Chapter Eight

KEEPING YOUR MONEY

Having achieved your fortune, you may find that it fritters away even as it lies in your pocket, or in your bank account.  You never had a chance to spend it, still less enjoy it. You wonder if mice are nibbling or even a rat gnawing away the odd chunk. How can your money shrink - and how can you protect it?

The explanations vary with the nature of  your wealth. Take wages. You receive your salary only after income tax and national insurance have been deducted from it. So if you can minimise these deductions, you have more left to spend. Methods of reducing your tax bill would fill a bookshelf. The shelf would sag.

If you don't need or intend to pay an accountant, the best laypersons guide is published by the Consumers' Association. Every spring they produce a Money Which? tax guide. You can buy it in bookshops. Never economize with last year's copy, because the rules change every year. www.which.co.uk/

The next mouse nibbling away at your earnings is inflation (see Chapter 17).Every price rise lowers the value of your money; it buys less for you, so it is worth less to you. If you can choose, it is better to be paid weekly or fortnightly than monthly. Your earnings have less time to lose value.

If you are paid by cheque, arrange for your salary to be paid directly into a building society or interest-bearing bank account. At least you will be earning interest on your money straight away.

Many 'ordinary' current accounts which you use with your chequebook also pay you interest. Or you can change from one that does not to one that does simply by asking to. You have to ask - the bank would rather not pay you interest if you are satisfied without any.

If you inherited your loot, you may find that what Aunt Annie left you has been immediately shrivelled by inheritance tax. If Aunt Annie had done her homework (unless she was stinking rich), this should never have happened. Inheritance tax resembles the sudden gulp of a shark more than the constant nibble of a mouse.

Still, not all need be lost. There is something called a deed of family arrangement which every solicitor should know about. Your solicitor can draw up a document to be signed by all the beneficiaries. These are the people who would have received money or goods under the will. They sign to agree that the will should be changed.

If this is done within two years of the date of death, the new allocation takes the place of the original will. The new split-up will aim to reduce the tax payable as much as possible. Unlike in cookery, with wills it is possible, by recutting the cake, for everyone to increase the size of their eventual piece. We look at this again in Chapter 15.

In practice, the problem is to persuade all the beneficiaries to agree to the changes. Families grow notoriously suspicious of each other where wills are concerned. Some people would prefer everyone to receive less rather than everyone more but a few even more than others. They would happily cut off their nose to spite their face.

Even when you simply borrow your money, you may find it whittled away. Some brokers, banks etc. charge arrangement fees for making a loan. In theory, these cover their costs of paperwork. In practice, it is often just a way to squeeze more money out of you.

The same thing can arise if you later rearrange your borrowings. Suppose times grow hard and you extend your house or flat mortgage from twenty-five years to thirty to reduce your monthly repayments. Alternatively, you may wax prosperous and want to pay off part of your loan early. Either way, you can find yourself saddled with arrangement fees or early redemption fees to pay.

What can you do about this? At least, ask at the time you borrow for full details of all the extras you will have to pay. Then they will not come as such a nasty shock.

Big organizations lay down set rules. But if your borrowing is on an individual basis, and if the lenders are keen to lend, you can sometimes persuade them to forgo their fee. Senior bank managers often have discretion and can make what terms they think fit.

Perhaps you can arrange things to avoid fees. If the fees only apply to repayment within five years of borrowing, for example, it may be worthwhile to hold back your sale until the five years have just finished.

Sometimes lenders insist on life insurance and offer you their own expensive policy. You may be able to avoid this. Perhaps you can persuade them to accept instead the policy you already pay into, or a cheaper one that you can arrange with a broker.

As you struggle to keep your money intact, to defend it from the mice's nibbling, don't just think in terms of black and white - of keeping your money or losing it. Half a loaf is better than none. You may not be able to avoid an expense completely, but any reduction in an inevitable bill, like tax, is worth having.

Sometimes by planning ahead, you can choose between income tax and capital gains tax. At the time of writing, the rates are effectively identical. But the detailed rules of capital gains tax may still make it the cheaper tax to pay. For instance, inflation is taken into account, which always works to your advantage. Better still, you can make £8,500 worth of gains a year (£17,000 for a married couple, 2005 figures) and not lose a penny in tax.

This sort of planning needs professional advice and regular reviews. Not so long ago, income tax stood more than twice as high as capital gains tax. Any change of government or policy may throw your well-laid plans back into the melting-pot.

Sometimes you can save money by paying a bill early if you receive a discount for prompt payment. Alternatively, if you can put off paying a bill until later, this saves you money. This is not the same thing as refusing to pay on time. Perhaps you buy from a catalogue. If it gives you the choice between paying cash and taking interest-free credit, choose the credit. Put the money on deposit, earning you interest, until you have to pay up. Don't weaken and spend it in the meantime, and don't tie it up. If you know you will have to pay in six month's time, don't invest in the sort of building society account, for instance, where you cannot withdraw your money for a year (often called 'term accounts') or where you can but only at the cost of losing much of the interest you have already earned.

