Hello again and welcome to Mortgage Advisor on F.I.R.E. I am in good spirits at the moment. The pain in my ankle and foot has reduced considerably. I have been able to take a taxi to the city centre and have lunch, but I still cannot walk for more then a couple of minutes before needing to rest. My other leg still hurts but the pain is not anything like as severe as the problems that have kept me holed up inside my apartment for almost a month.
I wrote last week about my weight and how it has increased due to comfort eating and my not being able to exercise. Just over a week ago I started a new type of diet. It is something I have done before with some success, but I did not stick with it long-term. It’s nothing too revolutionary; I simply have three meals a day and one snack. Between meals I do not eat anything. No grazing or snacking allowed. I am, however, allowed to drink water or coffee between meals. I keep myself on track between meals by setting a timer on my phone. A typical day looks like this:
8am – breakfast. Timer set for 4 hours.
12pm – lunch. Timer set for 7 hours.
3pm (ish) – latte.
7pm – dinner. Timer set for 3 hours.
10pm (ish) snack.
I’m not too concerned with the content of each meal, within reason. The point is not to count calories but get out of the habit of pointless grazing and snacking. In the last ten days or so I have lost a kilogram doing this whilst being physically inactive. I do get hungry, but glancing down at the timer on the phone and seeing it ticking down second by second is motivating me in a bizarre way.
From next Tuesday, 3rd December, I should be back at work full-time. I have the rest of that week, and the first part of the following week before going to Romania for a week to spend time with my girlfriend’s family. Then, I have a decent schedule over Christmas and before we know it, it will be 2020.
I am thinking that in the New Year, I will be making a slight change to the blog. The whole point of this blog is to chart my course to financial freedom through passive income. So, from 2020, I will keep a running track of the passive income received that year. The aim, as mentioned in the first instalment of this blog, is to get to £1,000 per month passive income. At first, I expect a slow start, but it should be encouraging watching the income snowball over time.
As for this week, I will start with my weekly financial update and then discuss the concept of Safe Withdrawal Rate (SWR) and look at how short-term goal setting can help one stay on track for the long-term goal; financial independence.
Premium Bonds: £9,150 (no change from last week).
Stocks and Shares ISA: £7,068.36 (up £177.61 from last week).
Credit Card Debt: nil (no change from last week).
Loan Debt: £3,855.95 (up £5.95 from last week due to initial interest).
F**k It Fund: £1,000 (no change from last week).
I am removing the tech fund and surplus cash from the equation, as those figures will eventually be spent and not invested. This is still a new blog and I may make changes like this going forward.
Total Wealth Figure: £190,719.36 (total assets including property now valued at £173,501 according to my lender) minus £138,774.78 (total debts including mortgage) equals £51,944.58 (up £772.66 from last week).
Safe Withdrawal Rate
The SWR is a rule, or guideline, as to how much of your investment you can withdraw each year whilst making sure you do not run out of money in retirement. There is much debate about what SWR is correct and it will vary according to your age, expected remaining life, inflation and the economy in general. I have heard figures ranging from 3% to as much as 8% from different authors and experts.
The SWR assumes that in retirement you will draw down a percentage of your investments to live off. The remaining investment should continue to compound and if you get the SWR right, you should have enough money to live off for the remainder of your retirement.
Although the SWR is an interesting way to conceptualise how one will fund retirement, I think it’s looking at the issue backwards. The SWR assumes that you will be selling the assets you have and then using the cash received to fund retirement. Once the asset is gone, you can’t get it back. Once the cash is spent, it’s also gone. Operating from a passive income perspective assumes that the assets will remain in place indefinitely and the income they generate will fund retirement instead. There is, however, something to be taken from SWR and applied to my own situation. When I do achieve F.I.R.E., I will want to continue investing in some form. I don’t want my assets to simply stand still. I want them to continue to grow so that my position improves over time instead of just treading water. By factoring in continued investment once I have obtained financial independence, this helps to safeguard against a stock market crash. When the next crash comes, and it will come, if I continue to buy stock, I will be buying it at a lower price and getting more bang for my buck.
My interpretation of the SWR will be somewhat different as a result. Instead of asking myself “how much do I need to sell to maintain my standard of living?”, I will be asking “how much of my passive income is it wise to spend?”
Once I achieve F.I.R.E., I am thinking that the property income will be the backbone of my regular income and the income from stocks will supplement the rental income. I may not need to spend the dividend income from stocks, and so that money would be reinvested.
There may be a time at which my total wealth is large enough that it hits critical mass. What I mean by critical mass, is the point at which the investments are compounding at such a rate, it is possible for me to safely sell some assets and still have my investments intact. However, if I was to sell stock in the future, I think it would only be for reinvesting that money in another asset such as property. Selling off assets to live off the proceeds feels a little too much like killing the goose (the investments) that produce golden eggs (the passive income). If you have only invested in assets that produce capital growth, then you will not have much, if any, income from them. This is one reason why I prefer income generating assets over capital growth. There are some exceptions to this.
Within my Stocks and Shares ISA there are several funds I invest in, such as the Vanguard FTSE100 Index and US Equity Index. My holdings are of the Accumulation class. This means that profit earned through the fund is reinvested to increase the value of the units owned within the fund. No income is produced as such. Once I get to a certain age, I will transfer those Accumulation units into Income units which means my holding within the fund will produce an income. I could, in theory, continue with Accumulation units and then sell them off bit by bit in retirement and follow SWR guidelines, but that just seems so counter intuitive. I think it would be better to transfer those Accumulation units into Income units and live off the income generated.
In addition to the value generated through those types of funds, I do invest in a selection of individual stocks that have an established record of dividends. As per the rules I posted last week, any dividend income received over the next few years will be reinvested. However, once I achieve financial independence, I may choose to keep half the dividend income to spend and then reinvest the rest. The balance I achieve at this point will be by personal equivalent of the SWR.
