Chapter 3
How to spend less
Now that you’ve reviewed your spending, you should have a broad idea of where your money is going, so you can start to look at ways of reducing it if you need to. Again, since everyone is different, so are your spending profiles, but there are some themes you can apply to most categories and start getting your spending under control. And to reiterate, this is only one side of the coin; to be financially better off, you can either spend less or earn more – and ideally both. Some of you may already be practising some of the approaches outlined below, so don’t beat yourself up if you can’t come up with a plan to trim thousands off your spending. Remember, this is about understanding what you spend your money on and controlling it better, not just as a one-time cut but changing the way you spend forever.
I’ll cover the basic concepts here and add more detail about marketing and assessing value in the next chapter – but this is your starting point. This chapter is broken down into three sections: I’ll start with some key themes and then tackle regular and discretionary spending. If you google ‘money-saving tips’ you’ll find plenty of ideas, which are great but a little overwhelming and not relevant to everyone. They may also go into micro-saving such as cutting off the end of the toothpaste tube to eke out every last bit. Rather than include a huge list, I’ll focus on bigger areas of spending that will drive the biggest impact or a behavioural change.
I like to view savings as an annual impact to help determine if it’s worth my effort and I have a figure of £100 as a guide. If it’s going to save me more than £100 over the year, then it’s worthwhile doing it. If it’s much less than this, I’m less inclined and likely to focus on something else.
There are several useful mantras about spending, with a couple of popular ones from Martin Lewis (from MoneySavingExpert), such as: ‘Do I need it? Can I afford it? Will I use it? Is it worth it?’ These are great but don’t help you get under the skin of how to answer them and that’s key to being able to change your spending habits. I prefer a much older quote from the 19th-century textile designer, writer and artist, William Morris: ‘Have nothing in your houses that you do not know to be useful or believe to be beautiful.’ This focuses on function but gives you a little latitude to have some things purely for pleasure.
Key themes
In addition to deciding what to buy, there’s also how you buy. I don’t know where it originated but I learned this expression from my father-in-law and it’s often referred to as the ‘iron triangle’: ‘You can have it fast, have it good, or have it cheap: pick two.’ This reflects that whatever two you want (for example, speed and quality), you’re going to have to compromise on the third (cost).
Thinking about general household goods (which take up a large portion of your necessary spend), typically you’ll be shopping at supermarkets and convenience stores (or corner shops), with the supermarket being larger and offering lower prices due to economies of scale. Obviously, you’re paying for the convenience of the more local corner shop and you’re not incurring time and money travelling to an out of town supermarket, but you will pay higher prices and have less choice. How much higher varies dramatically but as a rule of thumb, think in terms of a 10% premium, with some things as much as 25% more expensive. These convenience stores have their place but if it’s where you find yourself doing your regular shopping, I’d suggest rethinking where you shop.
Technology (and Covid-19) has created a third dimension in the form of the delivery app. A widely reported study by consumer watchdog Which? (2023) found that a basket of groceries was 38% more expensive when delivered by a rapid delivery service than the same items bought from the same store in person. Prices for a basket of ASDA groceries were 9% higher (Deliveroo and Just Eat) than the in-store price of £45.60, while Uber Eats were 19% more expensive at £54.39. This is a rapidly evolving marketplace and I predict more changes to come before they mature and find their place in our lifestyles – but be aware they’re currently a hugely expensive habit to get into. If you find out where your local corner shop is, you might find it’s not only cheaper but also quicker to walk or cycle there! In a similar vein, while the likes of Amazon have introduced the expectation of ‘free delivery’, never forget it’s anything but free. The cost of getting an order to you (from any online retailer) is factored into the price you pay and, in Amazon’s case, you’re paying for a Prime subscription to fund this (noted, this covers more than just shipping but the point remains, it’s not truly ‘free’).
