Maire Bonheim chatted to Alvin Hall about managing money in the midst of the global financial crisis.

Is it safe to save your money with a bank when there’s a chance it could go under?

Well the government has guaranteed deposits up to £50,000 so yes, if you have deposits up to £50,000 absolutely. Not all banks are going to go under at this time. You want to go for a bank that is conservative and has pursued conservative lending policies, as opposed to one of the banks that was overaggressive and overextended itself with lending and real estate.

What do you think about Gordon Brown’s package to safeguard banks? Do you think it’s enough?

I think we’re in such unchartered territory that no one can actually tell what the future is going to hold and I think he should be congratulated for coming up with a plan that really enables the British taxpayers who are funding this to eventually get their money back, if all of this proves successful. It was certainly much better than the US plan, where we were buying up toxic assets, and then had portfolio managers who were going to liquidate them without the US taxpayer getting any equity in the banks at all. And now the US is adopting the Gordon Brown rule. I think he was creative and it’s a good plan, but no one can tell how the markets are going to work any more because they are completely global and that’s what this crisis has shown us – that there’s no longer such a thing as a safe haven for anybody.

Who or what do you think is to blame for the credit crunch?

I think you can apportion blame everywhere. There’s no doubt that it started in the US markets with the sub prime mortgages, and repackaging of those mortgages and selling the securities around the world, which everybody thought was completely safe. That’s at the high end of investment banking. At the bottom end at consumer level, you had consumers who saw credit card offers coming in the mail and they thought it was their money; they would get an overdraft and think it was their money; and they’d start living farther and farther into the future on credit – and then when things began tightening they began to default on their loans. So you can look up and down the spectrum and there’s blame at every single level, from the investment bankers in the City all the way down to the consumers who lived on credit.

How long do you think it will be before the financial crisis is over?

I think you’re looking at a period of maybe three to five years. If you look back, in the 70s, 80s and then the 90s when the market went into the doldrums, it took about 3 years for the markets to recover and for stability to come to the market place – and this is more significant than those periods. In this case, I think the market will go down; there’ll be a slight recovery; and then there will be some other news coming out, for example Christmas sales will not be strong this year. The market will react in response to that by moving downward, and then it will more than likely move sideways as we see how these bail out packages are going to work. But no one can see the future because we’ve never been in this type of situation before.

Why do you think it was allowed to get to this stage?

People assume that this was a controllable situation but I don’t think anybody understood the full extent of the various types of securities that were being used, or the detrimental side effects of those. In the industry, when a lot of these new products were being created like sub prime mortgages and the products that resulted from them, they used historical risk to determine the risk associated with these. Historical analysis looks at some types of economic situations, but we’ve never been in an economic situation like this, and if you look at trying to create a free market at the same time to allow the markets to grow without regulation, nobody could have anticipated this.

Were the property markets in the US and the UK too highly priced?

Yes. There’s a difference in attitude between property in the US and property in the UK. In the UK people think property can only go up, after all it is an island. People buy their first house; most of them try to hold onto that first house when they buy a second house and then rent it out. When they buy the Third house, they then try to hold onto the other two, and they rent them out and get rental income from them. So over time more and more people actively or passively buy into the buy to let market. That naturally drives prices up because properties are not available in the market place. Taxi drivers were forming consortiums to buy up properties in London, all around the country people thought property could only go up, so that mentality drove prices up to unreasonable levels.

In the US we have a different issue. People want to move to bigger and better houses, moving further and further out to new suburbs. But the houses sometimes started at half a million dollars or a million dollars, because they were buying palatial mansions. The developers could build these properties because people saw their dream houses come true. It’s not about land there; it’s about creating a dream house. And they build more and more of them.

So in both markets prices became way too high; they clearly needed to correct, and they are. People are really shocked by it though, because they had started to use property like an investment. Historically property has been a form of enforced saving. You would live in a house for 5, 10, 50 years and it would go up. But now people are treating it as an investment, sometimes only holding on to houses for 3 or 5 years before selling or renting out. Any time you start treating something as an investment, you face the same risk as an investment. And that is the risk that it will drop.

How have peoples’ spending and saving habits changed since the start of the credit crunch?

