Chapter 4 - Managing Your Spending

Deciding the difference between wants and needs

After dealing with any emergencies and getting advice about debt we need to think about our attitude to spending. Spending on something we want can give us a short-term buzz but it can also bring long-term worry. It is essential that we identify the difference between our wants and needs. We all have dreams about what we want but we have to first cover the things we need like rent, food, clothes, heat, etc. Wants tend to be immediate – we see something and we want it straightaway.

The problem is that we may have £15 left at the end of the month and think ‘well, I can buy the skirt now’, but next week when an unexpected bill comes we go into a blind panic.

To plan ahead for all essential expenses can be difficult, particularly when your kids may be nagging you to buy something they want. Once we recognise that every spending decision affects another spending decision it all becomes easier. For example, spending £15 on a skirt may mean living in the cold and dark for a week because there’s no other money left for electricity.

In other words, always know your priorities! And if you don’t know them now, reading the rest of this book (especially about budgeting) will help you find out.

There are many things we have to spend money on – food, housing costs, fuel bills, essential clothes, bus fare etc so when it comes to the unexpected extras, the leftover (if there is any!) has gone. ‘Maybe it went in the newsagent or perhaps in the supermarket. No I think it went on the catalogues – I’m not really sure, but I do know that Kate’s going to kill me if I don’t give her back the twenty quid I owe her.’

Money does go too quickly, but there are particular things that make us spend more.

We need to remember:

The more we go shopping, the more we are likely to spend.
The more we watch TV, the more we are likely to spend.
The more we look at magazines, the more we are likely to spend.

If we have credit or store cards, we are more likely to spend (people who use credit cards are likely to spend 34 per cent more than people who don’t). Of course credit cards can be useful but often we buy things that we’d never have bought if we had had to pay by cash or cheque.

Buying an item

You may think that this is all pretty simple stuff but if you’re on a low income you need to be sure that when you buy an expensive item you are actually getting your money’s worth.

Price

What are you getting for your money?

Discounts

Are there any discounts or special offers, for example, for paying by cash or for slightly damaged goods or seconds services?

Guarantees

Are there any guarantees with the item? If so, for how long and what exactly do they cover?

After sales service

Is there any and is it free? You need to know who is responsible for paying if something goes wrong.

Conditions for return

If the product is faulty you can get your money back as there is a legal entitlement to a refund if goods are faulty. You do not have to accept a voucher (credit note), but you do need to return the goods within a reasonable time.

VAT

Does the ticket price include VAT? If this is not included you will have to add on nearly a fifth (currently VAT is 17.5 percent).

Delivery charge

Are there any charges for delivery, alteration, fitting, etc?

Payment options

Have you looked at the different ways to pay – for example, cash, credit card, credit sale, debit card, hire purchase (HP)?

Comparisons

With so much choice around, you need to be sure that you are buying the product best suited to your needs at the best price, taking account of all the possible extras above. Shop around for the best deal. The internet is a great way of doing this.

Haggling

This is something to mention as a final note. It’s something we aren’t very good at in Britain! If you are spending a fair bit, ask the seller to throw in a few extras for free or to give a discount for cash. You can carefully suggest that you could go elsewhere.

Market traders are particularly open to a bit of haggling for clothes for example. When you’re buying several items, you may be able to persuade them to knock a bit off for a bulk purchase.

Bills

It’s not just spending money that is important.

Careful money management is also about when and how we pay bills. It can be difficult to budget over a long period of time for bills that come every three months such as electricity and gas or twice a year such as water rates.

To help you budget, particularly for fuel bills, you may be able to set up regular payments to the gas or electricity company so that huge winter bills don’t cripple you. They will help you work out your annual bill and divide it into 12 months so that each payment from your bank account remains the same each month. You may even qualify for a discount by paying this way.

If you receive your income weekly, it may be tempting to use a key meter for your fuel bills, which effectively means that you pay as and when you use your gas and electricity and/or pay other bills weekly such as your TV licence – but beware, you may be paying a higher amount for what you use or amounts sooner than you would by paying monthly.

If you have a key meter (perhaps because you were in debt to a fuel company), contact the supplier about changing this. If they refuse to do so, get advice (see useful organisations). As with anything else you buy, shop around for the best deal. Regularly check that you are not paying more than you should. Also check for any discounts and other extras. Visit internet comparison sites to find the best deals for utilities, loans and other services. See page 55 for a list of comparison sites.

If you’re struggling with a bill, don’t wait until you receive the red bill (the final warning before disconnection) to contact the supplier. Utility suppliers can be very helpful if they know that you are trying to pay but you are a little behind this month. If you don’t tell them and you are disconnected, the charge for reconnection can be high. If you are in debt to a fuel or water company call the Lone Parent Helpline and ask for our factsheet Help with paying household bills for details of charitable trusts who may be able to help people in certain circumstances.

Prioritising your spending

To manage your money well, it is important to prioritise your spending (decide which items are most important). This may vary from person to person but here is a general guide.

First, pay your bills. Make sure your most important expenses are covered each month – for example, rent or mortgage, utility bills (gas, water and electricity) and your car payment.
Then pay your day-to-day needs, like food and travel.
Occasional costs can come up every three months or every year. Make sure you have put money aside to pay for these.
Save some money for emergencies. Unexpected situations can occur and it is helpful to have an emergency fund.
When you have covered all of these expenses and cleared any debt you have, the next step would be to save money for future plans such as buying a house, education and so on.

Using credit

Borrowing money through mortgages, loans, overdrafts, using credit and/or store cards can be a good way to help manage a budget, if done in an informed way. But when you are on a low income it can be tempting to use sources of credit that you had not planned to when money is tight. It can also be difficult to always pay off the amount you owe so you do not pay any or only a minimal amount of interest.

