Webchat with Alvin Hall
This is an edited transcript of our live webchat with independent money-saving expert Alvin Hall on July 3rd 2008. An author and presenter, Alvin advised the nation on BBC2's Your Money Or Your Life and has written several books on personal finance.
Rubyslippers: Alvin, if you were to have a windfall, would you save it or pay some of your mortgage off?
AlvinHall: It would depend on if I already had three-to-six months of my living expenses saved in a bank or building society. Having this emergency cash cushion is an important part of prudent financial planning because you can never tell when you may need that money for an emergency. If you already have that amount of money in savings, it would then seem prudent to pay off your mortgage with the windfall. During times such as the current credit crunch, I would not rely on a home equity line of credit as my "cash cushion" as many people have done in the past. In the current credit environment, your bank may decide to restrict the amount it would lend you against the value of your property. Having cash in the bank is always good.
UniversallyChallenged: Due to my husband's critical illness insurance payout (he has cancer. so is unable to work for probably the next year), we have an amount to invest. Which bank account would you recommend that we can access fairly easily (maybe a week's notice) but is a good percentage rate. The best we have found is about 7.5%. Can you beat that? Thank
AlvinHall: A 7.5% interest rate is pretty good. In order to get a higher return, you will more than likely have to place the money at risk and I don't think that's what you want to do. Keep the money safe and secure. And beware offers of a higher return that involve "investing". This word means there's risk of loss involved.
MsDemeanor: How do you think couples should manage their money in order to promote the best marital harmony? How much should you share? And should you know the details of each other's credit card balances etc? I bet you say yes! I find it hard to do this, as I feel as if I want my privacy but I also know I am more extravagant than muy hus and feel a bit disapproved of!
AlvinHall: Money is cited as being the cause of marital discord and divorce more often than infidelity. So it's important for you to be open, not secretive, about money. This does not mean you have to have a joint account or tell your partner or husband about everything you spend money on; but there must be some ground rules with which both of you are comfortable and with which both of you can live. You need to sit down, discuss the relevant issues point by point and establish clear parameters. One of the most important things, if you are going to handle your money separately, is whether your partner has any obligation to help you if your spending gets you in trouble. (The fact that you are more extravagant and want to be secretive about it suggests that you know you are spending more than you realistically should. You are very likely projecting your own disapproval onto your partner.) You need to start talking sooner rather than later!
RubySlippers: Can you point me in the direction of a really easy family budget plan?
Also, I am tempted to carry cash, rather than cards, to try to curb my non-essential spending (mags, lattes etc). Is this a useful thing to do?
AlvinHall: In my book, Your Money or Your Life, I have an entire chapter on budgeting. If that doesn't help, then you should try one of the money management software packages, such as Quicken. Budgeting is really about allocating money to your needs first (the things you have to pay every month). I also advocate saving a percentage of your money before even paying those expenses. The last thing you want to budget for is discretionary spending. These are the things you want. What makes it difficult for most people is that don't distinguish clearly between their needs and their wants.
Windfall: Alvin, in the next 12-18 months I'm hoping to earn a substantial sum - several 100k - enough to pay off the mortgage and leave me with a good investment, but not enough to retire on. Big spend over the next 15 years may be school fees and looking after my parents (which may require a bigger house) so I need a fairly low level of risk. I assuming I can put a good wodge in low risk investments (high interest accounts, ISAs) but I'd like to see some growth beyond that and I'm a bit clueless about what to do to generate it - any ideas?
AlvinHall: Windfall, congratulations. I'd like to have a windfall myself. Paying off your mortgage is good. But before you put the rest of the money to work, you have to determine you risk tolerance. Right now you are being very prudent and putting the money into a high-interest bank account which means it will not be at risk. The only way you can get a better return is to invest in shares; but I probably would not do so at this time given all of the uncertainty in the market. Be patient with yourself and the money. Wait for better investment days to come along. There's no harm in keeping your money just ticking over in a high interest account. At least you're not losing it.`
Windfall: Alvin Thank you: you're right, the key thing is for me to work out how risk tolerant I really am. Luckily I have a while to do that.
Sophable: Fantastic to have you on here! Once ISA allowances have been used, what is the next best place to put savings in your opinion in the context of the current economic climate?
AlvinHall: In the current economic environment, it's probably best to hold your money in cash until things settle down. I had dinner with a friend last night and he talked about how he had been investing money and watching his investments go down. He was not happy. There no harm in holding onto cash and waiting to invest it when the markets look more positive.
sophable: So paying off mortgage no good either? Better to hold onto cash? Thank you so much for your swift response.
