What Oil Prices Mean for Energy Bills

Energy BillsFor a few weeks now, the news has been full of news about oil prices plummeting. This has been good news for consumers, as it has eased the average household budget in a couple of different ways. Petrol prices are now the lowest they have been for some time. Energy production is also cheaper and the falling price of oil has led to a similar drop in the price of gas, meaning that utility bills are coming down too.

But what does this really mean for household energy bills, and is the situation quite as it appears? Most of the big energy companies have indeed announced a reduction in prices, but they have been accused of making only “token” cuts which satisfy people’s expectations of a price drop without really passing on the savings they are making.

This view would seem to be supported by the fact that the industry regulator expects companies to benefit from bigger profit margins in the coming year. This suggests that at least some of the savings are being pocketed rather than being passed onto the consumer. Quite how questionable this practice is arguably depends on just how much is being passed on and how much is being kept, and this does not seem to be clear according to the information that is widely available at present.

The energy companies maintain that the cuts to energy bills seem small because there are so many other factors that go into a household’s bill besides the cost of energy. This is true, as wholesale energy costs only account for 44% of the average bill. Nonetheless, many consumers and industry commentators remain sceptical about whether the price cuts are more than a token gesture, and in a climate where energy companies have become no stranger to accusations of profiteering the situation is at best a questionable one.

Electricity tariffs have so far remained unchanged in the face of falling wholesale energy costs. However, the big six energy suppliers have all introduced cuts to gas prices which range from a mere 1.3% (EDF) up to 5.1% (Npower).

Ultimately, the fall in oil prices does mean that many households can expect to see their energy bills drop, but not by much. The fall in prices can make variable-rate tariffs seem attractive. However, given that prices can (and sooner or later will) rise again, many believe that fixed-rate tariffs still offer better value overall. This is particularly pertinent considering how often it has been alleged that the industry is much quicker to increase prices when wholesale costs rise than to bring them down again when prices fall.

Squeezing Better Interest From Banks

Savings AccountInterest rates at the moment are frankly not great. In 2008 – just before the financial crisis – savings accounts paid over 5% on average and there were better-than-average deals on the market do. Now, the average is less than 1.5% and you are doing particularly well if you approach 3%.

While there is no way you can avoid low interest rates, there are a few tricks you can use to make the most of a bad situation. These include:

Abandoning Fixed-Rate Accounts Mid-Term

The best interest rates are available on fixed-term accounts of up to five years. In order to get that rate, you need to tie your money up until the account reaches maturity. The problem is that if you sign up for a five year account, rates might improve in two or three years while you are still tied into your old deal.

However, many accounts do not prohibit withdrawals altogether. Instead, you face penalties such as losing a few months’ interest. This can still leave you better off than if you had gone for an easy-access or shorter-term account. If a better deal comes along in a couple of years, accept the penalty and take out your money. Put it in the new account, and leave the old one harmlessly disused until the term ends.

Stacking High-Interest Current Accounts

High-interest current accounts can offer better rates than savings accounts with the added bonus of easy, instant access. Naturally there are catches. There are sometimes fees, and usually a minimum monthly contribution. The superb interest rates will also only apply to a certain amount, with anything above that amount receiving a much more standard current account interest rate.

However, you are free to open accounts with more than one provider. What’s more, the minimum monthly contribution only has to be paid in. It can be paid out again as soon as you like. This makes it possible to stack these accounts to boost the amount you can save in them at high interest rates.

Supposing Account A and Account B both have a limit of £3000 for high interest and a £1000 minimum monthly input. Open Account A, and have at least £1000 paid in through your wages or a standing order every month. When you have reached your limit for high interest, open Account B and set up a standing order to pay £1000 into it every month from Account A. Leave the original arrangement in place, and you will benefit from the following:

  1. £1000 is paid into Account A every month, satisfying its conditions.
  2. That £1000 is then passed on to Account B, satisfying those conditions as well.
  3. Your combined high-interest current account savings limit is £6000.

This trick can be used with more than two accounts if necessary.

