wealthcrash.com

Some people in Britain seem to be suffering from the delusion that, as a result of high demand, house prices can’t fall.

They try to convince themselves that there’s a shortage of houses and, with all those immigrants coming here, house prices have got to rise – even if interest rates are going up.

I’m afraid that’s untrue, because:

• The prices of flats – so beloved of buy-to-let landlords – are already falling.
• If there truly were a huge shortage of houses, there would be hundreds of thousands of people moving into caravan cities. There’s no evidence of this.
• House prices in Ireland – which has also had a low interest-rate/high-immigration driven property bubble – have been falling. In the first five months this year Irish house prices have dropped 2.1%.
• People have less money to spend on houses. Let’s say you’re in the market to buy a house. You have £986 a month available for mortgage payments.
  • A couple of months ago, that would have allowed you to pay off a £160,000, 25 year mortgage with HBOS – variable rate 5.59%.
  • If you’re looking today, you’ll pay 6.44%. That means you can now afford to pay off £147,500 .
  • In other words, today you are able to offer £12,500 less for a house than you could have offered a couple of months ago.

The Bank of England has the bit between its teeth. It’s determined to reduce the cheap money supply that’s been inflating the value of assets in the UK. Don’t expect mortgage rates to start coming down again any time soon. If anything, expect the opposite.

The rise in interest rates today has been accompanied by the usual chorus of complaints from those with vested interests the financial sector- and the retail industry – that interest rates are too high. Banks and building societies continue to tell us that house price inflation is not a danger; 10 – 20% rises each year, year after year, are okay.

Sorry? Why, when wages are increasing at less than four percent per annum, is it alright for houses to rise at more than 10 percent? The current “average” situation in the UK is that people sitting in the “average” £200,000 house, appreciating at the “average” 10% each year are making £384 per week, just by owning a house. But where is that cash – higher than the minimum wage by the way – coming from?

In the old days, it would have been the printing presses at the Royal Mint, working flat out to print ever more money. Today, however, it’s created by computer keystroke.

The Bank of England has looked at the money supply and noticed that it’s currently rising at 14 percent each year. Sensibly, it has concluded that the British economy is awash with inflationary money – money that’s continually being created because interest rates are too low to restrain our greed for “cheap money”. So the Bank has done what it needed to do to slow down the supply of money – it has made it more expensive for people to borrow it.

Jens O. Parsson wrote tellingly about the effects of inflation:

“Everyone loves an early inflation, the effects at the beginning of the inflation are all good, there is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets and spectacular general prosperity, all in the midst of temporary stable prices. Everyone benefits and no one pays.

That is the early part of the cycle, in later inflation on the other hand the effects are all bad.

The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait in the terminal inflation. There is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion. Now, however, accompanied by soaring prices and ineffectiveness of a traditional remedy. Everyone pays and no one benefits. That is the full cycle of every inflation.”

These are the effects the Bank of England is currently trying to spare us the worst of.

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.

With this being the year of the 300th Anniversary of the UK, I thought I’d pose a question to show the value of starting saving early.

Question:
How much money would you have accumulated by now if, back in the year 1707, you’d invested £1 at an interest rate of ten percent?

Answer:
A remarkable £2,617,010,996,170.

If you shared it out, that’s enough to turn over 2 million people into millionaires, while still leaving yourself with over £600 million to play with.

But But But…
Did you?

I see that Halifax Home Insurance has released a report saying that over one million British holidaymakers come back from holiday each year to find havoc in their houses.

This year’s holidaymakers can expect repair bills of £2.3 billion to put right damage from criminals, the elements, friends, family and faulty utilities.

Damage Figures for the Last Ten Years

Criminal damage
Over the last ten years 2.5 million holidaymakers have come home to find that they’ve been burgled and more than 600,000 people have had their homes vandalised while they were away.

Water leaks
1.7 million holidaymakers came home to water damage – about £1 billion pounds worth nationwide .

Storm and fire
Almost 700,000 returned to storm damage and over 100,000 to fire damage.

