1. When it comes to teaching kids about money, the sooner the better.
Up until they start earning a living, and sometimes well beyond that, kids are apt to spend money like it grows on trees. This lesson will help you put your children on the road to handling money responsibly.
Long before most children can add or subtract, they become aware of the concept of money. Any 4-year-old knows where their parents get money - the ATM, of course. Understanding that parents must work for their money requires a more mature mind, and even then, the learning process has its wrinkles. For example, once he came to understand that his father worked for a living, a 5-year-old asked, "How was work today?" "Fine," the father replied. The child then asked, "Did you get the money?"
2. Once they learn how money works, children often display an instinctive conservatism.
Instant gratification aside, once they learn they can buy things they want with money - e.g., candy, toys - many children will begin hoarding every nickel they can get their hands on. How this urge is channeled can determine what kind of financial manager your child will be as an adult.
3. Seeds planted early bear fruit later.
It's important to work on your child's financial awareness early on, for once they're teenagers, they are less likely to heed your sage advice. Besides, they're busy doing other things - like spending money.
4. An allowance can be an effective teaching tool.
When your kids are young, giving them small amounts of money helps them prepare for the day when the numbers will get bigger.
5. Teenagers and college-age kids have bigger responsibilities.
Checking accounts, credit cards and debt are as elemental to the college experience as books and keg parties. Teaching high-schoolers about banking and credit will make them more savvy when they leave the nest.
6. Even investing should be learned early.
High schoolers can and should be taught about the market - using real money.
Thursday, July 2, 2009
GM's bankruptcy pitch - Day 3
NEW YORK (CNNMoney.com) -- General Motors returned to bankruptcy court Thursday seeking approval of its plan to restructure and create a "new GM."
Judge Robert Gerber reconvened for a third day after Wednesday's session continued into the evening.
Wednesday hearing included the testimony of Harry Wilson, a member of the auto team that is helping GM and the U.S. Treasury with the bankruptcy process.
Wilson, who has made a career out of investing in distressed firms, said the government has set a July 10 deadline for the restructuring plan to be completed.
"This business can not withstand a process of uncertain duration," Wilson said. "GM was far too large, too complex and too complicated to survive a [routine] Chapter 11 process."
Mark Salzberg, an attorney with Washington-based Patton Boggs, representing unsecured bondholders of GM, asked Wilson a series of questions about the reasoning behind leaving bondholders out of the bankruptcy process.
Wilson said that one of the "strategic benefits" of a 363 sale, in which the preferred assets of the old GM are transferred to the new GM, is that "consent of bondholders was not required."
Wilson said that there were other benefits, including "speed, certainty and the ability to leave liabilities that did not have any benefit to the enterprise."
New GM: The Detroit-based automaker, which filed for court protection on June 1, wants to use bankruptcy to create a new company and shed crushing debt and expensive contracts.
Under the plan, U.S. taxpayers would end up owning 60% of the new GM, with other stakes held by Canadian governments, bondholders and the United Auto Workers union.
Holders of $27 billion in GM bonds would get stock in the reorganized company, as will a union-controlled trust fund that will take stock rather than the $20 billion in cash it had been owed to pay future retiree health care costs. Those 650,000 retirees will have their coverage reduced.
GM plans to close more than a dozen factories, drop U.S. brands and shut down up to 40% of its network of 6,000 dealerships.
A successful and swift move through bankruptcy is crucial to GM's restructuring and a key test of the Obama administration's efforts to rescue GM and Chrysler.
Chrysler's bankruptcy was approved on June 1, just hours before GM entered Chapter 11. An attempt by creditors to block the Chrysler bankruptcy was turned back by the U.S. Supreme Court.
On Friday, in a move that could smooth its restructuring, GM filed documents in U.S. Bankruptcy Court in New York saying that it had agreed to accept legal responsibility, post-bankruptcy, for drivers who are injured by vehicle defects in old cars.
'Business is doing better': General Motors is trying to turn itself around amid slumping auto sales and a severe recession.
On Tuesday, GM's chief executive testified that the company's June sales were stronger than expected -- in part because the bankruptcy process is going swiftly.
Judge Robert Gerber reconvened for a third day after Wednesday's session continued into the evening.
Wednesday hearing included the testimony of Harry Wilson, a member of the auto team that is helping GM and the U.S. Treasury with the bankruptcy process.
Wilson, who has made a career out of investing in distressed firms, said the government has set a July 10 deadline for the restructuring plan to be completed.
"This business can not withstand a process of uncertain duration," Wilson said. "GM was far too large, too complex and too complicated to survive a [routine] Chapter 11 process."
Mark Salzberg, an attorney with Washington-based Patton Boggs, representing unsecured bondholders of GM, asked Wilson a series of questions about the reasoning behind leaving bondholders out of the bankruptcy process.
Wilson said that one of the "strategic benefits" of a 363 sale, in which the preferred assets of the old GM are transferred to the new GM, is that "consent of bondholders was not required."
Wilson said that there were other benefits, including "speed, certainty and the ability to leave liabilities that did not have any benefit to the enterprise."
New GM: The Detroit-based automaker, which filed for court protection on June 1, wants to use bankruptcy to create a new company and shed crushing debt and expensive contracts.
Under the plan, U.S. taxpayers would end up owning 60% of the new GM, with other stakes held by Canadian governments, bondholders and the United Auto Workers union.
Holders of $27 billion in GM bonds would get stock in the reorganized company, as will a union-controlled trust fund that will take stock rather than the $20 billion in cash it had been owed to pay future retiree health care costs. Those 650,000 retirees will have their coverage reduced.
GM plans to close more than a dozen factories, drop U.S. brands and shut down up to 40% of its network of 6,000 dealerships.
A successful and swift move through bankruptcy is crucial to GM's restructuring and a key test of the Obama administration's efforts to rescue GM and Chrysler.
Chrysler's bankruptcy was approved on June 1, just hours before GM entered Chapter 11. An attempt by creditors to block the Chrysler bankruptcy was turned back by the U.S. Supreme Court.
On Friday, in a move that could smooth its restructuring, GM filed documents in U.S. Bankruptcy Court in New York saying that it had agreed to accept legal responsibility, post-bankruptcy, for drivers who are injured by vehicle defects in old cars.
'Business is doing better': General Motors is trying to turn itself around amid slumping auto sales and a severe recession.
On Tuesday, GM's chief executive testified that the company's June sales were stronger than expected -- in part because the bankruptcy process is going swiftly.
Today's best saving rates
The Bank of England's June rate freeze has prompted a rally on fixed-rate savings deals. Rebecca Atkinson reviews all the best savings accounts on the market.
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Interest rates remain at just 0.5%, and the Bank of England looks unlikely to start increasing this official rate of interest until the outlook for inflation is clearer.
If you've seen your interest rate drop over the past few months then it really is time to find a new home for your money. The good news is that are some decent rates out there - especially with the June base rate freeze prompting a rally on fixed-rate deals.
If your money is stuck in a low-paying account, now really is the time to find it a new home.
FIXED-RATE
Clydesdale Bank and Yorkshire Bank are offering a five-year savings account paying an impressive 5% AER on upfront deposits of £2,000, or 4.5% for three years. A two-year bond, meanwhile, will earn you 3.75%.
Newcastle Building Society is also offering a five-year fixed account paying 5% AER on deposits from £5,000. And from 3 July, it will offer a postal account fixed at 4.5% until August 2011.
Stroud & Swindon has a range of fixed-rate accounts, including a deal that pays 5% until 31 July 2012. You must deposit £5,000 plus to qualify.
Elsewhere, private bank Close Brothers is currently offering a three-year fixed savings account paying 4.75%, or a two-year deal paying 4.5%. Both deals require an initial deposit of at least £10,000, and can only be opened between 20 June and 3 July, subject to availability.
Or, Yorkshire Building Society offers an e-bond paying 4.5% until 31 August 2013 on deposits of £100. It will also pay 4% over three years, or 3.5% over two.
ICICI Bank offers a range of fixed-rate accounts that allow you to fix for anything from six months to five years. You need to have £1,000 to deposit upfront, and the interest you earn varies depending on the term:
HiSave Interest Rates
One-year 3.6% AER
Two years 4.35% AER
Three years 4.35% AER
Four years 4% AER
Five years 4.4% AER
As a general rule, providers are currently rewarding savers opting for longer-term fixed deals with better rates. For example, Halifax has increased the rate of interest on its five-year websaver account to 4.75% AER (up from 4.4%) on deposits of £500. It pays 4.5% for four years or 4.25% for three.
Meanwhile, Birmingham Midshires and Saga both pay 4.35% AER for three and four years respectively on deposits from just £1.
Birmingham Midshires also offers a two-year account paying 4.25% AER on deposits from £1. Kent Reliance also pays this rate for two years, while Barclays has a three-year account also paying 4.25%.
West Bromwich Building Society, meanwhile, offers an E Bond paying 4.15% AER until 31 May 2011 for anyone with at least £5,000 to deposit. Withdrawals or additional deposits are not permitted and you can only manage your account via post or the telephone. It also pays 3.25% for 12 months.
Santander-owned Abbey is offering a two-year fixed-rate bond paying 4.15% AER on balances from £25,000. It also pays 4% over 18 months again on an upfront deposit of £25,000.
