970 BOTTLES OF BEER ON THE WALL

TODAY’S BLOG

970 BOTTLES OF BEER ON THE WALL…

I’ve been trying to think of ways to explain the benefit of long-term investing. I’m not a big beer drinker, but given that when I do go to a pub, I’m always shocked at how much a pint of beer is. According to the ONS, the average pint of beer in the UK was £3.67 in January this year. Clearly a  national average, because that wouldn’t buy much in London.

30 Years Ago… 1989

Anyway, let’s suppose I am someone that likes to buy the occasional pint of beer. As I get older, like most people I tend to remember elements of the past fondly. Particularly this time of year as students return to University. 30 years ago, perhaps you were at University or had long since left. 1989 – the time when Nigel Lawson was replaced as Chancellor by John Major. Simply Red had a hit album “A New Flame”; Challenge Anneka had aired for the first time and Nick Faldo won the Open. A pint of beer back then was £1.03.

BOTTLES OF BEER

YOUR ANXIETY

Let’s suppose you had £1000 you wanted to do something with. The memory of Michael Fish and the great storm closely followed by Black Monday was fairly fresh in your memory. You didn’t fancy the stock market. So you found a decent deposit account, rates were high causing problems for borrowers but great for savers at 14%.

Thirty years later that £1000 had risen to £2,080 by January this year. You had forgotten about it except for when you sighed with relief as economic recessions came, Y2K, Dotcom bubble, Korean crisis, 9/11, credit crunch – you had avoided them all.

Yet there is a problem. In 1989 your £1000 would have bought a 30-year younger you 970 pints of beer. Today your £2,080 would only stretch to 566 pints.

Your Uni Friend John had a PEP

Your good friend John from University had put his money into the UK stock market, he put £1,000 into a Personal Equity Plan, some quirky idea brought in by Nigel Lawson. He bought a FTSE100 tracker fund (ok, maybe not, but stay with me). He had to live with the same economic stresses and saw the topsy turvy workings of the stock market. However, at the end of 30 years his £1000 was worth £11,494. He hadn’t touched it (neither had his adviser) and so all dividends were reinvested. This sort of money enables John to buy 3,131 pints of beer. That’s 5 times more than your 556 pints.

Julia also had a PEP

John is fairly happy, but his girlfriend Julia at the time also put £1,000 into a PEP, but she put it all into the FTSE250 tracker. She figured that slightly smaller companies might do a bit better than bigger ones. Lo and behold, Julia’s £1,000 has turned into £20,818. Julia can buy 5,672 pints of beer, that’s ten times (10x) TEN TIMES as much as your 556 pints.

OK – Smallprint (or not) Caveat Emptor…

Admittedly I have taken some liberties with costs, charges and the available funds in 1989. The biggest liberty I really took was suggesting that people leave their money alone. They/we don’t. We all tend to fiddle around, attempting to find a slightly or perhaps considerably “better” option.

Long story short, when considering investment for decades, what on earth does “risk” really mean? The risk of the power of the money in your pocket being worth less (or worthless) due to rising prices? The risk of seeing your money stagnate in cash? The risk of seeing the value of investments rise then fall?

30 Years £1000

Monsters grow

What ought to be blindingly clear…. don’t let your anxiety dictate your financial planning and investment strategy. It is a dreadful guide to future performance. The monster at your door is inflation, however small it seems today, feed it for 30 years and it’s still hungry and likely to eat you alive.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk 
Call – 020 8542 8084

WHAT WE’RE ALL ABOUT

If you would like a no-nonsense one page document explaining what financial planning is all about please enter your email here.

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GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

WHAT WE’RE ALL ABOUT

If you would like a no-nonsense one page document explaining what financial planning is all about please enter your email here.

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970 BOTTLES OF BEER ON THE WALL2019-09-30T18:23:04+01:00

Budget 2015: Students

Budget 2015 – Students

I’m going to attempt to be non-political by explaining how the current student loan system works. This relates to “Type 2” loans, which started in September 2012. Having watched mainstream media coverage of the Budget, I was alarmed at the degree to which little was known about the cost of a prospective Degree… by both media pundits and potential students.

Your Starter for Ten

Being a student involves many things, but financially these are the basics – the cost of the course, the cost of the accommodation and the cost of living. Over the last 30 years the number of students has increased enormously, fuelled by the belief that higher qualifications result in better choices, better income, better national prosperity. As you will know Colleges and Polytechnics became Universities some time ago, for no other reason (I think) than appearing less elitist.

Anyhow, the cost of a University course varies relatively little, most are £9,000. Those not living at home, need accommodation, which realistically costs between £3,500 – £6,000 a year, depending on location and type. Once through the first year most are left to house share within the private sector. Then there is the cost of living… food, drink, books (depending on the course) and the occasional fun night out. I think its possible for most students to live on £80 a week for this.

Loans and Grants

That’s it. Those are the costs. You can pay yourself or you can apply for a tuition loan to cover the cost of the course and a living maintenance “grant” (also a loan) for the living part. Those from families with low incomes can also apply for a further grant, some of which can be a loan, some is a grant, never to be repaid. The Chancellor announced on 8th July that this bit is changing – so that its all wrapped up as a loan. Nothing gratis.