Much tax avoidance aims to delay payment. For instance, Jane sold her florist's shop on 5 April 1990. She had to pay tax on the profit she made on the sale on 1 December 1990.

Mary sold her knitwear boutique on 6 April 1990, just one day later. She did not have to pay tax on the profit she made on the sale until 1 December 1991 - a whole year later than Jane.

If Mary's tax bill was £3,000 and the building society was offering 10 per cent p.a. interest, then she could save £300 by waiting a day. She put the money to pay the tax into the building society, and it earned her £300 interest before she had to hand it over.

For tax avoidance like this, most people need the advice of an accountant. Do tell your solicitor in writing beforehand what date you need on your document. Don't expect him or her automatically to do everything in your best interests. They may not know either your personal situation or the tax rules.

The same applies to anyone else you deal with. For this reason, keep your money under your own control as much as possible.

John and Sue sold their house when they moved abroad. They flew off before the sale was complete. The proceeds were paid to their solicitor, and they waited anxiously for him to send the money on. After a couple of weeks, it arrived. So far so good.

At the time when the solicitor completed the sale and obtained their money, John and Sue would have received $2.90 for every £1. Two weeks later the exchange rate changed. Now every pound of their money only bought $2.10.

The couple sold their house for £80,000. The solicitor's delay cost them $64,000 towards their new house ($232,000 - $168,000). This sum alone could almost have bought them a house in their new country. Yet their solicitor had done nothing wrong. It was not his job to get them a good exchange rate. And they never impressed upon him the urgency.

What should they have done? Told him to pay the £80,000 straight into their bank account in England. Then they could have phoned the manager themselves and found out every day what exchange rate the bank was offering. (With internet and emails, it is even easier.) They could have changed their pounds to dollars on the day of their choice over the phone. If necessary, they could have waited, with their £80,000 earning them interest, not converting their pounds until the rate improved. (I will say more about exchange rates in Chapter 16.)

FORGET GAMBLING

If you want to keep your money, forget gambling. It devours your funds - at best like a greedy mouse, at worse like a ravenous shark. By gambling I mean gambling of every sort, from roulette to bingo, from Premium Bonds to horse-racing, from the pools to draw tickets. You could squander your life gambling on the internet. And so could your children. So beware. *

Gambling is a vast worldwide industry which employs tens of thousands of people. All those wages and those glamorous casinos are paid for by gamblers. Did you know that betting shops are kept dismal by law? It is a feeble attempt to discourage punters. Otherwise they would emerge as plush as a hotel lounge.

Next time you pass a fruit machine in a pub, remember that the profits go one-third to the publican, one-third to the owners of the machine and one-third to the brewery. And they all do very nicely. You may even spy the landlord feeding in change until he has milked the machine of all its pay-outs for his own pocket.

Next time you spot a one-armed bandit, look for the label saying how much gambling tax that machine pays every year. Don't be surprised if the figure rises over £1,000. Now imagine how much profit that machine earns its owners. They still gain handsomely, even after tax. So why is the pub not packed out with such gold-mines? Because the tax charged on the second one is even higher.

Gambling thrives on mistaken beliefs. Here are just three.

- The law of averages People console themselves, 'I've lost last time, so I might well win this time, and I'm certain to win next time.' Wrong. Ask any mathematician. Probability theory is the name for the branch of maths which covers chance. Perhaps you thought there was no more to it than crossing your fingers and hugging your lucky rabbit's foot! Whoever said, 'Gambling is like a tax on people who can't do sums' knew what he was talking about.

Suppose you toss a coin. What are your chances it will come down heads? If the coin is normal they are 50:50 or, to put it another way, 1 in 2.

If you toss a coin and it comes down heads, what are the chances of it coming down heads again? You will hear all sorts of answers to this one, based on some sort of law of averages. In fact the answer is 50:50 or 1 in 2 again. It will go on being the same, even after you have thrown the coin 1,000 times and each time it fell heads.

Why? Well, first of all you must work out all the possible outcomes and count them. With a coin this is easy: it could only fall heads or tails. This only offers you two possibilities. If it comes down heads, this is one of the outcomes, it is 1 in 2. So your chances of a normal coin coming down heads are 1 in 2.

Every time you toss, you face a new situation. You must work out the odds again. What happened in the past has no influence at all. Mind you, after 1,000 heads, anyone would begin to wonder if the coin really was normal.

Go a stage further. If you take a pack of cards, what is the chance that the first card you turn up will be a diamond? Total the possibilities. There are 52, because there are 52 different cards, but any of the 13 diamonds would do. So there are 13/52 chances or, put another way, 1 in 4.

