Hello and welcome back to Mortgage Advisor on F.I.R.E. I hope you are all having a great time over the Christmas period.
I’m shaking things up a little off the back of reader feedback. For the past few weeks I have followed the same format with sections in order; Weekly Update, Financial Update and then my financial subject of the week followed by Final Notes and a preview of the following week. I am keeping those sections, but I will now introduce my posts with a section called Introduction. I trust I do not need to explain what purpose this section will serve.
This week I will talk a little about my Christmas experience and then have a look at my finances for the week. The financial subject of the week will be a look back over some of the worst financial mistakes I’ve made. This will be difficult for me as it will perhaps be the most I’ve opened about some subjects to the general public.
Christmas this year has been a little underwhelming. I’m not generally a “Christmas person” anyway, but this year has been disappointing even by my own low expectations. The highlights have been spending time with my parents. I saw both my Mom and Dad on Christmas Eve, then had Christmas Day lunch with my Mom and it was the first time since I was a child that I’ve spend Christmas Day with just my Mom. I then saw my Dad on Boxing Day in what has become a little ritual of going for brunch to exchange presents. The company of my family (I class my girlfriend as family) is always the highlight of my Christmas. The second highlight is food. I love food but this year, the food has been a disaster.
On Christmas Day we booked Miller and Carter, as we did last year. It cost £75 per person, which is about the going rate for a full menu including starter, main, dessert and coffee. The food started out ok and just got worse. I had a fillet steak which I ordered medium. I will happily eat steak rare and one of my favourite dishes is steak tartare so I’m not squeamish about raw meat but on Christmas Day morning I was not in a good way. Without going into too much detail, I felt rubbish and had spent an hour in the bathroom before getting ready to go for lunch. The joys of IBS…
I did not feel like having blood on my plate after already seeing blood that morning (I know, gross). So, I ordered my steak medium. I class medium as charred on the outside with pink being the main colour through the middle of the cut. The middle of the steak should have felt some heat from the kitchen, but it should still have colour. There should not be a cube of raw beef that makes up the middle half of the meat. I was not feeling great at all and no staff came to check how our food was. I love a good steak; it’s one of my favourite meals and there are a few restaurants where I’ve had fantastic steaks. In Syracuse, New York, the waiter insisted I cut into the middle of the steak to check it was cooked to my liking when the meal was served. I experienced this on a cruise earlier this year, and in a fantastic steak restaurant in Valletta called Sciacca Grill. For a steak restaurant to not cook your steak anything like how it was ordered is as bad as it gets. The sides to my meal were also tired. The onion loaf looked, and tasted, like scraps from the chippy and the fries were cold and stale. A very disappointing experience. When our plates were cleared, I mentioned to the waitress how poor my food had been and the chunk of raw beef on my plate confirmed my experience. I left with an apology and a voucher for £26.50 – the price of a fillet steak.
Boxing Day was also a bit of a disaster in terms of food. We went to a place called Graze Inn, which we have done the last two years. It’s not the best food but it’s generally ok. The location is the main reason for choosing there as it’s midway between my apartment and my Dad’s house without needing to navigate the city centre. The restaurant has changed since my last visit on Boxing Day 2018, and not for the better. The restaurant is much smaller now and all the tables are close to the bar where the sound of the coffee machine drowns out all conversations. The brunch menu has a dozen or so options with bacon and sausage, a few sweet options and then a vegan option and then a halloumi sandwich. Nothing was grabbing me, so I went for the halloumi sandwich. I left most of it as it was a soggy, tasteless mush. Out of the seven people in our group most of us were disappointed.
All in all, a poor food experience over Christmas.
Premium Bonds: £9,900 (no change from last week).
Stocks and Shares ISA: £7,521.26 (up £112.55 from last week).
Credit Card Debt: nil (down £196.90 from last week).
Loan Debt: £3,800.49 (down £30.77 from last week).
F**k It Fund: £1,075.85 (no change from last week).
Total Wealth Figure: £191,998.11 (total assets including residence valued at £173,501 by my lender) minus £138,397.92 (total debt including residential mortgage) equals £53,600.19 (up £340.22 from last week).
Not a bad week overall. The ISA has increased in value once again following the election a couple of weeks ago. It’s a nice feeling having the credit card back down to zero and I’ll feel even better when I eventually get the loan paid down. That might have to wait a bit longer though as there are things in our apartment that need addressing.
