Zimbabwe is not the worlds best run economy. Official inflation runs at the millions of percents per annum and unofficial estimates put it in the billions. A teachers monthly salary would struggle to buy five loaves and two fishes, which still requires a miracle to make large numbers if meals from. Not that it matters because there’s nothing to buy in the shops anyway. A lack of paper money means people are restricted to withdrawing a daily amount that’s about as useful as a penny in purchasing whatever goods there are.

Still, there are always ways to make money if you look hard enough. Many Zimbabweans are economic migrants in neighbouring South Africa, and they send all sorts of things back to relatives, including parcels of food, clothing and hard currency.

How does it get back? People with minibuses take it there for a not so small fee. They also charge pretty high commission on hard currency. But there’s a real market for it and most Zimbabweans in SA want to send stuff back regularly, which means that anyone who’s in the transporting business needs to be as trustworthy or customers will dry up. It might be expensive, but so is driving back and forth crossing borders,

At the end of the day, even in the worst economic conditions there can be ways to make a living. They usually require access to capital of some kind and not everyone can take advantage of them.

None of us are likely to face the situation that currently exists in Zimbabwe. There the government is in disarray because Robert Mugabe has created a dictatorship and sent the economy to hell in a hand basket, getting away with it by trading on his liberation struggle credentials.

In contrast Britain - whose economy is heavily weighted towards the financial sector - is probably going to have a bad recession, but there are still functioning schools and hospitals, everyone will need to buy food, most people still need petrol and other goods. Even banks still need customer service advisors and investment funds need to be managed.

We’re going to be ok as long as we can keep our wits about us. Maybe it’s going to be harder to make money, save and invest, but it’s still going to be the only path to a comfortable, rich enough future.

Apparently, there’s a credit crisis on at the moment. Banks are finding it difficult to raise money on the markets, and (as they do) they are passing on that difficulty to us. Or in other words, banks are finding it harder to borrow money, and so in turn they are making it harder for businesses and people to borrow money.

It’s supposed to be a major deal, and I know that people are talking about it a lot, but I seem to have missed the memo about the effect it should have on me.

My day job is in a growth area, so there hasn’t been any slowdown in workload, and currently we’re enjoying relative job security. So, I’ve got no more worries than usual on the employment front. Also, despite a lot of talk of recession, I haven’t actually noticed more major redundancies than normal.

Prices, are apparently going up. I don’t keep a price book (I probably should, but I’m too lazy) and so I haven’t noticed whether this is true or not. I know that the price of petrol (gas, for those that don’t speak the Queen’s English) has increased lately as the price of oil continues to rise, but as I don’t own a car, I felt the direct pain of that. In a country where you can buy a T-Shirt for less than half an hour’s work at minimum wage, I think prices would have to increase a lot for there to be real hardship for the majority of people.

I think the biggest obvious impact that the credit crisis has is in the availability and cost (in the form of interest rates) of credit. I only have two debts - a student loan, and a mortgage. The interest rate on my student loan is tied to inflation, and is paid back via the tax system, so as long as my salary continues to increase at least in line with inflation it shouldn’t cause me any reduction in net income.

My mortgage is a two year fixed rate deal (typical first time buyer mortgage) and I’ve got another year to go before the end of the fixed rate. So there’s no problem there. Of course, I will want to remortgage in a years time which could be interesting if house prices drop too much (currently I’m about 10.3% above negative equity) the latest prediction are for a 5%-10% drop so I may not be able to remortgage on good terms, or at all. In which case, I’m almost certain to see an increased mortgage payment. But, as the last year has shown, a lot can happen in the financial markets in twelve months.

In short, I’m not worred about the credit crisis, it honestly doesn’t seem to have had much effect on me. But maybe I’m missing something. Let me know about your experiences, and what you think of the credit crisis in the comments.

So yesterday, when I pointed out the free download that was available of Suze Orman’s book Women and Money, I said that I’d explain how some of her ideas relate to British personal finance products

checking accounts = current accounts

You probably know that what are called checking accounts in the US, are called current accounts in the UK. Suze recommends that you open a new checking account with the following features:

• no monthly fee
• a low balance to qualify for free checking
• free checks and check writing
• online access and free online bill pay
• insurance coverage

In the UK, you should actually be able to do a lot better than that. Every single bank in the UK offers at least one (and sometimes many) current accounts with those features. To that list you can also add:

• high interest
• FSA registered
• telephone banking
• the ability to set up direct debits and standing orders
• free cash machine transactions at all banks

Currently the best accounts if you are in credit are with First Direct (it’s a high cash bonus rather than a high interest rate) or Alliance and Leicester or Cahoot . Which one you should get depends on how much you earn and deposit each month .