Cheltenham & Gloucester recently launched a fixed-rate account paying 4.05% for two years on balances of £50,000. If you have less to save (between £500 and £49,999) you'll earn 3.8%, or if you'd prefer to only fix for one-year you'll earn 3.5% on balances of £100.
The AA also pays 4.05% on its 16-month fixed-rate account.
One-year fixed-rate savings accounts are in high demand at the moment but, sadly, are not as competitive as their longer-term cousins. Skipton Building Society pays 3.87% AER until 28 February 2010 on deposits of £500.
INSTANT ACCESS
If locking away your money isn’t for you, then a no-notice deal might be more suitable for you. Just remember, the interest rate on these accounts is variable so it could decrease down the line.
Coventry Building Society currently offers its special Poppy Save instant access deal paying 3% AER on balances between £1,000 and £250,000. This rate includes a 1% bonus for the first year, so after this time your rate will drop.
This account is great for savers with a conscience, as the Coventry will donate 0.25% of the average balance to The Royal British Legion's Poppy Appeal.
ING Direct now pays 3% AER (up from 2.75%) on its varialble rate savings account. You can open this deal from as little as £1, and there are no penalties or restrictions when it comes to accessing your money. This deal is only for new customers - bear in mind, that interest is paid monthly so you won't benefit from compounded interest. After one year, the rate will fall to just 0.5%
Principality Building Society offers an e-Saver account paying 2.85% AER, including a bonus rate of 1.20% for the first 12 months. You only need a balance of £1 to open this account and there are no limits on the number and size of deposits or withdrawals, although the maximum balance allowed is £1 million. This account can only be opened and managed online.
Intelligent Finance, part of Lloyds Banking Group, also pays 2.85% on its online isaver. There are no withdrawal restrictions and you only need £1 to open an account. Again, you can manage your account online and there is also the option to use your savings to offset your mortgage.
This account guarantees to pay at least 1% above the Bank of England base rate until 31 December 2009. However, be aware that you need to have a mobile phone to set up payment instructions to this online account.
Sainsbury's Finance has an internet savings account that pays 2.8% AER on deposits between £1,000 and £500,000. However, you are only allowed to make three withdrawals during the first 12 months, and after this time the rate will drop to just 0.75%.
Newcastle Building Society offers an Online Saver account paying 2.5% AER on a deposit from just £1. Withdrawals are permitted without any loss of interest.
You can opt for this account to pay your interest on a monthly basis; however, you will need to have a minimum balance of £1,000.
Alliance & Leicester offers an Online Saver deal that pays 2.5% AER variable including a bonus of at least 1% until on 2 August 2010.
Barnsley Building Society also offers an online saver account paying 2.5% on deposits from £1. Again, you can make unlimited withdrawals, but these are subject to daily limits. This deal can be managed online, so you don't need to have a Barnsley branch in your area.
Stroud & Swindon Building Society pays a variable-rate of 2.25% on its postal account on opening deposits of £1,000. The account can only be managed via the post, but allows instant withdrawals of at least £1,000. It also guarantees to pay at least 0.25% above the Bank of England base rate.
NOTICE ACCOUNTS
If you want to make withdrawals but are happy to give your bank or building society notice before you do, then you could get a better rate. FirstSave currently pays 2.5% AER on its 90-day notice account, which can be opened from £100. You can opt for monthly or annual interest payments, but you must have a balance of at least £5,000 for the former option.
Secure Trust Bank, meanwhile, pays a slightly more attractive 3.15% AER on its 60-day notice deal on deposits from £1,000. Bear in mind that you can only make three withdrawals a year from this account.
REGULAR SAVINGS
The credit crunch has not only highlighted the importance of saving, it has also created a financial climate where saving products offer better value than in recent years.
Lloyds TSB, meanwhile, has increased the rate on its monthly saver account to 5%. The deal, which is fixed for 12 months, requires savers to pay in between £25 and £250 each month.
The benefit of this account is that instant access withdrawals are allowed - however, you cannot replace any funds withdrawn.
CHILDREN'S SAVINGS ACCOUNTS
If you have decided to invest your Child Trust Fund (CTF) voucher into a cash savings account, then the Hanley Economic Building Society currently offers an account paying 5% AER which allows you to make additions from £1.
However, as this account can only be managed via a branch, you might be better off with Yorkshire Building Society's offering. This pays 3% AER, but includes a bonus of 0.7% for 12 months.
Earl Shilton Building Society pays 2.85% AER, as long as you invest the full £250 voucher plus £10. Or Skipton Building Society pays 2.65% with the minimum addition set at £10.
All the above rates are variable and could change.
If you have already invested your voucher but want to open up a savings account for your child, then Halifax's one-year Regular Saver account pays 6% AER for one-year on deposits from £10.
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This tool provides views of the easy access savings market that match your specified need. Use it to find and apply for the account of your choice, choosing from our commercial partners or the entire market. The data is supplied by Defaqto, an unbiased and independent data provider, and the rankings are not influenced by any commercial arrangements. Be aware that where you are offered the option to apply, we have a commercial arrangement in place.
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Interest rates remain at just 0.5%, and the Bank of England looks unlikely to start increasing this official rate of interest until the outlook for inflation is clearer.
If you've seen your interest rate drop over the past few months then it really is time to find a new home for your money. The good news is that are some decent rates out there - especially with the June base rate freeze prompting a rally on fixed-rate deals.
If your money is stuck in a low-paying account, now really is the time to find it a new home.
FIXED-RATE
Clydesdale Bank and Yorkshire Bank are offering a five-year savings account paying an impressive 5% AER on upfront deposits of £2,000, or 4.5% for three years. A two-year bond, meanwhile, will earn you 3.75%.
Newcastle Building Society is also offering a five-year fixed account paying 5% AER on deposits from £5,000. And from 3 July, it will offer a postal account fixed at 4.5% until August 2011.
Stroud & Swindon has a range of fixed-rate accounts, including a deal that pays 5% until 31 July 2012. You must deposit £5,000 plus to qualify.
Elsewhere, private bank Close Brothers is currently offering a three-year fixed savings account paying 4.75%, or a two-year deal paying 4.5%. Both deals require an initial deposit of at least £10,000, and can only be opened between 20 June and 3 July, subject to availability.
Or, Yorkshire Building Society offers an e-bond paying 4.5% until 31 August 2013 on deposits of £100. It will also pay 4% over three years, or 3.5% over two.
ICICI Bank offers a range of fixed-rate accounts that allow you to fix for anything from six months to five years. You need to have £1,000 to deposit upfront, and the interest you earn varies depending on the term:
HiSave Interest Rates
One-year 3.6% AER
Two years 4.35% AER
Three years 4.35% AER
Four years 4% AER
Five years 4.4% AER
As a general rule, providers are currently rewarding savers opting for longer-term fixed deals with better rates. For example, Halifax has increased the rate of interest on its five-year websaver account to 4.75% AER (up from 4.4%) on deposits of £500. It pays 4.5% for four years or 4.25% for three.
Meanwhile, Birmingham Midshires and Saga both pay 4.35% AER for three and four years respectively on deposits from just £1.
Birmingham Midshires also offers a two-year account paying 4.25% AER on deposits from £1. Kent Reliance also pays this rate for two years, while Barclays has a three-year account also paying 4.25%.
West Bromwich Building Society, meanwhile, offers an E Bond paying 4.15% AER until 31 May 2011 for anyone with at least £5,000 to deposit. Withdrawals or additional deposits are not permitted and you can only manage your account via post or the telephone. It also pays 3.25% for 12 months.
Santander-owned Abbey is offering a two-year fixed-rate bond paying 4.15% AER on balances from £25,000. It also pays 4% over 18 months again on an upfront deposit of £25,000.
Cheltenham & Gloucester recently launched a fixed-rate account paying 4.05% for two years on balances of £50,000. If you have less to save (between £500 and £49,999) you'll earn 3.8%, or if you'd prefer to only fix for one-year you'll earn 3.5% on balances of £100.
The AA also pays 4.05% on its 16-month fixed-rate account.
One-year fixed-rate savings accounts are in high demand at the moment but, sadly, are not as competitive as their longer-term cousins. Skipton Building Society pays 3.87% AER until 28 February 2010 on deposits of £500.
INSTANT ACCESS
If locking away your money isn’t for you, then a no-notice deal might be more suitable for you. Just remember, the interest rate on these accounts is variable so it could decrease down the line.
Coventry Building Society currently offers its special Poppy Save instant access deal paying 3% AER on balances between £1,000 and £250,000. This rate includes a 1% bonus for the first year, so after this time your rate will drop.
This account is great for savers with a conscience, as the Coventry will donate 0.25% of the average balance to The Royal British Legion's Poppy Appeal.
ING Direct now pays 3% AER (up from 2.75%) on its varialble rate savings account. You can open this deal from as little as £1, and there are no penalties or restrictions when it comes to accessing your money. This deal is only for new customers - bear in mind, that interest is paid monthly so you won't benefit from compounded interest. After one year, the rate will fall to just 0.5%
Principality Building Society offers an e-Saver account paying 2.85% AER, including a bonus rate of 1.20% for the first 12 months. You only need a balance of £1 to open this account and there are no limits on the number and size of deposits or withdrawals, although the maximum balance allowed is £1 million. This account can only be opened and managed online.
