I have a dear friend who I have known since school. She is funny, caring, tough and always the life of any party.

She also never has any money, and is perpetually in debt.

Here’s why.

She is a Dog Owner

I have been down the pet path myself in the past with cats.

While having a pet is a great boost in certain areas of life, they can be a real big money drain. Food, vets, insurance, initial purchasing, sundry items such as carriers, leads, clothes etc. etc. Year on year these prices just go up and up and sap the life out of your finances.

My mother is in a similar situation – with 3 cats with big appetites (and of course, they will only eat premium food), she spends more on them per month than she does on the adults in the house.

My friend has a rather large dog, that costs rather a large sum to feed and insure. To add insult to financial injury, due to the times she works (she is an A&E doctor), she has to pay for someone to come and walk it at least once every day as well.

I hazard a guess that in total she spends over £4,000 annually keeping her four-legged friend.

She Likes Expensive Holidays

Everyone needs to get away for a while to relax and recharge, but it does not need to be to expensive destinations year in year out. For the last 4 years running she has flown to Las Vegas which is expensive enough, but to compound the issue she then spent 2 weeks gambling whilst there (and lost overall, naturally).

I estimate she spends £2,500 a year on each holiday.

She Only Buys Premium Food

If it is not from Waitrose or Marks & Spencer, she doesn’t eat it. For those of you not in the UK, they are the two more ‘upmarket’ supermarkets that cater for the more well-to-do in society (or those who wish to be associated with same). An average microwave meal from either will set you back approximately £5, where the same could be purchased in Tesco for £1.50 or so, or even half of that if you are not averse to buying from the Value range. In other words, these stores are 6 times more expensive for no good reason other than buying into the brand ethos.

As an experiment at the beginning of the year just before I found my frugal self, I shopped exclusively in both stores just as she does for a whole month. I have just dug out my bank statements and added up each visit for the month.

I am shocked.

My food bill rocketed from an average of £97 to £339!

Over £4,000 a year just on food to feed one person. Nearly 3 and a half times my spend then, or nearly 7 times what I spend now.

She Drives a Lexus SUV

When she bought her four-legged friend, she felt she needed to upgrade her car to not only be able to carry the thing in comfort, but also project a more professional persona in line with her vocation.

She splashed out on a brand new 4×4 – on finance – to do this. Couple the interest payments and horrific mile per gallon calculations for the vehicle concerned, I suspect Sarah is sinking an additional £7,000 a year here compared to if she had just kept her perfectly suitable and fully owned, cheaper to insure, cheaper to run, cheaper to service previous vehicle.

She Carries a Credit Card Balance

You may wonder how I know this, but let’s just say it is amazing what friends will disclose after a few drinks. My attempts thus far to bring her round to financial sense have failed, despite probing questions and long discussions.

Her current credit card balance is around £2,000 at 19.9%. She always pays the minimum amount and by my calculation will be free of this debt around 2036 having paid £3,240 in interest for having done so. If we include the accrued interest, let’s say keeping this revolving balance costs her £1,000 a year.

She Smokes 20-a-day

My thoughts on smoking aside, a packet of her cigarettes currently costs £6.04 for a packet of 20. If she buys a packet every single day as her habit demands, this adds up to £2,204 a year.

She Cannot Resist Clothes Shopping

Remember that carried credit card balance? The majority of it is from her regular romps up to London for clothes shopping. She thinks nothing of spending the entire day traipsing up and down Oxford Street going in all the fancy designer clothes boutiques and coming out with armfuls at a time.

Wow.

Every year, adjusting for the fact she needs to buy some kind of food, my friend is spending £16,000 a year either servicing habits, keeping a companion or trying to inflate her lifestyle.  If instead of spending this she saved it at 4% for 25 years (the amount of time until she will theoretically retire) the effects of compounding would result in her having a retirement fund of her own – excluding the one she pays into with our employer – of – wait for it.

Wait for it.

£731,211.33!

Very nearly three quarters of a million pounds.

Do you have any friends you’d like to hit with a financial clue-stick?

• MBNA Launch Best Credit Card Balance Transfer Deal Ever
• Credit Card Analysis: From Hell to Heaven
• Cash ISAs vs. Regular Savings Accounts
• The Credit Crunch Has Positives
• 10 Economic Predictions for 2010

In 2006, long before I came to the realisation that my finances were in a dreadful state, Trent over at The Simple Dollar proposed a simple question.

Living on Half Your Monthly Income: Could You Do It?

I’m going to pretend first of all – for the sake of this financial experiment – that I am not still living at my parents house. In my mind that is cheating when it comes to the spirit of the question. So I will for the moment assume that I had a rosy life before now, and have managed to buy myself a wonderful little apartment and have a mortgage to go with it.

