Wednesday, January 13, 2010

Miranda Sawyer really needs some education

I am still seething after reading a ridculous Sawyer column in Sunday's Observer entitled How on earth do fat cats spend it all?

Miranda's basic premise is that she can't understand what a fictional fat cat, Mr Big, earning £800k a year, does with all his money. She works through a few sarcastic estimates and quite ridiculous fantasies of what he might spend his money on (huge mortgage, Eton, posh holidays and £1,000 meals.)

Miranda asks for "Answers on a crocodile-skin postcard studded with hens' teeth, please: we are genuinely intrigued."

Well, Miranda, the answer is this.

While I'm loathe to say the country's going to the dogs and things aren't like the old days, Miranda demonstrates two crucial flaws that I suspect she shares with a huge chunk of young/ish people.

One, she demonstrates complete financial cluelessness when it comes to money management, and two, she has absolutely no idea about financial planning, savings and investment. Thirdly, and less importantly, she has little idea about how the tax system works.

Except, according to Wikipedia, Sawyer is 42, and also has an Oxford Law degree. So, both old enough and smart enough to know better.

If Miranda's overblown examples are anything to go by, her aim each month, once she gets her hands on her Observer-enabled readies, is to spend it as quickly as possible. Judging by her best-guess of what Mr Big might do, she doesn't save. She doesn't invest. She probably doesn't have a (tax free) Cash ISA, and I'd be very surprised if she had a (tax free) investment ISA. Is she using her (tax free) Premium Bonds? Doubt it. Does she have a three month "emergency fund" - I wouldn't think so. Does she have the right protection? Life insurance, health insurance... probably not.

Miranda makes the vaguest of references to health insurance (covered by his job) and "Oh, and his pension. Except that's usually paid separately," - er, what does that mean? Separately from what, exactly?

Miranda might think she's very witty, but when it comes to money - unlike the fictional Mr Big - she's a total child.

Here's what I think Mr Big does.

Miranda naively presumes he won't have a mortgage (although she estimates a worse case one) - he might not, but he might. But he will certainly be putting a huge chunk a year into a pension. If his pension pot hasn't reached the 2010 Lifetime Allowance of £1,750,000, he's probably contributing the maximum annual allowance of £245k. And bear in mind that, although a pension pot of £1.75m sounds huge, if he retires at 60, it will buy him an annuity paying a little over £100k a year - a lot of money, sure, but 12.5% of his current income.

He'll certainly be doing both Cash and Investment ISAs - an annual allowance of £7,200 this year, unless he's over 50 in which case is £10,200 (which it is for everyone from the next tax year in April).

In all likelihood, he'll have investments - probably overseen by an investment / wealth manager - a portfolio of bonds and equities (although in this market, a goodly chunk of it might be in cash), with a handful of alternative investments thrown in for good measure. His manager will review the asset allocation of his funds on a regular basis, in light of his risk profile, age, and financial plans.

He may also have some cash savings accounts or fixed rate cash bonds, he'll almost certainly have his £30k maximum investment in Premium Bonds (although the winnings aren't necessarily better than the interest, but at least they're tax free), and he may have a whole range of other complex investment products designed for sophisticated investors.

He may have set up trusts for his children or family. He may have a property portfolio. He may be funding his children's education, or buying them property to start them off (or he may not: some wealthy people like to leave their kids to fend for themselves). He may even have an expensive divorce from an ex-wife. He probably pays of his credit card each month. He'll almost certainly give something to charity.

In short: he'll have a financial plan, which is about acheiving financial security, as well as doing something good with your money, and he'll be working towards it. Sure, he may have luxury holidays and more than one expensive car (and one is bound to be a 4X4). He may pay for the best education he can get for his kids. He might go to flash restaurants. Or buy really expensive hand-crafted Italian wool suits.

But that's not all he does.

Miranda, I know some people who live in the £2 million pound houses in North London of which you speak. And I'll tell you something: they're not like you. They might always have fresh flowers in their hall (or they may not), but most of them are frugal with their funds, thoughtful about their philanthropy and sensible about their future financial security.

How do you think you get a £2m house? YOU DON'T SPEND EVERYTHING YOU'VE GOT.

So Miranda, here are 11 basic financial lessons:

(1) your objective each month is spend less than you earn
(2) even better, you should save SOMETHING every month, and it works a lot better if you automate it, set up a regular payment. When it's gone, it's gone. But when you need it, it'll be there. Start small (1% or 2%) and build it up each year. It's about habit
(3) apart from mortgage debt, pay off your debts before you start saving (it's cheaper)
(4) don't buy on credit, save first
(5) have 3 months emergency money in an easy acess savings account
(6) start paying off your mortgage as soon as you can, especially while rates are low. Most mortgages let you overpay by 10% or 20%, or instead of paying monthly, split your payment and pay every two weeks, which effectively pays 13 months a year
(7) start a pension as young as possible
(8) use your tax-free ISA allowances, the government is basically giving you free money
(9) know how much is in your current account
(10) however much money you have, shop around for the best deal
(11) get protection; life insurance (if you have dependants), health insurance (if you believe in it), health cash plan, house insurance

Miranda, I am very sorry that you never got a basic financial education, which you appear to have demonstrated in the pages of the national press, but you can wake up tomorrow and get your (financial) house in order.

And how great would it be if you wrote about that in the Observer, and inspired others to sort their own financial affairs, instead of bemoaning the unfair sucesses of fat cats.

We have a ticking pensions timebomb in the UK which we're effectively ignoring. Total UK personal debt in November 2009 was £1,459bn. Billion. Up by nearly 1% in a year where people were supposed to be paying down their credit. Average household debt in the UK is £57,888 (including mortgages).The average owed by every UK adult is ~ £30,226 (including mortgages). This is 133% of average earnings.

Miranda, this is not a joke. My answer (on a 50p postcard is) - forget intrigued. Get (financially) educated.


nickgrim said...

Excellent article. There does seem to be a worrying trend amongst people of my generation (mid-twenties to mid-thirties) to live hand-to-mouth; those few that think about it must be assuming that The Government Will Provide, which it clearly won't be able to afford to do. It all looks a bit bleak.

nickgrim said...

Oh, and, couple of typo fixes for you:

"some wealthy people like to *live* their kids to fend for themselves" should probably be "leave".

"a *protfolio* of bonds and equities" should obviously be "portfolio".

sashinka said...

Thanks, Nick, typos fixed:)

Anonymous said...

Ouch! Fair comment though

davbeau said...

All the financial management in the world will not end the iniquities of either the lack of accountability of self serving remuneration panels to their shareholders nor the governments failure to reign in the excesses of even the banks it mostly owns. So the article is a silly side issue which ignores completely the underlying problem that Miranda Sawyer's article was written in the context of.

Even on that side issue - financial planning - the article is rather blinkered to say the least. For example, to assume that most people have the spare cash for ISAs is naive. But that naivety is nothing next to the comments on pensions. Where has this writer been for the past 10 years? Workplace pensions - the main mechanism of that most sensible of personal financial management pillars has been steadily dismantled from under us. What are workers supposed to do in the face of that? Millions of jobs have been made 'contract' to avoid other employer social responsibility without increase in salary to fill in those gaps privately. Meanwhile the press has for years been filled with horror stories about private pensions too - leaving the whole pension industry completely distrusted by the people of this country. I thought everybody knew this.

Please go an tell your well rewarded friends to take a pay cut instead of a pay rise much bigger than the rest of the company and re-instate the company pension for their workers before you venture to lecture those who have been deprived.

Let them eat cake indeed.