Friends and Family
A million people came home to damage caused by their children half-a-million people said a house sitter had caused damage whilst they were away.

Utility Repairs
Around seven million people have come home to find a fault with a utility such as their central heating, hot water, gas or electricity – costing over £210 million per year to fix.

Checklist for Leaving your House Unnoccupied

Here is a basic checklist that can help you protect your property whilst you’re away from home.

• Check your home insurance policy, especially if your home is to be empty for a consecutive period of days. Watch out for the policies that only cover an unoccupied house for up to thirty days.
• Ensure pipes are lagged if you’re leaving the property unattended in cold weather.
• Leave a key with a trusted neighbour and ask them to check your property regularly.
• Put all deliveries on hold, e.g. newspapers and milk.
• Make sure your house looks lived in:
  • Buy a timer to turn lights on and off in the house when you are away.
  • Ask whoever is looking after your property to open and close curtains from time to time.
  • Organise a friend to mow your lawn regularly.
  • If you’re taking your vehicle, request a friend or family member park there occasionally to make the property look lived in.
• Deposit valuables at the bank or with a trusted friend. Avoid keeping excessive amounts of cash or jewellery in an unoccupied property.
• Always leave a contact address and phone number so that your neighbours know how to contact you in an emergency.

Money can grow or shrink.

If you invest it wisely, it grows and can produce a return for you, – such as a rent, an interest-rate, or a dividend.

You can look on this return as a stream of money you don’t need to work for.

If, on the other hand, you spend your money on consumer goods or services, it disappears for ever. You need to go out to work again to replace what you’ve spent.

To escape wage-slavery, you need to hang on to more of your money and give less of it to someone else. You need to start working for your own long-term benefit.

I know it’s impossible to save all of your earnings. Our society isn’t set up that way. Big companies are very clever at finding ways to persuade us to hand over our money. These businesses, of course, are owned by their share-holders – people who are smart enough to generate income from investments rather than working for it.

With a little thought, it will be possible for you to increase the proportion of your income that you invest for your own benefit rather than benefitting someone else by spending it inefficiently.

I’ve just said that it’s impossible to stop spending money completely – but it is possible to spend it efficiently, leaving a surplus to invest in income producing assets – your ticket to financial freedom.

If, instead of spending it, you can invest £1,000 this year at a ten percent return, then in 30 years it will have grown to over £17,000. If you can save £1,000 like that each year for 30 years, you will no longer need to be a wage-slave.

The trouble is I’m talking about a thirty year timescale. Most of us think much more short-term than that; but what if you could save that £1,000 without feeling the loss of purchasing power? Do you have £1,000 of expenditure you could dispense with in order to enjoy future freedom?

There are plenty of ways to stop spending £1,000 in a year. You probably go to work 220 days each year. If you could cut £2.50 per day from work-related expenditure, that would give you an immediate saving of £550. What about taking home-made sandwiches instead of buying a lunch? What about taking a flask of coffee instead of buying it?

A few more easy things to do – and I won’t go on about giving up smoking – suffice to say that smoking is one of the best ways business and government have ever found of keeping wage-slaves at work.? You could:

• Replace fizzy drinks with water.
• Replace bottled water with tap water – if you don’t like the taste of your tap water, leave it overnight in a jug in the fridge – you’ll be surprised how much the flavour improves.
• Stop buying and reading magazines – this has a double benefit. Most magazines are ridiculously expensive and are aspirational. They help keep you in wage slavery by promoting a large assortment of wholly unnecessary and expensive consumer goods. You proably only buy some things because magazines got you interested.
• Could you throw away that silly mobile phone? You’d be far more relaxed without it. Admit it, the vast majority of those calls and messages are unnecessary, aren’t they? Get a very cheap phone for emergency use only.

And the catch-all tip is:

Save First…………. Spend Second.

The very first thing to do with your pay is to save £19.20 per week or £83.33 per month. Only once you’ve done that should you spend what’s left over on your living expenses.