Goal #1: My goal for the first six months of 2020 is to save another £5,700 towards my BTL deposit.
The first goal is to get that first BTL. It will be a huge psychological boost to have that first property bought and let out. Once I see that rental income coming in, this whole journey will feel like it’s underway. Now, I feel like I’m in the queue waiting to drop my bags off at the airport. Once I have that first property let out, it will feel like I’m hurtling down the runway. To get the first BTL, I need to finish saving my deposit. So, my first goal is to gather £14,850 – my share of the money needed to fund the deposit, legal, tax and refurb costs associated with buying a property to let out. My JV partner will be contributing an equal amount. I need my share by the end of May’20, giving me six months to accumulate £5,700. I’m currently saving a minimum of £400 per month towards the deposit, although this month I saved £500. Even at £500 per month, I would still be £2,700 short. However, I will receive £1,800 in December as well as a bonus in March’20.
Assuming a worst-case scenario and I only save £400 per month for the next six months, I will be £3,300 short. The £1,800 received next month reduces that deficit to £1,500. Typically, I would expect my bonus to raise my salary by around £1,000 net for that month. So, the deficit is roughly £500.
Goal #2: My goal for 2020 is to receive at least £2,000 in passive income.
Passive income is the name of the game. Ultimately, I am aiming to receive £12,000 per year in passive income. My goal for 2020 is more modest. Based on my calculations for anticipated rental income from the first BTL, for the latter half of 2020, and considering projected dividend income it is not unreasonable to aim for £2,000 in passive income in 2020.
As we are only a couple of weeks away from the election, next week I will discuss how the new government could impact my plans. I will also look at some contingencies I have in mind if BTL becomes a non-starter. So, check back next Friday for part six of Mortgage Advisor on F.I.R.E.
Thanks for reading, and if you have any questions, comments or feedback, I would love to hear from you in the comments section.
Greetings all and thank you for returning for part four of Mortgage Advisor on F.I.R.E. I'm still in pain but have reduced the number of painkillers I am taking. My ankles are both in a bad way. My right foot hurts when the ankle moves in certain directions, mostly twisting motions. The left Achilles tendon is sore generally.
I’m in between a rock and a hard place because I need to lose weight to put less strain on my joints, but I gained weight when my shoulders were operated on and I stopped exercising. Diet is the key to everything, and I really need to be more disciplined with what I eat. The problem is, being side-lined once more through ill health has made me feel down and when I feel down, I comfort eat. It’s a frustrating cycle.
I have an MRI booked in for 29/11/2019. This will be my eleventh MRI which should mean the one after is free.
Premium Bonds: £9,150 (up £500 from last week).
Stocks and Shares ISA: £6,890.75 (down £21.64 from last week).
Credit Card Debt: nil (down £3,899.99 from last week).
Loan Debt: £3,850 (up £3,850 from last week).
F**k It Fund: £1,000 (up £149.04 from last week).
Surplus Cash: £400 (up £105 from last week).
Tech Fund: £50 (up £50 from last week).
Total Wealth Figure:* £51,221.92 (up £832.39 from last week)
*(total assets including residence valued at £172,500) £189,990.75 minus (total debts including mortgage) £138,768.83 equals £51,221.92.
As you will have noticed I have taken out a loan to pay off my credit card. This was something I had been thinking about for a few weeks. My decision was forced when I realised that much of the credit card balance was now being charged interest and the APR was more than double what I could get on the loan. The loan is not going to be a long-term debt. I fully intend to have it cleared by the end of Q2 2020. I have £1,800 coming in December, as well as a bonus in March. Between those two lump sums and some overpayments, I should have the debt cleared by April/May time. It’s unfortunate, from a financial point of view, that I’ve started to automate my finances just as we approach Christmas. I will be spending a week in Romania with my girlfriend’s family just before Christmas and need to allow a little extra spending money than normal for the trip. Once Christmas and New Year are out of the way, I can start to concentrate on building passive income in 2020.
I am still working to a timeline that will see the first BTL being completed by mid-2020. We cannot move faster because the deposit money for my JV partner is tied up in investments until mid-2020. We can start searching for properties ahead of time, and I think we will probably start looking around Easter 2020. By the end of 2020/early 2021 we should have our second BTL and depending on house values I may have enough equity at that point to release funds from my main residence to fund the deposit on a third BTL with my girlfriend. It really does look positive.
This is a four-year plan and I’ve stated before that the best advice for building wealth is to “pay yourself first” and, as much as possible, make the process of building wealth as automatic as possible. To that end, I thought it would be a good idea to get down some ground rules for how my investment strategy will look in 2020.
Rule 1: Save a minimum of £400 each month in Premium Bonds.
The deposits for the BTLs are the base on which this whole endeavour is built. There are several places I could store those funds but with interest rates generally being low, I still prefer keeping the money in Premium Bonds. The funds are not being kept long enough to be eroded by inflation to any significant degree, but I may need access to them at short notice which rules out a longer, fixed-term savings account. There may be some savings accounts out there that will offer 1%-2% more than the accounts I have researched, but then there is the time and effort involved in researching and setting up those accounts, and then moving the money around. For the sake of a few pounds, I feel more comfortable keeping the deposit money in Premium Bonds and having the small chance of a significant win. My return on Premium Bonds has been pretty good with prizes in fifteen of the last eighteen months.
Rule 2a: Invest a minimum of £250 each month into my Stocks and Shares ISA.
Rule 2b: Reinvest all dividend income from the ISA.
Rule 2c: Absolutely no withdrawals allowed from the ISA.
The second part of my plan for long-term wealth is my Stocks and Shares ISA. This is a separate project to the property investment and is aimed more at looking after my financial interests in the 15-20-year time frame. Some of my holdings are already providing a modest income that will only grow over time, but this ISA is very much a long-term work in progress.