AlvinHall: It's always good to have a cash cushion equal to 3-6 months of living expenses just in case of an emergency. Because I'm essentially a freelancer, I keep 1-year's expenses in the bank as cash. Once you have your safety net in place, then pay off the mortgage. Many people in recent years have used the equity in their homes as a safety net. But what happens if the bank decided not to lend against it or decides to lend less, which could happen during this credit crunch. (Look at the number of people whose credit cards have been revoked or turned down for mortgages.) Cash as an asset class has been underrated. In times like this it can be your best friend.
LynetteScavo: Have you written about how we can budget etc? If so what's it called? If not, you should!
AlvinHall: LynetteScavo, I've written six or eight books. My newest one, Show Me the Money, is for children, as well as their parents. It gives them a broad understanding of how money works. It's colourful and fun. You'll learn a lot from it as will your children.
Cathpot: Hi Alvin, I put a small amount of money away each month into an ISA which tracks the stock market. It has been going for 4 years now and returns are currently very poor. This is an investment I am not looking to cash in for at least 10, probably 15 years. Should I continue to put the money in on the basis that it will be buying shares now at a low price and in 10 years time should be worth more, or should I stop and put money into a savings account? If I do stop adding to it will the money within it continue to be reinvested in shares? Thanks for your time.
AlvinHall: By continuing to contribute to your ISA you are taking advantage of pound cost averaging. Your money is buying more shares while the prices are low. This will lower your overall costs of what you own. The reason your ISA has performed so badly is that the markets have been bad recently. All of the major indices are in negative territory. However, given that your timeframe is so far away (I wish I were as young as you) I would probably continue to contributing. What you may want to look at are other ISA that have provided a better long-term return--and I| emphasize long-term over short term.
Cathpot: Thank you for your answer, slightly surreal to have been discussing this with DH this morning and gently dithering about a decision as we dont know enough about it and now when he comes home I can tell him I asked Alvin!
RTKangaMummy: Our son is 13 now and he has about £6,000 to invest this year - ie now. Next year, he will be given another £6,000. And so on for the next 5 more years (each year he will be given another approx £6,000 to invest). So we need somewhere secure with HIGH interest.
BUT WHERE?? Building society or national saving bonds or somewhere else. ALL of this money is for him for the future ie NOT to be withdrawn until he is an adult. Thanks
AlvinHall: It's commendable that you are putting money away for your son's future. But what you are looking for - a secure investment with high interest - is impossible to find without there being the risk of loss. If you are your using secure to mean 'risk free' then you must be willing to accept the relatively low interest rate paid by a bank or building society on the money deposited for you son. If you want high interest, you may need to give up some of the security you seek and invest in a unit trust that is made up of shares. You may get a better return over the long term that you would at a building society, but you are exposing that to volatility and the possibility of loss.
RTKangaMummy: Thanks for the reply Alvin. That explains why we haven't found what we are looking for because it doesn't exist! Thanks for info. I think we will put it in the highest interest Building Soc we can find for him then, I definitely don't want to lose this money.
Bundle: Hi Alvin, My husband (main breadwinner) went freelance about a year ago. So far our income is fairly steady. Our mortgage agreement ran out so we're paying a bit over the odds with our lender on their 'normal' rate. If we switch should we go for a fixed/tracker/variable? We may move in the next two years so don't want to be locked in for too long or suffer massive penalties if we up the loan.
AlvinHall: Bundle, there is no easy answer to your situation. If you are planning to move in two years, will you be saving enough by changing your mortgage to justify the work involved. Or, let me be honest here, are you letting outside pressures influence you? I'm of the keep it simple school. If you're not losing lots of money and you can handle the mortgages, why chase the small changes? On the other hand if the saving will be substantial over the two year period then it makes sense to change.
MegReally: I want to know if it is a good idea to throw everything into the mortgage for the next 8-10 years and then throw it into a pension. I say this because dh and I have about £150 between us a month for pensions which is pitiful I know, no company scheme for us either, I wonder if it is a good idea to get rid of the mortgage first to save interest. We could probably pay it off in 10 years if we put everything in to it and that would leave us about £5-600 a month spare altogether. People think that you are always talking huge figures for mortgage and pensions and we aren't, and we don't have anywhere really where we can 'cut down' to save money, except of course if we sell the kids. Then we wouldn't need a car, maybe...
AlvinHall: MegReally, I think you have to work on both fronts: the mortgage and the pension. It sounds like you and your husband are relatively young. So the money you put in your pension will have lots of time to grow. Paying off the mortgage will certainly save you on interest costs, but as long as it isn't a burden right now, start to increase your payments as your income goes up. If you get a windfall or bonus, then use that to increase your mortgage payment. But keep that pension going. It was one of the best decisions I ever made to contribute to my pension regularly when I was your age back in the year --01. I am quite happy with its value now, even in this volatile market.
