Simple Pound

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Apologies for the less frequent updates, but our project has reached a stage where we actually need to do some work. The good thing about this is, that I can research new current account, savings and investment options and call it “studying”.

So I’ve spent most of yesterday comparing current accounts and calculating interest based on the average Briton. According to National Statistics, the average UK resident’s current account incomings and outgoings can be broken down as follows:

• weekly pay: £447
• food & non-alcoholic beverages: £40.90 (or 9.15%)
• alcohol & tobacco: £17.66 (or 3.95%)
• clothing & footwear: £ £26.51 (or 5.93%)
• housing: £81.09 (or 18.14%)
• household goods and services: £28.88 (or 6.46%)
• health: £7.78 (or 1.74%)
• transport: £67.85 (or 15.18%)
• communications: £10.59 (or 2.37%)
• leisure: £53.60 (or 11.99%)
• education: £6.26 (or 1.40%)
• hotels & catering: £53.60 (or 11.99%)
• misc: £52.39 (or 11.72%)

Unsurprisingly we spent most of our money on housing and transport. Bearing in mind that this “average person” as such probably doesn’t exist, how well do these numbers reflect your spending patterns?

Now that I had some numbers to play with, I calculated the average monthly interest people can expect from the various current accounts on offer. My previous intentions were to switch banks immediately after getting my first pay cheque, but some precautions should be considered before making the final choice.

When searching for the best current accounts, the ranking you get is the following (assuming an average credit level of £1,000):

1. Alliance & Leicester Premier Direct: 6.50% AER
2. Abbey: 6.30% AER
3. Halifax High Interest: 6.17% AER

I have realised that Lloyds (my current bank) is actually willing to pay me 4.25% AER if I credit my account with at least £1,000 a month (salary!). That interest rate applies up to a balance of £5,000 - and this is exactly the catch. While the above banks offer a substantially higher interest rate, many of these are either time-limited (i.e. introductory offers) or apply to only a fraction of your balance.

This makes Abbey the worst offer of the three ones listed above because you only get 6.30% AER on the first £1,000 in your account and that rate only for 12 months - I suspect that afterwards you’re credited using the standard interest rate which is 2.50% AER.

In case you are interested, the average Briton would earn £3.74 in interest with Alliance & Leicester, £3.55 with Halifax and £2.44 with Lloyds TSB. While this constitutes a spread of more than 50% you will have to know for yourself whether the extra few pounds will be worth the trouble.

My general guidelines here would be:

Don’t forget tax. Bear in mind that the quoted AER rates do not include the 20% income tax you are automatically charged. This means that the best offer of 6.50% comes down to only 5.20% after tax.

Understand how interest is calculated and when it will be credited to your account. Most banks will calculate your interest on a daily basis and credit your account either monthly or annually. I personally prefer to get my interest monthly, because it serves as an excellent motivation to spend less. But admittedly this will be more important with savings accounts, because I usually keep my current account balance at a minimum while stashing away extra cash in an instant-access online savings account with real-time transfer.

Beware of introductory offers. If you don’t want to keep switching banks, make sure you know what interest rates you can expect after the introductory time is over. Don’t give your money to banks who can’t or don’t want to share such basic information.

Beware of other limitations. Many of these high-interest accounts assume you pay in a monthly minimum. Find out what happens if you fail to meet this requirement and how long it will take to get “back on track”. Also, bear in mind that the quoted interest rates may only apply to a certain amount of money. If, for instance, your average monthly balance exceeds £1,000 you are better off choosing a current account with Halifax than with Abbey despite the lower interest rate.

Real-time, instant access savings account? If you like keeping the bare minimum amount of money in your current account (e.g. to discourage you from thinking you’ve got all that money to spend!), an instant-access online savings account is a must. Most banks will offer such an account in connection with their current account, but make sure that transfers happen real time and don’t take 3-4 working days! If I expect a cheque to come through I can transfer funds between my accounts within seconds!

Cross-check other product offerings. If you prefer simplicity over an additional 5 pounds a month, then you should check the other products your potential new bank has on offer and how they compare in the market. Choosing an average current account offering with a decent savings account will be better for you in the long run than having the best current account the market has to offer but being stuck with lousy interest rates for your savings account.

My current favourite is Halifax because they seem to offer a decent range of products and a great current account with the 6.17% AER on balances up to £2,500. Share your thoughts on yours! Where does your money currently go to? And how happy are you with your current bank?

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How much money do you spend a year on books? That figure should exclude any academic textbooks you might require as a student, but with the average paperback novel priced between £7 and £10 it is probably still a respectable amount - at least if you find the time to read regularly.

As I’m slowly getting ready to move to London in June, I have started a massive de-cluttering project, simply to reduce the number of boxes I will have to carry. I have looked at every single CD, DVD and book in my room and asked myself whether I will really need it. Quite unsurprisingly it wasn’t very difficult to discard all of my textbooks from last year as well as the majority of the remaining Computer Science textbooks in my shelf. The only academic textbooks I’m keeping are those that might prove useful at work.