FDIC = FSCS

Just like the Yanks have insurance on bank deposits, so do us Brits. Every bank, building society or credit union regulated by the FSA is insured by the Financial Services Compensation Scheme (FSCS). In the event of a bank or building society failing, the first £35k that you hold in all your accounts combined at the bank will definitely be returned to you.

401(k) = direct benefit (money purchase) pension

A 401(k) scheme or similar is an employment based retirement account. The exact equivalent in the UK is a direct benefit pension, often called a money purchase pension. As in the US, these usually come with employer contributions, which may or may not be dependent on your own contributions.

There are more generous limits on contributions. You may contribute up to the lower of your annual earnings and £215k over all your pensions, including private pensions.

roth IRA = stocks and shares ISA, sort of

The closest thing that we have in the UK to a Roth IRA is a stocks and shares ISA . Stocks and shares ISAs are more flexible than Roth IRAs, which has it’s own disadvantages. You can contribute up to £7000 per year (increasing to £7200 in April) to a stocks and shares ISA, but this limit is dependant on whether you have a cash ISA as well.

Anyone over the age of 18 may hold a stocks and shares ISA, regardless of their earnings.

traditional IRA = private pension, sort of

A traditional IRA in the US, is much the same as a British personal pension, but the limits on making tax-free contributions are much more generous. They are the same as those for an employment based defined benefit pension.

In addition, you can contribute up to £2,808 before tax (which HMRC will top up to £3600) even if you don’t have any earnings, there is no age limit on this.

advance directive / healthcare DPOA = living will: advance statement and advance directive

In the UK, the way to specify in advance what you would like to have happen to you should you become incapacitated is through a living will with an advance statement and/or an advance directive.

An advance statement describes treatment that you would be happy to have, want to have or prefer not to have. It also indicates who you would like to be consulted over your treatment. It is not legally binding, but healthcare professionals must take it into account.

An advance directive is a refusal in advance of certain types of treatment. It is legally binding and must be followed except in a few cases .

anything else?

I’ve given equivalents all the American financial products that I noticed featuring heavily, but if you spot any others, let me know. I’m always happy to try to translate from yank speak to the Queen’s English.

Image by jennifrog

In case you’re not familiar with the concept, a loan shark is someone who will lend you money, unregulated and therefore illegally, and which you then pay back in weekly instalments. The interest rate is literally extortionate, and the results of non-payment is traditionally threats of, and actual, violence.

You know, I’ve never really considered that loan sharks actually exist in this day and age. I’ve seen them in tv dramas and so on, but (presumably) because I’ve lived a reasonably sheltered lower middle class existence all my life, I haven’t interacted with this end of personal finance. I wonder what else I’m missing out on, and I hope I don’t need to find out.

Image by alq666 

It should be no news to anyone that there is currently a sub-prime mortgage crisis in the good old United States of America. It’s been on the news, and in the papers for months already.

But, does it really matter to non-Americans? And if so, how?

what is a sub-prime mortgage?

In order to persuade a bank to lend an extremely large sum of money to buy a house, you generally used to need a few things:

1. A sizeable deposit
2. A verified income
3. A house in mind, in fit condition
4. A good credit score

In the olden days, it used to be almost impossible to get a mortgage without these things. But then, someone realised that there were likely to be people with deposits, incomes and satisfactory houses in mind, who just didn’t quite have a good credit score.

The idea was that you could offer them a mortgage at a higher interest rate than normal, to offset the greater risk of default. Then people who could afford to buy houses (they had enough income) wouldn’t be cut off from the mortgages they required. The sub-prime mortgage industry was born.

what went wrong?

Quite simply, more sub-prime mortgages holders defaulted than expected. There are various structural reasons for this, to do with mortgage backed securities and other financial products (for more information check out this explanation).

As mortgage holders defaulted, the people they owed money to had to write off lots of debt. This included British banks such as HSBC, who had a sub-prime mortgage unit Decision One Mortgage. They lost in the region of $945m and last February made their first ever profits warning (that they wouldn’t make as much money as expected).

Although the defaults had an impact, they haven’t directly had much effect over here as US sub-prime arms of British banks were generally small.

what happened next?

The number of defaulting mortgages was unexpected, and by this time, the money was owed to many different investors - particularly banks - forming part of their assets (a bit like buying a bond). They realised that they didn’t quite know how much liability they were likely to have, and what the return would be on their investments.

