Finance – Intermediate
Personal Budgeting
Whatever the source of your income, it will probably vary over your lifetime, so careful budgeting is very important. There are 3 steps to budgeting:
First of all you need to know how much of your income is actually yours, because if you have a job you will have to pay income tax. This will automatically be taken out of your pay by your employer by a process called Pay As You Earn or (PAYE for short). It really means that you don't receive the gross pay that you were offered when you took the job. Instead you receive your net pay which is the amount left over after deductions.Other deductions that may be made are:-
As a rough estimate you can reckon to lose up to 25% of your gross pay when you start to earn from a full-time job. At the end of each week or month you will receive a pay slip. It tells you what deductions have been made and how much you are getting to take home - your net pay.
Keeping Spending Records
Like it or not, your net pay will probably be reduced even further by the number of bills that you'll have to pay. Some of these will be fixed; you might have to pay a weekly rent or mortgage; you might have bought something on H.P.; you'll probably have fixed travelling expenses. All of these things have to be accounted and allowed for.
When you set up your own home you'll be involved in things like rent, gas, water and electricity bills, possibly a telephone bill or T.V. licence. You need to work out how much your bills are likely to come to and then put enough aside each week or each month to cover this total cost. This is the money that you are keeping in reserve.
Drawing up a Spending Plan
After you have set money aside in reserve from your net pay to pay for all your likely bills and have allowed something for daily food and travel, what's left is yours.
You'll probably want to spend some on clothes, on entertainment, holidays, maybe a motorbike or car. Whatever you choose remember that it pays to shop around. Don't buy on impulse - think very carefully before handing over your hard-earned cash. Compare prices, find out as much information as you can. If you're planning on buying a large item, like a stereo or motorbike, then it's even more important to get it right first time. If necessary get some advice; pop into your local library and look up their copies of Which? magazine, or find a Trading Standards Service to help you.
Saving
So far we've talked a lot about how you're going to spend your money but there's another important element to budgeting and that is saving. You might be planning a special holiday, getting married or moving into a flat that needs furnishing. Give some thought to your aims and ambitions but don't try to over-reach yourself. It isn't sensible to save more than you can reasonably afford.
If you're planning on saving for some time it's wise to choose a scheme that will pay you interest. That way your savings will grow. Don't leave your money stashed away in the house. For one thing it's an open invitation to burglars and secondly it will simply be lying idle. You want to make your savings work for you.
If you have not managed to save enough money to buy a certain item outright, then you may consider buying on credit.
Buying on Credit can be simply described as having something now and paying for it later. It means you can choose the music centre you want now and enjoy listening to it while you pay for it. There's no need to save up for months on end and no need to dip into any savings you might have.
Tempting?..... Yes, but it's not always that easy
ALWAYS REMEMBER.....
Using credit involves borrowing someone else's money and it can be expensive. You will usually end up paying back more than you borrow. This is because the lender will probably charge you interest. The lender is in business and aims to make a profit.
Whenever you buy anything, it pays to shop around. The same principle applies to credit deals. Some are much more expensive than others because different companies charge different interest rates. Look out for the letters 'APR', usually followed by a percentage (%) e.g. 'APR 20%'. You'll see them on lots of advertisements for credit in newspapers, shop windows and leaflets. If you don't - ask because it's your guide to the cost of credit deal. The importance of 'APR' is explained in more detail later but as a general rule, where the period of the loan is the same, the lower the 'APR' the better the deal.
Because buying on credit can be very costly, you must think very carefully before you commit yourself. Don't just hope you'll be able to afford the repayments. Do your sums and try to make sure that you will. Think about what would happen if you suddenly had to cope with a drop in income such as losing your job.
Never let yourself be coaxed or pressurised into taking out a credit agreement.
Don't sign any agreement until you've read it and can understand it. If you are in any doubt, get advice and do it quickly. Your nearest Consumer Protection/Trading Standards Department or Citizens' Advice Bureau (CAB) should be able to help. There's a useful leaflet called 'Shop around for Credit' which you can pick up from them. It's free and tells you what to look out for.
Getting Credit
There are lots of different ways of getting credit. You can buy a car on hire purchase; use a credit card to fill up the petrol tank; open a budget account to buy clothes; take out a personal loan with a finance company to pay for some furniture; go to your bank and take out a loan to pay for a holiday or take out a mortgage from a building society, bank or finance house to buy a flat or house.
What Credit Means - Buying what you need now and then paying for it by regular instalments in the future. It also means getting into debt. So again you've got to budget carefully and plan your spending to make sure that you don't take on more than you can reasonably afford. Remember too that borrowing someone else's money will cost you. The instalments that you pay will include something called interest. This represents the actual cost of the loan.
So you must find out everything you can before you decide to buy anything on credit. Get some advice about the different types of credit facilities that are available. They include things like:-
Although it is quick and easy to borrow cash to spend as you choose or to help you out of financial difficulties, don't borrow money to get yourself out of debt. You'll only end up deeper in trouble than ever. If you have debt problems, ask a Citizens' Advice Bureau for help.