Intelligent Finance, part of Lloyds Banking Group, also pays 2.85% on its online isaver. There are no withdrawal restrictions and you only need £1 to open an account. Again, you can manage your account online and there is also the option to use your savings to offset your mortgage.
This account guarantees to pay at least 1% above the Bank of England base rate until 31 December 2009. However, be aware that you need to have a mobile phone to set up payment instructions to this online account.
Sainsbury's Finance has an internet savings account that pays 2.8% AER on deposits between £1,000 and £500,000. However, you are only allowed to make three withdrawals during the first 12 months, and after this time the rate will drop to just 0.75%.
Newcastle Building Society offers an Online Saver account paying 2.5% AER on a deposit from just £1. Withdrawals are permitted without any loss of interest.
You can opt for this account to pay your interest on a monthly basis; however, you will need to have a minimum balance of £1,000.
Alliance & Leicester offers an Online Saver deal that pays 2.5% AER variable including a bonus of at least 1% until on 2 August 2010.
Barnsley Building Society also offers an online saver account paying 2.5% on deposits from £1. Again, you can make unlimited withdrawals, but these are subject to daily limits. This deal can be managed online, so you don't need to have a Barnsley branch in your area.
Stroud & Swindon Building Society pays a variable-rate of 2.25% on its postal account on opening deposits of £1,000. The account can only be managed via the post, but allows instant withdrawals of at least £1,000. It also guarantees to pay at least 0.25% above the Bank of England base rate.
NOTICE ACCOUNTS
If you want to make withdrawals but are happy to give your bank or building society notice before you do, then you could get a better rate. FirstSave currently pays 2.5% AER on its 90-day notice account, which can be opened from £100. You can opt for monthly or annual interest payments, but you must have a balance of at least £5,000 for the former option.
Secure Trust Bank, meanwhile, pays a slightly more attractive 3.15% AER on its 60-day notice deal on deposits from £1,000. Bear in mind that you can only make three withdrawals a year from this account.
REGULAR SAVINGS
The credit crunch has not only highlighted the importance of saving, it has also created a financial climate where saving products offer better value than in recent years.
Lloyds TSB, meanwhile, has increased the rate on its monthly saver account to 5%. The deal, which is fixed for 12 months, requires savers to pay in between £25 and £250 each month.
The benefit of this account is that instant access withdrawals are allowed - however, you cannot replace any funds withdrawn.
CHILDREN'S SAVINGS ACCOUNTS
If you have decided to invest your Child Trust Fund (CTF) voucher into a cash savings account, then the Hanley Economic Building Society currently offers an account paying 5% AER which allows you to make additions from £1.
However, as this account can only be managed via a branch, you might be better off with Yorkshire Building Society's offering. This pays 3% AER, but includes a bonus of 0.7% for 12 months.
Earl Shilton Building Society pays 2.85% AER, as long as you invest the full £250 voucher plus £10. Or Skipton Building Society pays 2.65% with the minimum addition set at £10.
All the above rates are variable and could change.
If you have already invested your voucher but want to open up a savings account for your child, then Halifax's one-year Regular Saver account pays 6% AER for one-year on deposits from £10.
The return of the 5% savings account
Savings accounts with rates of 5% and more are back as banks once again start to vie for your money.
Savings accounts with rates of 5% and more are back as banks once again start to vie for your money.
The past eight months have seen headline rates of savings accounts diminish to dismal levels, with many accounts paying little over 0% interest, in reaction to the falling Bank of England base rate. This now stands at just 0.5% and is extremely unlikely to fall any further, giving savings providers an opportunity to increase their rates slightly.
As a result, instant access accounts are now very much back in the spotlight; although rates are still pretty low compared to those seen during 2008, savers with their money in variable-rate accounts at least have the security of knowing their returns are unlikely to fall going forward - and could even rise when the base rate eventually returns to a more ‘normal’ level.
Meanwhile, funding for mortgage lending for banks and building societies remains expensive, putting the onus back on savings books to provide them with the capital to increase their mortgage operations.
This has led to a host of new fixed-rate accounts, and an increase in average rates. According to data provider Moneyfacts, one-year savings accounts pay, on average, 0.31% more today compared to March, while two-year accounts pay 0.67% more.
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But it is the longer-term savings accounts that have seen the biggest increase in rates; Moneyfacts says four-year accounts pay 0.84% more on average and five-year deals 1.13% more.
Michelle Slade, analyst at Moneyfacts, says: “Volatility in the money markets is prompting providers to turn to their savings book to fund their lending activities.
“In order to attract savers from their competitors, providers are offering ever-increasing rates. At the beginning of March just three bonds paid a rate of 4.00% or more, as of today that number has grown to 124.”
Fixed-rate accounts
Clydesdale Bank and Yorkshire Bank are both offering a five-year savings account paying an impressive 5% AER on upfront deposits of £2,000, or 4.5% for three years. A two-year bond, meanwhile, will earn you 3.75%.
Newcastle Building Society is also offering a five-year fixed account paying 5% AER on deposits from £5,000. And from 3 July, it will offer a postal account fixed at 4.5% until August 2011.
Stroud & Swindon has a range of fixed-rate accounts, including a deal that pays 5% until 31 July 2012. You must deposit £5,000 plus to qualify.
Elsewhere, private bank Close Brothers is currently offering a three-year fixed savings account paying 4.75%, or a two-year deal paying 4.5%. Both deals require an initial deposit of at least £10,000, and can only be opened between 20 June and 3 July, subject to availability.
Or, Yorkshire Building Society offers an e-bond paying 4.5% until 31 August 2013 on deposits of £100. It will also pay 4% over three years, or 3.5% over two.
ICICI Bank offers a range of fixed-rate accounts that allow you to fix for anything from six months to five years. You need to have £1,000 to deposit upfront, and the interest you earn varies depending on the term, but it will pay up to 4.4% if you fix for five years or 4% for four years.
As a general rule, providers are currently rewarding savers opting for longer-term fixed deals with better rates. For example, Halifax has increased the rate of interest on its five-year websaver account to 4.75% AER (up from 4.4%) on deposits of £500. It pays 4.5% for four years or 4.25% for three.
Meanwhile, Birmingham Midshires and Saga both pay 4.35% AER for three and four years respectively on deposits from just £1.
Birmingham Midshires also offers a two-year account paying 4.25% AER on deposits from £1. Kent Reliance also pays this rate for two years, while Barclays has a three-year account also paying 4.25%.
West Bromwich Building Society, meanwhile, offers an e-bond paying 4.15% AER until 31 May 2011 for anyone with at least £5,000 to deposit. Withdrawals or additional deposits are not permitted and you can only manage your account via post or the telephone. It also pays 3.25% for 12 months.
Santander-owned Abbey is offering a two-year fixed-rate bond paying 4.15% AER on balances from £25,000. It also pays 4% over 18 months again on an upfront deposit of £25,000.
Cheltenham & Gloucester has launched a fixed-rate account paying 4.05% for two years on balances of £50,000. If you have less to save (between £500 and £49,999) you'll earn 3.8%, or if you'd prefer to only fix for one-year you'll earn 3.5% on balances of £100.
The AA also pays 4.05% on its 16-month fixed-rate account.
One-year fixed-rate savings accounts are in high demand at the moment but, sadly, are not as competitive as their longer-term cousins. Skipton Building Society pays 3.87% AER until 28 February 2010 on deposits of £500.
Monthly savings accounts
The credit crunch has not only highlighted the importance of saving, it has also created a financial climate where saving products offer better value than in recent years.
Lloyds TSB recently increased the rate on its monthly saver account to 5%. The deal, which is fixed for 12 months, requires savers to pay in between £25 and £250 each month.
The benefit of this account is that instant access withdrawals are allowed - however, you cannot replace any funds withdrawn.
Accounts for children
If you have already invested your child trust fund voucher but want to open up a savings account for your child, then Halifax's one-year Regular Saver account pays 6% AER for one year on deposits from £10.
Savings accounts with rates of 5% and more are back as banks once again start to vie for your money.
The past eight months have seen headline rates of savings accounts diminish to dismal levels, with many accounts paying little over 0% interest, in reaction to the falling Bank of England base rate. This now stands at just 0.5% and is extremely unlikely to fall any further, giving savings providers an opportunity to increase their rates slightly.
As a result, instant access accounts are now very much back in the spotlight; although rates are still pretty low compared to those seen during 2008, savers with their money in variable-rate accounts at least have the security of knowing their returns are unlikely to fall going forward - and could even rise when the base rate eventually returns to a more ‘normal’ level.
Meanwhile, funding for mortgage lending for banks and building societies remains expensive, putting the onus back on savings books to provide them with the capital to increase their mortgage operations.
This has led to a host of new fixed-rate accounts, and an increase in average rates. According to data provider Moneyfacts, one-year savings accounts pay, on average, 0.31% more today compared to March, while two-year accounts pay 0.67% more.
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But it is the longer-term savings accounts that have seen the biggest increase in rates; Moneyfacts says four-year accounts pay 0.84% more on average and five-year deals 1.13% more.