That seems a little fairer.

Ground Rules

• My monthly income is calculated without any potential overtime
• Income tax remains at 20%
• V.A.T. calculated at 15%

With those rules set, half my present monthly income after tax is around about £1,000 (or $1,600 USD for my American visitors). That is a little better than some folks, and between a little and a lot worse than others.

Playing With The Numbers

Continuing the assumption that I had been financially astute in my prior years and hadn’t been taken to the cleaners by my ex wife instead, for this little paper experiment I bought a wonderful flat with a £32,000 deposit and a mortgage of £71,000 for a 70% LTV (or as our American friends would say – a little over 30% down).

• According to the Barclays Mortgage Calculator: £336.
• Gas and electricity bills are £50 each, so: £100.
• Water Rates (Supply & Drainage): £40
• Council tax on a flat with 25% single-person discount: £82.
• Landline telephone (with broadband of course) £15.
• My mobile phone bill: £20
• Groceries: £75
• Road Fund License (Tax): £14
• Car Insurance: £30
• Fuel to get to work: £120
• Car Servicing: £20
• TV License: £12
• LoveFilm Subscription: £15.65
• Blog Hosting: £12

How Did I Do?

Half of my monthly income (without figuring overtime into the equation) is £1,000.  My total outgoings in my simulation above come out at £891.65.

I can continue my standard of living without making any changes whatsoever if my income suddenly halved! This is quite a surprise actually. In fact, I could continue to save over 11% of my monthly take-home if I agreed with myself not to go out or conduct unnecessary spending.By the end of a year, excluding holidays I could actually still save £1,300.

And If It Dropped Tomorrow?

In the spirit of the question as things stand for me right now (rather than my fluffy fantasy above), could I survive?

• Rent: £120
• Mobile Phone: £20
• Mobile Broadband: £5
• Landline Telephone: £10
• Groceries: £50
• Road Fund License: £14
• Car Insurance: £30
• Fuel: £120
• Car Servicing: £20
• LoveFilm: £15.65
• Blog Hosting: £12
• Credit Card Payment: £120
• Loan Payment: £413

Total monthly expenditure would equate tomorrow as £949.65. Still just under half my income, but a little tighter. My savings goal would struggle. This would leave me with 4.9% of my pay left to save, totaling just £604 for the year.

What Did I Learn

Every exercise you do, try and take something away from it. I have learned that I am pretty frugal already. I don’t spend excessively, and I even upped my normal food spending in the fantasy exercise to make it a fair fight. £50 a month on food is very low statistically. As Trent realised – if you can live on half your income, why aren’t you doing so now and saving or investing the other half? What unnecessary money drains are you entertaining?

Could you live on half your income? Would you need to make any changes?

• Hedging Against Pump Price Increases
• A Guide to: Individual Savings Accounts (ISA)
• Dig Yourself Out of Debt: Spend Less Than You Earn
• The Importance of Redundancy Planning
• Why Rate Chasing is Worth It

Before 2009 I was in a dark place both emotionally and financially.

I held the view that credit cards were there to supplement missing income, handling day-to-day spending (and carrying the balance) and that minimum payments were my best friend.

What an idiot I was.

Today, continuing my ongoing thoughts on reducing the costs of debt I totaled up the cost of my “hell” credit card which is now paid off, and my “heaven” credit card that carries a balance, but at 0% APR. Once paid off this card will never carry a balance again. It will be set to ‘pay in full’.

The Hell Card was mismanaged from the day I got it (9 June 2001), and virtually ignored from 2006 onwards. This card has cost me thousands of pounds in interest, overlimit fees and payment protection insurance that I didn’t even know I had. While the online facility doesn’t provide full access to statements from day one, I have totaled up the last year to date and had a look at how badly managing a credit card – in personal finance terms – can cost you dearly.

The interesting point is throughout the life of this card, I have been reported every month as an ‘excellent’ customer to the Credit Reference Agencies. The company concerned has made money off me every single month for 8 years, and I have never missed a payment. I was their ideal customer: paid on time, always carried a balance, never challenged their fees and had their insurance to boot.

What an idiot I was.

As we can see, for the first 4 data-set points I was still burying my head in the sand. The minimum payment was going up, the interest was going up, the PPI costs were going up, and I was being dinged with a £16 over-limit fee every single month on top of this.

The next month I was charged interest on this over-limit fee, and interest on the interest of the over-limit fee on top of the balance. When you start compounding credit card fees, your debt quickly snowballs into hellish proportions.

On the 4th data point above (January 2009) I had my light-bulb moment. I’d had enough and wanted out. I balance transferred £900 off of the card onto a 0% deal, made a one-off payment to get back under my credit limit, and upped my regular payments. The fees stopped on the next statement.