Before you start to use any type of credit, it's important that you know how they work. That way, you'll understand what you might be letting yourself in for before it's too late to change your mind.
Types of Credit
Here are some details about the different kinds of credit that you may come across:-
1) Hire Purchase
You will usually have to pay a deposit (a small amount of cash) before you take the goods away with you. And you'll have to sign an agreement promising to pay the rest of the money (the balance) plus interest in regular amounts (instalments) over a fixed period of time. You may also be asked to pay something called an "option to purchase fee" which is often added to your last instalment.
Until you have made this last payment the goods don't belong to you, they remain the property of the finance company. So you won't be allowed to sell them to anyone else. If you do, the finance company may be able to take them back.
If you don't keep up your payments, the lender (the finance company) may be able to take the goods away from you. But once you've paid one-third of the total credit price the lender can't take them back without a court order.
If you find that you can't manage and you want to end your agreement, you must let the company know straight away. You may have to hand the goods back and make up any instalments that you have missed. You might even have to pay up to half the total credit price. And if you've damaged or misused the goods, you may have to pay for putting them right.
2) Credit Cards
A lot of people are using, or are being persuaded to use, credit cards to buy all sorts of goods and services. The most popular are Access and Visa but there are lots more around that work in the same way. You will be able to find out which credit cards, if any, a shop accepts because there will be signs in the window and round the shop telling you.
Credit card schemes are run by banks, finance companies, shops or companies that specialise in this type of finance. But watch out - the interest rates vary so find out the APR before you start and remember, some companies charge an annual fee.
If your application is accepted you will be given a plastic card that you can use instead of cash to pay for things.
You will also be given a credit limit. This means that you won't be allowed to spend more than a certain amount using your card.
Every month, you'll be sent a statement showing what you've bought and how much you owe. You'll have to pay back some of that amount each month. Your statement will show you the minimum you must pay in that month. You must pay at least the minimum but you can pay more. If you like, you can pay off the whole lot straight away. That's really the best option because you won't have to pay interest. Using a credit card in this way can be very useful. It gives you some short-term interest-free credit and it's much easier to carry a plastic card than cash.
BUT if you pay back in instalments, you'll be charged interest on what's left after you've made your monthly payment. And that mounts up each month.
If you keep spending (you can spend up to your credit limit, remember) and just paying at the minimum each month, it could be very expensive indeed.
3) Bank Overdraft
A scheme for people who already have a current account with the bank. You get your bank manager's permission to overdraw on your current account (i.e. take out more than it contains) up to a specified limit and for an agreed length of time. Usually a short-term arrangement.
4) Credit Sale
This is also similar to hire purchase but there's one very important difference. The goods belong to you right from the start so you can sell them before you've finished paying for them if you want to. Of course, you'll still have to keep making the repayments because if you don't the finance company can sue you to recover their money. You may even have to pay back the whole lot in one lump sum. But they can't take the goods away from you or anyone you may have passed them on to.
5 ) Mortgage Loan
This is a credit facility for buying your own home. You have to meet certain conditions. The building society or bank may give you more favourable consideration if you have already been saving with them for some time. You cannot usually borrow the entire cost of the home, so you will have to pay part yourself. There are different types of mortgage, and you should get advice on what kind is best for your needs before choosing. Remember that most mortgages last for 20-25 years, so it is important that you make the right choice.
6) Personal Loan
Available to anyone and is usually granted for a specific item e.g. home improvement, car. You choose how much you want to borrow (the bank won't let you have more than it thinks you can afford). Repayments are in equal monthly instalments. The period of repayment can go up to 5 years-depending on the size of the loan and what it is for. The rate of interest is fixed for the whole period of the loan, and is paid back as part of the monthly instalments.
Some loans may be "secured on the property". It means that if you fall behind with your repayments, the finance company might be able to force you to sell your home to get back the money you owe them. So think very carefully before you agree to anything like this.
Some companies advertise personal loans in the newspapers and allow you to borrow and use money in any way that you want. Don't fall for their
sales talk.
The law relating to Credit
When looking at the main types of credit agreement and the way they work, we've so far avoided any specific mention of the law. There are, in fact, very strict rules about lending and borrowing and most of them are laid down in the Consumer Credit Act. They're there to protect you!
Most of the rules in the Act apply to credit agreements, whatever the type of credit, where the amount you borrow (the amount of credit) is £25,000 or less. So most credit deals you're likely to take on in the future will be covered.
Before you get as far as taking out a credit agreement, the Consumer Credit Act protects you by having rules about:-
* Licensing - everyone in the business of lending money, introducing their customers to credit deals or even hiring their goods out for long periods, must have a special licence.
* Advertising – it can be very persuasive and there are, therefore, strict controls on the way that credit is advertised.
* Information which must be included in a credit agreement - A credit agreement must set out the terms of the deal you're taking on in detail and explain your rights under the agreement.
* Extortionate Credit - the Consumer Credit Act gives you the right to challenge a credit agreement if you think the interest and other charges are really sky-high, or what the law calls an 'extortionate' credit agreement.