Michelle Slade, analyst at Moneyfacts, says: “Volatility in the money markets is prompting providers to turn to their savings book to fund their lending activities.
“In order to attract savers from their competitors, providers are offering ever-increasing rates. At the beginning of March just three bonds paid a rate of 4.00% or more, as of today that number has grown to 124.”
Fixed-rate accounts
Clydesdale Bank and Yorkshire Bank are both offering a five-year savings account paying an impressive 5% AER on upfront deposits of £2,000, or 4.5% for three years. A two-year bond, meanwhile, will earn you 3.75%.
Newcastle Building Society is also offering a five-year fixed account paying 5% AER on deposits from £5,000. And from 3 July, it will offer a postal account fixed at 4.5% until August 2011.
Stroud & Swindon has a range of fixed-rate accounts, including a deal that pays 5% until 31 July 2012. You must deposit £5,000 plus to qualify.
Elsewhere, private bank Close Brothers is currently offering a three-year fixed savings account paying 4.75%, or a two-year deal paying 4.5%. Both deals require an initial deposit of at least £10,000, and can only be opened between 20 June and 3 July, subject to availability.
Or, Yorkshire Building Society offers an e-bond paying 4.5% until 31 August 2013 on deposits of £100. It will also pay 4% over three years, or 3.5% over two.
ICICI Bank offers a range of fixed-rate accounts that allow you to fix for anything from six months to five years. You need to have £1,000 to deposit upfront, and the interest you earn varies depending on the term, but it will pay up to 4.4% if you fix for five years or 4% for four years.
As a general rule, providers are currently rewarding savers opting for longer-term fixed deals with better rates. For example, Halifax has increased the rate of interest on its five-year websaver account to 4.75% AER (up from 4.4%) on deposits of £500. It pays 4.5% for four years or 4.25% for three.
Meanwhile, Birmingham Midshires and Saga both pay 4.35% AER for three and four years respectively on deposits from just £1.
Birmingham Midshires also offers a two-year account paying 4.25% AER on deposits from £1. Kent Reliance also pays this rate for two years, while Barclays has a three-year account also paying 4.25%.
West Bromwich Building Society, meanwhile, offers an e-bond paying 4.15% AER until 31 May 2011 for anyone with at least £5,000 to deposit. Withdrawals or additional deposits are not permitted and you can only manage your account via post or the telephone. It also pays 3.25% for 12 months.
Santander-owned Abbey is offering a two-year fixed-rate bond paying 4.15% AER on balances from £25,000. It also pays 4% over 18 months again on an upfront deposit of £25,000.
Cheltenham & Gloucester has launched a fixed-rate account paying 4.05% for two years on balances of £50,000. If you have less to save (between £500 and £49,999) you'll earn 3.8%, or if you'd prefer to only fix for one-year you'll earn 3.5% on balances of £100.
The AA also pays 4.05% on its 16-month fixed-rate account.
One-year fixed-rate savings accounts are in high demand at the moment but, sadly, are not as competitive as their longer-term cousins. Skipton Building Society pays 3.87% AER until 28 February 2010 on deposits of £500.
Monthly savings accounts
The credit crunch has not only highlighted the importance of saving, it has also created a financial climate where saving products offer better value than in recent years.
Lloyds TSB recently increased the rate on its monthly saver account to 5%. The deal, which is fixed for 12 months, requires savers to pay in between £25 and £250 each month.
The benefit of this account is that instant access withdrawals are allowed - however, you cannot replace any funds withdrawn.
Accounts for children
If you have already invested your child trust fund voucher but want to open up a savings account for your child, then Halifax's one-year Regular Saver account pays 6% AER for one year on deposits from £10.
What does your postcode say about you?
Insurers, annuity providers and other financial institutions are increasingly using postcodes to categorise consumers. Laura Howard investigates the postcode lottery and reveals how your address can work for - or against - you.
Postcodes, in their current six-digit form, were first introduced in Norwich in 1959. And they have a practical function - allowing mail to be processed 20 times faster that would otherwise be possible, according to Royal Mail.
However, certain postcodes are increasingly being seen as prestigious, and people are often willing to pay over the odds for a property in the "right" postcode.
But the power of postcodes goes much further. Financial services institutions - mainly insurers - use them to help categorise your application for a financial product in terms of its cost to them. It's the first three digits (or first half) of a postcode that holds the key to your premium - and, just like the lottery, the numbers can either work for you or against you.
Postcode lottery
Postcodes are pivotal to insurers when calculating premiums for buildings insurance (which covers the structure of your home), as they are the main indicator for risks such as flooding or subsidence. Statistics built up over the years by insurers are used to place each postcode on the spectrum of risk.
As ratings become more sophisticated, premiums for some properties are being calculated using all six digits of the postcode, or even using the characteristics of an individual property. Back in 2002, for example, Norwich Union introduced a digital flood map that could be used to assess the flood risk of a particular property rather than a postcode area or street.
This is done using the elevation of the property, relative to sea level or river levels, rather than just its geographical location. Sally Leeman, spokesperson for the insurer, says: "This means that two properties on the same road with identical postcodes can have different premiums, because one is at the top of the hill rather than the bottom."
Don't be content with contents insurance
When it comes to contents insurance, postcodes are mainly used to assess an area in terms of the likelihood of burglary. However, it doesn't necessarily follow that a well-to-do postcode area will be cheap for insurance, says
Peter Gerrard, head of insurance research at moneysupermarket.com. "You may have a street full of executive six-bed homes. But as well as being secluded and often unoccupied, such houses are likely to have more valuable contents, and this increases the risk of burglary and puts up contents premiums," he explains. "Just up the street could be a block of affordable housing and, as they come under the same postcode, their less wealthy occupants will have to pay a similar premium."
Buildings and contents cover is typically offered as a single policy, called home insurance. West Norwood in Lambeth, south London, is the most expensive area for home insurance in the whole of the UK, thanks to an above-average risk of burglary, flooding and subsidence.
The lowest premiums in the area average £342.38 a year, according to research from moneysupermarket.com - but that's still 21% higher than the most expensive area outside London, the former cotton mill town of Bacup in Lancashire, where the lowest average quote is £288.58 a year.
London homes in general are the most expensive for home insurance, while Kincardineshire, East Anglia and Powys are among the cheapest.
Bring it on down
Short of moving home, there is nothing you can do about your postcode, and it's unlikely that insurers' will revise their criteria. However, there are other measures you can take to bring down the cost of your home insurance.
For example, check the cost of rebuilding your home, advises Gerrard. "Some people are still confused about this. A £200,000 home may only have a rebuild cost of £80,000, as it is the land, not the building materials, that's expensive."
Having a burglar alarm fitted that you use, installing double glazing, fitting a five-lever mortise lock on your front door and joining a Neighbourhood Watch scheme are all ways to help bring your contents premium down.
If your premium is still too high, you could ask a broker to look for insurers who assess their premiums on an individual basis rather than using block pricing, but be prepared for the premium to be just as high or higher.
"Consumers would also do well to shop around every year instead of automatically renewing with the same insurer," adds Gerrard.
Postcoding your pension
In August 2007, Legal & General launched a pilot that incorporated postcodes into the cost of annuities, which provide a pension income in retirement. Usually, non-profit pension annuities are determined by using the age and sex of individuals to assess their life expectancy, but, according to L&G, where a customer lives can also influence how long they are likely to live, so the postcode is still relevant.
Simon Gadd, director of Legal & General's annuities business, says the move is a natural evolution for the pension annuity market: "A customer's medical history and lifestyle-related factors such as smoking, obesity and high cholesterol are now used in the pricing of enhanced annuities (where your monthly payments are greater, due to a shorter life expectancy), and our extensive experience data indicates that postcodes are also a reliable rating factor. This means that we are able to more accurately assess, and so price, the longevity risk for each customer."
If this is true, then surely the same mantra should apply to life insurance? Kevin Carr, head of protection strategy at Lifesearch, says: "There has been a lot of talk about postcodes in recent years, and it is my gut feeling that they will eventually creep into the life and protection side of insurance.
"The question is: to what extent? However, while smoking can double your life insurance premium, moving from Moss Side to leafy Cheshire might bring down the monthly cost by just a few pence."
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There is much uncertainty as to whether your postcode or address affects your access to credit - where, for example, a previous occupant had defaulted on borrowing. However, while your postcode alone has never determined your credit score, it's true that, at one time, your address certainly would have - whether a default at your address was your doing or not.
Credit checks used to be run only on an address, but, following a tribunal initiated by the Data Protection Commissioner in 1993, this unfair system was ended in 2004.
"These days, lenders can only carry out credit checks with an individual's consent, and only on people, not addresses," says James Jones, consumer affairs manager at credit reference agency Experian. "When you apply for credit, the lender will only see credit information about you and anyone to whom you are financially linked, known as your 'financial associates'.
"Information about previous occupants of your home is not retrieved and can have absolutely no bearing on your creditworthiness."
While you can no longer be refused credit on the grounds of your address, you may be penalised in other ways.
"Postcode profiling is used by marketers to determine where to send direct mail offers, so you could miss out on an invitation to apply for a platinum credit card if you live in an area where low-income groups predominate," says Jones.
