plonkee money an english-er's thoughts on personal finance

August 31, 2007

getting out of debt the British way

Filed under: credit and debt — plonkee @ 12:00 pm

On 29th December 2006 the United Kingdom of Great Britain and Northern Ireland made her final repayments on loans from the United States of America and from Canada taken out in 1945. The loans were incurred, not as a direct result of paying for the second world war, but in contrast to the American and Canadian experience, being so close to the front line and fighting for so long across its Empire had left the British economy in tatters and close to bankruptcy.

In the aftermath of victory, the British elected a Labour government with a landslide margin, and on examining the books in more detail, the economist John Maynard Keynes was dispatched, cap in hand, to beg for money from our North American allies.

I think there are a number of lessons that can be learned from the British experience that can be applied to personal circumstances.

  1. Don’t be afraid to ask for help (but maybe not money)�from friends. The British turned to their closest allies, the Americans and Canadians, despite the loss in national pride.
  2. Look to make cutbacks wherever you can. Rationing didn’t end in Britain until 4th July 1954, fourteen years after it had begun and nearly nine years after the end of the war.
  3. You can still have fun, just more frugally. By request of the International Olympic Committee, the host of the 1948 Olympic games was London. The city was being rebuilt so there was no Olympic village, instead, athletes were housed in schools, government buildings and military barracks. It was memorable for the outstanding performance of Dutch housewife Fanny Blankers-Koen.
  4. If you truly believe in it, you can make it happen. The Labour government of 1945 is generally recognised as one of only two truly ground breaking governments of the twentieth century. Their most profound legacy is the National Health System, whose principles are ‘from each according to his ability to pay, to each according to his needs as a patient’.

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August 30, 2007

investing for the nervous

Filed under: investment — plonkee @ 12:00 pm

You know those tv adverts for investments that always point out that the value of your investments may do down as well as up? They’re completely right. In fact, they understate the case. I reckon that every single serious investment (as opposed to say a savings account) held in a sensible manner will go down in value.

If you look at any graph of the stock market, you’ll see that its quite shaky. There’s a lot of noise, but the overall trend is up. This up trend is why it is usually recommended that people invest in the stock market. In the great scheme of things, the noise isn’t that important. But the noise does mean that if you hold even a relatively cautious investment for any length of time (as suggested by experts, bloggers and many other sensible people) one day, your investment will be worth less than it was the day before. This is the nature of investing.

If you are a day trader, you try and take advantage of the noise of the stock market, and so the noise matters. If you are a nervous investor, I cannot think of any circumstances under which it would be good for your health for you to try day trading. If you want to gamble, then you may as well head to Monte Carlo and drink Martinis. If you are not a day trader, but an investor, with a sensible and appropriate investment portfolio then remain calm. Short-term loss of value is an inevitable part of investing. Ride it out, it doesn’t matter what your investment is worth now as much as what your investment is worth when you come to use it.

August 29, 2007

additional income: stoozing, or credit card arbitrage

Filed under: credit and debt — plonkee @ 12:00 pm

what exactly is stoozing?

Its the practice of borrowing money for free from credit card companies, and then putting it into savings accounts in order to collect the interest. Its also known as credit card arbitrage, and there have been aficionados for some time. According to some the word ‘stoozing’ is derived from an early exponent of the technique whose username on the UK Motley Fool boards was Stooz.

aren’t credit cards evil?

No. Credit card companies are evil in the sense that all corporations are evil and want nothing but your money, but credit cards are a tool that it is possible to use to either lose a considerable amount of money, or through the technique of stoozing, gain you a considerable amount of money.

why will credit card companies lend me money for free?

Because they hope that you will get it wrong and end up paying them, rather than making money for yourself.

what is the best way of stoozing?

This depends entirely on how disciplined you can be.

the less risky and easier way

If you have saved up some money for say, a holiday or a new car, then you can use that to start your stoozing fun relatively risk free. Firstly, make sure that the savings are in a high interest account (tax-free if possible). Pay for the holiday / car / whatever on your existing credit card. You then apply for a 0% balance transfer card, transfer the entire balance of your existing credit card onto your 0% card, and then pay the minimum on this. Once the 0% balance transfer rate is about to end, apply for a new balance transfer card, rinse and repeat. The amount you make from this method depends on the size of your original savings.

the more convoluted way

This is outlined on money saving expert. It basically involves using a 0% balance transfer even though you don’t have a balance to transfer and putting the balance transfer amount directly into savings. Once you have the seed money, you can then keep transferring it between 0% cards, and you can (often) start the cycle again with a new balance transfer.

the 0% balance transfer offer has a fee

It can still be worthwhile using a 0% balance transfer offer with a fee. It depends on whether the fee is capped, and the underlying interest rate on the card. The fee will attract interest, and without paying off the whole balance (defeating the object) you cannot stop accumulating interest on the fee.

Suppose you have a �1000 balance transfer for a year with a 3% fee on a card with a 9.9% underlying interest rate payment, and you put the �1000 in a savings account that pays 6% tax-free. Ignoring the effect of the minimum payment, one year later you will have:

Savings account: �1000 + �60 interest = �1060
Credit card �1000 balance transfer + �30 fee + �2.97 interest = �1032.97

So you come out ahead.

If you include a 5% minimum payment at the end of the year you will end up with

Savings account: �444.90
Credit card: �432.97

So you still come out ahead. What you are looking for is the lowest possible fee (capped is better if you have a large amount to balance transfer), a low interest rate on the fee, and a low minimum payment.

isn’t it a lot of effort for little reward?

Yes and no. If you can get large balance transfers of around �10K, then you should make between �100 and �600 per year depending on the offers available. That’s up to �600 a year for free.

the key thing to remember

The easiest way to avoid messing this up is to never under any circumstances spend the original balance transfer amount plus fees and associated interest. If you want to spend in the interest, then fine, but at any point the balance transfer game could come to an end and you will need to pay back the money that you borrowed to the credit card company.

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