Don’t buy into brands
It’s time for some more self-reflection and, as a precursor to the later chapter on marketing, don’t discount the influence of peer pressure and buying into brands. In numerous cases, in taste testing (or where the brand is hidden), it’s never a foregone conclusion that the most expensive or branded item is the most preferred. I’ll admit I’ll always have Heinz tomato ketchup with my fish and chips, so it’s OK to allow yourself a small indiscretion every so often. And if you chased around looking for the ‘best buy’ for every different product, you’d spend your life in supermarkets and be constantly stressed trying to remember whether it was Aldi or Lidl that had had the best salad cream, so cut yourself a little slack. The gist of my argument is that branded goods are not always the best. I’m also up for a little subterfuge; if you have kids, buy your local supermarket ketchup and decant it into a Heinz bottle when they’re in bed. You never know, it might just work! Try it with adults too; we have some friends who regularly shop at Waitrose (‘because it’s better’), so whenever they come round for dinner, we always buy everything from Lidl and have never had any complaints.
Knowing when to buy cheap and when to buy quality (and knowing the difference) is a subtle art and there are no hard and fast rules. But if you analyse your spending and give more thought to what you’re buying, you’ll subconsciously start to recognise what works for you. It’s summed up brilliantly by Terry Pratchett in Men at Arms: The Play (1997), in which he argues that the rich remain rich because they spend less money, which sounds obvious but he explains it differently than you might expect. Buying a well-made pair of boots for £100 that would last more than 20 years is cheaper than buying an inferior pair for £25 that only lasts two years before you need to buy another pair. The point is, you have to have £100 to spend in the first place; in other words, you needed to be rich. If you can only afford £25 for an inferior pair, you could well end up spending £250 for boots over the course of 20 years. He called this the ‘boots theory of socioeconomic unfairness’.
The first trick is not always assuming a well-known brand equals quality. It’s sometimes genuinely better quality (such as being made from higher specification raw materials) but not necessarily, with components often being exactly the same as a less premium brand. The second trick is to recognise frequency – how often are you going to use something? Longevity is disappearing in this ever more rapid world of fast fashion and technological advances but buying something once and keeping it for a long time is not only good for your wallet, it’s better for the environment too.
Check your credit rating
Before we hit some big-spending topics, a quick comment on your credit rating: it can have a huge impact on your ability to secure better finance. In short, know what your credit score is, know how to influence it and check it regularly. Again, thanks to the internet, this has become easier to do and there are several free options, notably Clearscore and Experian. They all work on the same principles and I don’t believe one is any better than the other. The mere fact that you’re checking your score is key. The average UK score is currently around 585/1,000, so while it’s obviously nice to know if you’re ‘above average’ it’s more important to actively manage your score, either improving it if it’s a little low or maintaining it if it’s good. Many factors impact your score, such as whether you miss a credit card payment, dip into any overdrafts, have county court judgements against you, opened a new account or bought something on finance that’s triggered a credit search. I was actually a little surprised when ours came out at a perfect 1,000 earlier in the year, but even then it still dipped to below 900 for a few months as we’d paid for some holidays and a new bike, which maxed out our credit card. Despite our strong financial position, it was still deemed to be a ‘red flag’. Take time to register and look through all the data. Most companies will go back and generate a historical profile, so you quickly get a good picture of your score profile and you have the ability to request corrections that might be negatively impacting your score (such as a bad debt against a previous owner of your property).
What’s in a percentage rate?
Many of your larger purchases are likely to be financed at one time or another and the headline figure is normally the percentage rate. As ever, there are a variety of ways this can be expressed, most commonly an annual percentage rate or APR. There’s also a variant used with mortgages, the annual percentage rate of charge or ARPC. It follows that an APR of 2% is better than 4% for a loan if all other conditions are equal, such as admin fees. A further variation is the annual equivalent rate or AER (sometimes also called the annual percentage yield or APY, as it’s more commonly quoted in relation to savings and investments rather than loans).
