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?

• My Financial Meltdown: Part 1
• Beware The Balance Transfer Cheque
• My Financial Meltdown: Part 3
• Credit Card Analysis: From Hell to Heaven
• 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?

• My Financial Meltdown: Part 3
• Beware The Balance Transfer Cheque
• One in Four Households Struggling
• A Guide to: Individual Savings Accounts (ISA)
• 6 Mistakes That Doubled The Price of My Car

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.

• Why Rate Chasing is Worth It
• 7 Reasons My Friend is Poor
• Dig Yourself Out of Debt: Know What You Owe
• The Credit Crunch Has Positives
• Dig Yourself Out of Debt: Spend Less Than You Earn