Rule 3: Save a minimum of £100 each month in my F**k It Fund.
I have another pot of money that I call my F**k It fund, which is self-explanatory. It’s a pot of money that is there for if/when I decide “f**k it”. It’s also an emergency fund and I will continue to grow this pot little by little until I have enough money to live comfortably for at least three months, and a little less comfortably for another month or two after that.
Rule 4: Save a minimum of £30 each month in my Tech Fund.
My MacBook gave up the ghost a few weeks ago and now all my writing is done through my girlfriend’s laptop or through my phone. I will need a new laptop at some point, but I will not go into debt for it. Instead, I have started a small “tech fund” to save for my next laptop and then my next smartphone. My current iPhone was bought for cash in July’17 in New York as it was significantly cheaper than buying in the UK. This is probably the longest I have had a smartphone and I hope to get at least another two years out of it. The phone still holds a charge, has no cracks and performs like it did out of the box. No need to replace it just yet, but the time will come.
Rule 5: If I use my credit card, pay it off immediately.
Although I have paid my credit card off, I like the fact it earns airmiles. I will continue to use the card for spending on the condition that I pay the card off as soon as I spend on it. I have maintained this habit for the last few days and I hope that writing here about this will help keep me honest.
I had some feedback last week that I did not explain in enough detail why I prefer Index Trackers to funds that are actively managed. I will attempt to explain in a little more detail why I prefer Index Trackers.
No doubt there are plenty of honest fund managers out there who act with integrity and diligence. However, even the most trustworthy and dedicated fund managers are at the mercy of their own mind. I heard a phrase recently which I have modified slightly: the brain cannot guard against itself.
The point I am driving at, is that people generally do not like to lose. When they lose, they tend to try and reclaim those losses. The concept of chasing losses is what the whole gambling industry is based upon. Stocks and funds can go up and down and if a fund was having a particularly bad time of it, an active fund manager may be tempted (consciously or not) to try and chase those losses by making riskier and less well researched trades. This rarely ends well for the fund, the fund manager or the investors.
If you take a bit of time to research investment funds you will see a mixture of research that shows active funds can outperform tracker funds. This is true; active funds can outperform tracker funds, but this is the exception and not the rule. Many reports that claim this will, one way or another, be trying to sell you a fund and the research will cherry-pick those funds that are performing well.
Several (audio)books I have read or listened to have reported that it is not unusual for fund managers to have several funds on the go at once, and that they quietly close down the funds that are not performing well so that they can concentrate on the funds that are performing well. Then, once they have just the top-performing funds in place they can claim that their actively managed funds outperform index trackers.
The practices I have mentioned above are frustrating, but churn is something that is illegal and that there are some brokers and managers out there that do this makes me very angry.
Churn is where a broker or fund manager excessively trades to earn more in commission. Most brokers earn money on every trade they make for a client and this comes out of the money the client invested. The conflict of interest here is obvious; it is in the interest of the broker to trade as often as possible.
There is another way for fund managers to act with integrity and Guy Spier talks about this in his book The Education of a Value Investor when he refers to how Warren Buffett would charge fees. I forget the exact figures, but the principle was the epitome of honest, ethical fund management. The fund manager would only take a fee if the fund achieved at least 6% (I think it was) growth. Anything above 6%, the fund manager would charge a percentage against the surplus growth. In short, the fund manager only gets paid if the fund performs well.
Churn is something that can have catastrophic consequences for investors. Here is an example to illustrate, which draws on all the typical human psychology.
You invest £10,000 with a stockbroker and give them discretion to trade on your behalf. The broker charges 0.5% for each trade and then there is Stamp Duty at 0.5%. On the first trade, you are charged £50 in broker fees and £50 Stamp Duty.
The broker buys 19,800 shares of Company A at 50p per share for £9,900. The stock then immediately drops to 47p per share. The holding is now worth £9,306. The broker decides to trade again. The shares in Company A are sold at 47p but the broker takes a further 0.5% (£46.53). The investor now has £9,259.47 from an initial £10,000 investment.
The broker explains to the naïve investor that Company B is a sound investment. The broker places a trade for 7,000 shares in Company B at 130p per share (share prices are always in pence). 7,000 shares at 130p is a trade of £9,100 in addition to Stamp Duty of £45.5 and broker fees of £45.5. The investor has £68.47 of residual cash.
The shares in Company B drop to 120p per share and the broker sells them and explains to the investor that this was necessary to “cut losses”. 7,000 shares are sold at 120p per share, resulting in £8,400 being recouped. Once the broker takes his fee of £42, the investor is left with £8,426.47 with the residual cash included. After just four trades, the investor has lost over £1,500 (more than 15%) of their investment.
This is a very basic example and you might be thinking, “but what if the share price goes up?” Have a look at any stock and you will see that the buy price is normally higher than the sell price. So, whenever you buy a stock you immediately lose value. Take Apple for example, I’m looking at the live prices now and the buy price is $262.85, and the sell price is $262.22. Once you factor in commission, fees and tax you immediately lose value when you buy shares. Brokers that are engaging in churn will not care if your stock goes up or down as either is an excuse to sell. “Hey, your stock in Company A is up 10% and so I sold to lock in your profit!” and “Company A is trading 7% down so I sold to cut your losses.”
The previous few paragraphs contain value for novice or naïve investors. Trading stock is risky if you go into it with no education. Although there are some out there that claim to make money day trading, I am sceptical of anyone who claims to make serious money this way. The only way I think you can make money by high frequency trading is with huge sums of money where tiny changes in the stock price result in significant return.
A basic index tracker would be something like a FTSE100 tracker. This fund would have shares in all FTSE100 companies and so the value of the fund would mirror the collective performance of the FTSE100. There is limited trading within the fund, and this would only happen as and when a business is relegated from the FTSE100 and another business is promoted to take its place. These are generally more passive in nature with lower fees and because the human element is removed there is no risk of losses being chased or of churn.
