Money, Money, Money

The way money gets talked about in the press these days, it’s hard to maintain a reasonable perspective on exactly what you can buy and how much it costs.

For example, a transfer of a football player worth £2m would hardly raise an eyebrow these days, even in League Division One. Yet to most of us, £2m is an unimaginable amount of money. Counting that out in twenty pound notes would easily take the best part of half a day.

At the other end of the scale is yet another financial rescue package announced today of £37bn. Loads of money isn’t it? Well actually, in 2007 IBM had revenue of $98.8bn or £56.9bn at today’s exchange rate. So the UK government is actually bailing out banks with less money than IBM can turnover in a year; plus we need to keep shareholders happy.

Another thing is the perceived value of winning the national lottery. Many people assume that if their six numbers came up, they could retire and live on the interest. Actually, you probably couldn’t.

Say you won £2m on the lottery: great. Pay off the mortgage, loans, and credit cards: £150,000. Throw a big party, go on a celebratory round-the-world holiday, and buy a fancy new car: another £150,000. Significantly more if you’re into some exotic Ferrari etc. Give a bit to friends and family: that’s anywhere from £200,000 upwards. So you’re left with £1.5m in the bank and you’re still in your original house. So you want to move to somewhere bigger / quieter / more relaxing / requiring less work. You’ve now whet your appetite with your taste of the good life, so you’re talking about £300k+.

So now we’re all content with our nice house, nice car, happy family and you’ve quit your job. Plus you’ve got around a million in the bank – sorted aren’t you? Well no, actually. To “live off the interest”, you need to invest that cash into a safe place. And “safe place” automatically means “low yield”. You can’t go round gambling with it into stocks and shares (or even property these days), because this is now your livelihood. If the stock or property markets take a tumble, then you’re struggling to pay the bills. You also need to get the money on a regular basis, so you can’t have it tied up in 5- or 10-year trust funds. So you’re now looking at the high-end of regular savings accounts. Unfortunately, things aren’t that easy either.

Inflation currently stands at around 5%, so if your money is earning 5% interest in a bank account, then it’s quite simply “standing still” in real terms. What cost £100 last year now costs £105, so you’re not any better off. Obviously as a long-term plan you need to be getting an interest rate better than inflation. Say you find a good couple of investments and manage to sort out something for 8%. That means for every million you have in the bank, you get £80,000 back in interest. But of course, you’re taxed on that (at higher-rate tax band), so there’s another £22,500 gone. And of course, you can’t touch the bit that’s put aside to cover inflation, so you’ve just effectively lost another £50,000. £80,000 in interest and you’re only allowed to have your hands on £7,500 of that per year.

Now that doesn’t sound bad – after all you don’t have any mortgage or other debts to pay off, do you? But you’ve moved to the bigger house which costs a fortune to heat and light. Plus, you’re now used to fine dining and the expensive holidays which you don’t really want to cut out. You’re no longer employed, either, so you need some hobby to fill-in the time between now and death. £7,500 is now significantly less than you thought you were going to get as a pension when you planned for retirement before all this happened. That “millionaire’s lifestyle” of you and beloved flying business class to New York for a weekend costs over £7,000 (excluding accommodation) and is now looking very distant indeed.

business_class

Money: stay happy without it, because if you do happen upon some, it’s never as much as you think. Unless of course you’re a bank, in which case gamble it anyway, because someone will come along and rescue you if you ever get into trouble.