What I’ve discovered in the process is that I had about 10 novels in my shelf that wouldn’t even sell for £0.01 on Amazon anymore - despite being in excellent condition! That’s when “Read it - Swap it” came back to mind, which is a website I had come across during the time I was revising for exams and against my usual inclination for any sort of procrastination I left it till later to explore it further.

So what is it? The website basically acts as a market place where people can swap their old books against other people’s old books. In order to participate you must sign-up and list all the books you’d be willing to swap with someone else. Anyone interested in one of your books can offer you a “swap”. When that happens, you will get an email with a link to the other person’s book list and if you come across something that might interest you, you can agree to swap (there is no obligation to…). Once a swap is agreed, both parties post the book to the other’s address and you get to read a new book while simultaneously getting rid of extra clutter in your home!

Signing up is free and all you pay for the “new” book is the postage of your “old” book, but since your swapping partner is doing the same, you’re essentially even. The library currently contains well over 100,000 books and if everyone spreads the word this number can be increased even further (*hint*)! I have certainly added all my books and within less than 24 hours had already 2 people interested in them (even though I didn’t particularly like theirs…).

Go and check it out yourself!

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Everyone who is even just remotely interested in financial markets or personal finance is eagerly waiting to see whether the Bank of England will decide an increase in interest rates today.

We currently have a base rate of 5.25% which means that the Bank of England (BoE) charges 5.25% interest for loans that high-street banks take out in order to lend money to their customers. That means when the BoE decides to increase interest rates, any retail bank that seeks to borrow money will have to pay more interest on it. Since banks don’t usually like to decrease their profit margins, an increase in the base rate will almost certainly be passed on to consumers.

Now, how does that help with inflation? Inflation is the result of more money being spent than output produced - prices increase in order to bring down demand. As a matter of fact (and especially with the growing debt level in the UK) the money people spend isn’t necessarily money they have earned (i.e. a salary) but frequently money they have previously borrowed from a financial institution. Think houses, cars but also any balances carried forward on credit cards…

If the BoE now increases interest rates, borrowing money gets more expensive as high street banks adjust their offers. While you might be able to borrow £10,000 with 5% interest in a time where the base rate is 4%, you will certainly have to pay at least 7% when the base rate approaches 5.5%-6%. Assuming a loan period of 3 years, this results in a difference of roughly &pound20 a month. While £20 doesn’t sound too much, you still end up paying £300 in interest more a year. Therefore, with an increase in the base rate, it gets more expensive for people to take out loans or a mortgage. This in turn should make people think harder about whether they really need to take out this loan, and hence reduce demand and thus spending.

On the other hand an increased base rate means that people are likely to get more interest on their savings (because banks get more money for theirs at the Bank of England…). If you can suddenly earn 7% a year in interest when before only a meagre 4% were available, you are more likely to leave your money in the bank, rather than go out and buy some more shoes . It’s easy to see that more money in savings means less money being spent…

The overall effect of an increase in interest rates is therefore a reduction in demand and associated spending. This in turn reduces inflation as now production can keep up with demand and we (theoretically) return to the equilibrium price for our goods. If you’re keen to find out more about how monetary policy works, the Bank of England website is a very good place to start reading…

Back to real life - the interest rates meeting is on today. Analysts and the City in general have been speculating for weeks what the outcome of said meeting might be. While about a week ago, the BBC published an article that proclaimed interest rates would have to be raised to at least 5.75%, predictions got a lot more modest now.

One of the strongest indicators for a potential increase in interest rates on Friday is the fact that the Bank of England failed to hold its 2% (CPI) inflation target. Inflation was at 3.1% in March and in order to bring this back down, raising interest rates seems like a sensible option. And while you could panic because an increase would bring the interest rate to its highest value since 2001, putting it into perspective shows that it has been, in fact, hovering around a historically low value - especially if you compare it to figures for the early 90s.

However, there are some voices in the market who suggest that a raise in interest rates might not at all be necessary. First of all, the effect of the high energy prices that contributed to the rise in inflation is coming to an end as utility companies (are being forced to) pass on their cost savings, which will reduce people’s utility bills. Further, the growth in house prices is finally slowing down (yes! ) and the number of approved mortgages is even decreasing! All these signs could mean that we’ll be back on track with 2% inflation by the end of the year.

Let me know whether you think an increase is likely, and why (or why not). We can later check who got it right and even though the first person who guessed correctly won’t be getting a freebie, you can still prance around knowing you’ve got it all figured out.

Update: The Bank of England announced an interest rate increase of 0.25% to 5.5%.

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The truth is, no matter how much you know about investing, it’s worth nothing if you don’t have any money at your disposal to invest… The only two ways you can deal with this problem is by either increasing your income or decreasing the amount of money you’re spending.

Since most of us will be facing some difficulties trying to increase our income in the short run, we’re ’stuck’ with the latter. There are numerous ways, and below is a list of links of get you started.

• 50 ways to save money
• 50 more ways to save money
• 101 ways to cut expenses

Bear in mind that the last one is based on American lifestyle and their available options (like IRAs…their retirement savings account), so while some of their tips won’t necessarily apply to British people (or anyone outside the US for that matter), many nevertheless do - it’s definitely worth a read.