A recent Lloyds TSB survey showed that 34% of people have cut back on their spending in reaction to the credit crunch and 54% of people are trying to pay off their debts. I think this is true both in America and in Britain. In addition I think people realise that they have less money to spend so they are trying to find ways of lengthening the buying power of their money, whether it’s collecting coupons or buying 3 for 2 offers, they are trying whatever they can to extend the buying power of whatever money they have.

People recognise that if you are in debt, you run the risk of the bank calling you up and asking for full payment; if you’ve been living off your home equity line of credit, then you may discover that they’ve raised interest rates on it, so it’s best to be free of debt, especially consumer debt. I think you’re going to see the impact of that most in the upcoming Christmas holiday season when people become nervous about how much Christmas may be costing them and start cutting back appropriately.

If you have credit card debt is it better to pay that off first, or take longer to pay it off but also save a little?

It’s best to pay off your debts first. While you’re saving, you may be earning 5% or 10% on your savings but the credit card is costing you 14%, 18%, or 22%. Why would you want to save at a 5% rate when you have a credit card outstanding at a 14% rate? You’re losing money. So it’s best to pay off your credit card debt and then take all the money you were using to pay off your debt, and immediately start saving that money. You weren’t living off that money anyway, so start to save it. But what most people do, as soon as they pay off their debt, what is the next thing they go out and do? Spend. 

What tips would you give to people who are finding it impossible to save during the credit crunch?

I think they need to look at their incomings and their outgoings much more carefully. They need to know where every pound and pence is going. I did this myself at the beginning of the year. It’s only when you know where your money is going that you’ll know how and where you can cut down. There are two ways of looking at this. You can start with your non discretionary expenditures - the money that you must spend every month. That could be your utility bills, your phone bills, your mortgages – and you need to see that you’re getting the best deal possible.

You may need to switch to a different utility provider or lower mobile phone tariff. Cut back on all of these to see what money can be released. Then look at your discretionary spending. Maybe you’re still going out and buying takeaways two nights a week, maybe you’re drinking an extra drink at the pub 4 nights a week, maybe it’s cigarettes or magazines.

You need to see where you’re routinely going over the limit and cut back on that. That can release money first to pay off your debt, and then for savings.

What would you say to people who believe they don’t make enough money to save – are there some people who literally can’t afford to save?

I was raised extremely poor but my grandmother always managed to save $20 a month. It wasn’t a lot, but when times got hard that little bit of money was a big help. I think anyone can save if they really want to, but you have to be willing to make the sacrifices.

And people also think that if you’re not saving £100 a month or more it’s not worth saving – when you are out of a job or in a difficult situation any amount can help. People should try to save during the good times and always put money aside even during the bad times no matter how small it is, because at least it’s earning interest and growing rather than being frittered away on something you can’t remember a day later.

How much would you suggest everyone should save up?

Ideally people should try to save between 3 and 6 months’ living expenses in the bank and that money should be sacrosanct, because you could have an accident or be made redundant suddenly and by having that in the bank it gives you some flexibility. If you talk to financial planners, they say you should put aside 15% of your annual salary for savings. That also depends on your income, and for some people that’s a large amount. So even if you start off with putting £100 or £20 away each month.

The key thing is to make sure you don’t touch the money except in the most extreme situations. Most people don’t have that discipline and that’s why although they save they quickly spend it, especially if they have a debit card. They have a bad day at work and the money starts calling to them. I tell people, put your savings in an account and do not get a card against it – so the only way you can access it is to go to the bank.

Do you have a pension or do you think there are better ways to save for retirement?

I have a pension but I think the best way to save for retirement is to be diversified. You should have some money in cash, some in a pension, some in income securities and some in real estate. The combination will provide you with a good retirement.

I think people don’t clearly understand that investing and saving are not the same thing. In Britain those two words have been collapsed. One of the questions I’m asked most commonly is, “I have some money in the bank. How can I invest it?” And I always ask, “Do you want to save it or invest it?” People don’t understand the difference. With pensions, many people think they are saving and therefore they are not subject to risk, when really most pensions are invested in the stock market.

 For more savings tips from Alvin Hall, Click Here.

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