However, in the credit-on-tap culture we live in today, there are plenty of other channels for accessing credit, so this is hardly a problem. In any case, missing out on such an invitation is probably a blessing in disguise.
Postcodes, in their current six-digit form, were first introduced in Norwich in 1959. And they have a practical function - allowing mail to be processed 20 times faster that would otherwise be possible, according to Royal Mail.
However, certain postcodes are increasingly being seen as prestigious, and people are often willing to pay over the odds for a property in the "right" postcode.
But the power of postcodes goes much further. Financial services institutions - mainly insurers - use them to help categorise your application for a financial product in terms of its cost to them. It's the first three digits (or first half) of a postcode that holds the key to your premium - and, just like the lottery, the numbers can either work for you or against you.
Postcode lottery
Postcodes are pivotal to insurers when calculating premiums for buildings insurance (which covers the structure of your home), as they are the main indicator for risks such as flooding or subsidence. Statistics built up over the years by insurers are used to place each postcode on the spectrum of risk.
As ratings become more sophisticated, premiums for some properties are being calculated using all six digits of the postcode, or even using the characteristics of an individual property. Back in 2002, for example, Norwich Union introduced a digital flood map that could be used to assess the flood risk of a particular property rather than a postcode area or street.
This is done using the elevation of the property, relative to sea level or river levels, rather than just its geographical location. Sally Leeman, spokesperson for the insurer, says: "This means that two properties on the same road with identical postcodes can have different premiums, because one is at the top of the hill rather than the bottom."
Don't be content with contents insurance
When it comes to contents insurance, postcodes are mainly used to assess an area in terms of the likelihood of burglary. However, it doesn't necessarily follow that a well-to-do postcode area will be cheap for insurance, says
Peter Gerrard, head of insurance research at moneysupermarket.com. "You may have a street full of executive six-bed homes. But as well as being secluded and often unoccupied, such houses are likely to have more valuable contents, and this increases the risk of burglary and puts up contents premiums," he explains. "Just up the street could be a block of affordable housing and, as they come under the same postcode, their less wealthy occupants will have to pay a similar premium."
Buildings and contents cover is typically offered as a single policy, called home insurance. West Norwood in Lambeth, south London, is the most expensive area for home insurance in the whole of the UK, thanks to an above-average risk of burglary, flooding and subsidence.
The lowest premiums in the area average £342.38 a year, according to research from moneysupermarket.com - but that's still 21% higher than the most expensive area outside London, the former cotton mill town of Bacup in Lancashire, where the lowest average quote is £288.58 a year.
London homes in general are the most expensive for home insurance, while Kincardineshire, East Anglia and Powys are among the cheapest.
Bring it on down
Short of moving home, there is nothing you can do about your postcode, and it's unlikely that insurers' will revise their criteria. However, there are other measures you can take to bring down the cost of your home insurance.
For example, check the cost of rebuilding your home, advises Gerrard. "Some people are still confused about this. A £200,000 home may only have a rebuild cost of £80,000, as it is the land, not the building materials, that's expensive."
Having a burglar alarm fitted that you use, installing double glazing, fitting a five-lever mortise lock on your front door and joining a Neighbourhood Watch scheme are all ways to help bring your contents premium down.
If your premium is still too high, you could ask a broker to look for insurers who assess their premiums on an individual basis rather than using block pricing, but be prepared for the premium to be just as high or higher.
"Consumers would also do well to shop around every year instead of automatically renewing with the same insurer," adds Gerrard.
Postcoding your pension
In August 2007, Legal & General launched a pilot that incorporated postcodes into the cost of annuities, which provide a pension income in retirement. Usually, non-profit pension annuities are determined by using the age and sex of individuals to assess their life expectancy, but, according to L&G, where a customer lives can also influence how long they are likely to live, so the postcode is still relevant.
Simon Gadd, director of Legal & General's annuities business, says the move is a natural evolution for the pension annuity market: "A customer's medical history and lifestyle-related factors such as smoking, obesity and high cholesterol are now used in the pricing of enhanced annuities (where your monthly payments are greater, due to a shorter life expectancy), and our extensive experience data indicates that postcodes are also a reliable rating factor. This means that we are able to more accurately assess, and so price, the longevity risk for each customer."
If this is true, then surely the same mantra should apply to life insurance? Kevin Carr, head of protection strategy at Lifesearch, says: "There has been a lot of talk about postcodes in recent years, and it is my gut feeling that they will eventually creep into the life and protection side of insurance.
"The question is: to what extent? However, while smoking can double your life insurance premium, moving from Moss Side to leafy Cheshire might bring down the monthly cost by just a few pence."
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There is much uncertainty as to whether your postcode or address affects your access to credit - where, for example, a previous occupant had defaulted on borrowing. However, while your postcode alone has never determined your credit score, it's true that, at one time, your address certainly would have - whether a default at your address was your doing or not.
Credit checks used to be run only on an address, but, following a tribunal initiated by the Data Protection Commissioner in 1993, this unfair system was ended in 2004.
"These days, lenders can only carry out credit checks with an individual's consent, and only on people, not addresses," says James Jones, consumer affairs manager at credit reference agency Experian. "When you apply for credit, the lender will only see credit information about you and anyone to whom you are financially linked, known as your 'financial associates'.
"Information about previous occupants of your home is not retrieved and can have absolutely no bearing on your creditworthiness."
While you can no longer be refused credit on the grounds of your address, you may be penalised in other ways.
"Postcode profiling is used by marketers to determine where to send direct mail offers, so you could miss out on an invitation to apply for a platinum credit card if you live in an area where low-income groups predominate," says Jones.
However, in the credit-on-tap culture we live in today, there are plenty of other channels for accessing credit, so this is hardly a problem. In any case, missing out on such an invitation is probably a blessing in disguise.
Top 10 lessons in personal finance
When it comes to managing our money and avoiding costly mistakes, we could all do with a bit of revision. Johanna Gornitzki takes us back to the classroom and shows how to get your finances back on track.
What do you think of when you hear the term 'ISA'? While most Moneywise readers would know immediately that it’s a tax-free savings account, an astonishing 15% of 18-to-24-year-olds think it’s an iPod accessory, while 10% believe it’s an energy drink, according to a recent survey by Scottish Widows.
Given this lack of financial awareness, it’s not surprising that many young people find it hard to make the right decisions when it comes to their finances. But it’s not just youngsters who are guilty of making mistakes with their money. Most of us, at some point in our lives, have squandered money on a pointless insurance policy, made a dud investment or been hit with a surprisingly large tax bill.
So, in the interests of better financial education, and to help you protect yourself from making some of the most common money mistakes, Moneywise takes your finances back to school with its top 10 lessons in personal finance.
Lesson one: Learn to live within your means
According to uSwitch, a mind-boggling 4.8 million adults in Britain currently spend more than they earn, and another nine million only just break even at the end of each month. While it’s nice to treat yourself to a weekend away or a new car, living beyond your means is not sustainable - and this will become even more apparent in the coming months as household bills continue to rise.
"We’re about to go through a recession, so people will have to start saving and pay off their debts. If they don’t do that, they’ll be in for a shock," warns Mark Dampier, head of research at IFA Hargreaves Lansdown.
If you find yourself going overdrawn every month or your credit card bill is growing bloated, it’s time to go back to basics and write a budget. Once you know how much you have coming in every month and how much you need to shell out on regular expenses like food, mortgage or rent, and bills, you’ll have a better idea of how much you can afford to spend on enjoying yourself. And if you’re tempted to borrow, stop and think first about how and when you’ll pay it back.
Guide to writing a budget
Lesson two: Don’t save when you have debts
Saving money can make you feel good. But if you’ve got a big credit card bill hanging round your neck, pumping all your spare cash into a savings account is unlikely to be the best use of your money. Even if you’re earning 5% or 6% on your savings, with interest rates on credit cards typically around 15% to 20% (or 30% if you have a store card) it doesn’t take a mathematician to see that you would be better off clearing your debts first as they’ll be growing at a faster rate.
Take a typical credit card balance of £1,812. According to uSwitch, if you just paid the minimum balance of 2% each month, with an APR of 18.33%, it would take you 29 years to clear the bill and cost you £2,857.55 in interest. So it makes sense pay off as much as you can every month. Even by stepping up your repayments to just 3% you would cut the repayment time and your total interest cost almost by half.
Of course, it’s sensible to have a small emergency fund, but once you’ve put that away, you should concentrate on paying off your debts.
Today's best savings rates
Lesson three: Financial advice isn’t as expensive as you might think
There are many areas of financial planning that are easy to do yourself, but there will always be some areas, such as tax, pensions and mortgages, where professional advice can be incredibly useful. But while a lot of consumers assume they can’t afford to see an IFA, this needn’t be the case.
All IFAs offer a choice of payment options. This will either be a fee or they will earn a commission based on the products they sell, so you don’t have to pay a penny. The rules regulating IFAs mean they do have to justify every product they offer you, nonetheless many consumers are more comfortable paying a fee as it guarantees that their IFA won’t factor his or her commission into the advice.
Even if you do pay a fee for your IFA, you could still save money in the long run. Peter Chadborn, principal of IFA CBK Colchester, says that nine out of 10 of his new clients come to him having bought the wrong product.
