Category Archives: Personal finance

This category contains information on how to deal with personal debt. It is based on the fact that I went through a serious debt crisis in the late ’90s. I was very close to filing for bankruptcy but I found another way, so I am always keen to pass on what I learned from that experience.

ECONOMY GROWING FASTER THAN EXPECTED BUT PERSONAL DEBT WORRIES PERSIST

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The UK’s economy grew at 0.8% between July and September according to official figures from the Office for National Statistics (ONS). That growth is double the 0.4% expected by most analysts.

“This is the second major GDP growth surprise in a row and suggests that the UK economy is more resilient than many had feared,” said James Knightley, economist at ING.

“The government will no doubt take this as a sign that the private sector can fill the gap created by public sector cuts, but with consumer confidence, hiring intentions surveys and housing activity data all softening we remain cautious.”

The key is that phrase “hiring intentions”. I am a glass-half-full person, so I like to focus on the facts that the GDP increase is double what was expected and that it’s the strongest third-quarter figure in a decade, according to the BBC’s Stephanie Flanders.

However … a growth in GDP does not necessarily – and quickly – improve the lot of the majority of people in this country, particularly those who are already in debt or who face losing their jobs as a result of the recently-announced spending cuts. Our economy is still rather dependent on relatively non-labour-intensive sectors, e.g. financial services, so today’s good news is “necessary but not sufficient”.

Until those “hiring intentions surveys” also show a rise, there will still be large numbers of people going into bankruptcy or taking out an IVA (a Protected Trust Deed in Scotland).

I too was in that situation not so long ago. However I found another way, which I detail in my book “Back to the Black: how to become debt-free and stay that way.”

What is also encouraging is that construction seems to be showing the strongest gains in the last couple of quarters, as this would lead to job creation more than some other sectors.

To quote Stephanie Flanders again: “There is still plenty to worry about in this recovery: much of it beyond our shores, and beyond the government or the Bank of England’s control. But for today at least, I think we’re allowed to join the cabinet in a sigh of relief.”

Here’s a link to that Stephanie Flanders piece: http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2010/10/good_news_on_gdp.html

If you want to know more about how I personally escaped the threat of bankruptcy and IVA and found another way, go to www.back-to-the-black.com

THOSE CUTS: PROGRESSIVE OR REGRESSIVE?

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Are the measures announced in HM Government’s Comprehensive Spending Review progressive or regressive, i.e. do they favour the poorest or the richest, relative to their respective incomes? Or are they totally fair, as claimed? You might well think that this debate has been flogged to death, so I won’t add my inexpert economic analysis; however the Institute for Fiscal Studies (IFS) now states their view that they are on balance regressive.

That’s also the view of Tim Harford, presenter of “More or Less”, one of my favourite radio programmes. Here’s a clip of what he said on the radio on 21 October: http://news.bbc.co.uk/today/hi/today/newsid_9113000/9113265.stm

(BTW, I found that clip easily, from the very user-friendly “Today” website. The programme is of course a National Treasure, though that other NT, Sandi Toksvig, says: “I love the Today programme: twenty minutes of news, crammed into three hours”)

CONSUMER CONFIDENCE INDEX

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Nowadays, consumer confidence is taken as an even more important barometer of the economic health of the UK than is any index of industrial output. That’s why it was rather depressing to read this morning that confidence is at its lowest level for more than a year, according to a monthly confidence index published by the Nationwide Building Society. This drop is, of course, in anticipation of the spending cuts to be revealed in the Comprehensive Spending Review next week.

Experts at the British Retail Consortium predicted that the figure would be “volatile” until after the impact of the cuts was known, which seems to me “a PhD in the bleedin’ obvious”. However when we actually look at the numbers, I wonder how meaningful is this “index” and the media coverage it’s had. The September index was reported by the BBC to have dropped by 9 to 53 in September. Thus a drop of 15%. In a month. By contrast, it rose 10% in August. Can both figures really be true? Of course I realise that recent announcements of planned cuts could have prompted a drop this large; however I have looked at the Nationwide website and it’s clear that this index fluctuates greatly almost every month. It was only 45 a year ago; moreover it was 100 only a couple of years before that, at a time when the credit crunch was already well underway. Surely a more meaningful measure of confidence is actual retail sales?

This is clearly a case for study by BBC Radio 4’s excellent programme “More or Less”, which looks more deeply at numbers in the news, especially when they might have been misrepresented (Can that really happen? Shock, horror!). Naturally, most of us know only what the media tells us about the impact of the cuts. For example, I thought I read at the start of the process that the spending reductions would be spread over 4 years or so; however, we never hear that fact nowadays. Whenever the media talk about, say, 25% cutbacks in departments that are not being ring-fenced, the stories give the clear impression that the cuts and the resulting job losses will be more or less immediate.

