My father once said something so obvious it perplexed me. “The thing with wealthy people, Ollie, is they don’t spend all their money.”
Quite apart from the core idea, this answered an unconventional question: when is a truism not a truism? A truism is an observation so obviously correct it provides no value. Except, I surmise, when someone needs to hear it.
I think I did need to hear it, at the time. A truism is not a truism, then, when it’s useful.
In my case it was.
Readers of this column will be familiar enough with my successful mission last year to pay off a credit card that was squeezing my finances and crippling my self-esteem. But one of the most beneficial parts of that process was discovering I wasn’t alone.
Plenty of people I spoke to in the aftermath of that column described their own journey not only in understanding money, but in becoming comfortable retaining it.
In hindsight, I would almost go so far as to self-diagnose as having had a mild phobia of being wealthy. Yes, that line definitely belongs to the self-indulgent narrator of a whimsical West End play. But it’s the truth. It would certainly explain why, as a younger man, I seemed to be doing everything I could to get rid of my money. I didn’t know how to manage it, so I spent it so it wouldn’t be there anymore. I’ve since started saving again!
Having understood this, I’m fascinated by the UK’s lack of savings culture.
Why Do We Struggle to Save?
To unpack this, I am going to posit two basic points. The first is you shouldn’t invest without some savings; and, secondly, that house prices are far more influential than we notice.
In my article earlier this week, I kicked off our coverage of individual savings accounts (ISAs) by highlighting that, by a country mile, the general public prefers cash ISAs to stocks & shares ISAs.
This, I imagine, is the result of a complex combination of risk aversion, poor financial education, and mistrust of financial services. Cash ISAs are, one can presume, seen as a “bank” product, with a “secure” rate attached. The FSCS safety net of £85,000 helps. Mention the words “stocks and shares” and ISAs start to look – and sound – very different.
To be clear: this is not all bad news. The cash ISA is a good vehicle, especially right now, while interest rates remain high.
But there are problems. For one, good cash ISA take-up masks what is actually going on under the bonnet of Britain’s finances. The truth is there is a savings crisis. A lot of people don’t know what a cash ISA even is, let alone an ISA rate or ISA allowance.
Moreover, according to a report by the Resolution Foundation last month, more than 11 million people of working age don’t have a spare £1,000 to pay for unexpected bills.
In partnership with the abdrn Financial Fairness Trust, it estimates the UK has an emergency savings and retirement savings shortfall of more than £74 billion.
This is a shocking conclusion, not least because a grand is a staggeringly low bar. As Morningstar and others have long argued, a comfortable “rainy day fund” for unexpected redundancy, life emergencies, or just a huge bill, is around three months’ wages.
According to the government’s latest data, the average annual pre-tax salary is £34,900 – a monthly pre-tax wage of £2,908. After tax (and after a minimum auto-enrolment pension contribution) this person, I estimate, takes home a maximum of £2,197 a month. Three months’ salary to them would be £6,591. That this average person might struggle to even have a spare grand speaks volumes. God knows how those on even lower incomes manage.
But that’s the answer. They don’t. Why?
Why do We Have a Savings Problem in The UK?
There are myriad factors that have contributed to the UK’s savings crisis. Some MPs would posit laziness as a factor, but I think it’s more complex than that. Social mobility is stalling.
The first is debt. You can blame the availability of easily-accessible (and irresponsibly-advertised) consumer debt for one, and its ubiquity on TV screens – selling everything from sofas to cars, televisions, tech, holidays and short-term credit. In the long run, such deals tend to make life more expensive.
What’s more, fast fashion, cheap consumer goods, and the buy-now-pay-later lifestyle have all eaten away at our appetite to save. Get what you want now – or so we are implicitly told.
You can also blame stagnating wages, the war in Ukraine, or maybe even Covid-19.
But I don’t think that explains it entirely. A key problem, many people tell me, is the sheer cost of housing, and the very obvious knock-on effect this has on childcare costs.
The UK’s Housing Crisis Laid Bare
Over the past 25 years, house prices have exploded. The available housing stock has reduced, the quality of housing has stagnated, and social housing has disappeared.
Today, parents often work multiple jobs to pay the bills. This requires logistical backflips to keep kids safe, fed, and entertained after school. According to one estimate, the average cost of sending a child under two to a nursery full-time in the UK is £14,030, or £1,169 per month. Suddenly that average monthly salary doesn’t look so big, does it?
But back to housing.
As supply has dwindled, prices have risen, and have led to the further compartmentalisation of UK housing. The pressure placed on the rental market means it’s now cheaper to be a homeowner than to outsource the upkeep of your residence to a landlord. But tell that to a mortgage holder crippled by the last 18 months of mortgage mayhem, mini-Budget madness, and Bank of England intervention. There is no easy angle.
Spotting a chance to make bank from demand, houses of multiple occupancy, or HMOs, now sit where single residencies once stood, and often for more than twice the price per unit.
There are those who will tell you this is a demand-side problem. I firmly, firmly disagree. Its root is squeezed supply, and a political class that has prioritised those with houses over those who can reasonably be expected to need them. A failure to plan has collided with an unwillingness to compromise, and the results have been disastrous. It’s now so bad people talk in the pub about kicking old folk out of their large four-bedroom detached homes!
For the record, I know this because I heard it over and over again. And not just in the pub. In the homelessness shelters in December.
As the clock struck midnight on Christmas day, several guests told me how they went from being fully employed with homes to sleeping rough. And it happens quickly. Within six months you can be out on the street with nothing. For those who can’t keep up, or who suffer just one of life’s very normal dislocations, the consequences are horrifying.
Even for those not staring down this barrel, all this has a marked effect, and it’s psychological as well as economic. This is why the “laziness” arguements are, well, lazy.
Lifetime ISAs and Life-Long Solutions
Home ownership is at the heart of Britain’s social contract. Work hard, save well, and it should be within your reach. Except that it is now suddenly – catastrophically – harder, even for the affluent, who are (absurdly) reliant on government top ups to their Lifetime ISAs to supplement what they earn, save, and inherit from the Bank of Mum and Dad. Some believe products like this merely push house prices higher.
For those without this support, meanwhile, there is little point in even trying. So why bother? If saving is tricky, why would people even consider investing?
This is where arguments about “laziness” miss the point.
Laziness isn’t the word, but disaffection certainly is. Plenty of people are working hard, but they’ll tell you their money doesn’t go as far. Throw inflation into the mix and you have a perfect formula not just for demoralisation, but outright despair. I often think about that when economists observe Britain’s high inflation, low productivity, and stagnant economic growth. Nobody has admitted we’re in the throes of stagflation. But we are.
This month, Jeremy Hunt told us that one answer is a “British ISA”. It will get Britain saving, but also Britain investing in itself. Or so he argued.
A continuation of George Osborne’s politicisation of savings policy, this product hands savers a generous £5,000 allowance, but compels them to buy UK-listed companies. I’ve covered the financial arguments for and against the policy here, but there is one more thing to say.
The ISA as a product has evidently been a triumph. But there is no point even thinking about more ISA products if the country’s household finances are in the state they are.
It marginalises the already-disaffected, confuses those with even an ounce of financial nous, and – and this is the crucial point – is a politicised distraction from the actual issue. What next? A Brexit ISA? You get my point.
The answer, instead, is to work on all the issues that make saving harder. People deserve simple incentives, good financial information, and – frankly – some much-needed hope. Once you choose hope, anything is possible. Now there’s a truism for you.
Ollie Smith is UK Editor at Morningstar