Low percentage rates can be very seductive; however, they’re a little tricky to unpick, particularly when the rate changes over a period of time – typically if an introductory rate is quoted. It’s normally the headline-grabbing number of any finance deal but the length of term also plays a significant part and, for this reason, my preferred approach to any finance deal is to ask the simple question ‘How much am I paying in total over the full term?’ For example, a loan or purchase of £5,000 in value at 7.3% APR over 36 months would give you a monthly payment of £154.54 and a total repayment figure of £5,563.36. Or, in other words, it will cost you £536.36 to borrow the money. If you took the loan out over five years (same APR), the monthly repayments would be £99.16 (less per month) but the total repaid would increase by £386.43 to £5,949.79.
Therefore, there are two decision points to consider in any big purchase via finance. First, what are the monthly payments and can you afford them as part of your regular budget? And second, what’s the total cost and does it represent value for money for what you’re buying? Sometimes you just have to accept that in order to afford something, you end up paying a little more. This is fine, providing you know that you’re making a conscious decision and that it’s a worthwhile trade-off. I find it’s a good way to evaluate if I really need or want something. Am I prepared to pay the ‘financed’ price for it?
Regular spending
Starting with the biggest first, let’s cover some high-impact areas of core spending. To reiterate, I’m not going to tell you what’s the cheapest or best deal; I want to help you understand how finance works in each category so that you’re better informed and can make the right decision for you. There are many comparison sites out there but fundamentally they all focus on the cheapest deal and while I’m not saying cheap isn’t good, I don’t believe they help you understand what you’re actually paying for.
Mortgages
Banks will lend you money but never forget that they want to make money out of you and are good at hiding how they do this. Interest rates are a key element of mortgages and we’re coming out of a long period of historically low rates, so it was always going to be painful when they went up from such a low base. At the time of writing, the Bank of England base rate is 5%, which I consider low against the 8% we were paying when we had our largest mortgage balance and very low against my parents’ mortgage rate of 15%, which I recall from my childhood.
Property has historically proved to be a good investment over the long term and, despite the scary rates, I still took my dad’s advice and got onto the property ladder as soon as I was able to while in my first job. Over the past 15 years, average house prices have risen from around £155,000 in 2008 to £290,000 in 2023. For most people, it’s going to be a struggle to get on the first rung of the ladder, let alone keeping up with changing payments, but you need to build affordability into your plan and approach mortgage payments as a priority. I couldn’t get a mortgage when I was looking to buy my first house, as no one would lend against my combination of salary, deposit and the cost of the house. I was a little cheeky in that I asked to see the company’s finance director, explained my position, stated that I liked working there and wanted to stay, and was there any chance of a small pay rise to allow me to get the mortgage? I remember him saying that no one had ever asked him that before but I must have made a good impression because he agreed!
One of the single most important decisions we made, which has given us our financial freedom, was to focus on paying off our mortgage. The interest you pay to the bank is huge and the sooner you can reduce it, the better. So it’s time for some maths to show you what you’re really paying for and why it should be your number one target.
Consider a house worth £250,000. You have a £25,000 (10%) deposit and a repayment mortgage over 25 years at 6%. A quick online calculator gives us a figure of £1,449.68 per month. This is where most people stop. But think about the numbers: 25 years, 12 months per year at £1,449.68 a month – that’s £434,904 in total. You borrowed £225,000 (house value less the deposit) and you’re paying the bank £209,904 in interest. Yes, they’re lending you a large sum of money (and not without risk) but do you realise what you’re really paying in total? It’s nearly the same as the value of the house! If you managed to squeeze another £5,000 onto the deposit, you’d save £9,666 in interest payments. The effect of overpaying can’t be underestimated either. In the example above, overpaying an additional £200 a month would allow you to pay off your mortgage nearly six years earlier, saving £56,000 in interest payments.