From that point onwards, the card looks more sensible. Imagine for a moment though what the graph would look like if I had access to the previous 7 years worth of data. I will be writing to the company to try and get this information for another post – I’m genuinely interested to see what it looks like.

The cost of the Payment Protection Insurance goes down with the balance, as does the minimum payment required and the interest being charged. If I’d been sensible I should have canceled the PPI in January, but hindsight is a wonderful thing.

What an idiot I was.

The Heaven Card in contrast, has been well-managed from day one.

I obtained it as part of my journey to financial sensibility and debt freedom, so perhaps this shouldn’t be too surprising. I stupidly let myself be sold card protection when I activated the card, and the fee for this was charged to my Standard Balance behind my 0% transfer. Oops. Over the whole year though, the interest only works out at £12: less than one over-limit charge on the hell card.

If I’d noticed what was happening over card protection, I would not have paid a single penny in interest during the life of the balance transfer. No fees, no interest, no PPI, nada. Compare this to the hell card:

That looks considerably less painful to my wallet – and it was. Aside from the (currently) £8 in interest from my Card Protection error, I’ve not paid a single bit of interest, or PPI or fees. In 1.9 payments time the balance will be £0 and I would have paid just £10 interest for my card protection blunder. Not too shabby, and not a mistake I’ll be making again.

In total, in just 12 months (and I only had my head buried in the sand for 3.5 of those months) I got stung for £664.14 worth of interest, insurance and fees for borrowing £3,500 on my hell card. Multiply that over 7 years and that is potentially £4,648.98 worth! What an amazing waste of money. That is – all but pennies – exactly how much I am still in debt by as of August 2009. Ironic.

The real kicker: If I had opened a savings account in 2001 with £10, and paid myself that sum divided over the months, compounding monthly earning 5% for 8 years I’d be sitting on £6,558.41!

What an idiot I was.

I will be attempting to reclaim these charges at some point – if I win then it will go nicely towards getting my Emergency Fund going. If not, then no harm in trying.

I think it important I make the point that despite my own idiocy, I still do not view credit cards as  inherently bad. They are not your best friend by any means, but credit cards are a tool much like a chainsaw. If you are sensible with the tool, it can make life much easier. Used correctly it can even make you money.

If you are an idiot with it though, it can cost you dearly.

• My Networth Update - Aug 2009
• Dig Yourself Out of Debt: Spend Less Than You Earn
• Six of the Best! September 2009
• 7 Reasons My Friend is Poor
• 6 Mistakes That Doubled The Price of My Car

I’ve become fascinated by the long term cost of things of late. I suppose this is merely a natural progression in a personal finance journey; you are no longer content to know just what things have cost to date, but what they will cost you in the future, too. Of course no one knows what will happen in the future with any degree of certainty although two outcomes remain a given: you’ll pay taxes, and die at some point.

Beyond those two cheery thoughts, a little artistic license may be required.

As I was driving to work yesterday evening, a thought started buzzing around the fringe of my consciousness. “Just how much have I paid for this car in its 6 and a half year life?”. As many personal finance bloggers have mused in the past, cars are expensive. They are even more expensive on a finance ‘deal’.

I realised I could probably answer my question with a reasonable degree of accuracy, as I keep all documents relating to my car since purchase no matter how small. I promised to add it all up and find out, If I remembered between the thought coming to the surface and getting back home.

This afternoon I dug out my “Car Expenses” docket and opened up a new Google Spreadsheet to start typing in numbers.

I drive a 2003 diesel Ford Focus 5-door hatchback and this is if I am an honest, a superb vehicle. It’s extremely efficient if driven right (currently 67.5mpg according to its computer), still looks great, can haul anything I put in it, and is extremely comfortable and reliable.

Unfortunately, these are the only good things about my purchase.

When I first bought it at age 19, I wanted “the best” – after all, my consumerist desires had been nicely nurtured by the salesman and two decades of advertising exposure – so I went all out. I had metallic paint, supaguard protection inside and out, the highest trim level (Ghia), a 6-disc CD changer, 115 bhp engine rather than the usual 100 and so on and so forth. The list of ‘extras’ goes on for miles.

In total the “there and then” purchase price would have been £16,209. Not too bad for a brand new reasonably  specified vehicle, even in 2003 money.

Purchase Mistake #1: Unfortunately, that wasn’t what I paid. When I first bought the car, I had £8,000 in savings to put towards a new vehicle. In hindsight I could have got a lesser vehicle – still new – for that alone. The purchase price of the car I wanted was £16,209.01 which meant I needed to source £8,209 from elsewhere. I probably found the necessary 1p in my pocket to save getting that on finance also, so £8,000 needed to be financed. The place I bought the car was all too keen to sell me their finance package and looking back it wasn’t a bad deal: 6% APR over 3 years.