A related example: one of our allegedly serious papers carried an interview last week with a single mother who would be seriously affected by the recent decision to restrict total benefits payments to UK average income. The article clearly stated that Ms X would have to consider a move out of London, away from family and friends, “within the next couple of months”. However the benefit limit decision will not be effective till 2013; a fact that was not mentioned in the story. Why not? Could this omission be because bad news sells papers? Am I being too cynical?

Here’s my point: the tendency of many media outlets sometimes to oversimplify and usually to paint the worst possible picture of any new development adds further to the stress on people who are already in debt or who think they might be in the future. It’s important to put things in perspective and that’s something that’s hard to do after reading some of our doom-and-gloom media coverage. As that old French philosopher said (at least I think he was a French philosopher, but my information comes from the media), “my life is full of great disasters, most of which never happened”.

If you have concerns about your own debts, read my book “Back to the Black” about the necessity of putting your financial situation in perspective before deciding your response to any demands from your creditors; or any piece of bad news you read in the press.

UK DEBT STATISTICS SHOW WRITEOFF RATE INCREASING

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The latest UK debt statistics, courtesy of Credit Action, show two interesting trends.

Firstly, the “write-off rate” on consumer lending by UK monetary financial institutions to individuals increased further in the second quarter 2010 to 7.4%. In this quarter, UK banks and building societies wrote off £3.47bn, most of which was credit card debt. In the 12 months to the end of August, they wrote off £10.9bn of loans to individuals.

Secondly, they reported that average household debt in the UK is ~ £8,590 (excluding mortgages) but this figure increases to £17,896 if the average is based on the number of households who actually have some form of unsecured loan. That’s a drop from £22,000 when I last looked, about 6 months ago, which shows clearly that people have been paying off debt.

By the way, if we include mortgage debt, then average household debt in the UK is now about £56,690.

The report concluded that total UK personal debt at the end of August 2010 stood at £1,428bn, a slight increase. Based on that, the people at Credit Action still make the statement that I quoted in my book “Back to the Black”. In their words: “Individuals owe more than what the whole country produces in a year.”

PAYMENT PROTECTION INSURANCE – RECENT MEDIA COVERAGE

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In my last post I announced a new website dedicated to my eBook, “Back to the Black: how to become debt-free and stay that way”. You’ll find the site at http://www.back-to-the-black.com/

In the book I refer more than once to Payment Protection Insurance (PPI), about which I had a healthy scepticism based on personal experience. Ten years ago, my IFA persuaded me to take out PPI; after several hefty premiums, I discovered that, being self-employed, I would not have been able to claim from the policy. I complained of mis-selling, the policy was cancelled, I was promised a refund of premiums paid. I can’t recall ever getting that refund.

That was then. More recently, following lots of adverse media coverage, the whole PPI area was said to have been tightened up. Therefore, and in the interests of balance, I asked a practitioner who knows the subject to give me a current overview of the product. This he did and I included his comments in full within my book. Here’s what he said:

My view of PPI is: Very good product, where appropriate. Especially in these tough times.

BUT

1. Ensure product is specific to your circumstances – self employed / agency work / contract work etc.

2. What is non-pay period – some policies don’t payout for first 3 months!

3. ONLY go for monthly based policy, not single premium – unless it is at wholesale cost, with no commission attached.

4. Check what you have to provide to claim – sign on/ monthly certificates / doctors notes etc etc

5. Check how long payment lasts.

It is a valuable product on credit cards, as the charge is only based on the amount outstanding, so during good times and if you clear your card, it costs nothing. Valuable on a mortgage, but again do research, don’t just take the mortgage provider’s contract. Search around.

The sale of PPI has changed significantly over the past year or so, as many past products are now being claimed against as mis-sold, so providers are more cautious in ‘stitching up’ the client. As always, look at the small print and take notes, and send written confirmation of your understanding to the provider of any conversation you have had.

But is the matter resolved? This month’s edition of the magazine “Moneywise” has an article entitled: “The 10 financial products to ditch now”. (the front cover and the web version were even more forthright: “10 rip-off financial products.”)

Here is the piece:

PPI, which promises to cover the repayment on a debt if you lose your job or are unable to work due to illness or accident, appears to be a prudent way to protect yourself from huge debts. But, unfortunately, the banks’ hard sell of PPI meant that thousands of people ended up with a totally worthless product. “They were selling PPI to the self-employed,” says Peter Staddon (*see below), “although they would never have been able to claim for unemployment.”

