wealthcrash.com

I keep banging on saying – Save First…………. Spend Second.

The more you spend on unnecessary baubles and ego-boosters, the further off is the day you will finally be free of wage-slavery.

It looks like Britons have been collectively forgetting this in record numbers.

Government stats – you can get the full report from the Office of National Statistics (pdf file 163 kb) – show that:

• Since the same time last year, the proportion of our income that we save has dropped from 6.3% to 2.1%.
• Our savings proportion is the lowest since 1960.
• Borrowing has exploded from £3.2 billion in the first three months of 2006 to £7.9 billion in the first three months 2007.
• Household expenditure is up 2.9%.

The Big, Bad Picture

The big picture is that we’re saving less than ever and borrowing more than ever in order to keep spending money in the shops.

With interest rates rising steadily, that’s the worst possible thing to do. High interest rates reward savers and punish borrowers. I expect to see a lot more people running into financial difficulties in the next year or so. Please don’t become one of them – Save First…………. Spend Second.

I have a credit card. I use it all the time. Used in this way, the credit card is fantastic. It allows me to buy things while I keep my money in the bank for a little longer than if I’d paid cash. This way my money generates interest, to my financial advantage.

If the shoe is on the other foot and you spend more on your card than you can afford to pay off instantly, you end up paying interest. You feed the bank’s profits every month, while reducing your own capacity to save. The bank’s shareholders increase their asset base, taking them closer to financial freedom, while you pay unnecessary interest charges, delaying the day you can be financially free.

In the war to free yourself from wage slavery, paying credit card interest is a losers’ battle.

As I’ve said, though, provided you are disciplined enough to pay the card off completely every month, credit cards are fantastic. If you are an impulsive buyer, however, you’ll either need some therapy to undo the financial damage your impulses cause, or you’re best advised to stay clear of credit cards altogether.

Credit Card Advantages

• Flexibility – allows you to buy heavily discounted items that you have been saving for but don’t quite have enough money for yet.
• Protection – if a product or service you have purchased goes wrong and the seller refuses you a refund, you can use a credit-card chargeback to get your money back.
• Travel Insurance – When you buy tickets with your credit card, you usually get a degree of insurance – for example my Nationwide card offers free travel accident cover up to £50,000 and £100,000 for gold cards.
• You could get free protection, for up to 100 days or so, against loss, theft or damage on purchases over £50.

Credit Card Drawbacks

• If you are impulsive, you could end up buying things you really can’t afford.
• It’s easy to build up big debts because interest rates charged by card companies are usually high.

The first step to freeing yourself of wage-slavery is to build an emergency fund. Should anything go wrong, an emergency fund should give you time to rearrange your life without having to take drastic – and costly – decisions.

Many people recommend you should have three months’ worth of income saved up in your emergency fund. If you truly wish to throw off the shackles of wage-slavery, I’d recommend building an emergency fund equal to 6 months’ income. This will give you longer to rearrange your life should anything ever go wrong and will be a fine start to building your asset base. You will only become financially free if you can build an asset base to eventually provide you with income.

How Long Will it Take You, Starting from Scratch, to Save Six Month’s Income?

Currently, savings accounts paying a return of about six-percent are easily found. Unfortunately, this will be taxed, substantially reducing the true interest rate. So, let’s say you save the money in a cash mini ISA. You can put £3,000 into one of these every year tax-free and get a true six-percent return.

For Example: Your Income is £20,000 a year

Your annual after tax income is £15,320.54
Six months’ income is £7,660.
Interest Rate = 6%

Amount you need to save monthly to reach £7,660 is:

One year saving plan: £617.90
Two year saving plan: £299.70
Three year saving plan: £193.80
Four year saving plan: £140.90
Five year saving plan: £109.30

At the end of this savings period, you will have completed the first step in your road to financial freedom.

When I went to primary school in 1973, I remember our teacher bought what must have been one of the first personal electronic calculators sold in the UK. She demonstrated it to us in class, and we were all amazed at how it could instantly do the sums we were puzzling over.

Mrs. M told us the calculator had cost her £100 – a lot of money in those days. The calculator was very basic by today’s standards – it could add, multiply, divide and subtract.

If Mrs. M had continued adding and subtracting for herself, and had invested her £100 at ten percent, today it would have grown to £2,555. Not a fortune by any means, but enough to buy hundreds of advanced mathematical calculators.