If you do turn up a diamond and set it to one side, what are your chances of the next card being a diamond? Answer 12/51. Why? There are 51 cards left, and only 12 of those can be diamonds.

Remember, you cannot work out your odds unless you know all the possibilities beforehand. So in a lottery you cannot even start to work out your chances of winning until you know how many tickets are sold.

In the next stage of calculation, you take account not just of what could happen but of the likelihood of it happening. Of the ten horses dancing around at the starting post, one may have suffered an injury not long before, another may not like heavy going, a third may be ridden by the champion jockey,  a fourth may carry a lead-packed saddle to handicap it, and so on. You have to find out all these things. Then you must decide how important each one is.

Professional bookies are not that much wiser than the rest of us. They set the odds based on the amounts that punters are betting on each horse. They keep adjusting the odds so that overall they cannot lose. Even then, they use a system called laying-off.

To protect themselves from their wrong bets - those where the punters win - booking bet among themselves. If the worst comes to the worst and every favourite wins, they themselves win enough money from other bookies to pay out their customers' winnings and still come out ahead. If professionals need to hedge their bets like this, what hope do the rest of us have?

Here is the next fallacy about gambling:

- For everyone who wins, someone loses. This is not true either. Take the stock market, where people gamble that the shares they buy today will be worth more in the future.

Perhaps you sell some British Telecom shares because yesterday the price as high at £3 a share. The day you sell, the price drops to £2.75 a share. Have you lost?

This all depends. If you bought those shares for £1.50, then you have made a nice profit of £1.25 (ignoring any brokers' fees). If you bought them for £2.90, then you have lost 15p per share. Either way, the fact that the share price was even higher yesterday is irrelevant.

What about the person who buys your shares? Have they won? Again, it depends. If they go on to sell the shares for more than £2.75, then yes, they have. If they need to flog the shares off for £1.20, then they have lost. Either way, what happens to your buyer does not concern you. In the same way, what happens on the days you don't buy or sell has nothing to do with you either, except as a general guide.

Third fallacy:

-  My luck must change soon. Why should it? Tell that to the bankruptcy court. Each gamble has its own odds, remember?

Bookmakers often offer you a choice. Place a bet and, if you win, you have betting tax to pay on all you win. Or place a larger bet where, if you win, there is no tax to pay. (The bookie will pay it for you.) Always choose the former. The 'choice' is simply a ploy to persuade you to bet more money. Besides, what could be more stupid than to pay for tax on a bet you did not even win? Would you pay income tax on wages you never earned?

There are people who make a living from betting. You could probably count them in Britain on the fingers of two hands. They work as hard and as long hours as people do at any other job.

You may wonder, if mathematicians know all the answers, why they don't coin it in? Several reasons. First, they realize that, even where everything is completely honest, casino rules are designed to favour the banker. The banker needs that edge, that advantage, to avoid bankruptcy. Second, consistently successful players will find themselves refused entry to casinos, or bookmakers will refuse to take their bets. The betting industry has its livelihood and profits to protect. If a punter appears with a 'winning' system, the operators must change the rules or go out of business.

Having said all that, life without the odd flutter would be very dull, and for some people, it would be hopeless. The remote hope of a pools win sustains them for monotonous years in a factory.

Money, well used, brightens your life. It should not fill it with penny-pinching gloom. There are a million and one ways to gamble, and some can offer great fun. Just treat gambling like a hobby. Tell yourself you enjoy it but mentally write off (forget about) the stake money as you lay it down on the green baize. You have spent it, and it has vanished, just as much as if you had gone to the cinema instead. Never rely on winning to pay the bills.

DON'T OVER-TIP

One last mouse that nibbles away at your money: tipping. Women are notorious over-tippers, probably because some restaurants, hotels and hairdressers are so intimidating. I remember one four-star hotel where every member of staff pounced, hand held out, as you walked down the corridor.

Never voluntarily tip more than 10 per cent. Give nothing at all if a tip is already included in the bill - they call it a 'service charge'. Remember, you are already paying VAT on the tip you have been forced to give, even if the waiter was surly and the food was cold. So how do you get good service? In my experience, what matters is your coat or jacket. It must look timelessly, unfakeably expensive. Fur - if your principles permit - or upmarket leather works wonders. And who knows if it is second-hand? You may know that your bag cost a fortune and your diamonds are real; a waiter will not. There are very few genuine female status symbols.

These are just a few ways to ensure that you keep your hard-gained money. You want it entire, to enjoy, to control, to spend, to increase. You don't want to watch it shrink and vanish like water in the desert. Money can manage other disappearing tricks too. We look at them in the next chapter and see how you can avoid them.

* This applies even more if you gained your money through gambling in the first place. Remember what I said about windfalls?

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