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The wealth of information on this site is available in a handy-sized book. Buy it from your bookseller, or online here.

ISBN 978-1-906439-21-7




Welcome to Money Sense exists to help you make the best use of your money. Whether you are a saver, or a borrower, or an investor you have a huge range of deals to choose from. What we try to do is give you the information you need to make the choices that are right for you. The difference between the right choices and the wrong ones can make a real difference to your life and to those close to you. We are not asking you to do anything that is difficult: finance is mostly common sense. All we ask is that you believe in yourself, and don’t be discouraged if you don’t understand something the first time you read it.

Much of this site is about investment because that is a subject that many people find hard to get to grips with. Investing can be complicated but it doesn't have to be. We try to take away as much of the mystery and complexity as we can. If we haven't always succeeded in doing that, then please tell us where we've gone wrong and we will try and put it right (mail us).

The financial services industry is vast. It employs many thousands of people in the UK, and millions worldwide. And like just about every field of human endeavour, finance has a language all of its own. The first step in being sensible with money is:

Don’t let the jargon put you off!

Most people recognise a bargain when it comes to spending: you know what you want and can shop around. But it isn't so easy when it comes to borrowing, saving, or investing. For a start, the jargon can be confusing. Sometimes it might be deliberately confusing. The more you understand, the more likely it is that you will do a better deal, and that probably means less money for whoever is trying to sell something to you. People who sell financial products are more interested in making themselves rich than making you rich, and you certainly don’t want to have to do any kind of deal with someone who knows something important that you don’t.

Money involves figures, and terms like percentages, APR and AERs. It's pretty boring and sometimes scary stuff. Unfortunately, there isn't any way to avoid the jargon, but the good news is that it really is not that hard to understand. Better still, when you do understand it, you will be surprised at how much better off you can be by making more sensible financial decisions. And the first step towards understanding is not to let the jargon baffle you.

Finance is simply about managing your cash

The next step is to realise that we are talking about something that is really quite simple. We need money so we can get the goods and services that we think will improve our quality of life. We need finance because we often don't have the money we need at the time we need it. Maybe we want to buy a house now that costs a lot more money than we have right now. And we will certainly want to be able to pay for food and clothes and holidays in the future, even though we will no longer be getting paid for working.

In both these situations, what we need is some way of exchanging cash now for cash in the future. When we borrow, we get the cash we need today by giving up some of the cash we expect to earn tomorrow, next month, next year. When we save or invest, we give up cash we have right now so that we can get cash some time in the future. That’s it. Finance is simply about managing our cash. Just about everyone will be a borrower at some time, and just about everyone will be a lender at some time. And there are people (banks, building societies, insurance companies for example) in the middle who borrow from me to lend to you, and vice versa.

Of course, it isn't just individual people who are trying to manage their cash: businesses and governments are also borrowers and lenders.

Making the most of your money

If there was just one big bank and everyone and every organisation in the country had to borrow from it or lend to it, then finance would be pretty simple. It could also be pretty unfair. Who would decide how much you had to pay to borrow, and how much you would make from lending? And who would decide how much the bank would make for acting as go-between?

In fact world wide there are thousands of banks and other organisations engaged in finance in some form or another. There are many ways of borrowing money and very many places to borrow it from. There are even more ways of saving or investing to get cash in the future. The good news is that there is a lot of competition for your business whether you are a borrower or a lender. The bad news is that it can involve a lot of shopping around and it isn't always easy to recognise a good deal – or a bad deal.

Money sense means shop around – and keep shopping around!

We tend to be lazy when it comes to money. Once we've decided which savings account to put our money into we don't feel we should have to shop around again this time next year. The same thing goes for our motor or household insurance. Shopping for money deals is not sexy, and people who sell financial services exploit our laziness and lack of knowledge. Our desire to buy something that is exciting (a new car, hifi, clothes, holiday) or a bargain at sale time can tempt us to do a very bad deal financially. That store card we are offered, or the extended warranty, or the holiday insurance is almost certainly a seriously bad buy.

That’s where we come in. We want to help you to get the best deals when you borrow money and the best deals when you save or invest. Most people understand what borrowing means, but might not be so clear when it comes to saving and investment.

Saving and investing: what’s the difference?

The dictionary tends to treat saving and investing as meaning more or less the same thing: setting aside money for use in the future. As far as we are concerned, saving means putting cash in the bank or building society, or even under the mattress. It's still cash, and we can count it or look at our bank statement to see how much we have. Investing means using our cash to buy some sort of asset that will give us cash in the future in return for us buying it now.

Savings are liquid

The difference between saving and investing from our point of view is a matter of what we call liquidity: which means how easy it is to get our hands on the cash. Savings are liquid: we know exactly how much there is, and unless there is some penalty for taking it out, we can spend it more or less right away. Although some investment assets can be turned into cash pretty quickly, this might not be a good time to sell. In some cases it can take quite a long time and some expense to turn them into cash. Although you can put cash into an ISA (Individual Savings Account) and enjoy some tax advantages, the benefit is lost when you take the money out. For that reason we will treat the ISA as a way of investing rather than a method of saving.

Saving and borrowing

Saving and borrowing are pretty straightforward. If we put money in a savings account we expect it to earn interest. For example, if we put £100 in a building society account today, we would have about £105 in a year's time. Our money has earned us £5 interest (which is 5 percent). If we borrow money we expect to pay interest. Suppose we could borrow at 5 percent (5%) a year interest. If we borrow £100 today and repay it this time next year, we would have to pay back £105. (In reality, it is very unlikely that we could borrow or lend at the same rate of interest. The bank or building society wants something for its trouble and will almost certainly charge us about twice as much for borrowing as it gives us for saving, but we will come to that later)

Investing is rather more complicated. There are several types of asset, thousands of individual assets of each type, and several ways of getting cash in return. Some types of investment are pretty risky whilst others are very safe. So, if investing is complicated and often risky, why bother?

Why invest?

The reason we invest is because in the long run we can expect to get more cash in return than we could get from saving. That's not simply being greedy: even with today's relatively low inflation, what we get for our money will on average be less next year than this year. Fifty years ago we could have bought quite a reasonable house for £2,000. The same house today would cost us over £100,000. Not all of that increase is due to inflation, but more than half of it is. The rest of the increase is due to economic growth. When an economy is growing, most people have more money to spend. They can afford to pay that bit more for the houses that they want to live in, and as the supply of houses in the most desirable areas is limited, competition between buyers pushes the prices up.

Saving is fine if we are not looking ahead more than a few years. In fact, saving should play an important part in the financial lives of most of us. But if we are thinking about needing cash in ten or twenty years' time, we should be looking for ways of protecting our savings from inflation and seeing how we can benefit from economic growth. That’s where investment comes in.

Before we go on to talk about investment in more detail, lets take a look at borrowing and saving, and also think briefly about insurance.


  9 October, 2008 © 2008 K.R.Wade and Co Ltd prev page next page