However, don’t let this put you off all plans. “Some policies are good. Look for those sold through brokers as they can arrange cover that suits your needs,” he adds.

Alternatively, consider income protection insurance, which can pay until you retire, and is often more comprehensive.

SAVING: The figures vary but, according to which? PPI could add an additional £2,000 to £3,000 to a £7,500 five-year loan

USELESSNESS RATING: There are better protection products available

* Peter Staddon, by the way, is the head of technical services at the British Insurance Brokers’ Association. His view should therefore be taken seriously.

PPI can provide valuable protection but beware, especially if you are self-employed.

Finally: the same issue of Moneywise confirmed that new customers with Lloyds Banking Group will not be “ripped off by the sale of PPI (their wording, not mine) alongside loans, mortgages and credit cards after the bank announced it would stop pushing the product. Lloyds is the first of the banks to take this step”.

A most welcome step.

NEW WEBSITE FOR “BACK TO THE BLACK”

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I’ve just launched a new website dedicated to my eBook, “Back to the Black: how to become debt-free and stay that way”.

On the new site you’ll find lots of information about the book; about yours truly; and about the reasons why I came to write “Back to the Black”. There’s a selection of case studies from the book; and a link to the eBook retail site where you can view or buy the book.

 You’ll find the new website at www.back-to-the-black.com

“BACK TO THE BLACK” NOW AVAILABLE

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My book, “Back to the Black: how to become debt-free and stay that way”, is now available as an eBook on the “Smashwords” site.

Ten years ago I ran up heavy debts when my business collapsed. I had started a training business seven years before, after a long career in the chemical industry. When my enterprise ran into difficulties, credit was easy, so I could fund it with loans and credit cards. In the short term this plugged the gap; I thought things would improve. They didn’t.

So I closed the business down, looked for a job, and tried to work out how to solve my debt problem. My first intention was to pay off everything I owed but I knew it would take time. I didn’t think I could get the debts down to a manageable level in less than five to ten years; my creditors would not give me that kind of time.

My financial adviser recommended bankruptcy. I had by then sunk all my assets into the business, so he said that there could never be a better time for me to go bankrupt. For many reasons I didn’t want to do that although after a fairly short period, I would have been debt-free. The advantages and disadvantages of bankruptcy – and its modern alternative, the IVA (Individual Voluntary Arrangement) – are set out in detail in the book; recent developments have taken away some of the former stigma and the practical disadvantages of these solutions.

However, I decided instead that I would negotiate a deal with my creditors myself. This approach I call “Plan C – negotiate a deal” – and you’ll find it in Chapter 10 of the book. I made an offer to all my creditors for full and final settlement. Eventually all of them, apart from the taxman, agreed to the deal.

At the time, I thought my debt problem was insurmountable. It was a very stressful period. However, I was lucky to have the support of a debt advice agency and other professionals and friends.

I came through the experience; I learned a lot.

I was not, and am not, happy with the fact that I was unable to pay my debts in full. After the event, however, I decided to write up what had happened, partly for my own benefit. I even thought that maybe it would make a couple of newspaper articles. If other people with debt problems could benefit from reading about my mistakes and what I’d learned, then something good would have come out of it all.

Those articles eventually grew into a book – “Back to the Black” – which sets out what I call the three main strategies for dealing with debt. It also contains lots of advice for dealing with debt-related stress and with the demands of creditors.

In summary, my book is based not on a theoretical approach to debt, but on painful experience. I hope that you can benefit from reading about that experience. If you have debts, whether they are consumer debts or business debts or both, the principles for dealing with them are the same. The experiences you are going through, though unique to your situation, will have much in common with mine.

Go to www.smashwords.com/books/view/22886 if you’d like to know more.

MR MICAWBER LIVES!

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Yesterday I was spending an evening with friends when one of them said he’d just started to read the free edition of “Back To The Black”. I asked what he thought of it so far and he said what friends do, that he liked it. However, he said, there was one thing missing. Naturally, I wanted to know what was missing.

“The bit where you advise people to work out how much they can afford to spend … and then spend a little less.”

Barry was right; I hadn’t specifically advised people to do that. However, I had instead quoted the dictum of Mr Micawber. In case you’re not a fan of Dickens, Mr Micawber was a character from “David Copperfield”, who famously said, “Annual income twenty pounds, annual expenditure nineteen pounds nineteen shillings and sixpence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds, ought and six, result misery.”


My friend is a very well-read guy but the message was that I should perhaps have been a little more direct with the advice.