It is thought that this the caused banks to be more wary of making loans to each other, or make them at higher rates, as they were unsure of both there own and everyone else’s true financial position. In any case, credit is in short supply - a credit crunch.

has the credit crunch had an impact?

Yes. Most British banks raise their money for loans from the deposits of their customers, but not all do so. Some, instead borrow the money on the credit markets (effectively from other banks) and then re-lend it to members of the public.

As you can imagine, if it is harder or more expensive to buy money, but you are still lending it out, you’ve got something of a problem on your hands. Which is exactly what Northern Rock realised in September. They were forced to borrow from the Bank of England, which led to a short run on Northern Rock branches as lots of people queued up to withdraw their savings.

In order to prevent a panic (or something) the government announced that they would guarantee the deposits - Northern Rock pretty much had enough money to cover it all, but it would have been the end of the bank. This mess is still in the process of being fixed.

The other important but less obvious impact of the credit crunch is the general impact on the economy. Developed economies are somewhat linked together, and with increasing globalisation, if something effects one of the biggest world economies, it tends to affect everyone to a certain extent, especially if they are a major trade partner.

In addition, the financial sector is one of the powerhouses of the British economy, and this crisis directly affects them. This is probably one of the causes of the recent stock market slides.

any more bad news?

In a bid not to get caught out in the same way that the Americans have been, British banks and building societies are tightening their criteria for mortgage lending. People on the margins are finding it harder to get new financing. Having a good financial footing with low or no consumer debt is more important than ever, if you are trying to qualify for a mortgage. But then, it’s good practice to get rid of as much debt as possible before taking on a mortgage.

Image by yananine.

A personal finance and life blogger from metropolitan New York, bripblap is extremely well travelled. Enjoy his tips below and subscribe to his excellent feed.
American Express - don’t leave home without it! That may be one of the most famous phrases in advertising history, but it tapped into a deep fear for most travelers: the fear of being stranded in the distant unknown parts of the world without ready access to their money. What are some simple tricks to use to safeguard access to your money when traveling?

1. If you are traveling to very remote areas, make sure you have plenty of cash. The parts of the world that don’t accept credit cards or debit cards are dwindling, but there are still places. Keep plenty of cash, but keep it spread amongst your wallet, your luggage and even a bit hidden somewhere else. I used to prefer to keep some spare money hidden in my toiletry bag on the theory that nobody is going to check there.

2. Carry dollars. Despite the fact that the dollar is terribly weak right now, it is still the most accepted currency in the world. Carry $100 bills; these are far easier to exchange, ironically enough, overseas than in the US. If you are coming from another country (you’re a European traveler, etc.) I would still recommend carrying US dollars. Don’t count on your drachmas or forints being accepted everywhere.

3. Keep a list of your credit card numbers and customer service - and give a copy to someone at home. There is nothing like having your wallet stolen overseas. However, you want to be able to quickly cancel them if you do lose them or have them stolen, and the easiest way is to have a separate “panic card” ready. Give one to a friend at home in case your panic card is stolen, too.

4. Debit cards are convenient, but pricey. When I started traveling in the early 90s, debit cards were almost worthless when traveling. As time has passed, though, they have become far more useful. Be careful when changing money, though - you may pay a fee to your bank and the local bank. In addition, you may get hit with an exceptionally unfriendly exchange rate.

5. Go gray. I can’t emphasize enough that you should stay in compliance with the laws of the countries you visit, which often prohibit individual currency exchanges. Depending on the country you visit, though, you may find significantly better exchange rates dealing with individuals than with banks or exchanges. In developing countries with high inflation rates local people will often be willing to give you better rates simply to protect their earnings by converting them to dollars. I would not recommend exchanging with locals, however, unless laws (and safety) permit.

6. Get rid of change. Spend your change as fast as you get it, and small bills, too. These are often difficult - if not impossible - to exchange on your return. Try to spend all of your local currency before you leave the country. Exchanging your money to local money and then back to your money is a terrible waste. Try to spend down to 0 before you leave; put your last few expenses on a credit card.

7. The most important money tip when traveling, of course, is to keep it and yourself safe. Never flash large sums, never discuss how much you have, keep it well hidden and ensure you know how you could get ‘emergency money’ if you needed it (for example, where ATMs are that accept your bank’s ATM network).

Fun (and safe) travels!

I suggest you write an article about how interest rates effect inflation and vice versa. Something practical for the masses.