Moving into 2020 it’s just a matter of waiting for funds to come together that will allow me and my JV partner to start searching for properties. We will probably start looking mid-March. It’s expected that we will have our deposit ready by May 1st, but we want to have a property or two in mind at the point we have the cash ready.
Financial Mistakes and Regrets
If I knew at age 18 what I know now, I would probably be a millionaire. I would have snapped property up whilst it was cheap, and I would have invested in stocks as soon as I was able. There is little point dwelling on this, as I’m not able to go back in time. My hope is that my experiences will help other people avoid some of the mistakes I made from turning 18 until I started educating myself about money.
I might be the only person to drop out of the university twice.
I went to University of Leicester in 2003 because everyone else I knew was going to university. I did little to no research and ended up unhappy. I dropped out early in the second year. I was not mentally ready for university at that time. In school and sixth form I had been reasonably popular with a large group of friends, but something changed as sixth form ended. At the time I could not explain it, but I now know it was depression. I was depressed for a long time. I only snapped out of it when I took a job with Norwich Union (now AVIVA). I have a lot of good memories from my time there and I started to come out of my shell again. I made some friends and felt better about myself, and I made the decision to “finish what I started” and go back to university. I did much more research and went to UCLan to study Sport Psychology. For the most part, I had a great time. I met my girlfriend there and missed out on a First in my degree by a narrow margin. I did, however, achieve a First in my dissertation which is my proudest academic achievement. I wrote a report on home advantage and stadium design in English professional football. I had a great tutor who I am still in contact with a decade later. Overall, my time at UCLan was a successful time. Financially though, it was a disaster.
My two stints at university as an undergraduate student have left me with almost £30,000 of student loan debt. Every month I pay £100 back from my salary. I don’t include this loan in my commitments because the payments are taken at source and I’ve mentally compartmentalised that debt. The biggest frustration is that I’m now working with people who never went to university and did not get a degree, yet we are on the same money doing the same job. In net terms, they are £100 per month better off than me. If I had that £100 each month, I would be further along the line to financial independence. Rationally, I know that life doesn’t work that way. I had to have all my life experiences to get to where I am now. But still, university remains my biggest financial regret, not only due to my undergraduate experiences but more my post-graduate experiences.
I have had many bad experiences of trying to complete a master’s degree. I signed up with the Open University, but it quickly became clear that the tutors did not care. When I tried to contact one tutor, they told me that their OU work was not their priority. The following year I was accepted on to a course with another university, but as the course date drew closer, I did not hear anything. I kept contacting them asking for enrolment details and was repeatedly fobbed off. The day before the course start date they informed me they had messed up my enrolment and would not guarantee a place as the course was now full.
The year after that another university mis-sold a course to my girlfriend and me as an Occupational Psychology course, when it was in fact a business course. I then started a masters with the University of Leicester but had problems with some of the tutors who unfairly marked some of my work. I will not get into the details as it’s not that interesting, but I had definitive proof my work had been marked incorrectly. They refused to engage with me regarding the mark, stating that I was not allowed to “question their academic integrity” or words to that effect. I was then mistakenly CCd into an email chain where the staff were bad mouthing me. I quickly exited the course. At this point I was quite bitter but was still determined to get my masters because it felt like unfinished business. I started another MSc with University of Derby but after just a few weeks I ran out of enthusiasm for formal study. I was also not the same person who left UCLan on an academic high. I was older, and in worse physical and mental health. All in, I estimate that my unsuccessful attempts to study for a master’s degree cost me £10,000 on top of what I owe in student loans.
The problem with universities is that they are incentivised to get as many bums in seats as possible and they are not answerable to anyone. If you have an experience like I did at University of Leicester, as a student you are powerless. The cost of education is absurd as well. Tuition fees can now run into the tens of thousands when you then get ten hours of contact with lecturers each week, if you’re lucky. There is also an issue with how university is positioned in our society. Back in the day, you went to university if you were intelligent and wanted to specialise in a specific field. Now, young adults go to university “for the experience” which is a euphemism for drink, drugs and sex. Does one really have to sign up to thousands of pounds of debt for that “experience”?
My advice to any young adult thinking of university is don’t do it. Take some time, a year or two as a minimum. Experience the world of work. Do some reading around different subjects that interest you and then if you decide you want to specialise as a lawyer, doctor, architect or engineer, go and do it. If you want to go to university to get drunk and get laid, it’s not worth getting into that much debt for.
