A progressive, South West based accountancy practice

Taking advantage

Introduction

A lot has been written about the fall in oil prices, the low inflation expected in the UK, and the deflation now being recorded in the Eurozone. Deflation is considered to be a dangerous thing. The argument goes something like this.

Prices fall, and consumers decide to wait before buying anything, in the hope that prices fall further. While this may sound like good news, it puts retailers and manufacturers under pressure. Their profits are lower, and in turn, they look to cut back on investment, and costs. Costs include wages, which mean employees have less to spend, which means they hold off on major purchases, thus reinforcing the cycle.

Japan, in particular has experienced a couple of decades of very slow economic growth, caused in part by this kind of deflation. As a consequence, it has lost its global reputation for innovation, and in turn market share for technology products.

So how can this be good news?

As I write (January 2015), petrol prices are already below £1.10 a litre, and it looks as if they are going to be lower as we move into spring. In part, this has been caused by lower demand from China and other economies, increased US shale gas production, and a refusal to cut production from the OPEC countries (some would say for geopolitical reasons).

Fuel costs form part of the delivery cost for virtually all items sold in shops. If these are lower, then the shop prices should be lower.

It should mean our regular shopping, and topping up the car, are cheaper than in 2014. Unfortunately, the home heating market doesn’t operate in such a simple way, so we may not see cuts in our gas and electric bills.

What can we do with the “windfall?”

It is difficult to know how long it will last, but here are a few ideas on how to “spend” the savings.

  1. Set up a regular savings plan

The spare cash could be used to fund a regular savings plan. We can usually find cash for things we prioritise, such as a takeaway meal, a holiday or a special present for a loved one. Why not prioritise a savings plan?

Make sure you don’t miss the money

If you set up a regular transfer for just after payday, chances are you’ll not notice it. Most of us arrange for utility bills to be taken just after payday. We do this so we know we have the money available to meet our commitments, and manage the rest of the month as best we can. Why not do the same with our savings?

If we are brutally honest, we can probably make do without our daily coffee, lunch out, or weekly takeaway if we had to. Making the savings transfer early in the month will force us to do just that.

You could also make one off transfers each time you “save” on your regular bills. For example, it costs me about £10 less to fill up with diesel now, so I could transfer that cash each time I fill up with petrol. As I fill up about twice a month, over £200 could be added to my savings within 12 months.

Find a reason

At this point, you’ll probably saying, that’s not a good enough reason to go without, so you should try and find a reason to save. Here are some advantages…..

It gives you the incentive to actually save. Aiming for something, is better than doing something just for the sake of it. Think about dieting for example!!

It helps build support within the family if they know, the “sacrifice” is for a good reason. I know our son loves going on cruises, but these have to be saved for. Having that expectation makes it easier for him to accept the deprivation that may be necessary.

It will help you set a target for the amount to save. A general intention to save does not allow a target level to be set. It becomes an endless, aimless task. Setting a goal means you can measure your progress towards it, see the end date, and give specific information to others who have an interest in the end objective. Many of us use SMART goals in business, so why not adopt this for our savings projects.

Hopefully, by the time you have reached the target, you’ll have identified another reason to save, or have just developed the habit.

Resist the temptation to “dip into” savings

We all know that savings are “for a rainy day” right? The question is ”How rainy does it need to be?” Is a need for a takeaway enough? What about a new suit, or dress?

If I know there’s cash available, I get seriously tempted to spend it. After all, I can use my money management spreadsheets to justify the spend, and show that I can put more aside in future to make up the shortfall, except I never seem to catch up…..

Name it, and shame yourself

Giving the savings account an appropriate name means you are reminded of the reason you are saving each time you log on, or access it. The reminder can help you resist the temptation to “dip into” the savings. For example, if you call the savings account “children’s holiday fund”, how will you feel if you take out money to fund a takeaway or other temporary requirement?

Make it inaccessible

Online banking and smart phone apps make it all too easy to transfer money around. If you can, try using an account that is difficult to access. I have set up a savings account in my wife’s name. This means I cannot access it using our online banking service. We have to visit a branch as she does not have internet banking, or the app. Hence, it is much more difficult to remove funds than pay them in!

  1. Pay down debt

Many people have taken advantage of the low interest rates to make overpayments on their mortgage(s). While you need to be careful of early repayment penalties etc., this can save a small fortune. One client of ours has cut 8 years off his mortgage term, saving himself over £20,000 in interest! In turn, your loan to value ration drops quicker, giving you access to the very best rates on the market, which allows to overpay more without increasing the total amount paid.

Or you could target those higher rate credit and store cards.

Make it hard to borrow more

Some of you may be thinking, I could just end up buying more on these cards if I have more “available to spend”. In a similar way to above, why not make it difficult to spend using the cards?

Cut them up, or put them in a drawer. My wife and I have cut up all our credit cards (except one which we use for internet purchases) and will be making a collage of them. This will act as a reminder of how easy it is to build up debt!

  1. Self-insure

The washing machine will need replacing. If not, the fridge will need repairing, or the dishwasher, or the PC, or the……..

Good businesses plan for replacements and have a contingency fund. Why not set up one for your domestic expenditure? We all know that consumer goods don’t last forever, so we will need to replace them eventually. Having a bit of extra cash means we can plan for this eventuality without reducing our standard of living.

There could be other benefits

It could even save money, as we can start to reduce our dependence on extended warranties and service contracts. Use a separate account which gives you instant access, as you probably won’t want to wait for a month if you need to replace the washing machine!

  1. Give it away

You could simply give away the extra cash. If there is a cause that’s close to your heart, find out how to give it support. If you are a UK taxpayer, maximise the benefit by making a gift aid declaration. If not, find the easiest way to make it happen. Most 3rd sector organisations can help you help them.

  1. And finally…..

You may just want to cut back on your income earning activities, and enjoy the extra free time that creates. Be careful though, as these low prices are unlikely to become a permanent feature of the economic landscape, and it may be difficult to increase your hours/ salary etc. in future.

Conclusion

The recent steep fall in fuel prices has given us some extra cash in our pocket (assuming we drive).We could just fritter away the benefits, or we could make some changes and positively affect our financial futures. The options set out above are just a few of the ways this can be achieved. Let me know what you decide to do., or call me if you’d like some help with general budgeting, business planning, or wealth creation

COMMENT