It sounded like a good idea to me, so here goes:

supply and demand in pancakes,… or anything else

Imagine people selling pancakes. If there is a big demand for pancakes, but there aren’t many people supplying pancakes then the prices will go up as the customers outbid each other for pancakes. If there is a big supply of pancakes, and not a lot of people demanding pancakes, then the price of pancakes will go down as the pancake sellers undercut each other.

Now what is true for pancakes is also true for the relationship between money and prices. If there is more money than there are goods and services to buy, then the prices for the goods and services will go up. If there is less money than there are goods and services to buy, then the prices for the goods and services will go down. The measurement of the change in prices over time (the rate at which prices change) is inflation.

the price of money

This is where interest rates come in. One of the ways that you can think about interest rates, is as the price of money. If you look at something like zopa* or prosper*, you get borrowers saying how much interest they’re willing to pay (what price are they willing to pay for money) and you get lenders saying how much interest they want to charge (what price are they willing to sell money for).

As I’ve explained before the interest rate, or the price of money overall, in a currency is effectively determined by the central bank - such as the Bank of England, the European Central Bank or the Federal Reserve for example. This means that if the central bank’s interest rates are high, money is more expensive, and if the central bank’s interest rates are low, then money is cheaper.

bringing it all together

As with all things, if money is expensive then it will tend to be in short supply, and if money is cheap it will tend to be in plentiful supply. But as we saw before, if money is in short supply [interest rates are high] then prices overall will go down [inflation is low or negative], and if money is in plentiful supply [interest rates are low] then prices overall will go up [inflation is high].

This is why higher interest rates tend to lead to lower inflation; and lower interest rates tend to lead to higher inflation.

*these are affiliate links, regular links are zopa and prosper

I knew that the rate used to be decided by the Chancellor of the Exchequer, but is now decided by a committee. I also knew that if the Bank of England rate changes, so do the rates for both borrowing and saving at high street banks and building societies (the ones that you and I are most likely to use). But, what exactly is it, and why does have the effects that it does?

The Bank of England interest rate is the rate at which the Bank lends money to high street banks.

In the normal run of things, high street banks can’t keep enough money on hand and they have to get some from elsewhere, so that they can lend money to customers and so on. Most of the money they need comes from people with deposits with them, but the system is such that they tend to run short on daily cash flow.

Since the Bank of England prints most of the currency, they essentially control the money supply, and eventually, someone will have to come and ask them to for money. This means that the Bank of England interest rate drives all the other English banks.

how it works, simplified

If you want to borrow some money from a high street bank, it will have to borrow some of that money from the Bank of England. If the interest rate it gets from them is, say 5%, then in order to make a profit, it needs to charge you a little more that, say 5.25%.

Savings accounts rates tend to be a little bit lower from the Bank of England interest rates, say 4.75% in this example, because there are costs involved in running savings accounts.

If you want to know more, you can look at the Bank of England website.

The big question is, how shall I obtain this money in US$?

The way I see it, there are three main options, and of course, I could do a combination of these.

rely on plastic

This would basically mean using a debit or credit card to make purchases wherever possible, and withdrawing small amounts of cash for sundries at ATMs once I’m in the States.

Benefits include not having to do anything before I go, and being able to only change as much money as I need. Downsides are that ATMs may not be available when I want them, my card may get stopped because my bank thinks someone has stolen my card, each transaction involves a fee.

buy traveller’s cheques

I could get buy American Express traveller’s cheques and then cash them once I’m in DC.

This has the advantage of being pretty secure. The disadvantages are that it’s a pain to carry them round, and if I don’t use all the cash I have to fork out two lots of commission.

carry greenbacks

Finally, I could just change some £ sterling for US$ before I leave.

The main benefits are that once it’s done I don’t have to worry about converting any money and I have more time to shop around for the best exchange rate. The disadvantages are that it’s not very secure, and again, if I underspend I’d have to change the money twice.

How do you normally deal with foreign money, and what do you think that I should do?

There are also plans afoot to increase the level at which deposits are insured to as much as £100k. I think this is an attempt to prevent a panic in the event of another bank going into difficulties, rather than this having become any more likely.

I’m not really sure what to think about these proposals. I’m generally in favour of increased consumer protection, and persuading the risk averse to put their money into savings accounts rather than hiding it under the mattress is probably a good idea. On the other hand, there is a limited level of familiarity with risk and return in the UK. I wouldn’t like to see people continuing to believe that any action is risk free.