Chapter Nine

HOW (NOT) TO SQUANDER

"Do we really need a chapter on squandering money?" you may wonder. We can manage it without help. Yes, we all do sometimes. By squandering, I don't mean a wild spending spree, a pre-Christmas shopping orgy, a splurge. If you decide to spend your money in that way, you are free to do so and at least you should get pleasure from it.

The sort of people I have in mind simply don't realize they are squandering. They genuinely believe they are saving money. They even pride themselves on their economy and boast about it to their friends.

Here are  thirteen  simple ideas for how to squander your money:

1. Shove your savings under the mattress. You run the risks of theft and fire. You tempt the family to help themselves if they know it is just lying there idle. It should be at work earning you interest or giving you pleasure. Besides,  inflation is eating away at all that idle money and reducing its value.

Take Dai and Megan. They ran a butcher's shop in a small Welsh town and did very well in a quiet way - so nicely that they thought it a shame to pay so much tax. They started hiding a little of the takings down the sides of the settee. A few years of this and they could find nowhere left to hide it. All the upholstery was padded stiff with folded banknotes.

Every member of the family knew about the hoards. Neither Dai nor his wife dared spend it. In that small community, the neighbours would have started to ask questions.

When they died, the family found that many of the bank-notes had been nibbled by mice. Others were such old-style notes that the local bank refused to accept them. Dai and Megan may have saved their money, but it was the worst possible sort of saving. It gave them no pleasure, simply worry. It brought insecurity when it should have brought reassurance.

As some sage said: you don't possess possessions; possessions possess you.

These days the people most likely to keep large amounts of loose cash at home are pensioners. One old lady gave me a touching explanation. If she was ever burgled, she reasoned, the intruders would expect to find bundles of notes, not because she had it, but to prove they had not wasted their time. She needed to be able to produce plenty. Otherwise they would beat her senseless on the assumption she must be hiding it.

If this is your reasoning, I suggest you hide £200 right next to a miniature burglar alarm and put the rest safely in the bank. And don't flash around a wad of notes in a crowded post office.

2. Spend your money on depreciating assets.

A depreciating asset is one that quickly drops in value, whether or not it is worn out, even if you  paid a fortune for it. A new car plummets in value when you drive it out of the showroom. New furniture drops dramatically in  worth as it crosses your threshold.

To find out how fast an asset depreciates, ask yourself how long you can expect it to last and stay reliable. The maker's guarantee may be some guide here. They will only cover the period they are sure will be trouble-free. In general, you can congratulate yourself, and your family, if household appliances or electrical goods last ten years. (In France you cannot insure appliances over ten years old. The insurance company assumes they are worn out.)

Your ten-year-old car will probably look a sad remnant of the new one you bought. By contrast,    your ten-year-old house or flat will never wear out. With any luck you could sell it for far more than you paid for it. The same applies to any antiques that you have owned for ten years. These are not depreciating assets but the opposite appreciating assets.

Suppose you buy a new car. At the end of four years, it will probably have covered 50,000 miles. Even if not, it certainly cannot compete with a new car. For the same performance and reliability, you need to replace it. Suppose it cost you £6,000. You work out its depreciation as follows:

Year Cost.......................    ....£6,000

less Depreciation.................£1,500

Value at end of year 1..........£4,500

How did I work this out? Well, we decided that the reliable life of a car was broadly 50,000 miles or four years*. Divide the cost by 4 to get the depreciation of £1,500. This is the amount by which the car's value has dropped in the year. Deduct this from the original cost and you get the value of the car at the end of a year. Only £4,500. Depressing, isn't it?

Repeat the same process, year after year:

Value at end of year 1..........£4,500

less Depreciation.................£1,125

Value at end of year 2..........£3,375

less Depreciation....................£844

Value at end of year 3..........£2,531

less Depreciation....................£633

Value at end of year 4..........£1,898

At the end of four years your car is not worn out. If it was, the value would be reduced to nil. It is still worth £1,898. What this all means is that over four years' use your car has lost £4,102 (£6,000 - £1,898).

Of course, if you had bought a really expensive car, it would have lost correspondingly more. So what can one do? You need a car.