"I had a couple who came in with two life and critical illness insurance policies, for example," he says. "Only one was a guaranteed policy [if you have a reviewable policy your premium is likely to increase with time] and both of them only covered 13 critical illnesses. The monthly premium for both was £45. We found them a new policy, which offered a guaranteed premium and covered over 30 illnesses, for a total of £28.74 per month - a saving of 36%."
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Lesson four: Tax planning isn’t just for the rich
UK adults will pay more than £9.3 billion in unnecessary taxes this year, according to IFA Promotion’s latest Tax Action report. Given how much we all hate paying taxes, Alan Phillips, divisional director for financial planning at Brewin Dolphin, says, "it’s surprising how many people don’t look at what they can do to mitigate their tax burden".
While tax planning may sound daunting, there are plenty of things the average person can do to reduce the amount of tax they pay. If you have savings, you should make sure you use your ISA allowance as all interest will be paid tax-free. If you’re a couple, remember that you have two allowances that you could use.
If you aren’t a taxpayer, double-check that you aren’t paying tax on your savings. If you discover that you are, HM Revenue and Customs or your bank can provide you with a R85 form to complete to rectify the situation. It’s also worth checking that your tax code is correct and you’re receiving all the tax credits you’re entitled to, as well as making sure your home is in the right council tax band.
If you suspect you might be above the inheritance tax threshold - that is, if you have assets, including your property, worth more than £312,000 (married couples and those in civil partnerships have a combined total of £624,000), it’s worth speaking to an IFA about what you can do to prevent your beneficiaries being hit with a whopping tax bill.
This might include re-drafting your will or taking advantage of the annual gift allowance - each year you can give away £3,000 to any individual tax-free.
It also pays to make sure that any life insurance policies are placed in trust so that death benefits don’t form part of your estate.
Alan Phillips adds: "Everyone should tax-plan to ensure they make best use of any allowances, and their estate is best positioned to reduce any potential IHT liability."
Lesson five: Is a savings account the safest home for your money?
A savings account is safe in so far as you won’t physically lose any money, but it doesn’t necessarily follow that it’s the best home for your cash. Not only is its growth potential limited, making it tougher to achieve your financial goals, but you could find that its value is eroded over time as inflation continues to rise.
Whether or not a savings account is the best option for you depends on what you’re saving for - and for how long, says Annabel Brodie-Smith, communications director at the Association of Investment Companies. If you expect to need your money in the next five to 10 years, a traditional savings account will usually be the best place for it. However, if you have more time to play with, equities could be a better option.
While many savers see equities as high-risk, if you have time to ride out short-term market wobbles, your money should grow much faster than it will in a savings account.
Brodie-Smith says: "Over the 10-year period ending June 2008, a £1,000 investment in equities in the average investment company would have seen a return of £1,980. With a UK high-interest savings account, a £1,000 investment would only have given you £1,118."
If you have more than 10 years before you need to get your hands on your money, the gap between cash and equities is even wider. During an 18-year period, a UK savings account with £1,000 would have given you a return of £1,650, while money invested in equities would have risen to £4,456.
Of course, investing is never risk-free and you could end up losing some money, but if you choose your investments wisely (see lesson six) and build up a broad mix of funds, you can get better returns without taking too much of a gamble.
Lesson six: Don’t follow fashion when investing
Scanning the Sunday papers you might well see an article recommending a great new fund, and wonder if should you invest in it. No, warns Paul Dickson, head of financial planning and wealth management at the accountancy firm Armstrong Watson.
"You shouldn’t follow fashion when it comes to investing, because by the time an investment becomes popular it’s usually time to sell," he explains. "Look at the property market, for example. Many UK investors followed the trend of thinking ‘bricks and mortar’ was the perfect investment, and they carried on investing in residential property even as the real returns from this kind of investment fell."
The best way to invest is to first work out your goals, how long you want to invest for, and your attitude to risk. You also need to make sure your portfolio is as diversified as possible - put all your eggs in one basket and you’ll take a much bigger hit if that particular investment falters.
It’s also important to be committed to your investments and to take a long-term view. When the market falls many private investors tend to panic and cash in their investments. But this is one of the most costly mistakes you could make as you could be cutting your losses at the worst possible time.
Peter Hicks, executive director UK retail at Fidelity, explains: "It can be tempting during times of stockmarket uncertainty to delay making investment decisions or to sell existing holdings in the hope of buying back in when values are lower. In theory, this is an attractive idea, but it seldom works in practice."
According to Fidelity, for example, if you had invested a £1,000 stake in the UK stockmarket in June 1993, it would have been worth £3,260.58 at the end of June 2008. But if you had dipped in and out of the market and missed the best 10 days during this period, your investment would only have been worth £2,147.09. And if you had been unlucky enough to miss the 40 best days, your investment would be worth just £885.32- leaving you with a loss of £114.68.
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Lesson seven: Ignore pensions at your peril
According to Met Life, a whopping 2.8 million homeowners are risking their retirement income by treating their property as their pension. Whether you have a buy-to-let or are planning to downsize, falling house prices could mean you get much less than you bargained for when you come to sell. Or if you were considering releasing some of the equity in your home, you might not be able to release as much money as you thought you would.
In the worst-case scenario, you could even find yourself unable to sell your property, leaving you with a house that no longer suits your needs and with no income to support you in retirement.
While pensions have had a bad press in recent years, Matt Pitcher, a wealth manager at IFA Towry Law, says: "A pension is still the most tax-efficient way of saving for retirement, as the government tops up your contribution by 20% or 40% depending on your tax rate. No other type of retirement saving gets this kind of overnight growth."
If you’re a part of a company scheme, you also have the added benefit that your employer may make monthly contributions on your behalf.
Lesson eight: It could happen to you
One in four women and one in five men will suffer a serious illness, such as cancer or heart attack, before they retire. Yet, despite these worrying statistics, few of us even stop to think about how we’d cope in that situation.
"Imagine the emotional state you would be in if you lost a loved one," says Peter Chadborn. "Then imagine on top of this that you could face financial ruin. Obviously, you can’t prevent the former from happening, but you can prevent the latter."
Worryingly, half of the population would not be able to survive financially for more than 17 days after the loss of an income, according to research by Combined Insurance. And with household bills and personal debts continuing their upward march, people will find it even harder to cope. Policies like critical illness, income protection and life cover might not be the sexiest types of financial products, but they could offer you lifeline if disaster strikes.
It’s worth protecting your mortgage and your income from the risk of death or illness - a good financial adviser will be able to recommend the right cover for you. Fully comprehensive protection may be expensive, but in this case something is definitely better than nothing.
Lesson nine: Loyalty doesn’t pay
When it comes to personal finance, if you stick with the same products over the years, all the evidence shows you’ll end up paying for it. Take savings accounts: many providers welcome new savers with a tempting offers on accounts, but do not make these available to existing customers.
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The same goes for mortgages - stick with your current lender after your fixed or discounted rate runs out and you could see your interest rate rise by up to 2%. Likewise, the cost of your home and car insurance will go up each year whether you’ve made a claim or not. The key is to review all your financial services on a yearly basis, and switch if you’re no longer getting a good deal.
Lesson 10: Read the small print
Reading the small print on any of the financial services you buy is unlikely to be the most enjoyable use of your time, but it could be the most valuable. Chadborn warns: "The consequences of not reading the small print could be greater than you could handle. What would you do if your insurance policy didn’t pay out or your monthly mortgage payments turned out to be more expensive than you originally thought?"
Even with more straightforward products it’s still important to know what you’re signing up for. Some of the highest-rate savings accounts, for example, are likely to have strings attached, such as penalties for withdrawing your cash.
And while it’s great that you can use your mobile phone while you’re abroad, unless you read the small print and check the charges before you jet off, you could be hit with a surprisingly large bill when you get home.
What do you think of when you hear the term 'ISA'? While most Moneywise readers would know immediately that it’s a tax-free savings account, an astonishing 15% of 18-to-24-year-olds think it’s an iPod accessory, while 10% believe it’s an energy drink, according to a recent survey by Scottish Widows.
Given this lack of financial awareness, it’s not surprising that many young people find it hard to make the right decisions when it comes to their finances. But it’s not just youngsters who are guilty of making mistakes with their money. Most of us, at some point in our lives, have squandered money on a pointless insurance policy, made a dud investment or been hit with a surprisingly large tax bill.
So, in the interests of better financial education, and to help you protect yourself from making some of the most common money mistakes, Moneywise takes your finances back to school with its top 10 lessons in personal finance.
Lesson one: Learn to live within your means
According to uSwitch, a mind-boggling 4.8 million adults in Britain currently spend more than they earn, and another nine million only just break even at the end of each month. While it’s nice to treat yourself to a weekend away or a new car, living beyond your means is not sustainable - and this will become even more apparent in the coming months as household bills continue to rise.
"We’re about to go through a recession, so people will have to start saving and pay off their debts. If they don’t do that, they’ll be in for a shock," warns Mark Dampier, head of research at IFA Hargreaves Lansdown.