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Credit Card Services You Don’t Need

If there’s one lesson to take from all the recent banking scandals, it this – don’t let your bank swindle you out of your cold hard cash. To avoid being caught out, be on your guard and watch for these tricks when applying for a loan or credit card.

Identity Theft Coverage

You’re thinking, “Yes, I do need that!” A little known fact is, the Truth in Lending Act of 1968 says you’ll be out no more than $50 if your credit card is lost or stolen. Don’t pay for this coverage. If they offer it for free, great, but they’re not really offering you anything you’re not already entitled to.

Payment Protection Insurance

This one comes in many different guises including:

  • Credit Card Protection
  • Repayment Protection Insurance
  • Accident, Sickness and Unemployment Cover
  • Loan Protection Insurance
  • and many more

It is often offered at the point of sale with bank staff usually telling the borrowers that it compulsory or worse still adding it on without the borrowers consent!

Banks across the world, with a customer base in the UK, have now set aside close to £30billion to compensate customers who were mis-sold PPI in this way. So check your statements for anything similar and ensure that you aren’t paying for something that you don’t need.

Credit Score Monitoring

Many credit card companies off credit score monitoring, and they don’t offer it for free. You can utilize a number of other services, for free; to get the job done, so do not put extra money in your credit card company’s pocket for something you can get for free!

Balance Transfers

Unless you can pay off the transferred balance in full by the end of the introductory 0% interest rate period, you’re stabbing yourself in the foot with this one. You’ll have interest accrued on the balance from the original card to pay off when it transfers. If it’s not paid off, it too will start accruing interest there. Be smart about the balance, length of the interest free term, and what your budget says you can pay.

Credit Score Repair

Contrary to what credit card companies want you to think, your credit score isn’t that complex.

  • Payment history (35%)
  • Amounts owed (30%)
  • Length of credit history (15%)
  • New credit (10%)
  • Types of credit used (10%)

Credit repair services only use the same things you can do on your own. There is nothing special here, so don’t waste money.

Not falling for these tricks can save you a lot of money. Simply decline at application, and if you’re pushed, stand firm.

Secured vs. Unsecured Debt

You’ve no doubt heard the two terms, and knowing the difference before you apply for a loan is critical to getting the best possible deal.

What is Secured Debt?

Secured debt is a loan that is backed up by collateral; a physical asset the lender puts a lien on. If you do not repay the loan, the lender can take the asset from you. For instance, you can put your land, if you own it free and clear, up as collateral for a mortgage, but if you foreclose, the bank gets the home and the land.

This represents less of a risk to the lender, because they know you’re motivated to make your payments so you don’t lose the collateral. And, they are protected if you do, because they’ll get your asset and can sell it to recoup their loss on your loan.

Secured loans will typically come with a lower interest rate. You can get home loans, auto loans, and personal loans as secured.

What is Unsecured Debt?

These are loans that are not backed with collateral. This is a heavier risk for the lender, because there is nothing for the lender to take away from the borrower if they do not repay the loan according to the terms. Most of the time, the interest rates are higher, and can be variable tied to the current prime rate.

Unsecured debt includes:

  • Student loans
  • Medical bills
  • Credit cards
  • Payday loans

Just because there is no collateral involved in an unsecured loan does not mean you should not worry about paying it back. Defaulting on an unsecured loan will wreck havoc on your credit, preventing you from getting financing in the future, and if you manage it, it will be at much higher interest rates, or require collateral to show you are not a risk.

Below is a great infographic by PayPlan highlighting Debt Perception vs Reality…

Estimated Growth for 2014 and 2015

The Chancellor of the Exchequer, George Osborne commented on the predictions, stating that the British economy is “continuing to recover and recovering faster than forecast.”

Statistics from the Office for Budget Responsibility (OBR) suggest that there may be an increase of 2.7% for GDP in 2014. This is an improvement on the estimate in December of 2.4%. In addition to this, a rise of 2.3% (compared to 2.2% previously estimated), has been forecasted for 2015, with 2016 remaining at 2.6% growth. The estimated figure for 2017 however dropped to 2.6% from 2.7% along with 2018 at 2.5% from 2.7%.