 

 

Student Debt

The debt clock starts once the 3 year course ends. Interest is added and so the debt increases, but the amount of interest added depends on income (RPI for those earning less than £21,000 and RPI up to 3% for those earning £21,000-£41,000, above that its RPI+3%).

Repayments are made via salary if you are employed, or via self-assessment returns if self-employed. No payments are made if income drops below £21,000. Leaving the UK means that the loan is repaid directly to the Student Loan Company… failing to notify them will result in penalties. The loan lasts for 30 years and then cancelled, whatever the balance.

So let’s suppose you have three years of tuition loans (£18,000) and 3 years of maintenance loans (say £15,000), a total debt of £33,000. In theory if you never work or earn more than £21,000 you will not repay a penny. Hopefully University was inspiring enough and helped to obtain a career in something that is rather better paid than £21,000 a year over time… so most will pay something.

The Repayments

This is where it seems that most of the misunderstanding occurs. Loans, however large are only payable if income is over £21,000. If income falls below this, payments stop, interest continues to accrue. In essence then the mechanics of this are more like an extra tax than a loan.

Gross Income Annual Payment Monthly Payment
£21,000 £0 £0
£22,000 £90 £7
£25,000 £360 £30
£35,000 £1260 £105

 

Perhaps you could think of a mobile phone contract… £30 a month seems pretty “normal” for a phone. So I fail to see how £30 a month is not affordable for a Degree. Of course many graduates would hope and expect to earn much more than £35,000. As they do so, their repayments rise. In fact repayments are calculated at 9% of pre-tax income over £21,000. So a graduate earning £150,000 would pay £11,610 a year or £967 a month (the monthly payments are always rounded down). Of course by that point one would expect the loan to have been repaid anyway.

The Politics

Frankly I would need to be persuaded (and open to being so) that going to University isn’t affordable under the current terms. However this misses the wider and more substantive political point. Do we want a well-educated society that one day will be “running the country”. Do we view higher education costs as an investment in our own population or not? The argument that better educated people get better paid jobs and therefore pay more income tax applies whichever side of the debate you stand.

It would appear that given the increase in courses and students, most believe that a Degree must provide better choices. In 1920 only 4,357 first Degrees (as in a Degree not a Masters) were awarded, by 1950 the number had increased to 17,337 and by 1970 51,189. 1990 saw 77,163 Degrees awarded and in 2000 this rose to 243,246. In 2011 the number stood at 350,800. This level of growth is pretty dramatic isn’t it. Since 1980 the number of graduates each year has increased five-fold or eighty-fold since 1920. [source: House of Commons Library, SN/SG/4252 27 November 2012]

Naturally a “free” University system is open to abuse, (every system is) the current one is too – its possible that a graduate could avoid repaying the loan by keeping income below £21,000 a year for 30 years… but I imagine that would be rather difficult, when allowing for real life and inflation.

Happy to be challenged, but let’s ensure the facts are right. The notion of starting adult life with a large debt isn’t pleasant, but in practice it isn’t a bad solution to help more people improve their education.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Budget 2015: Students2017-01-06T14:39:26+00:00

University Fees – what Parents need to know

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University Fees – what Parents need to know

 As you know, University is not free. Most courses cost £9,500 a year and accommodation is likely to set a student back £5,000 when all is said and done. Add in money to eat, drink, buy the odd book and probably £100 a week is not unreasonable to live off…. In 2013.

The impact of inflation

So let’s suppose that you have not yet even had your child. Let’s assume that you are expecting shortly in 2014. So your yet to be born student will be entering University in say 2033, aged 19. £20,000 of fees with inflation running at a consistent 3%  becomes £35,070… and you have a three year course, so total costs are likely to be £108,400 (roughly). So you have 19 years before any money is needed – but needed it will be in 2033, 34 and 35.starter for ten

Get an early start

If we assume an investment return of 5.50% (not exactly blowing the lights out) but this is still a real return of 2.50% above inflation investing £250 a month will do the job. However, you’ve got a lot of commitments with your new baby, never mind a possible drop in income. So you decide to delay saving… until you are clearer about educational prospects. So let’s suppose you wait until your baby is a teenager at 13 with 6 years to go before University life.  The maths is the same, you simply have less time to squirrel money away and of course less time for it to grow. Well, now you need to find £1,950 a month to achieve exactly the same result.

What is financial planning?

The thing about financial planning, is that its not really about any financial products. Its about helping you to figure out what you want to do. We review our assumptions together – here we made assumptions about inflation, investment returns, University fees, going to University and when. The same logic applies to any goal, we need to figure out what something costs today, allow for inflation and the time until you aim to achieve it. So, whether you have a University challenge… here is your starter for 10… when will you begin your financial planning?

Dominic Thomas: Solomons IFA

University Fees – what Parents need to know2017-01-06T14:39:42+00:00
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