Ten financial commandments for life

In his top 10 essential cash tips, money expert Peter Carvell explains how to turn pennies into riches with simple common sense...

My father gave me wonderfully valuable advice about everything, except money. He was right about playing outswingers at cricket, always sending thank you letters, never understanding women, and not going out in the midday sun within 100 miles of the equator.

Yet he taught me nothing about money.

When it came to money, he had a blind spot. It was one of trust. He trusted anyone who told him about money. He trusted the insurance salesman who sold him a pension that charged enormous fees, the bank manager who recommended the bank’s new Wonder Bond, the friend in the City who told him he knew of ’a sure thing.’

Nearly all his investments came to a disappointing end in recent years, and the family was worried that his retirement would come at a bad time. Then he quietly revealed that there was no need to worry. Over 30 years, he and his lawyer had quietly been putting his bonuses and odd inheritances into property.

He had apparently been very impressed with the Forsyte Saga on TV in the Sixties (he looked a bit like Kenneth More), had decided that property was the safest investment, and  acquired a portfolio of flats long before the Buy to Let brigade. Isn’t it amazing how much more intelligent your father becomes, the older you get?

So, even though he didn’t actually tell me, he had practised the first guideline in investing. It is also the first I would tell my son in my 10 guidelines for him:

Buy Property

For four reasons. Not just because you need somewhere to live, but because it is the first lesson in gearing that most of us learn. Put up 10%, borrow 90%, but take 100% of the profit.

Secondly, property is always the one collateral that all bankers love, when we need to borrow more money.

Thirdly, as an investment, property has gone up an average of 9% p.a. for the last 40 years, almost exactly the same growth as shares. Finally, when we come to sell, there is, quite incredibly, still no tax to pay in the UK.

Buy Trackers

If you invest in the stock market, the most efficient way is through Tracker Funds. All they do is to track various indices, of which the FT100 is the most popular.

These funds have the great advantage that their charges are under 1% a year, while so-called managed funds charge you 5%, and then 1-3% every year. Pay into the Tracker every month, not annually, so that your money buys more units when the index does go down.

Wrap them in an ISA

Since Gordon Brown arrived, ISAs are no longer the great deal they were meant to be, but at least you will never pay tax on them when you sell. So wrap a Tracker Fund into an ISA protection, and you’re investing in the market, without paying high costs, and ensuring that no taxman wants to know.

Avoid paying tax

This usually means learning from your accountant how to handle your investments efficiently. He will ensure you use your CGT allowance, spread the investments round the family to gain all relief possible, and do any tidying necessary at the end of the fiscal year. Of course, you may have to pay some tax some years, but make it a principle to aim to most of your investment profits.

Be very cynical about Personal Pension Plans

Company pension schemes are good because the company contributes, and you know what you’re going to receive at the end. The personal schemes do get tax relief from the government, but do not give you any guarantees.

Anyone cashing in recently has learnt that the hard way. Plans, that the salesman promised would be worth a million, were suddenly £700,000 because of the market crash; and the annuity was no longer in double figures, but 6-7%.

You can take 25% out in cash that is not taxed, but, in return for their earlier subsidies, the government then taxes your annuity, just at the time you really need help. Even worse, the other 75% of your investment is lost forever to the insurance company.

There are arguments for saving for a pension if you start young, but do you really want to lose 75% of your money when you most need it?

Don’t believe any promises

Financial products are no different from any other. They’re not designed for us; they are created to make money for the companies. They shout promises and use words like 'Guaranteed', but check the small print. If it seems too good to be true, then it is.

Check how much of your money is actually going towards the product. Many so-called managed funds take 5% the day you give them the money and yet only one in ten even matches the performance of a Tracker fund. The With Profits bonds, that were the biggest sellers of all time, paid brokers 7% for selling them to us.

Invest in ‘things’

Even if you love playing with a portfolio of shares, and checking the FT at least every Saturday, use some of your investment money to buy enjoyable ‘things’, that can make even better investments. Fine claret and Port, laid down at birth, has often seen many a child through school.

Searching for good furniture and antiques can make a visit to any town or auction worthwhile. Collect classic watches, numbered prints, or, if you have a spare barn, famous old cars.

The only thing to remember is that this kind of investment can take time to sell; only shares have an agreed value which you can obtain in a one minute call.

Switch Credit Cards

Credit cards offer great deals every day, and offer no incentives to us to stay loyal. So switch to a 0% offer at any opportunity, and avoid paying 15-30%, which, bizarrely, is what the majority pay on their unpaid credit.

Take money seriously

I don’t mean you should talk about it and become a City bore. Just remember that you work hard to make your money, so make your money work hard for you. Do your budgets, set out your short and long-term aims, and invest your money-for-the-future to achieve those aims.
 
Be a Fool

Grandfather may have mythically told his grandson “I leave you one thing: the name of my tailor”. May I leave you one name – The Motley Fool, or www.fool.co.uk. In their books and on their website are more helpful views than in a hundred traditional investment books.