If you find yourself going overdrawn every month or your credit card bill is growing bloated, it’s time to go back to basics and write a budget. Once you know how much you have coming in every month and how much you need to shell out on regular expenses like food, mortgage or rent, and bills, you’ll have a better idea of how much you can afford to spend on enjoying yourself. And if you’re tempted to borrow, stop and think first about how and when you’ll pay it back.
Guide to writing a budget
Lesson two: Don’t save when you have debts
Saving money can make you feel good. But if you’ve got a big credit card bill hanging round your neck, pumping all your spare cash into a savings account is unlikely to be the best use of your money. Even if you’re earning 5% or 6% on your savings, with interest rates on credit cards typically around 15% to 20% (or 30% if you have a store card) it doesn’t take a mathematician to see that you would be better off clearing your debts first as they’ll be growing at a faster rate.
Take a typical credit card balance of £1,812. According to uSwitch, if you just paid the minimum balance of 2% each month, with an APR of 18.33%, it would take you 29 years to clear the bill and cost you £2,857.55 in interest. So it makes sense pay off as much as you can every month. Even by stepping up your repayments to just 3% you would cut the repayment time and your total interest cost almost by half.
Of course, it’s sensible to have a small emergency fund, but once you’ve put that away, you should concentrate on paying off your debts.
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Lesson three: Financial advice isn’t as expensive as you might think
There are many areas of financial planning that are easy to do yourself, but there will always be some areas, such as tax, pensions and mortgages, where professional advice can be incredibly useful. But while a lot of consumers assume they can’t afford to see an IFA, this needn’t be the case.
All IFAs offer a choice of payment options. This will either be a fee or they will earn a commission based on the products they sell, so you don’t have to pay a penny. The rules regulating IFAs mean they do have to justify every product they offer you, nonetheless many consumers are more comfortable paying a fee as it guarantees that their IFA won’t factor his or her commission into the advice.
Even if you do pay a fee for your IFA, you could still save money in the long run. Peter Chadborn, principal of IFA CBK Colchester, says that nine out of 10 of his new clients come to him having bought the wrong product.
"I had a couple who came in with two life and critical illness insurance policies, for example," he says. "Only one was a guaranteed policy [if you have a reviewable policy your premium is likely to increase with time] and both of them only covered 13 critical illnesses. The monthly premium for both was £45. We found them a new policy, which offered a guaranteed premium and covered over 30 illnesses, for a total of £28.74 per month - a saving of 36%."
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Lesson four: Tax planning isn’t just for the rich
UK adults will pay more than £9.3 billion in unnecessary taxes this year, according to IFA Promotion’s latest Tax Action report. Given how much we all hate paying taxes, Alan Phillips, divisional director for financial planning at Brewin Dolphin, says, "it’s surprising how many people don’t look at what they can do to mitigate their tax burden".
While tax planning may sound daunting, there are plenty of things the average person can do to reduce the amount of tax they pay. If you have savings, you should make sure you use your ISA allowance as all interest will be paid tax-free. If you’re a couple, remember that you have two allowances that you could use.
If you aren’t a taxpayer, double-check that you aren’t paying tax on your savings. If you discover that you are, HM Revenue and Customs or your bank can provide you with a R85 form to complete to rectify the situation. It’s also worth checking that your tax code is correct and you’re receiving all the tax credits you’re entitled to, as well as making sure your home is in the right council tax band.
If you suspect you might be above the inheritance tax threshold - that is, if you have assets, including your property, worth more than £312,000 (married couples and those in civil partnerships have a combined total of £624,000), it’s worth speaking to an IFA about what you can do to prevent your beneficiaries being hit with a whopping tax bill.
This might include re-drafting your will or taking advantage of the annual gift allowance - each year you can give away £3,000 to any individual tax-free.
It also pays to make sure that any life insurance policies are placed in trust so that death benefits don’t form part of your estate.
Alan Phillips adds: "Everyone should tax-plan to ensure they make best use of any allowances, and their estate is best positioned to reduce any potential IHT liability."
Lesson five: Is a savings account the safest home for your money?
A savings account is safe in so far as you won’t physically lose any money, but it doesn’t necessarily follow that it’s the best home for your cash. Not only is its growth potential limited, making it tougher to achieve your financial goals, but you could find that its value is eroded over time as inflation continues to rise.
Whether or not a savings account is the best option for you depends on what you’re saving for - and for how long, says Annabel Brodie-Smith, communications director at the Association of Investment Companies. If you expect to need your money in the next five to 10 years, a traditional savings account will usually be the best place for it. However, if you have more time to play with, equities could be a better option.
While many savers see equities as high-risk, if you have time to ride out short-term market wobbles, your money should grow much faster than it will in a savings account.
Brodie-Smith says: "Over the 10-year period ending June 2008, a £1,000 investment in equities in the average investment company would have seen a return of £1,980. With a UK high-interest savings account, a £1,000 investment would only have given you £1,118."
If you have more than 10 years before you need to get your hands on your money, the gap between cash and equities is even wider. During an 18-year period, a UK savings account with £1,000 would have given you a return of £1,650, while money invested in equities would have risen to £4,456.
Of course, investing is never risk-free and you could end up losing some money, but if you choose your investments wisely (see lesson six) and build up a broad mix of funds, you can get better returns without taking too much of a gamble.
Lesson six: Don’t follow fashion when investing
Scanning the Sunday papers you might well see an article recommending a great new fund, and wonder if should you invest in it. No, warns Paul Dickson, head of financial planning and wealth management at the accountancy firm Armstrong Watson.
"You shouldn’t follow fashion when it comes to investing, because by the time an investment becomes popular it’s usually time to sell," he explains. "Look at the property market, for example. Many UK investors followed the trend of thinking ‘bricks and mortar’ was the perfect investment, and they carried on investing in residential property even as the real returns from this kind of investment fell."
The best way to invest is to first work out your goals, how long you want to invest for, and your attitude to risk. You also need to make sure your portfolio is as diversified as possible - put all your eggs in one basket and you’ll take a much bigger hit if that particular investment falters.
It’s also important to be committed to your investments and to take a long-term view. When the market falls many private investors tend to panic and cash in their investments. But this is one of the most costly mistakes you could make as you could be cutting your losses at the worst possible time.
Peter Hicks, executive director UK retail at Fidelity, explains: "It can be tempting during times of stockmarket uncertainty to delay making investment decisions or to sell existing holdings in the hope of buying back in when values are lower. In theory, this is an attractive idea, but it seldom works in practice."
According to Fidelity, for example, if you had invested a £1,000 stake in the UK stockmarket in June 1993, it would have been worth £3,260.58 at the end of June 2008. But if you had dipped in and out of the market and missed the best 10 days during this period, your investment would only have been worth £2,147.09. And if you had been unlucky enough to miss the 40 best days, your investment would be worth just £885.32- leaving you with a loss of £114.68.
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Lesson seven: Ignore pensions at your peril
According to Met Life, a whopping 2.8 million homeowners are risking their retirement income by treating their property as their pension. Whether you have a buy-to-let or are planning to downsize, falling house prices could mean you get much less than you bargained for when you come to sell. Or if you were considering releasing some of the equity in your home, you might not be able to release as much money as you thought you would.
In the worst-case scenario, you could even find yourself unable to sell your property, leaving you with a house that no longer suits your needs and with no income to support you in retirement.
While pensions have had a bad press in recent years, Matt Pitcher, a wealth manager at IFA Towry Law, says: "A pension is still the most tax-efficient way of saving for retirement, as the government tops up your contribution by 20% or 40% depending on your tax rate. No other type of retirement saving gets this kind of overnight growth."
If you’re a part of a company scheme, you also have the added benefit that your employer may make monthly contributions on your behalf.
Lesson eight: It could happen to you
One in four women and one in five men will suffer a serious illness, such as cancer or heart attack, before they retire. Yet, despite these worrying statistics, few of us even stop to think about how we’d cope in that situation.
"Imagine the emotional state you would be in if you lost a loved one," says Peter Chadborn. "Then imagine on top of this that you could face financial ruin. Obviously, you can’t prevent the former from happening, but you can prevent the latter."
Worryingly, half of the population would not be able to survive financially for more than 17 days after the loss of an income, according to research by Combined Insurance. And with household bills and personal debts continuing their upward march, people will find it even harder to cope. Policies like critical illness, income protection and life cover might not be the sexiest types of financial products, but they could offer you lifeline if disaster strikes.
It’s worth protecting your mortgage and your income from the risk of death or illness - a good financial adviser will be able to recommend the right cover for you. Fully comprehensive protection may be expensive, but in this case something is definitely better than nothing.
Lesson nine: Loyalty doesn’t pay
When it comes to personal finance, if you stick with the same products over the years, all the evidence shows you’ll end up paying for it. Take savings accounts: many providers welcome new savers with a tempting offers on accounts, but do not make these available to existing customers.
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The same goes for mortgages - stick with your current lender after your fixed or discounted rate runs out and you could see your interest rate rise by up to 2%. Likewise, the cost of your home and car insurance will go up each year whether you’ve made a claim or not. The key is to review all your financial services on a yearly basis, and switch if you’re no longer getting a good deal.
