It was announced a few weeks ago that wages rose faster than inflation; a statement that coincided with the news that house prices increased on average by 1.9 percent across the country and unemployment continued to fall.
All of this is welcome news and long overdue; as a nation we’ve struggled through six long difficult years since 2008 and whilst many are still cautious about the recovery, the signs are that it will continue.
The economic crisis in 2008 was created by governments and their policies, and it was created by banks and the companies that audited them. But it was also created by us. The great crash of 2008 was caused by a decade of spending and borrowing on the part of the general public that probably has no precedent.
Now that the return to prosperity seems to have arrived, there’s a chance for all of us to do things differently this time, and to ensure that our own personal good fortunes can be more sustainable.
During the Great Depression in the 1930s the economist John Maynard Keynes argued that governments should operate a ‘counter-cyclical’ policy, meaning that they should save during the times of surplus and spend those savings during times of dearth.
This meant that upswings never became unsustainable booms, because the government taxed wealth in order to save it, and then they could spend their way out of trouble during downswings.
There is much to be said for this common sense approach, and even the Chancellor George Osborne has pledged to run a budget surplus by 2018. Whilst Keynes was writing primarily about what governments should be doing, there is no reason why we can’t take on his advice at a personal level.
This suggests that the next few years for all of us need to be about employing a counter cyclical mind set and making simple, prudent decisions that will future-proof ourselves financially, not just for years but for decades. As the Chancellor put it recently, we need to ‘mend the roof while the sun shines.’
In too many instances in the decade 1998 to 2008, people were encouraged to believe that the good times would never end and that the low prices that globalised manufacturing could bring, along with an artificial housing boom would continue to deliver magic money.
Our sobering economic experiences, which have lasted longer than the Great Depression itself, have indicated otherwise, and there can be few illusions any more about how long the good times will last if we are careless. Here, then are some simple rules for a more sustainable future.
Britain’s economy is largely based on housing, and the property market is one of the most powerful forces pulling us out of recession. If you have decided to move recently or are hoping to add value to your property through a re-mortgage, you have to think of your decision as a key aspect of your long term prosperity.
New banking regulations being introduced this month will make it very hard for you to over extend yourself to the unsustainable levels of 2008, and if you want to borrow more ambitiously, you will need to prove that your finances have a clean bill of health.
This seems like a painful imposition, but in reality it is timely and necessary as the country gets ready to indulge in a frenzy of house buying and selling (Britain’s favourite obsession). Preventing a significant percentage of the home owning population from defaulting en mass the next time the economy runs into trouble could be one of the real golden legacies for the government.
If you have your eyes set on a dream property that will require excessive borrowing to afford, it might be the moment to ask whether it is worth saddling yourself with potentially unmanageable debt? The property has to be something that works for you, not the other way round, meaning that it needs to appreciate in value and (obviously) be a nice place to live, instead of simply it being somewhere you slave all day to afford.
Not only does this make sense in the immediate term, but also in the longer term too. Remember, when the storm hits again (and one day it will, rest assured), the ones who weather it will have assets and the ones who don’t far too well will be saddled with liabilities.
In the last budget the government announced that it would be raising the upper limit on ISAs to £15,000 from July 2014, allowing you to save far more each year without HMRC taxing the interest. In addition to this, the entire amount saved could be cash, whereas previously half had to be in stocks and shares.
To say that this has been welcome news by the savings industry is something of an understatement, and for individual savers it presents an excellent opportunity to see more returns on their wealth. Remember Keynes big idea? In a very subtle way the government is encouraging all of us to emulate his thinking and set up our own counter cyclical policy.
By saving in a regular and sustainable way and getting into the habit of tucking a little bit away each month, preferably somewhere like an ISA that is tax efficient, we can do wonders for our own financial stability. Not only could savings eventually go into sound investments like property in the future, but it is our insurance against tough times.
This all sounds rather obvious, doesn’t it? It bears repeating however, that because so few people between 1998 and 2008 saved at all, in fact quite the opposite occurred, and a relaxed credit environment led to a level of personal indebtedness of staggering proportions.
This one is simple. Pay it off as quickly as you possibly can. There is no one thing more injurious to financial health than borrowing, and if financial good times are about anything, they are about freeing yourself from this burden.
Credit cards, store cards, personal loans, and hire purchase agreements collectively represent the biggest threat to your future financial stability. In 2009, when the economy really took a nose dive, it was personal debt that was one of the first things that lenders called in, with countless customers desperate to appease ever growing queues of creditors.
There are some instances where borrowing is prudent, such as a purchase of a house or an investment in a small business, or a career development loan, but in most other instances it is a luxury that perhaps we as a society can ill afford. As a culture, most of our ideas about borrowing were formed back in more stable times (i.e. the 1960’s).
Back then the lender was more prudent and kindly and who one could meet in person and who would advise you on what you could afford to repay; in effect he acted as a brake on the system and offered advice how much to borrow.
Since the 1980s, the lending arms of certain business have not acted as advisory services so much as they have become salesmen, operating from call centre’s and looking to sell you their products (in short, to increase your personal indebtedness to them as much as possible).
Also borrowing was always predicated on the assumption that future personal financial stability was assured and that all of us would gradually become better off over time. Even though we are experiencing good times again now, there is no indication that these will last forever and it is vital that should there be another down turn, you can face it debt free.
It is true to say that we live in a very different financial world to the one we left in 2008, and most likely things will never be quite the same again in terms of our attitudes towards money, spending and saving.
This may be an unqualified good thing, as a lot of those attitudes and beliefs about money were long past their sell by date and resulted in a lot of financial pain. The past half decade has taught us some serious and challenging lessons about money and debt and now that the economy is starting to improve, we have to put those lessons into practice.
If you are thinking about getting financially fit now that the worst of the recession seems to be over, it might be an idea to see an independent financial advisor who can help you look at how you manage your money and suggest ways to make it work for you.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
For more information please contact us today.