It’s been a detailed post this week, but I enjoy discussing all things money and investment related. If you have any suggestions for topics you would like me to cover, please leave a comment. If you are enjoying this blog, please recommend it to a friend. Finally, if it’s not too much trouble, please follow Now We Live on Facebook, Twitter and Instagram.
Thanks for reading and enjoy your weekend.
The short version of the story is that I’m still in pain. My ankle/foot is still hurting a lot but the tramadol is taking the edge off and leaving me pretty spaced out. I’ve seen a consultant who thinks I could have a stress fracture or possibly something called Complex Regional Pain Syndrome (CRPS). The consultant did go to great lengths to explain that CRPS is rare and that it is diagnosed through a process of eliminating other diagnoses first. If it is CRPS I could be left in pain for months and as there is no known cure, the treatment is a case of pain management. I really hope it is not CRPS.
I don’t like being trapped inside due to health problems. Since the 5th of November I have been outside of my apartment four times. Each time was to visit hospital. I would love to head out and chill in a café or bar for a little while, but the pain is simply too intense. So here I am, curled up on the sofa dictating this blog whilst watching the rain hammer down outside. I do enjoy the sound of rain though. Water generally produces relaxing sounds, apart from the roar of a tsunami.
So, here we are: Part three of Mortgage Advisor on F.I.R.E. I am going to discuss a few things in this update. I will have a closer look at some of the best books I have read on financial independence and investing. I will post links to those books on Amazon and if you are interested in buying them, clicking the links embedded in this article and buying them this way will help support the running costs of this website. I will also have a brief look at BTL mortgage affordability, and Stocks and Shares ISAs. First things first though, I will look at my weekly financial update.
Premium Bonds: £8,650 (no change from last week).
Stocks and Shares ISA: £6,912.39 (up £31.19 from last week).
Credit Card Debt: £3,899.99 (down £37.24 from last week).
F**k It Fund: £850.96 (no change from last week).
Surplus Cash: £295.00 (down £5 from last week).
Total Wealth Figure: £189,208.35 (property valued at £172,500) - £138,818.82 = £50,389.53 (up £486.53 from last week).
Not a bad week overall. Some weeks will see very little change but the week when I get paid will see more change as I move money into investments and pay larger sums off my credit card and mortgage debt.
If you are just starting your journey of financial education, then the best book I can recommend to start with is Rich Dad, Poor Dad by Robert Kiyosaki. There is limited practical information in this book, but it will change your mindset for the better. It will make you think about money in a completely different way. Most people think of money as a taboo subject. In many households money is seen as a source of stress and some google-fu will demonstrate that financial issues are one of the main reasons couples split. There are two aspects to this; the first is that people do not talk about money enough. The second aspect is that people are generally not financially educated enough to talk about money in an informed way. Rich Dad, Poor Dad will put you on the right path but it is only the start of the journey.
Another book I would thoroughly recommend to advance your journey would be Money by Rob Moore. This book looks at the concept of money in a bit more detail. Again, it's a bit thin on the ground in terms of practical advice but the book will keep you thinking in the right way about money. Rob Moore made his fortune in property and so the book is coming at you from that viewpoint. To balance things up a little I would then suggest reading How To Own The World by Andrew Craig. This is a fascinating book that will help explain how stocks and shares ISAs work. It also looks in more detail at the mechanical, automatic way in which wealth can accumulate if you set up the right systems and processes. Another book looking at this is I Will Teach You To Be Rich by Ramit Sethi, although this is focused on the US many of the lessons can be applied to the UK as well.
If you find books like those mentioned a chore where you feel you are being lectured to, then I would recommend The Latte Factor by David Bach and John David Mann. I have just finished listening to the audiobook. At my level of financial education, it was a very basic listen. However, it approached the subject matter in an interesting way. On the surface, The Latte Factor is a work of fiction. However, through the events described there are several financial lessons learned. The Richest Man in Babylon by George S. Clason uses a similar method to teach financial wisdom. If you are interested in any of these books, please use the links in this article to purchase them from Amazon and help support the running costs of this blog and Now We Live.
BTL Mortgage Affordability and Eligibility
The eligibility criteria for the BTL mortgage are different for an owner-occupier mortgage. When you buy a property to live in yourself, you generally need to satisfy three things; affordability, credit worthiness and the property needs to be suitable for mortgage purposes. It does not matter if you are a first time buyer, a homemover or raising money on a property you live in and own outright. The three pillars of mortgage eligibility are the same; you need to be able to afford the mortgage payments. You need to have a good credit record. The property needs to be adequate security i.e. it can't be a wreck that is about to collapse and it needs to be in a habitable condition.
BTL criteria is somewhat different and these criteria are generally correct across the market although some of the specifics for the criteria differ between individual lenders.
Although I am looking at BTL properties being the foundation of my financial independence, I am a qualified mortgage advisor and have taken years to educate myself financially. If you are thinking of taking on a BTL mortgage, I strongly advise you to seek advice from a qualified professional who can look at your specific circumstances and tailor advice accordingly. I take no responsibility for your own actions.
Using the above criteria, if you are earning enough money and have a deposit saved, it can be quite easy to obtain a BTL. The biggest barrier myself and my JV partner will encounter is when we get three BTL we may be considered portfolio landlords. At this point, some lenders get a little more cautious about offering further BTL mortgages. However, a lot could change in the year or two it will take us to obtain that many BTL mortgages. Once you are a portfolio landlord, you generally need to approach more specialist lenders to obtain new BTL mortgages.