Senior economist from Standard Chartered, Sarah Hewin was sceptical of the predictions, stating that: “The outlook for the UK economy still has a question mark over it”.

In addition to the forecast from the OBR is the fall in anticipated government spending, from £111 billion for this financial year, to £108 billion.

The forecast however was met with scrutiny from Ed Miliband, the Labour Party leader, who criticised the chancellor for not meeting its’ goal of government surplus by 2014 to 2015. He said: “Back in 2010 you told us that at the end of 2014 the economy would have grown by nearly 12%… Today the figures say it’s been barely half that, and you want the country to be grateful.”

George Osborne however pointed towards further forecasts from the OBR which suggest an economic peak towards the end of this year, similar to the economy prior to the financial predicament of 2007 and 2008.

The OBR have also estimated that the UK’s unemployment rate will see a drop to 5.4% between now and 2018, with them expecting, before the end of this year, a drop to 6.8%.

Although the OBR’s predictions are mainly positive for the economy, the chancellor cautioned that there is still a lack of investment, exports and saving and too high an amount of borrowing.

A stronger Bank of England to hold banks accountable

A review is to take place on whether the Bank of England should increase their number of powers allowing them to hold more of a sway over the balance sheets of banks. Currently the Financial Policy Committee of the Bank of England cannot control banks leverage ratio, this along with other functions will be reviewed.

Bank of England governor Mark Carney spoke to the Treasury Committee about how the new powers, similar to those he had while at the central bank in Canada, had made it easier to tackle the global economic predicament.

Carney told them: “If I could pick one element that was essential to the performance of the Canadian banking system during the crisis, it was the presence of a leverage ratio.”

Mr Osborne had written to Mr Carney stating that “Now is an appropriate time for the FPC to consider whether and when it needs any additional powers of direction over the leverage ratio, how it should use these powers and how any new powers would fit in with the rest of its macro-prudential tool-kit.”

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Mr Carney pointed out that he was “more than mildly offended” when accused by John Mann, who belongs to the committee, on trying to show the economy as a “rosier picture”.  Mr Carney also found the claims that RBS were driving feasible businesses to shut down on purpose, “deeply troubling and extremely serious”, stating that “This has to be tracked down to the full extent of the law.”

He faced disapproval with his estimations on interest rates which had caused misunderstanding. In his defence Mr Carney replied stating that: “The exact timing of when that 7% threshold will be achieved is subject to uncertainty. We do our best to give our estimates of that uncertainty… One month’s unemployment figures does not have a material change on those likelihoods.”

Mosquitos and Personal Finance… Attack and Kill!!

Mosquitoes are like pesky debts that need to be paid, there’re always pecking at you. You can wart them off or you can kill them dead. Some debts bite at you constantly and then after a few years of biting, they notice that cannot get much out of you so they give up. However, they make sure they leave you wounded with scars which reflect your credit report.

Some mosquitoes bite every day, some every month. Their main goal is to make you feel uncomfortable so you can give in. Paying the minimum balance is just enough to keep them away temporarily. Problem is they’re still close by and ready to bite again. Now you have to re-up more bug spray. We do this for years.
You have to have a game plan beyond just temporary relief that will kill them so they will never come back. We have so many mosquitoes biting us every month we become sick and wounded making it harder to enjoy life.

Flip the script. Do not hang where bugs are. Avoid places where bugs prey upon humans. Throw more chemicals on the bugs eventually they will die. This will speeds up the process. The less bugs the less stress. Stop inviting bugs into your life to bite you. Every time you sign a contract or buy something on credit you are inviting risk.

Why the Financial Gurus Get It All Wrong

With the number of magazines, blogs, and books dedicated to personal finance you’d think we’d all have achieved financial independence by now. How is it then that most of us are still struggling day to day to make ends meet, just one job loss or illness away from financial devastation?

Financial gurus smugly tell us to live below our means, pay ourselves first, avoid lifestyle inflation, and then pat themselves on the back. Mission accomplished.