There’s another hidden cost of the repayment mortgage, especially if you think you’re saving money by remortgaging frequently. You’re probably not. The average person in the street might reasonably assume that their mortgage balance would be reduced equally each year; in other words, they will have paid back 1/25th of the mortgage every year, or £9,000 a year in our example. I’m sorry to say they’re wrong. Thanks to the cunning way that financial institutions construct their mortgages, they decide to split it differently through the term of the mortgage, with a heavy bias towards interest in the early years. Using the same example above, in the first year, you’ll have paid £17,396 to the bank and whereas you might have thought (hoped) that £9,000 was going towards reducing what you owed on the house, the bank only paid £4,005 against the house and took the remaining £13,391 as interest. And it continues like this on a sliding scale towards the end of the mortgage. In fact, it’s not until year 15 that you actually breach the £9,000 payment against the property. But who keeps the same mortgage for 15 years? Unless you’re locked in for five or 10 years, many people remortgage every three or four years, often with a hefty admin fee and the lure of the interest rate they’re paying. What they’re missing is that they’re effectively extending the life of their mortgage (and increasing the total interest paid) without realising it. Figure 4 demonstrates a typical repayment schedule, clearly showing that in the early years you’re paying much more interest than reducing your loan size.
So I’m in favour of overpaying your mortgage as much as you can (although most banks don’t like this because it dents their profits, so they limit you to a maximum of 10% a year in overpayments) and not remortgaging too often. One critical point to note (and to avoid a sneaky banker ‘trick’) is to check with your mortgage company that any overpayments will be deducted from the amount owed and the interest element reduced accordingly. Some have been known to recalculate the mortgage balance annually and to hold the overpayments as prepayments against interest, generously allowing you a payment holiday in the future – in other words, they’re taking your money without any benefit to you.
I prefer interest-only mortgages, with the caveat that you must have the discipline to make overpayments against the capital amount. With the same mortgage, it would cost you £1,125 in interest payments in month one but as soon as you make an overpayment, it comes off the amount owed and the interest payable reduces. An interest-only mortgage is even better if you can tie it to a bank account, where it becomes an offset mortgage. Here your current account balance offsets the mortgage balance (effectively reducing it), which maximises the effect of reducing your mortgage balance. If you have any, you can even use it to spice up your savings; rather than having savings earning 3% interest, why not hold that balance in your offset account and effectively earn 6%? The benefit is paying off your mortgage earlier and significantly reducing the amount of interest you pay. It also could save you some tax as you won’t be getting ‘paid’ any interest on your savings, rather you pay less interest on your mortgage.
In summary, I can’t pay your mortgage for you but I can open your eyes to the value of prioritising paying it off early. However, not everyone agrees with this approach. A quick internet search of financial strategies will corroborate this, but I’m in the camp of ‘pay off your biggest debts as soon as possible’ and I can guarantee you that paying off your mortgage is the biggest stress relief there is.
Car finance
Whether you’re a petrolhead or view your car as purely a means to travel from A to B, UK consumers appear to have drifted into accepting car finance as a default option and changing vehicles more frequently. Data published in 2023 by the Finance and Leasing Association shows that, despite a falling number of deals, the total new business for car finance in 2022 ballooned to more than £40 billion. What’s more worrying is that, unlike with mortgages, there doesn’t appear to be the same level of due diligence and affordability checking to prevent people from sleepwalking into an expensive way of buying a car. Some might argue that it’s a cheap way into car ownership, but in reality a lot of car finance isn’t ownership, it’s leasing (renting) and ties you into forever paying ‘rent’ for your car. Putting some statistics around this, new car drivers financed on average £25,325 in 2022, with more than 2.2 million drivers entering car finance agreements, up 3% on 2021. This happened while we were in the middle of a cost of living crisis. And what does everyone know about buying a brand new car? Yes, it loses a massive chunk of value and depreciates the moment you drive off the forecourt. Data changes quickly but an internet search shows some interesting trends: of the top ten slowest depreciating cars, all cost more than £50k and half of those cost north of £100k, so you have to dig deep not to lose money (retaining between 65–80% of their list price after three years). This chimes with the earlier example of buying boots; if you can afford a more expensive car, it retains its value better. At the other end of the scale, the bottom ten only retained 30–40% of their value after three years.
Car
Term
Miles
Deposit