Piffle: Alvin, what is the thinking man's wisdom about pensions these days? My husband thinks they are vital but I think lowering the mortgage and investing wisely will make better returns and offer greater retirement options.
Madame Platypus: If you are taking a career break because of children and therefore don't have a company pension, where is the best place to go to for advice on making sure that you are provided for in old age? Going to a financial advisor seems to be such a minefield.
Gemmiegoatlegs: I don't really understand pensions but I do know it's important to have one. I am studying at the moment and my husband's pension is crap. Bearing in mind that I will be 28 when I graduate, and I hope to have a decent wage, how much do I need to be putting away each month to see us both right in the future?
Wickedwaterwitch: Hello Alvin. I am 41 and have no pension. What would you suggest I do at this point: start one and pay a lot in? And what amount as a percentage of net income would you think would be right to ensure an OK standard of living on retirement? I'm also right in thinking, aren't I, that pension funds aren't protected? So could I put lots of money in and lose the lot if the pension fund goes bust?
TigerFeet: Hi Alvin I would be very interested in your views on pensions. My husband and I have both had (final salary) pensions in the past but don't currently. Should we be paying into our current employer's stakeholder pension schemes or doing something else with our money?
Alvin Hall: Unfortunately, there are few formulaic answers to each family's or person's question about their individual pensions. So I thought it would be best to remind people of some facts and factors that each of us must keep in mind when making decisions about what to do with our pensions. I strongly encourage you to sit down and have a level-headed discussion with your partner or spouse about what you collectively should do with "your" money. However, if the pension belongs to your spouse and has been funded with his or her own money, then the ultimate decision is theirs – and it may be different from the one you would make. You have to respect his or her decision.
The first thing to keep in mind is that a pension is a long-term investment. I noticed that several questions seemed to confuse the terms 'saving' and 'investing'. Saving is defined as putting your money in a risk-free account such as a savings account. The value of your money does not fluctuate. Instead it earns interest, increasing slowly over time. Investing is using your money to buy shares, bonds, or unit trust that will invariably fluctuate in value as the stock market goes up and down. In short, your money is at risk. Pensions are investment accounts and therefore will rise and fall in value, as we have certainly seen, and felt in our guts, recently.
Key to making any decision about pensions, including putting money into a pension, is knowing your risk tolerance and your time horizon (when you expect to need the money.) It's clear that many people never consider their risk tolerance or talk it over with their spouse or partner. This is not unusual. Most people focus on the gains of an investment; few want to think about the possible losses or fluctuation in value. But, before making any decision, you must sit down and talk about how much risk you want your money exposed to. Remember, you can't have the possibility of profits without the very real risk of loss. There is no such thing as a risk-free investment.
Your time horizon – that is, when you are going to need the money – is another key factor. The prevailing wisdom is that the longer your time horizon, the more your investments should focus on capital appreciation instead of income. The idea behind this is that ,if you are in your twenties or early thirties, you can ride out the inevitable cyclical downturns in the investment markets (like today) and benefit handsomely when the markets and price begin to rise. As you move closer to retirement, you should move your money into more conservative, less volatile investments, so that you can preserve the capital you've build up over the years. By focusing too much on the short-term ups and downs of the market you may actually undermine the benefits that time and a prolonged upturn in the market can bring.
And, finally, know what your pension is invested in and who is managing it. (This is one of the reasons why most pension questions can't be answered formulaically.) Ask your pension provider to provide you with written information about the unit trusts in which your money is invested. Pay attention to who is the fund manager and how long has he been managing this pension. During a downturn in the market, like we are seeing today, all pensions invested in shares are likely to provide a poor return. This isn't due to the investment manager but the downturn in the overall market. It is therefore important to find out about the performance history of the unit trust and how long has the manager been running it. How has the fund (and therefore the manager) performed through bull and bear markets? And how did the fund do as the market recovered, for example, from the bear market that began in 2000? While past performance is no guarantee of future returns, knowing how the investment manager has performed is good markets and bad will help you make a more informed decision about what to do your pension.
We would all like for our pension to be on autopilot, with us sitting back and enjoying our lives as our money grows. Unfortunately, no prudent financial planning is that simple. Not only will the markets change but so will we over time. My advice to everyone who wrote in about pensions is to set up a time with your spouse or partner to discuss your risk tolerance, your time horizon, and other factors related to your pension. Make an informed decision, not a purely emotional one.