Look again at the figures. You will see that the value drops furthest and fastest in the first year but only dips £633 in the fourth.  If you had bought a car like yours at two years old, you would have had to pay £3,375. Each year after that, you would have lost a lot less in depreciation. Moral: buy second-hand if at all possible.

How fast things depreciate does not just depend on their useful life. Some things become worthless overnight, like last year's calendars. Ask yourself when buying, does this have a resale value? Is there a market? Traditionally, one looked at small ads in local newspapers. Now, it has never been easier to find out the figures, using the internet and e-bay for instance.

Perhaps you never sat on your new three-piece suite, never slept in your put-you-up bed. You will still receive far less than you paid for it, even if you can sell it. Why? There is no market for quality second-hand furniture, until you come to antiques.

In general, try to spend as little of your money as possible on depreciating assets. Choose instead assets that will hold their value or even increase it (appreciate). This makes a tiny flat a better buy than a mobile home. An original anything keeps its value better than a copy. Compare real gems and costume jewellery, original art and copies.

3. Pay money for advice and then ignore it.

People do this all the time. They don't want advice but reassurance. They want someone with expertise to advise them to do what they have already decided to do. Unscrupulous advisers play on this. Just like fake fortune-tellers, they find out what people want to hear and then feed it back to them.

4. Play one expert off against another while you pay for both.

One of my clients, a brutish American, hired a firm of solicitors to buy him a British stately home. Things went wrong, so he hired another firm to look into what the first firm had done. He did not like what they told him, so he hired a third firm to check the checking of the second. All the solicitors were honest. The people  who were 'selling' the mansion turned out not to own it. He spent an absolute fortune in legal fees and still did not buy his stately home.

He was as bad as Anne, who consults her doctor and her herbalist at the same time about the same complaint. She blithely swallows whatever either prescribes but does not tell either about the other. When she feels better, she thanks the herbalist because his potions cost more!

5. Buy or build a brand-new house. Even after you move in, you will find you need to shell out a fortune over the next few years to stock, lay out and fence the garden; to put in extra power points, shelves and cupboards; perhaps, after the walls have dried, to wallpaper. With a 'second-hand' house, someone else has paid for all this, suffering the mess and inconvenience. Builders will tell you that people who extensively modify their homes often move soon afterwards. Why? The house has lost its charm. A new house will involve you in constant expense. A 'used' one at the same price works out far cheaper.

6. Buy something you don't really like because you think it must be useful. Surely no one can be so stupid, you might think. In fact, we all do it - perhaps a plain, dull garment that is described as a 'classic, or a 'must' for the kitchen that you never use. If you cannot whip up real enthusiasm when you buy it, before long you will want to replace it and will then have paid twice as much.  Or you will hide it in a drawer until, in shame, you give it to the Oxfam shop. How many garages are stuffed with never used DIY tools and never-attached car accessories?

7.  Buy by price alone. Julie came back to the office from the sales, clutching a bag and looking radiant. 'It only cost £2,' she cooed, 'So it must be a bargain.' She held up a black, shapeless piece of cloth that might have been a poncho or a stole. 'Fancy buying a garment for only £2,' she marvelled. 'I must be able to wear it somehow.' In fact, she paid £2 for something she never wore. It ended up as an expensive duster.

Remember the real definition of a bargain: A BARGAIN IS SOMETHING GOING CHEAP FOR WHICH YOU WOULD WILLINGLY HAVE PAID FULL PRICE.

Bargains are rare but they do exist. Anything else is simply something going cheap - not a bargain - because no one else wants it.

8. Change your lifestyle every few months. The biggest single way to waste money is change. It may be moving house, separation, whims or fashion, refitting a kitchen or keeping up with the Jones. Or that perennial favourite - changing something in the house to make it easier to sell one day.

I knew of a couple who moved house seven times in twelve years, all within a town of 20,000 people. Moving house was their hobby, although of course they would never have admitted it. As soon as they had completely rearranged the new place to their taste, they hankered after the challenge of another one. Sometimes they just moved to another house in the same street. Imagine the thousands they squandered on legal, estate agents' and removal fees, and in fitted carpets, curtains and lighting, all left behind.