But this makes about as much sense as advising a five pack a day smoker to simply stop buying cigarettes. Wouldn’t bet on it working. How about admonishing the alcoholic to pour out the Johnnie Walker hidden in his bedroom closet? Sounds great. But not going to happen.

No, simple advice will not change behavior, financial or otherwise. The missing ingredient to our fiscal success may rest in our understanding the psychology that drives our spending.

Once we understand the underlying psychological motivations that guide our financial decisions can we effectively change our financial lives. Let’s take a look at a few of the psychological forces that influence our money habits.

Social Conformity Doesn’t End in High School

By ourselves most of us tend to make rather rational decisions. Yet when confronted with the contradictory actions of those around us we often concede to the less rational alternatives.

Psychologist Solomon Asch conducted classic experiments in the 1950′s illustrating just how susceptible we are to the influence of others. College students were asked to complete a simple task. They were to match a line on one flashcard with one of three lines on a second flashcard – a task that any five year old could complete.

But there was a twist. All the participants read their answers out loud and all but one of the students were actually decoys, part of the group conducting the study. At one point in the experiment all the decoys would start providing the same wrong answer.

Would the student follow the decoys and also give the wrong answer, or would he stick to his guns and give the answer any five year old knew to be correct. Amazingly at least 75% of the students involved in the study at some point in the experiment gave in by repeating the same incorrect answer given by the decoys.

This illustrates the effective power of socialization or, as we called it in high school, peer pressure.

Just as in the experiment even when we know the right “financial answer”, we make the wrong choices because everyone else is doing it.

Although we understand the absolute absurdity of interest only home mortgages, the fact that the people around us are using them makes it acceptable. Intuitively we recognize the value of keeping a car for five or more years, but when everyone else is buying a new car every three years we too may do the same.

The “wrong” financial answer (interest only loans, purchasing a new car every 3 years, using credit cards instead of cash) all become socially acceptable because everyone else says it is. When enough people chose the wrong answer we capitulate.
The Rapidly Rising Anchor Sinks us All

Anchors are mental reference points we use in making purchases. They’re extremely important because our brains make decisions by comparing an unknown quantity to a known quantity – the anchor. Walk into a store and pick up an iron for instance. How do you know if the $30 price tag is too high? You attempt to compare it to the price of an iron you bought before or to the price of an iron you may have seen online or advertised in the newspaper.

The same concept works for higher priced merchandise as well. How does one really know how much a wedding should cost? We again compare the price to some anchor price we’ve heared or read about. If we’ve read in a bridal magazine that the average wedding costs $22,000 then we’ll subconsciously adjust our budget accordingly.

The problem occurs when our anchors get artificially skewed upward. When we hear that Lala Vasquez is planning a $100,000+ wedding or that Chelsea Clinton’s wedding costs in excess of 2 million dollars our anchor price moves artificially upward. Suddenly a $26,000 wedding doesn’t seem so outrageous in context. A $42,000 car becomes reasonable when we see a barrage of athletes and celebrities sporting $75,000, $100,000 even $250,000 sports cars. Paying $700,000 for a home suddenly doesn’t seem like such a stretch when you have images of multimillion dollar homes piped through your television on a daily basis.

The rich our becoming more wealthy than at any other time in US history. Combine this with our fascination and cult like coverage of celebrities and the super wealthy, and we have a whole set of anchors that are being artificially inflated, from homes and cars to clothes and dining.

Childhood Blueprints Influence Our Adult Money Decisions

Spend less than you earn. Sounds easy, yet commonsense knowledge crashes head long into money lessons seared into our subconscious during childhood. The way money was mishandled in our family could leave an indelible mark on the way we treat money as adults.

A child growing up in a household where parents spent recklessly and then scrambled to pay the rent may subconsciously incorporate the same patterns in adulthood. In an attempt to compensate, a workaholic parent showers their children with expensive gifts. As an adult the child may equate expensive gifts with love and subsequently be inclined to display their affection by purchasing lavish gifts as well.

Perhaps growing up in poverty a child promises never to experience it again. As an adult she overextends herself to compensate for what was missing in childhood. Maybe she goes overboard and purchases everything under the sun she never had for her kids.