There are costs associated with BTL that many amateurs do not consider when buying their first rental property. As of 14/11/2019, Stamp Duty Land Tax is payable on all BTL regardless of purchase price. If you are buying a rental property for less than £125,000 then you pay 3%. This is one of the reasons why many landlords accumulate properties in the £70K-£100K bracket. There are costs to bring the property up to the safety specs needed to rent it out, as well as agent and management fees. If you do not educate yourself first, you will almost certainly lose money on a BTL.
What I like about BTL is that the income is regular, and the underlying asset is stable. Over time, property prices increase. This is demonstrable over decades, if not centuries. There are risks with BTL such as a tenant not paying on time or simply refusing to pay altogether. However, there are steps you can take to mitigate this risk such as enhanced tenant screening, using guarantors or even insurance against tenants not paying rent. Although BTL is at the foundation of my plan for F.I.R.E., there is another important part; my stocks and shares ISA.
What is a Stocks and Shares ISA?
A stocks and shares ISA, sometimes known as an investment ISA, is a tax efficient way to invest in individual stocks or investment funds. There are many share dealing accounts out there but not all of them have ISA status. A basic share dealing account will allow you to buy and sell shares. Each account provider will charge fees in one way or another. Some have a flat fee per trade, whilst others allow a certain number of free trades per month before you are charged. In a stocks and shares ISA, these charges are still applicable. The main advantage to a stocks and shares ISA is that you are exempt from Capital Gains Tax on any profit made. If you are looking for long term capital growth, then you need to protect your gains within the ISA bubble.
Within the ISA you can choose to invest in a vast range of funds or individual stocks. There have been countless books written on how to pick funds or stocks, but the best advice I have received is to make the process as "hands-off" as possible.
There are many types of investment fund and there are several ways to categorize them. You can look at accumulation or income funds, or actively managed funds or passively managed funds. There is a lot of information to take in. However, as I stated a few sentences ago, my research suggests that the key to long term growth and wealth is to make the process as passive as possible.
Before I go into further detail, it is perhaps important to first explain what a fund is. An investment fund is where a group of people put their money into a pot. That collective pot is then used to purchase shares in other stocks or funds. You then see your money increase or decrease in line with the assets the fund has invested in. This is, obviously, a very basic definition and entire books are written on the subject. What I have found is that much of the complexity is unnecessary. My approach is to invest in passive index trackers.
These funds are not actively managed and as a result, have much lower fees and charges. I invest in funds that track the FTSE 100, FTSE 250 as well as a US Equity Index tracker from Vanguard (my preferred fund manager). Like with property, the stock market increases over time. There are peaks and troughs and some of those troughs are major, but over time the stock market has always bounced back and it tends to outpace inflation.
Over the last century or so, the stock market has shown average year-on-year growth of 8%-10%. I am investing £250 per month at the moment into my stocks and shares ISA. Assuming an 8% rate of growth, in ten years time my stocks and shares ISA could be worth £60,000. At a rate of 10%, we would be looking at almost £70,000. Over twenty years, at a growth rate of 8%, the fund would be worth £180,000. If you google a compound interest calculator and play with some figures, you will see just how scary compound interest can be.
A couple of examples:
Compound returns are so, so powerful.
You might be thinking of my own figures "£180,000 is not a lot of money to live off." You're correct. It is not. The point here is that the ISA is just one part of how I plan to create enough wealth to retire early. I will have the properties generating income on a monthly basis as well as the capital growth that comes with property. The ISA is a different animal.
In addition to the different funds I invest in, I also have holdings in individual stocks. These stocks pay dividends either two or four times a year. At present, I reinvest my dividends to increase my holding in those stocks. However, as I get to retirement I may look at splitting the dividends so I use some of them to live off and reinvest some of them. It is a similar principle with the investment funds. I mentioned earlier that there are accumulation and income funds. An accumulation fund is concerned with accumulating more value, which means gains in the fund are thrown back into the fund to increase the overall value. Income funds take the income generated by the fund and pay it out as dividends to those who own shares of the fund. Most of the major funds will allow you to switch from accumulation to income, so that when you are ready to live off your investments you move from the accumulation phase to the income phase. There is a part of this puzzle I have not yet discussed, which is the concept of Safe Withdrawal Rates. I will cover this in next week’s blog. For now, thanks for reading.
I've had a strange week since posting the first instalment on my blog. I had typed up the bulk of the second instalment the day after posting the first part with the intention of just adding a few bits towards the end of the week, such as an update on my financial position and what I decided to do with my credit card. Something got in the way though, and I'm currently talking into my phone through speech-to-text to get this update saved on the cloud, so that Darren Scothern (Chief Editor of Now We Live) can edit it and post the blog for me.
I've been suffering with Achilles Tendonitis in my left foot for a few weeks and I've been having physio for it. I did some exercises on Monday night and felt fine. In the early hours of Tuesday morning I woke up in a lot of pain, but this time from my right ankle. It was agony to even have the duvet resting on the foot. The slightest movement was extremely painful, and I could not put any weight on that side. So, I went to the Minor Injuries unit, but they could not help. I returned home and proceeded to get worse as the day went on. At around 4am on Wednesday morning I was desperate. I was in the most pain I could ever remember experiencing and I've had torn muscles, strained ligaments, and an assortment of other injuries. This has been the worst pain I've experienced.
I arrived at Accident and Emergency at around 6am Wednesday morning and saw the triage nurse quite quickly. I was wearing some tracksuit bottoms, a simple t-shirt and sweater. It was cool in the A&E waiting area with the big doors to the outside opening frequently and blasting cold air inside, but I was sweating. I took my jumper off and my t-shirt was soaked. I felt a little faint and asked my girlfriend to get me some water. I took a few sips and started feeling worse. The pain was so bad I could not think straight. I felt the blood drain from my head and face. My girlfriend and the medical staff later told me I turned grey. I told my girlfriend something, I can't remember what exactly. I felt like I was slipping away, like an out of body experience or something. I have a heart condition that is being managed with medication, and I remember thinking, just for a split second, this is it, my heart has given out and I'm going into shock. Then everything went dark.
