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I’ve been looking at a book by an American man called David Bach. It’s called Start Late Finish Rich and promises a “No Fail Plan for Achieving Financial Freedom at Any Age.”
It has some useful points in it (though whether you can really get rich if you only start saving at 60 is very debatable) but also two huge things that to my mind might make his readers poor rather more quickly than they make them rich.
The first is the idea that you must always ‘pay yourself first.’ This is not a new idea in personal finance land (I suggest it in my own book) – it basically says that every month you should have a percentage of your salary automatically paid into a savings account as soon as you are paid. This puts it out of the way of temptation and stops it getting caught up in your monthly round of shopping and drinking.
Save automatically, the theory goes and you’ll soon find you will have – relatively painlessly – accumulated the kind of nest egg that means you can deal with any emergencies that might come your way.
The problem the Bach’s take on paying yourself first is that as he wrote in last week’s Times he thinks you should be putting money aside even if you have debt. “It’s a mind shift” he says “its going from paying everybody and hoping that there is some left over for yourself to “I’m going to put myself first”. No matter what I’m getting paid first. So if I’m going to bust my tail and work my ass off I’m going to get paid first.”
This might sound attractive as an idea – perhaps it even sells a lot of books – but it doesn’t make any sense at all. The truth is that not everyone is ready to save. A lot of the people in the UK who do save are doing so despite the fact that they are in debt (5 million of us, says AXA). This is a mistake.
It is tempting to want to have some cash aside in an emergency fund or to start putting money away for your retirement but if you haven’t paid off all you owe (mortgages aside) it really isn’t worth it. Say you are paying 18% on your credit cards. A savings account is going to get you 5.5% tops, so if you save instead of paying off debt you’ll be throwing away over 10% a year.
On AXA’s figures the 5 million people both in debt and saving are paying out £5 in interest for every £1 they are earning on their savings. This makes no sense at all – all it does is make the amount of time it will take them to get out of debt longer. Where’s the logic in that?
This is Bach’s 7th book so I assume there are an awful lot of people out there ignoring their debts in favour of paying themselves first. I wonder if that makes him partially responsible for the huge rise in bankruptcies in the last few years.
He might also be culpable for some of the drivers behind the property bubble. Why? Because after paying yourself first his top tip for those wanting to get rich quick is to buy a home. And he wrote in the same Times article “those who already own a home should save to buy an investment property.” This doesn’t make any sense either. It’s nice to own a home. But there are good times to buy and bad times to buy.
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Arguably now is a bad time to buy. Prices in the US are very fragile, prices in Spain (where the British like to buy ‘investment properties’ are on the verge of collapse, prices in Ireland are already falling on some measures (asking prices in Dublin are 10% off their peaks) and even in the UK I’m beginning to feel less alone in my conviction that house prices just can’t keep going up.
And, even if prices don’t actually fall, buying a buy to let just makes no sense for the novice property speculator right now. We know that in most cases the net yields on buy to let properties are far below those on even average savings accounts and that, in many cases, they are negative.
So why would we buy a buy to let instead of, say, a perfectly good stock market investment? Or these days even a nice NS&I index linked certificate (note that with the RPI at 4.8% higher rate tax payers would need to find an alternative investment paying them 10.25% to match the current crop of certificates)? This doesn’t make any sense either.
Buying when the numbers don’t add up may get you on the ladder but it won’t bring you freedom and it certainly won’t make you rich. Instead it will bring slavery in the form of huge debt repayment, payable every month for 25 years.
It doesn’t bring security either – if you can’t make those repayments you won’t be allowed to keep the house (this isn’t unusual: 8,140 homes were repossessed in the UK in the first six months of 2006 and the numbers have been rising ever since). Where’s the security in that?
And never forget about the risk of negative equity. Ask anyone who found themselves owing thousands more than their house was worth (and paying out double in mortgage what it would have cost them to rent) in 1992 and they will tell you that for them the burden of unrepayable debt was a life destroyer. If you can’t sell for a price that pays back your loan you can’t sell at all. And you can’t move house. You’ve no get-out clause. You’re stuck.
I’m not anti buying houses. I’m just against buying them automatically because ‘you know where you are with bricks and mortar.’ You see, you don’t know where you are with bricks and mortar: buy at the right time and a house can bring you freedom, buy at the wrong time and it will only bring you slavery.
Merryn Somerset Webb’s new book Love is not Enough: The Smart Woman’s Guide to Making and Keeping Money will be out next week. To pre-order your copy click here: https://www.amazon.co.uk/Love-Not-Enough-Womans-Keeping/dp/0007235186