Worse still is change with false economizing. You want to repaper the lounge. You know it is just a whim - the existing paper is immaculate - so you salve your conscience by resolving not to spend much. Reluctantly, you cast aside the wallpaper you really fancy. Another adequate design is going cheap. So you buy the cheap paper. Before long, you confess you don't really like it and fancy a change again. And so on. You may spend a fortune and never buy what you really want.

Ruth is just such a penny-pinching squanderer. She prides herself on her economy but over the years she has bought umpteen of the following and never been satisfied with any of them.

-  lawn mowers, none of them good enough to tackle her half-acre lawn;

-  vacuum cleaners, none of them powerful enough for her large house;

- sheepskin coats, none sufficiently figure-hugging to look smart in her view;

- cookers, all of which developed wiring faults or had gadgets that did not work or doors that warped, because Ruth expected top quality and every novelty at a cheap price.

-  cars, because she never really bought the one she wanted, making do with a cheaper substitute and then regretting it.

Of course, our lives change all the time, and we have to spend to adjust to this. Sometimes we have no choice. But if you are spending just on a whim - what you own is perfectly adequate, you just fancy a change - stop for a second. Ask yourself, what will the new item actually do that the old one cannot? How much better or quicker will it be? Think how much the replacement will cost and then double the figure. After this, if it still seems worthwhile, go ahead.

This is not a notion I dreamed up. People in industry follow the same plan when they estimate the future cost of a new project. They call it 'allowing for contingencies'. Often they triple the starting figure.

You will note the words 'stop' and 'think' above. Because you have no chance for either, never buy over the telephone, from television or at the door. Pushy salesmen know well that delays are fatal for them.

9.  Always be the first to buy something new. This costs extra. Think back over the last few years, how many goods have reduced dramatically in price? Videos, computers, televisions, cameras, anything electronic, long-distance travel, anything the Chinese make...  Sometimes just waiting a year, or even until after Christmas, can mean that you buy the same thing for a lot less. If you must always rush for tickets for the latest show, fine - just as long as you realize how much extra it is costing you and decide it is still worthwhile.

10.  Always be the last to buy something.  It may come cheaper but if it is too old-fashioned in style or technology, or too out of season to be useful, you have squandered money, not saved it. Lack of spares or of mechanics familiar with the model will shorten its life.

11. Buy British or something with an English-sounding name out of patriotism when the foreign alternative is cheaper and better. For a start, that English-sounding name may not really be British - like Brother, a Japanese firm.

Even if the firm is genuinely British, you may well find a little 'Made in Taiwan' sticker on the products they sell. More and more multinational firms manufacture their products from items made in many different countries, including the UK. Perhaps the 'foreign' product is assembled here, like Japanese Sony televisions in Wales.

Most important, you are not helping British industry or preserving British jobs when you buy what you would not really have chosen otherwise. It encourages firms to continue producing the wrong thing and hastens their downfall. If customers bought elsewhere, they would have to change their ideas.

12. Buy by brand name. Just because something carries a brand name - that is not necessarily who manufactured it (even though you paid extra for a known name). Half of all televisions sold in Europe are made in Turkey. Do you know any Turkish television makers?

13. Buy because of an outdated reputation for reliability. How many items I have bought from Germany or Switzerland only to find them overpriced rubbish! Not to mention French wines. There is even a name for selling inferior goods to gullible foreigners - it is called 'dumping'.

REAL  ECONOMIES AND FALSE ECONOMIES

You need to know how much something really costs you to buy. Two garages may offer the same model of car, but one may quote a far higher price. Then you find the high price is the 'on-the-road' price. The cheaper garage will add on delivery charges, the costs of road fund licence and, often, a full tank of petrol. Then again, look closer at the cars. One may have a £50 radio, the other a £500 stereo system.

I knew two business partners who ordered identical prestige cars at the same price for the first day of the new number plates. The first sported all the trimmings, expensive radial tyres from a leading manufacturer, even a monogrammed leather key-ring. The second had cheap cross-ply tyres of an obscure brand; the keys were tied together with string.