Lesson 10: Read the small print
Reading the small print on any of the financial services you buy is unlikely to be the most enjoyable use of your time, but it could be the most valuable. Chadborn warns: "The consequences of not reading the small print could be greater than you could handle. What would you do if your insurance policy didn’t pay out or your monthly mortgage payments turned out to be more expensive than you originally thought?"
Even with more straightforward products it’s still important to know what you’re signing up for. Some of the highest-rate savings accounts, for example, are likely to have strings attached, such as penalties for withdrawing your cash.
And while it’s great that you can use your mobile phone while you’re abroad, unless you read the small print and check the charges before you jet off, you could be hit with a surprisingly large bill when you get home.
How to buy a property at auction
The slow housing market and an increase in repossessions have led to more buyers turning to auction houses. But while you may be able to pick up a discount, there are risks involved. Rebecca Atkinson explains how to buy a repossessed home at auction.
House prices have fallen significantly over the past 18 months and it is now possible to pick up some real bargains. Whether you are a property investor, a buy-to-let landlord looking to extend your portfolio or are simply looking for a new home, then the slow market and lower asking prices could well be whetting your appetite for buying.
At the same time, with increasing numbers of people unable to pay their mortgage, the number of properties being repossessed has also risen. This means there is a large amount of housing stock sitting on the market, potentially at a significantly reduced value.
For people interested in buying now, seeking out a repossessed home represents a real opportunity to snap up a property at a discount. However, you need to know where to look - and also consider the risks involved, especially if you are planning to buy through an auction.
Where to find repossessed property
The repossession process is fairly complicated, and begins when a homeowner gets into difficulties meeting their monthly repayments. Banks and building societies have pledged to do more to help struggling borrowers manage their mortgage and secured loan debt, with repossession treated as a last resort.
While this appears to be happening - the Council of Mortgage Lenders (CML) recently said it does not expect its prediction of 75,000 repossessions in 2009 to be realised - there were still 12,800 repossessions during the first three months of 2009, a 50% increase on the same period in 2008.
After a lender has taken possession of a property, it is likely to appoint an asset manager to ensure it is empty, clean and ready to sell. The property will then either be put on the market through an estate agent or sold directly through an auction. According to the CML, the method of selling the property will depend on its value in the market; if the lender is looking for a quick sale, it may opt for an auction. However, if it feels the property is likely to attract a lot of attention, it may decide an estate agent is the best way to achieve a sale.
Bernard Clarke, spokesman for the CML, says: “A mortgage lender has an obligation to the former homeowner to achieve the best value for their home; it also has to achieve a good value for its own sake, as it will want to avoid a shortfall on the outstanding debt. Holding out in order to achieve a higher price could end up costing it more.”
If you are looking to buy a property, and hope to achieve a cheaper price by buying one that has been repossessed, then contact estate agents in your area to see what they have on their books.
You can also use a new website, propertyearth.net, which lists around a thousand chain-free properties, including repossessed flats and houses, probate homes and unsold new homes from property developers. At the time of writing, the cheapest property up for sale was just less than £20,000 and the most expensive was on the market for £650,000.
The website allows you to search for property by price, postcode or description; when you find one you like, you simply contact the estate agent involved. The one thing every home has in common is that there is no chain involved.
Dominic Toller, managing director of propertyearth.net, says: “There is often a stigma attached to buying a repossessed property because of the often sad background story behind the sale, but the reality for buyers is that the owner, for whatever reason, is motivated to sell and may well be open to price negotiations.”
Auctions, meanwhile, might be more up your street because the process can be a lot quicker – once the hammer falls the lot is technically yours and the sale then has to complete within 28 days.
Another advantage of buying at auction is that you can usually get a good deal – while there are no exact figures on this, experts generally say buyers can save up to 30%. However, the actual price you achieve will depend on the type of property, why it is being sold at auction and how many people are interested – a lot of competition could drive up the price.
You can find auctions in your area by looking in specialist property magazine and newspapers. Estate agents may also be able to help. According to The Essential Information Group, which provides nationwide data on property auctions, April saw 2,333 lots put up for auction, of which 70% sold. The majority of property being put up at auction is in the North West, closely followed by the South East, London and Yorkshire and the Humber.
The Essential Information Group, which was established back in 1990, can provide you with detailed information on 400,000 property auctions across the whole of the UK. Although you have to pay for the data, if you are serious about buying at auction, you can use the website to not only find historical information on auctions but also to monitor lots currently available.
Another website, propertyauctions.com, allows you to search for property auctions and look at the available lots online.
How to buy at auction
Before the big day…
The most important thing to remember when buying at auction is to do your research in advance – the process is a lot quicker than buying through more traditional routes and it’s vital you know what you're bidding on in advance. Don’t get carried away with the excitement of the day.
Once you find an auction, make sure you request a catalogue and go through it carefully. This will provide details on the property up for sale, how to view lots and the general conditions of sale. You should also consult a surveyor or valuer to get their professional opinion on a property, in the same way that you would if you were buying on the open market.
It is not always compulsory to view a lot in advance of bidding on it, but unless you really like surprises, you should always try and inspect the property in question at least once. You may find it to be in a poor state, so it may also be necessary to consult a builder on the costs of bringing it up to scratch.
Notify a solicitor in advance of the actual auction, so that it can obtain any legal information on your behalf. Hand over any legal packs provided from the auction house, as well as the listing in the catalogue. Also, check for any special conditions related to the sale, as these could seriously affect the cost of buying a property through auction. For example, you may be required to pay the seller’s legal fees.
David Hollingworth, mortgage specialist at London & Country, says: “Buying at auction shouldn’t be all that different to buying through an estate agent – you really should consult a solicitor to make sure the lot is worth buying. It’s no good buying a property at auction on the cheap if it’s a dump.”
Last, but definitely not least, you need to get your finances in order before the day of the auction. Once the hammer goes down, you must be able to hand over a 10% deposit, with the remaining 90% required within 28 days. Don’t assume you’ll be able to get finance in that time – it’s wise to ensure you have a loan or mortgage agreed in advance of the auction and an application in process, or you’ll risk losing your 10% deposit.
Unless you are a cash buyer, consult a mortgage broker to find out the best way to apply for a mortgage. Although most lenders will issue mortgages on homes bought at auction, the process can be slightly complicated as, obviously, you do not know how much the property will go for.
You can then make your application in the normal way; your lender will need to issue a valuation of the property so be prepared to pay for this as well as legal fees. According to Hollingworth, valuation and legal fees vary but could cost around £1,000, while commissioning your own survey will set you back £500 or more.
Here lies the real risk of buying at auction. In order to make sure you don’t lose your 10% deposit, you must be prepared to pay out in advance of the bidding to get finance in place. However, if you don’t end up being the successful bidder on a lot, then you risk losing the money you’ve already paid.
Hollingworth says buying at auction isn’t for the faint-hearted or those without money to hand – as well as having the 10% deposit to pay the auction house, you’ll need to take into consideration the deposit your lender will ask of you. The larger the amount you have to put down, the cheaper the mortgage rate you are likely to secure.
“Do your homework, set a budget and make sure you have everything prepared in advance,” advises Hollingworth. “There is a real risk you could get carried away with the bidding and overspend. You could also win a bid only to find out no lender will give you a mortgage for it.”
If you are using a mortgage to buy a property at auction, then remember that you also need to consider buildings insurance as this is required by banks and building societies before a sale can complete.
On the day…
Before you head off to the auction house, call it up to make sure the property you are interested in is still available and hasn’t been withdrawn. You should also make sure you take your deposit with you – most auction houses will accept cash and cheques, but check before the big day. You are also likely to need two forms of identification.
When you get to the auction house you will be required to register your name, address and contact details. Once this has been done, you’ll be issued with a bidding number and allowed access to the auction room.
Don’t forget to request an 'addendum sheet', which has additional information about the property up for auction. Check it for any changes to the lot you are interested in.
It’s best to try and get to the auction early, to ensure you get a seat. If there are any lots up for bidding before the property you are interested in, then consider sitting in on these, especially if it’s your first time, as they will give you an idea of how the process works.
When your lot comes up for bidding, stay calm and remember what your budget is. Some bidders may wait to gauge interest in a property before making their bids while others are happy to kick things off. Remember, be aware of when you are bidding, as scratching your head at the wrong time could see you suddenly get in on the game.
Remember, all lots up for auction will probably have a reserve price – that is to say, the minimum amount the seller is prepared to accept. You will have seen the guide price (the amount it is expected to sell for), but the reserve price is not disclosed.
If the bids on the lots don’t meet the reserve price, then the seller may well keep hold of the property. However, if they are keen to sell they may still be interested in negotiations – the auctioneers may act as agents and a deal could be done at the end of the auction.
If the bids on the lots don’t meet the reserve price, then the seller may well keep hold of the property. However, if they are keen to sell they may still be interested in negotiations – the auctioneers may act as agents and a deal could be done at the end of the auction.
If you can’t make an auction in person, then it is possible to make a bid by proxy or participate via the telephone. Speak to the auction house in question to find out the process for this.
The golden rules of bidding at an auction are:
* Do your research on a property before even entertaining the idea of bidding on it
* Get your finances in order before the big day
* Get there early and make sure you bring your 10% deposit and ID
* Don’t get carried away with the excitement – keep your budget in mind at all times
* Don’t be intimidated by other bidders
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