I opened my eyes and I was on the floor of the A&E department with a group of medical staff around me. They lifted me on to a bed and wheeled me through to a ward. I was in and out of it at this stage. I was put through a series of tests on my heart and eventually was given morphine for the pain. I left hospital after 6pm with a support boot for my foot, my crutches and some stronger painkillers. But no diagnosis. I have an appointment next Wednesday with a private specialist.
It's been a freaky few days. I'm still in a lot of pain but it's not as severe as it was yesterday*. I can't stand without support. I'm using crutches to get around the apartment. I never knew that the ankle could cause this much pain. It's difficult to describe just how bad it is. It's like a white, blinding flash of pain starting in the ankle and surging through my body like an electric charge. Yesterday, had they offered amputation with the promise the pain would go, I would have taken it and thanked them.
On that somewhat depressing note, here is the second instalment of Mortgage Advisor on F.I.R.E.
David Scothern: 07/11/19 (edited by Darren Scothern, 08/11/19).
*after having this checked over by Darren, my pain got so bad that I considered calling an ambulance. In the end, I had a telephone call from a doctor who told me to increase my painkiller dosage. Before going to bed last night I took eight pills: 2 x codeine, 2 x nefopam, 2 x paracetamol and 2 x amitriptyline. It seemed to work, although I am not promoting this course of action. If you’re in pain, please seek medical attention and do not self-medicate.
My Financial Education
I grew up in a working-class household where financial education was not "a thing". My parents were very young when I was born and whilst I could not have asked for more loving or supportive parents, they were basically still children when they had me. It would have been unreasonable to expect them to impart financial wisdom on me. What I learned about money, initially, I learned from them. What they learned, they learned from their parents. And so on.
I remember sitting at home when I was a teenager one evening. I was maybe 18, or 19. For some reason, I was thinking about interest. The idea that money could create money was fascinating to me. Even at this age, despite not knowing the terms passive income, compound interest, or what things like asset allocation meant, I knew that if I wanted to be wealthy my money would have to work for me. I remember crunching numbers and working out how much I would need to have saved in an ISA to earn £1,000 per year in interest. The number seemed so far off at the time. Without a solid financial education, it was.
I started dabbling in share dealing a few years ago but most of my trades were ill informed. I won some. I lost more. I was learning about money, but slowly and without direction. It was a chance discussion with a friend and coworker that turned my groping around in the dark into a laser-like focus.
My friend, who is as frustrated and unfulfilled with working a J.O.B. as I am, told me about a book he was reading by an author who was a financial guru of sorts. The tag line of the book was that your home is not an asset, and instead it is actually a liability. I was intrigued. Some of you will know who I am talking about, and specifically which book I am referring to. It is Rich Dad, Poor Dad by Robert Kiyosaki. I signed up to an Audible account and started listening. The book changed my life. That is not hyperbole. The book...
Robert Kiyosaki discussed things I had known on some level, but not well enough to put them into words. After I finished Rich Dad, Poor Dad, I bought another book by Robert Kiyosaki, Cash Flow Quadrant. I finished that book quickly and purchased another by him; Guide to Investing. I was enthralled. Over the course of 2018 I finished several books on finance and investing, with a few other personal development books thrown in, and I kept a list of what I had read or listened to. Here is the list:
Rich Dad, Poor Dad by Robert Kiyosaki
Rich Dad, Poor Dad: Cash Flow Quadrant by Robert Kiyosaki
Rich Dad, Poor Dad: Guide to Investing by Robert Kiyosaki
Shares Made Simple by Rodney Hobson
Seven Habits of Highly Effective People by Stephen Covey
Money by Rob Moore
Think and Grow Rich by Napoleon Hill
FU Money by Dan Lok
Deep Work by Cal Newport
Start Now, Get Perfect Later by Rob Moore
The Five Rules for Successful Stock Investing by Pat Dorsey
Start With Why by Simon Sinek
I also read a fair amount of fiction, history and politics books. On a side note, Audible is an absolutely amazing service. I struggle to read physical books for long periods as I suffer from cluster headaches and migraines. I also have floaters in my vision that make reading frustrating for me as I see black spots all across the page. So, Audible allows me to listen and learn in a relaxed frame of mind. In 2018 I completed 33 books. As of November 4th, 2019, I have finished 79 books on a range of topics. As you have probably guessed there are quite a few finance and personal development books in there:
The Daily Stoic by Ryan Holiday
Property Investing Secrets by Mark Homer and Rob Moore
Multiple Streams of Property Income by Mark Homer and Rob Moore
Life Leverage by Rob Moore
No Money Down Property Investing by Kevin McDonnell
Meditations by Marcus Aurelius
How to Own the World by Andrew Craig
Fake by Robert Kiyosaki
The Naked Trader by Robbie Burns
Trading in the Zone by Mark Douglas
The Complete Turtle Trader by Michael Covel
Financial Freedom by Grant Sabatier
Trend Commandments by Michael Covel
I Will Teach You To Be Rich by Ramit Sethi
100 Side Hustles by Chris Guillebeau
Reset by David Sawyer
The Simple Path to Wealth by JL Collins
The Millionaire Next Door by Thomas J. Stanley and William D. Danko.
Your Money or Your Life by Vicki Robin
High Performance Habits by Brendon Burchard
The Complete No Nonsense Guide to Property Investing by David Tarn
Man's Search For Meaning by Viktor E. Frankl
The 4-Hour Work Week by Timothy Ferriss
The Richest Man in Babylon by George S. Clason
Secrets of the Millionaire Mind by T. Harv Eker.