Having said that, I don’t necessarily agree with all of the proposed options, but that is a matter of taste or attitude. In any case, you’re not expected to put all of these into practice at once. You would end up feeling deprived and unhappy, which is not the point of this exercise. Pick your favourites and stick to them for a little while before you feel comfortable making further adjustments (if you feel you have to…).

Let me know what your favourites are or whether there’s anything else you can recommend!

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I couldn’t have said it better. Except for, maybe, bourgeoisie… that’s a word not as commonly used anymore as it was back when Lenin was busy planning a revolution. But the same principles still apply - even if you manage to stash some money away and not spend it all in one go, you will have to beat tax and inflation for your money to actually increase in value over time.

Cliff @ Fool.co.uk has written an elaborate article with lots of examples on how taxes and inflation will affect your money. His conclusions: take advantage of tax-free returns by making full use of your ISA allowance or buying Index-linked Savings Certificates, which are guaranteed to beat the RPI-rate of inflation (currently 4.8%) over three to five years.

The RPI index is currently at its highest since 1991 and even though this might give some people mighty grief, other dramatic examples prove that we should be thankful to live in a stable and secure economy like the UK. Zimbabwe is currently suffering from the world’s highest inflation rate of 2,200%. Compare this to what we call a “scandalous” 3%… If you had put £10 under your mattress last year its buying power would be reduced to £9.71 now (assuming 3% inflation). If a farmer in Zimbabwe would ever be lucky enough to own the equivalent of £10 and he would have buried it in his backyard a year ago, the same money would now only be worth £0.43.

If you’re still worried about inflation in the UK, here is a calculator that let’s you determine exactly how much value your money’s lost over the years. Just promise you won’t be upset…

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According to the BBC, 69% of no-notice savings accounts pay interest that isn’t even sufficient to cancel out current inflation rates. In March the Retail Price Index (RPI) was up 4.8% from March 2006 - which means, if your bank is paying anything less than those 4.8% your money gets effectively de-valued while sitting in your savings account.

That is certainly the case with my Lloyds Online Savings Account, which currently pays a monthly interest of 4.65% AER. This rate already includes a 0.6% bonus paid for one year from opening the account, so if I was going to stay with them in the long run, my gross interest would drop to 4.07% in July.

Well, 4.65% at the moment isn’t that bad you might think - but here’s another catch: tax. All the interest you’re earning is taxed at currently 20% - so the net interest that eventually ends up in your account is only 3.72% including the bonus. Oh and did I mention that these rates don’t apply for anything in the account from £0 - £250. No… for the first £250 I get a net interest of 0.08% - that’s an eighth of a percent!

So, what should this rant tell you? If you belong to one of those people who have an account that doesn’t even match inflation anymore, then switch. And do so right now because you’re losing free money!

I have been looking around for good rates for quite some time now (in anticipation of my sign-on bonus needing a home), but it wasn’t until a friend recommended his savings account that I came across Icesave.

Icesave is a subsidiary of the Icelandic bank Landsbanki Islands, which was established in 1866 and is (apparently) Iceland’s first and longest running financial institution. They have only recently appeared on the UK market, but have already established operations in 13 other countries. Why am I telling you this? Well, when it comes to the bottom line banks are institutions just like any other company and thus there’s always a risk of them going bust. This risk is greater, the smaller the institution - so I think it’s reassuring to know that there’s a larger apparatus in the back.

Anyway… facts now: Icesave offers you an online savings account with 5.7% AER (5.56% if paid monthly), which comes down to 4.56% net interest after 20% tax. Funnily enough that’s scarily close to what I currently get in gross interest with Lloyds - but only if you include a bonus! This is by far the best rate I’ve found on the web - and it comes with almost no strings attached. That means no penalties for withdrawing money, no notice periods, but there is a minimum investment of £250 (and a maximum sum of £1,000,000 in case that matters to you).

Reading through various forums online, people are usually concerned about the response time of online banks, because - after opening an account - you are send your User ID by post - which in one case apparently took 8 weeks (?). After that all communications with the bank will be handled through the Internet or a (0845) customer service hotline.

I tested Icesave’s responsiveness by sending an email to customer services asking about details regarding the calculation of interest (when, how often etc) yesterday afternoon. I got an automated response saying that due to high demand for their account a reply could take up to 5 business days. Grmph, I thought (or something very similar). But then I got a very lengthy and detailed reply this morning… It’s not an instantaneous response, but not bad either.

I am basically now running out of tricks to test them (I couldn’t think of many other questions after reading their FAQ’s online). Since I don’t have the money to open the account at the moment anyway, I’ll just keep watching them closely for now. But unless I come across some really concerning information in the meantime, I’m pretty sure I’ll be opening an account with them in June/July…

Please leave a comment if you’ve had any experience / know anything about Icesave and their online savings account (any other comments welcome too… ). People having to make decisions tend to look for information supporting their initial “gut feeling”, so throw all the bad news at me that you can find…

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