Borrowing money with no sure way to repay puts pressure on your family’s future. Overborrowing also prevents many families from achieving long-term financial stability.

Extract from a newspaper article

‘France’s first branch of Crazy George’s, the British-owned furniture and domestic appliance chain, has had to close after only two days of trading amidst a storm of political criticism over its sales methods. The store, which targets customers on low incomes and offers easy but expensive credit, opened last Saturday. The repayment schedule may make the goods two or even three times more expensive than if bought outright. Examples included a washing machine for £5.50 a week, retail price £377, credit price £854! In Britain, where there are already more than 50 such stores and hire purchase is common, this passed almost unremarked.’

-The Independent

If you can save-up and buy with cash you’ll always save money.

Different kinds of credit

Secured

This doesn’t mean that you have got a good secure loan! What it does mean is that when you borrowed from the creditor they insisted on having some form of security from you before they agreed to lend you the money. So, if you fall behind on the repayments and all else fails, the creditor can claim the item you used to secure the loan. A good example of this type of credit is a mortgage, where the house itself is the security.

Be very wary of taking out any other loan that requires your home as security. If you are on a low income it can be hard to keep up with repayments and you will risk losing your home.

Unsecured

This generally means that the creditor has confidence in your ability to repay the loan and will, in any case, have built into the interest rate charge an allowance that you might default. For example, purchasing a fridge-freezer on a store card.

Fixed Term

This means that you pay back a sum of money each month for an agreed period of time. The amount of money may fluctuate as interest rates go up and down, but at the end of the period the debt will have been cleared. A bank loan is an example of this.

Revolving

This means that you only have to repay a minimum amount per month. On this basis, if you make the occasional purchase and you don’t pay off the balance in full each month, you could be paying towards this type of credit forever. Store cards and credit cards are examples here. This type of credit needs to be used sparingly and carefully, as you can end up paying interest on interest and a small debt can grow out of all proportion.

The costs of credit

As you can see, there are different risks involved with different forms of credit. There are also different interest rates and fees so, if you have to borrow, try to ensure that you are paying the cheapest rates possible. You can compare the rates associated with similar types of loans by looking at the APR (annual percentage rate). Generally the lowest APR will be the best deal.

An easy way to compare a variety of loans is to visit internet comparison sites. Unfortunately, families on a low income have limited credit options – those that come with a higher risk (for example, a secured loan, see above) and/or those that are particularly expensive.

Examples of expensive credit:

Doorstep lenders commonly charge 183 per cent APR each year.
Store cards are tempting as they may offer discounts but the typical charge is 23-30 percent APR – higher than most credit cards.
‘Rent to own’ retailers (who rent items such as TVs and sofas) charge a total amount that is several times the normal retail price and also have a reputation for rapid repossession of the goods if you miss your weekly payments.

If at all possible try to avoid these types of credit.

Consolidated Loans

In recent years these have become an increasingly popular way to try to get out of debt. They usually promise lower interest rates and lower monthly payments, but you need to be very careful.

A consolidated loan is a single loan that you can take out to pay off all your debts. So, instead of trying to pay off a number of debts, you would have just one consolidated loan to pay off. However, firstly, consolidated loans often reschedule debts over a much longer period so that you pay a lot more interest and secondly, these loans are usually secured against your property. This means you could lose your home if you do not keep up with repayments.

You should always get advice before making a decision about a consolidated loan.

Am I creditworthy?

Lenders generally carry out credit checks to find out about your credit history and your current credit standing. In other words, to find out how risky you are as a borrower and whether you are a good person to lend to.

Other companies, like mobile phone or utility companies, will run a credit check on you before offering you an account to make sure you will be able to pay for their services. If you miss payments and/or have a County Court Judgements (CCJs) your file with the credit reference agencies would be marked accordingly. In effect, this would mean that you would find it difficult and very expensive to get new credit for the next 6 years, which could be harmful for you and your family. This would be especially true if you had a major expense during the period, such as moving home.

The Office of Fair Trading’s Consumer Direct website (www.consumerdirect.gov.uk) explains how to get a copy of your credit file. If by any chance your file is wrong, the site also explains how to have information corrected. Contact details for the main credit reference agencies are provided in the Useful organisations section.

Top 10 credit tips

If you’re going to use credit, these 10 tips from the Office of Fair Trading will help you to borrow safely.

Can you afford it? Before you commit yourself, make sure you can really afford the repayments by making a budget – don’t be talked into borrowing more than you want to.
Shop around for credit. The first thing you’re offered may not be the best deal. There are many types of credit and many different rates on bank loans, credit cards, hire-purchase agreements and so on. Don’t pay more than you need to.
Read the forms before you sign. If you don’t understand them get help from a trading standards office or a Citizens Advice Bureau. Once you sign, you can’t change your mind if you signed on the trader’s or lender’s premises. If you signed anywhere else, you will have a short ‘cooling off’ period to change your mind.
Check exactly how much you’ll pay back including interest and charges. Is it good value?
Compare APRs. This is the easiest way to compare similar credit products – so if you’re looking at credit cards for instance, go for the one with the lowest APR. Usually the lower the APR the less you pay in interest. Sometimes a low APR is only offered for a short period.
Watch out for other charges such as the lender’s fees or fees to arrange the loan.
Look at the length of the loan, not just the monthly payment. The longer the loan period, the more interest you’ll pay back.
Watch out for optional extras. Sometimes paymentprotection insurance is included when you haven’t asked for it. You don’t have to take this up and it may not cover your situation.
If you use your home as security for a loan and don’t keep up repayments, you could lose it.
If you act as guarantor for someone else’s loan, you will have to repay the debt if they don’t.