Purchase Mistake #2: I thought I could do better. I telephoned my employer who ran an assisted purchase scheme for new car buyers. The headline rate is 3.5%, so I signed up to get my missing £8,000 and made up the difference that way. However, 3.5% is not the APR, that’s the flat fee per year. The APR which I subsequently found buried in the small print) is 7.5% if taken over 3 years like I did. Adding the arrangement fees and paperwork costs on top, I paid nearly £1,000 over the purchase price to borrow that £8,000. The only good point about this loan was the payments were taken from my gross wages, meaning the money was taken before my income tax and national insurance payments were calculated.

Purchase Mistake #3: In 2005 I got married, and so that we could set up home together having started with nothing, we took out a £15,000 loan over 5 years. Included in that was some consolidation of our existing commitments and operating capital on top. I paid off the loan from work, and rolled it up in this loan instead. Now my car would have been paid off in 1 more year if I’d kept the original repayments going, instead I had just extended them for another 5 years at 9.9% instead!

Purchase Mistake #4: In 2009 I filed for divorce. In order to restructure my finances to help get me debt free more quickly, I paid off the remainder of this loan and a few others with one super-loan from my bank for £10,000 at 8% over a further 3 years (although my intention from day 1 was to pay this off inside 12 months). This wasn’t a mistake per se, but does theoretically mean that 6 years after taking delivery of the car I am still paying for it and could do until 2012, almost 9 years after driving it off the forecourt!

So far, purely courtesy of finance costs, arrangement fees and interest my £16,209.01 car has actually cost £22,962.09 – nearly 30% more than the original price of the car.

Put another way I would be debt free right now if I had not taken out my car on finance. My net worth is at August’s calculation -£4,951.49 so I’d actually have almost £2,000 in the bank, instead of still owing others money.

I then went a step further and totaled up my insurance, road tax, servicing and other car-related expenses such as my annual diesel spend and played around with the Google Spreadsheet graphing toys to produce the following:

As we can see the Total Cost of Ownership goes down year on year from the point of purchase to about 3 years in, and then climbs rapidly. In 2003 (year of purchase) it cost me £1,771.71 excluding the down payments. In 2004 that dropped to £1,597, and in 2005 it dropped again slightly to £1,587.89. 2006 saw my servicing costs rocketing courtesy of crash #1, but lowering insurance premiums saw the TCO continue to drop slightly to its lowest point of £1,461.60.

Mistake #5: From that point onwards though, it has year on year cost me more and more to own the car. I began to neglect the servicing schedule. As a couple, our financial issues began to really cause a lack of disposable cash. Non-essential spending was cut to a bare minimum and there just was not enough to service the car beyond the absolute essentials to keep it running.

2007 saw fuel prices start to get noticeably more expensive as well so despite spending less than I should have been on maintenance, TCO went up to £1,814.35. Since then, fuel prices seem to have only one long-term direction: up. At this point I had not really correlated that keeping the car serviced and driving sensibly actually reduced my fuel bill…

2008 continued much the same as 2007 but problems were building up with the car thanks to the reduced love and care it had been given over the past 2-3 years. A further crash in the icy weather stored up further problems towards the end of 2008 that could only be put off very temporarily. My marriage came to an abrupt halt, and I saw the light.

2009 consequently became very expensive for servicing. I had to have 3 years worth of remedial work done, crash damage fixed and the 100,000 mile service performed, which is a big deal in a diesel Focus (timing belt change). As a direct result of this, the 2009 servicing cost is the highest to date but does follow the general rule that “the longer you own a car, the more expensive it becomes”. You can see from 2009 my fuel cost reduces despite higher prices, as I made an effort to drive more sensibly.

Mistake #6: The cost of my insurance dropped every single year by always shopping around for the best deal, but I wasted money here as well. I had always opted to pay over 12 months rather than paying for my insurance in one go. This is all well and good for budgeting purposes, but not too good for balance purposes when you consider the typical APR for doing so is 27.9%! I have paid £320 over 5 years just for choosing to pay monthly instead of annually for my car insurance. I corrected that error of judgment in 2009 as well.

The total expenditure of owning my car from new, crashing it twice (minor damage to my own vehicle only – no insurance claims), servicing it and keeping it fed?

£32,146.28!

• My Financial Meltdown: Part 4
• Dig Yourself Out of Debt: Spend Less Than You Earn
• Is Debt Worth It? Does It Matter?
• My Financial Meltdown: Part 3
• Dig Yourself Out of Debt: Avalanches and Snowflakes