Most articles have two costs: the cost of buying them (the purchase price) and the cost of using them (running costs).

You may waver between two second-hand cars offered at the same price. One may zoom along, bigger, newer and flashier than the other. But if it only manages 15 miles to the gallon (18.75 litres per 100 kilometres) and needs Group 5 (very expensive) insurance, it will soak up an oil-well and cost a fortune to run. Now you know why the owner offers it so cheaply. He found out the hard way.

Two dresses may carry the same price tag, but if one requires dry cleaning it will cost you much more in the long run. Anything electric that runs on batteries (even rechargeable ones) costs far more than a similar item that runs from the mains. And so on.

One common fallacy is that the only running cost of a car is petrol. Motoring Which? magazine used to consider petrol about a tenth of the full cost! Insurance, road fund licence, servicing, oil, loss of interest on the money you bought the car with, etc., make up nine-tenths.

If last year your car only clocked up a couple of thousand miles, it would be far cheaper to sell it and use taxis. (Except that in practice people refuse to use taxis. When they actually fork out the money, their extravagance shocks them. People prefer a series of little bills to one big one, even though the big one is much lower than the total of the small ones. This is another of the dangers of thinking week by week, or month by month.**) The break-even point arrives when you manage 8,000 miles a year.Above this a car comes cheaper than taxis. Of course, when you take passengers, you must add the miles they travel to your own.

A third factor to consider when buying is the depreciation costs we looked at before. This is what every business does.   The more your car is worth to sell at the end of its usefulness to you (its trade-in value, resale value or even scrap value) the less it has really cost you.

Businesses look at all these three factors: purchase price, running costs and depreciation. In a process called 'discounted cash flow', they work out every likely expense over the life of the article and when it should arise. Then they work back to calculate what the article really costs if they had to pay for everything today. They don't bother doing this before buying every nut and bolt, but if they face a choice between several new machines they will do calculations for each before deciding which to buy.

So how can you really save money when you spend it? By spending as little as possible to get what you really want. Here are four guidelines.

1. When you consider buying something you have never owned before, a dish-washer or a digital camera, a gymnasium or a boat, find out if you can hire one first. The range of things for hire grows ever wider: power tools, carpet cleaners, musical instruments. Look in the Yellow Pages of the phone directory. You won't need to worry about breakdowns; and if, at the end of the shortest possible hire, you don't like it, or you found, once the novelty wore off, that the article sat abandoned, you have saved the purchase price. When hire is not possible, buy an old one second-hand.

2. Buy second-hand rather than new. Someone else has endured the teething troubles and suffered the depreciation. My first dish-washer cost £10. It soon convinced me it was worthwhile and provided two years' service into the bargain. Second-hand books, for instance, can provide real savings. But think twice about electrical goods like heaters, in case they are no longer safe - unless you know who owned them before, or they have been reconditioned by an agent.

Dress agencies, an owner once told me, exist for three reasons: the garment was too big; the garment was too small; or the husband/boyfriend did not like it.

It can pay you to take a trip to a wealthy area where women still only wear their clothes once. Good agencies insist on dry-cleaning all garments to be sold. They also offer a rack or two of brand-new things, so you don't need to wear a wig or turn up your collar and look both ways for fear of being recognized before you step inside.

The stock may be as up to date as in ordinary shops, normally at a third of the new price. Try on everything you fancy, not just your size. Often the wrong label was stitched in originally, hence the previous owner's mistake.

3. Where possible, buy goods that have two values: the value of the article (a teaspoon) and the value of the raw material it is made from (silver). You can enjoy using it, and it should appreciate in value. One day, if the worst comes to the worst, you can always sell it, either as a spoon or to be melted down.  The same goes for antique furniture. These days, this covers anything pre-Second World War. It is often more robust, made of better materials and far cheaper than new. Buy things to use regularly rather than just ornaments and clutter.

Some people buy jewellery or furs with the idea (or excuse) that if they become hard up they can sell or pawn them. True, but basically they prove a poor investment over the years - although better than no investment at all.