And again, quite a bit of fiction. I have found that many of the best lessons I have learned about investing are the simple ones. There are no complicated systems or "hacks" for becoming wealthy. It is simple. The difficult part is that it requires persistence, discipline and an ability to think in the long-term. This is where the study of stoicism has helped me. It has helped me realise that I cannot control the external, but instead can only control the internal. Viktor Frankl's Man's Search for Meaning is a moving and powerful book. It is an account of Viktor Frankl's experiences in the Nazi Concentration Camps in the Second World War. Even if you have no interest in financial independence, this book should be read by everyone. Many of Frankl's observations can be applied to many walks of life and his work is similar to the Stoic philosophy in many ways.
Stoicism helped me by focusing my thoughts on the long term and understanding that I can only control my thoughts and my behaviours. So how does this relate to financial freedom? Well, I cannot get from my current position to wealthy overnight. If I try to get rich as quick as I can, then I will probably fall flat on my face. Instead of working on the end result, I need to work on the process. The process is internal and under my control. The end result is not. As I have read in a number of sources, the process of making money should be systematic, mechanical and the money should do the work through compounding. I do not work for my money, my money should work for me. I set up the correct process, and the money is created for me.
The Buy-to-Let Process
I discussed in my previous blog how I would potentially have £100 per month coming in from my first BTL after costs and splitting the rent with my JV partner. Compounding is where the process picks up from.
When I will receive the rent from this future BTL, I will still be earning money from my J.O.B. So, in addition to the £400 per month I save in Premium Bonds now, I will have the money freed up from paying off my credit card and the rental income from the first BTL. In total, at this point, I should be saving in the region of £700 per month. Assuming I want to get to £14,850 saved (the amount I needed for the first BTL) it would take approximately 20 months to save this amount. However, there are a couple of secret weapons. There is my own residence and my first BTL.
Additional Borrowing on a Mortgage
As time goes by, the debt owed on my main residence will reduce. Also, I live in an up and coming area of Sheffield that was voted the best place to live in the whole of the UK (Google Kelham Island). As my mortgage debt comes down, I will have enough equity in my property (the difference between your mortgage debt and the value of the property) to complete additional borrowing and put that towards the deposit. The plan is to release £10,000 this way. I will use £5,000 to fund my second BTL. The other £5,000 will be for my girlfriend to invest. Assuming I need £14,850 and I already have £5,000 from my residence, I only need £9,850. I also have the initial BTL.
When I was working out the cost of the first BTL, I included £3,000 for refurb costs. The idea is that we buy a property that needs some work. Not a complete refurb but a few quick hits that can improve the valuation. Once we have owned the BTL for six months we will be able to look at either additional borrowing or a remortgage to another lender to release the equity from the increased valuation. Switching to another lender would probably be more difficult and costly as it would require us to have taken an initial mortgage with no early repayment charges. Although there are some around, I suspect we will probably go with a fixed rate with a lender we know and trust. So, a further advance with the existing lender to take some of our money back out of the deal. It would work like this:
I understand that the process requires a lot of research and with one exception there are no guarantees. From over a century of records; property prices increase over time. This is as close to a guarantee as you can get. There are peaks and troughs throughout, but, properties will only increase in value over time. Because the interest only debt is stagnant the gap between the debt and value will only increase in the longer term which potentially allows you to return to the well several times. Each BTL becomes a plant producing seeds that will turn into other plants. Exponential growth is the name of the game.
Once we have two BTL earning rental income, instead of saving £700 per month towards the third property I will be saving £800 or more. Then, I have three properties which can be used to release more equity; the two BTL and my own residence.
A rough timeline...
Mid-2020: One BTL
End of 2020/Early 2021: Two BTL
End of 2021: Three BTL
Mid 2022: Four BTL
End of 2022: Five BTL
End of 2023: Six or more BTL.
The beauty of this plan is that the release of equity from each property already owned can be combined so that two or more properties can be "working" together to produce the deposit for one more BTL. Once you get to the point where you have ten or more BTL working for you, the speed at which property portfolios can grow is astonishing. It seems like it is too good to be true, but I personally know people that have done this; people I have met personally and professionally. It can be done. It will be done.
Financial Update (read to my girlfriend who typed it up for me and compared to last week).
Premium Bonds: £8,650 (up £400 from last week).
Stocks and Shares ISA: £6881.20 (up £362.20 from last week).
Credit Card debt: £3,937.23 (down £58.42 from last week).
F**k It Fund: £850.96 (up £0.61 from last week).
Surplus Cash (not including cash marked for living expenses): £300
Total Wealth Figure (All Assets minus all Debts): £188,758.76 (including value of my residence) - £138,856.06 (including mortgage) = £49,903.
I've used some of the spare cash I had last week to increase my Premium Bonds and I've kept some cash spare. I'm not wanting to commit yet to a definitive strategy of concentrating on the credit card or building up the deposit fund in my Premium Bonds. I've been using the credit card for day-to-day spending and then round up the payment I make to pay the debt down every couple of days. For now, I think I will keep to this middle-of-the-road approach and see what happens in the new year.
In the next instalment I will talk a little about the other arm of my strategy for long-term wealth; my Stocks and Shares ISA. I will also discuss some of the books I've read in a little more detail and recommend which ones are good to start with if you want to begin your own journey to financial independence.
Thanks for reading,
F.I.R.E. – Financial Independence, Retire Early: My Four-Year Plan for Financial Independence
This modern life of selling time for money does not work for me. I know it may be seen as a “millennial” or “first world problem”, but to draw on a recent quote “to suffer unnecessarily is masochistic rather than heroic.”
I’m not work shy, but I want to be able to do my own work. I want to create something, be that through writing, a website, a business… I just don’t want to be chained to a desk doing something that I find as frustrating as it is unfulfilling.
It's my plan to post once per week around the weekend with an update on my financial position and progress towards my goal. I will also discuss other random financial matters along the way.
So, on to my plan for F.I.R.E.
Financial Independence by 31/12/2023.
What is Financial Independence?
