BrilliantWithMoney

It is no secret that the financial world has changed, almost beyond recognition, over the past couple of years. It all started with the removal of easy access to cheap credit. Then the global banks started to come clean about the true extent of their exposure to ‘toxic’ assets. Recession and general economic woe followed swiftly behind.

In short, it was (and still is to some extent) a real mess, and we are all dealing with the consequences.

Economists and historians will tell you that these things come in cycles. When Gordon Brown promised an ‘end to boom and bust’ in his previous role as Chancellor of the Exchequer, you could almost hear the chuckles in the hallways of the London School of Economics.

Yet somehow this time feels a bit different. Whilst nobody can accurately forecast when this recession will come to an end, there are important lessons we can all learn from recent events.

The ‘rules’ of money appear to have changed. In fact, maybe they haven’t changed at all. The following principles could have all applied equally as well before this global financial meltdown. It’s just that following these ‘rules’ in the past would have meant going against the flow.

Here are my six rules for our relationship with our money in the new world of finance.

1 – We cannot rely on property.

In the old world it was so simple. We would put down a minimal deposit, take out a big mortgage and buy a house. Property prices would go up and every couple of years we would take out a slightly bigger mortgage.

How things change.

Falling house prices combined with a particularly brutal credit crunch brought this always unwise financial strategy to a grinding halt. We all feel poorer as a result. The frequent remortgaging before was subsidising our lifestyles. Directly or indirectly, you probably felt wealthier as a result of this money being dragged out of growing property values.

In the new world, we cannot live like this, with that source of cash gone for the foreseeable future. We need to reassess the way we choose to live our financial lives. It is never popular to suggest that people spend less, because spending less often equates to doing less. Yet only buying what you can really afford to buy is one of the most important financial foundations you can create.

2 – Cash is (still) king.

Yes, interest rates are incredibly low at the moment. If you are one of the people who rely on interest from savings to supplement your retirement income, you may be thinking that cash is the last place your money should be.

But cash remains king for several important reasons. It is still the only asset class to offer capital security. Assuming you stick to the limits of the Financial Services Compensation Scheme (FSSC) even a failing bank or building society will not result in the loss of your dosh.

Having a healthy reserve of cash means not having to take on expensive debt in an emergency, assuming said debt is even available when that time comes.

The often quoted concept of building an emergency fund of three to six months typical expenditure is more important today than ever before. Economic recession means uncertainty in the job market which could continue long after world markets start to recover. Having a cash emergency fund is a necessity against this backdrop.

Whilst you might have been able to borrow your way out of financial trouble when an emergency struck, now you would be lucky to find a sympathetic lender. Your cash savings are the only safety net you can rely upon in the future.

3 – It is cool to know about money.

In the old world, financial ignorance as generally acceptable. You could get by comfortably in most cases without much in the way of a financial plan. As long as you continued to earn money and keep up the minimum payments on any debt, the world was your financial oyster.

Today, financial ignorance is about as cool as your drunken uncle dancing at a wedding. To get by these days you need to be money savvy.

The media is lending a helping hand when it comes to meeting this challenge. Thanks to Robert Peston and his colleagues, it’s not considered strange to know the protection limits of the Financial Services Compensation Scheme or to be able to explain the intricate mechanics of quantitative easing.

Taking a healthy interest in this sort of stuff and understanding the bigger economic picture is great, but what really matters is your ability to convert this global overview into meaningful action for your own financial planning.

The press loves to talk about the bigger picture. They regularly throw around figures of billions of pounds and we are supposed to get excited by this. In reality, the billions matter much less to you than the hundreds or thousands which make up your own bank account, mortgage, pension fund or credit card. Practice selfish financial planning, at least until you are fully in control of your own money management, and then you can start looking at the global picture.

4 – Complex financial products suck.

Until the current global financial crisis struck home, it was fine to invest in complex investment schemes promising high returns with limited or no downside potential. In a rising investment market with plenty of cash sloshing around the system these things can work. When the supply of money comes to a sudden stop and the markets begin to crash, the shortcomings of these products is exposed for all to see.

The criminal actions of Bernie Madoff, who ‘made off’ with around $65bn of investor cash, may have been the very worst example of these things going wrong, but many investors have seen promised investment returns fail to materialise.

The simple rule now, as it should always have been, is that if it is too good to be true, it probably is. This includes so-called ’structured products’ which use complex financial instruments to offer capital protection with full exposure to risky investment markets. A guarantee may turn out to be any but a guarantee if one of a handful of factors goes wrong.

This leaves us with a financial world where it makes sense to shun the complex stuff and stick to the basics. There are four main investment asset classes – cash, fixed income securities, equities and property. The rest is all a distraction for 99% of investors. And don’t kid yourself that you somehow fall into that 1% who need to access to the ‘exciting’ alternative investment types.

The overwhelming majority of investors can get by with an appropriate mix of the four main investment asset classes. It is how much of your money you expose to each of them and for how long that counts, and not investing in a Guatemalan hedge-fund offering 28% a year returns with ‘no risk’ to your capital.

5 – We have to take personal responsibility.

The government used to be able to provide for you. You may not have had a particularly good lifestyle in retirement if all you had was the State pension to tide you over, but you could at least retire at age 60 or 65 without the fear of being consigned to abject poverty.

Now, the State cannot provide. An ageing population combined with increased life expectancy and a government in so much debt it makes Argentina in the mid-1990s look wealthy have all put paid to the ability of the State to do much more than keep you from becoming completely destitute when you get older.

We are all going to have to work for much longer if we plan to rely on the State for our retirement income. The State pension age is already scheduled to increase to age 68, for men and women, from 2044, but in practice it could be a later age from an earlier date. The latest thinking is that age 70 will become the minimum retirement age within the next couple of decades. By the time you retire, assuming you are young enough now, it could be even later than that.

What this all means is that taking personal responsibility for retirement planning has become essential. The continued demise of company final salary pension schemes means a combination of personal pensions and non-pension investment assets will be the preferred strategy for anyone planning to avoid a retirement merely surviving rather than thriving.

6 – Substance takes preference over style.

This is where things appear to have shifted quite radically over the past couple of years. If the boom times were about keeping up with the Jones’s, the bust times are about growing your own vegetables, and the waste hierarchy of reduce, reuse and recycle.

A change in attitudes towards consumerism were appearing long before the world plunged into this recession. Any link between personal happiness and buying stuff was weak at best, and it took the removal of easy access to cash to tip an already growing anti-consumerist movement over the edge into mainstream culture.

It is now considered ‘cool’ to make do and mend. Holiday destinations are judged based on their eco-credentials rather than hours of guaranteed sunshine. Demand for allotments has gone through the roof and vegetable seed companies have reported massive sales growth. Charity shops have benefited as our view of the world has been adjusted.

Whilst the great British love affair with shopping may not have been killed off for good, there has been a major attitude shift that could well continue past any economic recovery. People who for so many years were the embodiment of all style, no substance have largely had their day as a new way of living and being takes over.

Martin Bamford is site editor at BrilliantWithMoney and a Chartered Financial Planner with Informed Choice.