One client of mine owned a ring worth £36,000 (the price of a detached house in those days). At 10 percent interest, she was turning her back on income of £3,600  a year. She finally sold the ring because no insurance company would cover her.

One word of caution: beware of limited editions They raise a lot of money for the artist or promoters. They would rather sell the same thing ten times over than once and for all, or even 800 or 8,000 times. This explains those glossy offers in colour supplements for china, hand-painted thimbles and the like. Limited editions exist for things that might be collected some time in the future - if they happen to catch on. If not, you will be lucky if you can resell them at all. For investment, you want things that are already collected and already appreciating in value.

There is a dead period - perhaps twenty years, perhaps fifty - before most new articles become collectables. People reject them as old-fashioned, then hideous. Many are thrown away. (Others become valueless because a change in the law prohibits their resale. New fire safety standards rendered any upholstered furniture bought in the late 1980s and early 1990s worthless.) Afterwards the few left may rise in value. You want to leapfrog all that.

4. Once you have settled in your mind which item to buy, you want to pay as little as possible for it. We all know the principles of shopping around, if you can find the time and energy. Of course, the internet is a great help here. We all know the dodge of buying from about-to-be-changed catalogues at a price that was set six months before.

Some well-known stores offer to refund the difference if you find something you bought from them cheaper elsewhere. These offers are genuine. You are doing their market research for them.

When you have decided precisely what you want and where you plan to buy it, ask for a discount for cash. If the shop accepts credit cards, it pays 2 and a half percent or more to the credit card company. So it is no worse off if it gives you 2 and a half percent discount instead. This means £2.50 for every £100 you spend. Cash no longer has to mean a fistful of battered twenties; a cheque with a banker's card will usually do.

Budget airlines charge you if you pay for your tickets with a credit card. The sum seems huge compared to  the cost of the ticket. Pay by debit card and there is no fee.

Alternatively, having negotiated your cash discount, if you know the interest rate that your bank charges, you can decide whether it is worthwhile to arrange a short overdraft to get the cash.  It would be very rare for your credit card to work out cheaper.

Many shops offer discounts to members of certain organizations like trade unions, student unions or motoring associations; or to people who work for a certain employer, such as the Civil Service. Can you benefit from any of these? The organization   issues to members lists of firms with which it has negotiated special deals, or you may find stickers in the shop window. Carry your membership card and remember to ask. But decide in the right order - first what you want to buy, then what discount can you get. Never buy by size of discount.

My twenty-year-old hard-up niece once spent far more than she needed on travelling to see me. Father insisted Rose carry her student card and told her to ask for a discount. She forgot. Rose never had the wit to ask for a return ticket instead of two singles. She could have saved on both counts. 'Why didn't anybody tell me?' Rose wailed afterwards. The answer should have been, 'You're a big girl now'.

Just one final word on squandering. Spending money is a skill. Like any other, it needs regular practice and it should give you pleasure - not necessarily selfish pleasure either. Perhaps you are spending on someone else. Or maybe you decided to treat yourself to an electronic wheelchair instead of those dreadful chariots the Red Cross provides; a special keyboard-phone to keep you in touch with your friends despite your deafness; a modified car to help you lead an independent life or even earn your living...

Whatever your situation, you cannot expect to spend years hoarding every penny and then not make a mistake when you do finally buy something. How many people have saved for so long they cannot remember what they are saving for? How many people eke out their last years in misery with ample in the bank or under the mattress? As some cheerful person once remarked, there are no pockets in a shroud.

Just watch out that your carefully-planned purchasing does not become a spree. Before buying that third large item in a row, ask yourself - did I intend to buy this when I came in? Or has the salesperson just persuaded me into the spending habit?

This chapter has steered you around an obstacle course, helping you to avoid squandering your funds as you spend them and as you save them. The next looks at genuine ways to set aside money for your long-term needs.

*This is rough and ready. Precise values, model by model, are printed in Glass's Guide, the car trade's Bible. www.glass.co.uk

** Sellers know this and use it more and more. This is the idea behind giving you a free mobile phone (no purchase price) and charging a fortune for the calls you make (high running costs). Or selling a cheap toy with endless expensive accessories - like Barbie, My Little Pony.

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