Financial Independence is having enough passive income to meet all your basic needs, preferably with something left over for luxuries and for the enjoyment of life. It is a state where you no longer have to work for money, although you may choose to do so. It's being in a position where you can just say "no" to anything you don't want to do. It's not so much about the money; the money is the tool that carves your freedom. It's a means to an end.
What do I need for Financial Independence?
To cover the absolute basics, I need to account for the following:
Mortgage, Ground Rent & Service Charge - £300 per month.
Utilities - £100 per month.
Council Tax - £60 per month.
Food - £300 per month.
General Spending Money - £200 per month.
Rounded up, I'm looking at £1,000 per month. My somewhat ambitious target assumes that I will want to have a standard of living comparable to what I have now. £1,500 per month, although less than what I take home from my J.O.B., would be enough to ensure a very comfortable standard of living. It will be an even better standard of living if my plan comes to full fruition and I move to a country where the cost of living is lower.
Current Financial State
Premium Bonds - £8,250
Stocks and Shares ISA - £6,519
Cash Savings - £1,650
I did have more, but I’ve just used £14,000 to pay off a loan, meaning my only debt is now a mortgage of £135,236.68, and a credit card with £3,995.65 outstanding.
Each month I contribute £250 in to my Stocks and Shares ISA, and invest a further £400 in Premium Bonds. I also add £100 into what I call my Fuck It fund. This is a pot of money that I’m accumulating to cover basic expenses in the event of an emergency. The target amount is £4,500, or three months comfortable living at £1,500 per month. By the time I’m financially independent this will be a nice safety net to have.
My credit card balance is unusual. It's not normally this high but I've recently booked several flights using the card, and made a large purchase for a family member based outside the UK. I'll be getting some of that money back in December though. When I get that money back (approx. £1,800) I have to decide whether to pay that off the card or invest it. I'll explain later why I have this choice.
My financial state at the moment is healthy, even with the credit card. I have plenty of surplus income and I have a decent amount of cash behind me to cover emergencies. However, the key to F.I.R.E. is not capital, but passive income. I need to generate passive income and I need to do it quickly. The key to passive income is property.
Step 1: Purchase a Buy-to-Let property.
This is going to be a Joint Venture and we are looking at properties in the £80,000-£90,000 bracket. The great thing about property is that you can buy it using Other People's Money. So, instead of getting a return on just your own cash, you can leverage the cash of another person or business. Mortgage lenders are generally quite happy to lend against property as they know they will have a constant flow of interest being paid back, and if the borrower defaults they can just repossess the property. When buying a property to let out, it has to be on an interest only basis. The model does not work otherwise.
Interest Only mortgages are based on the premise that the bank lends you money for a set period of time. You pay interest each month but nothing towards the debt. At the end of the loan term, you pay the debt back in a lump sum. For many people this is a risky strategy, especially when they have an interest only loan on their main residence. For a BTL mortgage though, it is absolutely essential. Most BTL mortgages are set up with a loan-to-value of less than 75%. This means that the loan is for less than 75% of what the property is worth, so on a £100,000 property the mortgage would be for less than £75,000. This is to provide the bank with a buffer in the event of repossession. The other £25,000 comes from the borrower. The borrower is then charged interest on the £75,000 but the borrower gets to earn a return on the whole value of the property i.e. £100,000.
The real genius part of this model comes from inflation and compounding. Over the last thirty years, the average house price in the UK has risen from approx. £60,000 to over £200,000. An average increase of just over 4% a year. A £100,000 property now, based on long-term historical trends, could be worth over £200,000 in twenty years. The interest only balance does not increase with inflation though. So, in twenty years you will owe £75,000 against an asset worth £200,000 and not £100,000. The real value of the £75,000 will be lower as well due to inflation. £75,000 in 1999 has the same spending power as £120,000 now due to inflation. Using compounding and inflation, one can systematically create wealth.
The Cost of the BTL
Total one-off costs of £29,700, of which I would be paying 50%; so £14,850.
I'm using my Premium Bonds as the deposit. With interest rates as low as they are in savings accounts, I see no point in tying up large amounts of cash in bank accounts. With Premium Bonds there is no interest but there is the chance of earning money through the monthly prize draw. Since November 2018, I've won £325 through Premium Bonds with is decent return and almost certainly better than what I would have through a bank account.
We are aiming to have our first BTL by the middle of 2020. I have from November through to May to raise £6,600; the difference between what I have in Premium Bonds now and what I will need for my half of the BTL. In December I will be receiving the £1,800 I referred to earlier in this post. I could use it to pay down my credit card, but that balance will be coming down anyway. I think I will end up using that money to boost my deposit fund for the BTL. Instead of needing £6,600 by May, I would only need £4,800. I'm also expecting a further £800 to drop in to my bank in the next couple of days. If I throw this in to the Premium Bonds then I only need £4,000 by May.
The alternative is to hammer the payments on the credit card so I reduce the balance to zero, and then use a cash advance to make up the shortfall in any deposit funds I need. This is something I need to think about and there is no major rush, as I can always hold on to the cash whilst I decide. Another alternative is to transfer the credit card to a zero percent card and then just set up a regular payment to it to reduce the balance that way, but I'm not too keen on this idea. I have an air miles credit card and a lot of my spending goes on that card to generate the air miles. Another option I have considered is to round up my payments off the card. For example; if I spend £8.37 on lunch on the card, then I pay £10 off it immediately. This, in conjunction with regular payments, should bring the debt down over time as well.
Coming back to the BTL. Once we have the property, and we have an agent managing the property with a tenant in place, we can realistically expect to net £300 per month. We have agreed to keep a percentage of our monthly income to one side to cover expenses such as void periods, damage to the property or difficult tenants. From the first property, I can expect to see £100 per month. Not a huge amount, but it's a start. As we scale up we will see a better rate of return and I will explain how in the next installment of this blog.