your money if you need it. And maybe have a number of options to spread the risk so some more long term, some more short term where you can get at that money if you need it.
Clare: Traditionally the mantra has always been "move your savings out of your current account because you're going to get a better rate of return" - at the moment that actually isn't always the case. There are a number of current accounts available now from a number of banks and building societies that are paying rates, credit rates of interest that are higher than you can get on a savings account plus the rules for switching current accounts changed last year so it's now much much easier to move your bank account, it just takes 7 working days. Some of them also give you access to preferential savings products.
Family finances and borrowing money
Sarah: We have been talking about taking out loans to pay for your education, most people take out a mortgage to buy a home, is there anything else that it is worth considering borrowing a large sum of money for?
Alvin: Probably an automobile if you need it for your job that's that the only other thing that I can think of that you need to borrow for. Your home, your education, everything else I think you can pay as you go. I know that when people first buy their first homes, people are tempted always to go out and get the furniture on loan to furnish their house beautifully using a loan, I say no. So I think for young adults, it's just a matter of knowing not to borrow, but think of it in a different way, try to make the money you have go as far as you can. And know what's going to make you happy.
Owen: It's all back to affordability and the danger of getting hold of things now because you want them now is that you are putting off an inevitable burden in the future. And if you take things like furniture in your first home, even if you're renting a flat, for example and you need to furnish it, there are lots of offers available, as we all know at 0% deals for a certain period of time and they look great for a while but when they kick in often at an expensive interest rate then you've got to be ready for that and make sure your budget at that point can deal with those things.
Clare: Don't assume you're actually going to be able to get the 0% deals because they all depend on your credit history and credit score and obviously for a lot of young people they have not had the chance to build up a credit history. I think if you can get a 0% credit card, or a 0% finance thing that enables you to buy something you feel that you need I don't think it's necessarily always a bad thing. The ones I really don't like are the ones that say you don't have to pay anything for 2 years because you've got no idea what your financial situation is going to be in 2 years' time.
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