Why is it, to normal people (or to me at least) that financial terms seem to be so obscure and intimidating? Acronyms are everywhere. Just off the top of my head, and while my memory of excruciating corporate Board meetings hasn’t yet faded, may I list in no particular order, EBITDA, ROI, ROCE, POR, SKU, NSV, NNSV ….. and so on. Then there’s Cash Flow versus Free Cash Flow, I’ll talk gross margins but you’ll talk net (nett?), or net net (nett nett?) and how are you defining “profit” anyway? Even relatively simple terms, like does a “creditor” owe you money or is it the “debtor” that does, can make me question the fundamentals. I could go on, but already I’m losing the will to live.
The one concept that I liked, and used in my own finances, was depreciation. The way I used it was like this: I bought an Apple Macbook for £1,000 cash. I decided it would last me five years, so each month I “depreciated” it by direct debiting £20 a month into a savings account and forgetting about it. Five years later, I had accumulated the cash pile to buy a brand new Macbook (and I flogged the old one on ebay as a bonus).
It almost goes without saying that the trick to using positive depreciation is to have the cash to make the capital investment first. So saving money is the priority.
I could well have done with being educated this way instead of how I actually was – borrow the money and pay it off with a “Hire Purchase” agreement. As I write the term “Hire Purchase”, I’m struck by the sneaky wording. It actually sounds like quite a positive thing. Much better than “Stinking Debt Repayment” or something similar.
It took me the best part of thirty years to learn about the real difference between credit and debt. I think this is because that my first experience of Hire Purchase was a positive one. Without it, I would never have been able to buy my first racing bike, a Raleigh Shadow, purchased from Halfords when I was fifteen years old. It cost seventy five quid, a figure well beyond me and my folks at the time. It was with a sense of awe that I discovered Halfords would let me buy the bike “today” and pay it off later at the sum of £1.25 a week, which I earned delivering papers. It’s hard to describe how this option suddenly transformed my view of how people could afford things. “Debt” wasn’t one of the words that occurred to me. All I was focused on was the fact that I could have the bike now, right now, the object of my heart’s desire that had seemed an impossibility before.
In fact, thinking about it, there was a positive aspect to the debt – I took it without question that I must pay it off. This underlined to me that I would need to work and keep my job in order to pay back Halfords who I actually felt quite grateful to for giving me this option. I’d put the cart before the horse, of course, and had been encouraged to do it, but that’s not how I viewed it at the time.
I was also lucky in that I didn’t have much else to spend the money on at that age. I do remember that the weekly payments took the majority of my earnings and that I actually had to visit the Halfords shop every Saturday to make them. I had a little card that was filled in and signed by the shop assistant each week when I made a payment. (Ye Gods, even to me that sounds like Victorian Times compared to our computerised era. It was only the Seventies!)
Anyway, at least in those simpler days I had only that one financial acronym to deal with, “HP”, and I understood the deal. If only I could say the same with confidence today.