I’m sure we all can identify money lessons absorbed during childhood that still influence the way we treat money today. Examining what we internalized as kids helps us understand how we handle money as adults.

Gain Control of Your Money by Gaining Control of the Psychology

Yes money success is more complicated than simple statements – pay yourself first, avoid debt, earn more than you spend. The truth of the matter is that successful money management has as much to do psychology as it has to do with the math.

Until we understand the psychology behind our money decisions, we’ll never get our finances straight. Then next time you’re contemplating a major financial decision ask yourself questions. Are you making a particular financial decision or engaging in a particular financial behavior because everyone else seems to think it’s acceptable? Are you willing to pay more for a purse, car, or other expensive item because you’re subconsciously using an over-inflated anchor price? Ask yourself what lessons you internalized growing up that may influence your financial decision making? Once you get in the practice of questioning your psychological motives, you position yourself to make better decisions.

Master your psychology, master your money.

Alonzo Peters wants you to get your money straight and live a financially fulfilling life. Follow him at MochaMoney.com or on twitter at @OurMochaMoney.

10 Personal Finance Tips to Help You Make Bank

If you didn’t take a personal finance class in high school, you’re not alone. Approximately 90 percent of American adults were never even offered a personal finance course in school. So how can you catch up on your financial education and make solid financial decisions that will lead to a better future? Here are 10 simple money management tips to help handle your finances:

1. Know where you stand financially right now

•Know your assets: anything you own that has value, like your investments, your car or your home.

•Know your liabilities: any money you owe, like a credit card balance or loan.
•Know your net worth: how much money you have and all the profits you have generated over your entire lifetime.
•The following formula represents the relationships between these components: Assets=Liabilities + Net Worth

2. Know where you want to stand financially in the future and what your balance sheet should look like down the road. Understand what it takes to grow your assets and pay off your debt. Also, set a target net worth number to work toward.

3. Make bank by maintaining positive net income every month. Have a budget and make sure you spend no more than 90 percent of your income. Also, keep track of your money to see how well you are doing by measuring your progress toward your target net worth every month.

4. Stop chasing risky returns with your investments when you can get a risk-free real return by paying off your debt. Eliminate as much bad debt as possible by selling your non-essential assets, what you do not need to pay off your debt. After you have an emergency fund set up, do not buy any investments, except 401K contributions that are 100 percent matched, until you have paid off all of your debt that has an interest rate higher than what you can get on a 5 year CD.

5. Know the difference between good debt and bad debt. The key is to balance your needs and wants. Make sure you are spending less than what you make, which will prevent you from needing to borrow money to pay for your bills.

6. Know your emergency reserve requirements, how much money you have put away in case you lose your job and income. Calculate your desired reserve, which is your living expense reserve plus other reserves for large purchases. Make sure you fund these reserves in a highly liquid account such as a money market. Over time your actual reserve will surpass your desired reserve and at this point you will start having money available to pay off debt and then invest.

7. When you invest, think risk first, return second and make sure you understand your risk tolerance. Know what kind of investor you need to be in order to achieve your financial goals. This starts with understanding how much risk you should be taking. Only start investing after you understand your risk tolerance and make sure you are diversified across different asset classes.

8. Real estate is a snake with two heads: assets and financing. Make sure you are not overpaying for your home and avoid buying overvalued property. If you are taking out a loan, make sure you have done the math and know how much home you can afford. Make sure to get a fixed rate loan unless you are a sophisticated real estate investor and have a very strong balance sheet. You can visit making-bank.com for financial calculators that will help you assess your real estate investments.

9. If you can, have insurance for all of your insurable risks and get to know your 1040. Understand your insurable risks, such as premature death, sudden illness or car accident. Then, take advantage of work-related plans and make a plan to cover the rest. For example, this might involve obtaining health insurance on your own, in which case you might need to adjust your budget and lower other expenses. Also, research and understand what line items are affected on your 1040.

10. Being rich is not everything, but being financially secure is. Happiness is not measured with what’s in a bank account, but what it’s in the heart. This is my mom’s greatest financial lesson to me.