MARGOsBeenPlayingWithMyNooNoo: Ah yes. I am an Alvin fan too! How do you teach children the meaning of money? I see many a young adult getting charges on their accounts with bounced cheques over the years. I do try to talk to some of them about it (and end up sounding like their mum!) but it's like they don't understand that they have to have the money to spend it. Is there a best time to talk to a child about avoiding debt? What is the best way to encourage children to save?
Bossykate: Hello Alvin, what is the best way to encourage children to save? Thanks.
AlvinHall: One of the best ways to teach children to save as well as the value of money is give them pocket money and set clear, firm rules about what they can use it for. When they want something that is more than the money they have, establish an agreement that they must save their pocket money up to a specific amount and only then will you give them the remainder to buy the desired object. Also don't be reticent about getting your kids involved in things like shopping for food at the supermarket. Set a specific limit (in cash) that you plan to spend and then let the child keep a running total of the money being spent. If you go over, include the child in the decision about what must be removed from the basket. You may be surprised at how quickly your child absorbs information about the value of things. This is also a good time to talk to your child about spending only the money they have available and avoid going over. Don't be surprised if your child starts to question you about your spending limits.
Theinsider: Hi Alvin, I have several accounts (mainly current accounts) with Barclays (fairly small sums) and have two question. Firstly, is Barclays as safe as any other bank at the moment, in the sense that if there are problems my money is guaranteed? Do I need to think about changing for that reason? Secondly I am aware Barclays is not at all competitive with its interest rates and am thinking of changing anyway (my account is almost always in credit). I've put off changing banks in the past due to worry about dd transfers etc going wrong. Is it as easy and stressfree to change as they like to advertise? Do you have any other advice about changing banks?
AlvinHall: You live in a competitive banking world. The old days when you stayed at a bank for life are gone. Get out there and look for a bank that gives you more of what you want, especially because you are good with your money. Since the problems with Northern Rock, it is highly unlikely that the Bank of England would let another bank end up in such circumstances. If it did, it would undermine the public's confidence and lead to a major run on the banks. So Barclays is as safe as any other. Check out its competition to see if you can get a better deal. Don't be shy about asking for what you want!
Theinsider: Many thanks, I shall consider this the kick up the bum I need to find a better rate. Alvin Hall has told me so.
Funnypeculiar: Alvin, what do you think is the best way of actively managing finances on a day-to-day basis. DH & I tend to bumble along, and then do a bit of a review every few years/when money is suddenly oddly tight/plentiful/our IFA pokes us. Without being too anal about it, is there a better system that would help us review and monitor our finances?
AlvinHall: Here are a few day-to-day tricks that I use. I only withdraw money from the cashpoint once a week - only on Sundays. I then allocate that money over the week, sometimes only carrying that day's allowance in my wallet. I have a weekly limit on how much I charge on my credit card. Because it is a relatively small number, I almost always know where I am relative to it. Control your entertainment costs. On many Friday nights, I go out with my friends for a cocktail. I always know whether I'm going to have one or two which I nurse over the course of the evening, and I don't go over that limit; hence my costs are predictable. Set aside one day each week that you peruse the past week. I do this on Sunday morning when my flat is quiet, just before I go to the cashpoint. Sometimes what I find out causes me to take out less at the bank for the upcoming week.
Funnypeculiar: Great tip - I am (like many of us) hugely reliant on my (debit) card and actually have little idea of day-to-day spending. Thanks. Although hugely envious of your Fri night cocktails
AlvinHall: Unfortunately I've only got time for a couple more questions because I'm flying out of Heathrow at 4pm - cutting it close.
carriemumsnet (from MNHQ): My friend is getting a redundancy pay off of around £45k. She has a mortgage of around £175K . She can't afford to use it all to pay of lump of mortgage as will be going freelance and may need to dip into it, but if she puts it into a savings account is there one that pays high enough to make it pay as well as if she'd used it against the mortgage ie over 6ish% (Sorry, I know what I mean - hope it makes sense).
AlvinHall: I have been in your friend's situation. It's better that she keeps the cash for those periods when work is slow. Remember that work may not be as steady as he or she thinks as the economy slows down. Hold on to the cash and put it in a high interest account!
(PS, don't forget that one of the reasons Alvin agreed to join us, apart from the fact that you are all super fun, is that he has recently worked with OMSCo, the Organic Milk Suppliers Co-operative, to compile Cheap Changes, a pocket guide full of money-saving tips to help you to beat the 'credit crunch' without compromising your lifestyle. This is available as a pdf for Mumsnetters to download)