Gambling is my second major financial regret.
I used to gamble on football. A lot. It all started when I was studying at UCLan, and like a lot of compulsive gamblers, it started small and with a win. I won my first football bet and was hooked from that point on. I gambled on and off for over a decade and had some good wins in that time, but the gambling was consuming time, mental energy and more money than I realised.
The human brain and memory cannot be trusted. It’s like the quote from Emo Philips; “I used to think that the brain was the most wonderful organ in my body. Then I realised who was telling me this.”
I’m not going to lecture people about gambling as it’s not the point of this blog. I am going to share my experiences though. Gambling over the internet and in-play gambling, can so easily spiral out of control. The money does not seem as real, and it’s harder to keep track of your spending in this way. I would never walk into a betting shop and hand over hundreds of pounds in a few hours on in-play bets, but I have done that over the internet many times. There is a wealth of research in psychology that shows addicts get their “hit” of feel good chemicals before engaging in the addictive act. Gamblers get their “hit” when they place a bet, and not just when they win. Drug addicts get their initial “hit” when they see their drug, not just when they use it. I know a lot of people who gamble, some of whom have confided in me regarding their inability to control their gambling. I know a few other people who I suspect are addicted but are either in denial or scared to face their addiction. You’ll never know if you’ll become an addict or not. I heard somewhere that total abstinence is easier than half measures. So, a while ago I gave up all gambling. I don’t even take part in raffles because it must be total abstinence. If you allow yourself to take part in a raffle, then what about some informal football bets between friends? Then it becomes easier to progress to a few pounds on an accumulator and from there it spirals out of control.
A few months ago, I spent a few hours going through my historic bank statements to see how much I had spent on gambling. I had a rough idea in my head, and I wanted to see how accurate my estimate was. It was not even close. £5 here and £10 there soon adds up. The second biggest mistake I ever made was placing that first bet.
Gambling is too lightly regulated and too easy to access. You can open an account and gamble thousands of pounds in minutes. It’s scary how easy it is. If you’re tempted to gamble, don’t. If you are just testing the water, stop. It’s just not worth it. If people could make money consistently through gambling, the bookies would have closed long ago.
Gambling addition is a serious issue. Research has shown that gambling addiction results in more suicide attempts than any other addiction. Not only is gambling a financial mistake, it’s a path to mental health problems and possible suicide. It’s just not worth it. The only way to gamble responsibly is to not gamble.
The next part of this blog will be the first entry of 2020. I will be starting the Investment Income Tracker and, as per an earlier part of this blog, I will track how much income my investments and assets generate throughout the year. The aim is for my investments to produce enough income so that I no longer must work. My aim for 2020 is to receive £2,000 in investment income.
Thank you for reading. This post has been a little bit of a departure from the norm, but if you have any questions about this post please get in touch. Now We Live is on Twitter, Facebook and Instagram so feel free to contact me using any of those channels. If you are concerned about your gambling, please contact a support group such as Gamblers Anonymous.
Hello and welcome back to Mortgage Advisor on F.I.R.E. I am writing this in Snagov, a small village in Romania about forty kilometres outside of Bucharest. It’s a quiet little place on the edge of a forest and lake; the perfect place to come and write. Unfortunately, on this visit I have been very busy and playing catch up with sleep after a delay to my flight from the UK. We were scheduled to leave Doncaster airport at 22:15. Just as I was booking an Uber to take us to the airport, I had a message come through saying that our flight was delayed until 01:15 the following morning, but we still had to get to the airport as though the flight was on time to drop our luggage off. This was absurd.
We arrived at the airport and were given vouchers for food and drink as the flight was delayed by more than two hours. Anyone who has flown from Doncaster will know that choices for food are limited between a six-inch or footlong Subway, unless you feel like braving Wetherspoons. Costa have now opened in the departure area so I was able to boost my caffeine levels just at the time I would normally be going to sleep. We asked what time the Subway and Costa were closing and were assured it would be around 1am. It was surprising then, that when we tried to get food at Subway, the staff told us they were not serving anymore sandwiches that evening. Costa showed solidarity with their Sandwich Artist cousins by refusing to serve toasties or paninis warm. We were offered them cold. We refused.
The one silver lining was that we would be due compensation under EU law with the flights being delayed for more than three hours; we eventually left after 01:30. It was a strange flight though. I’ve flown to Bucharest many times over the last few years and it’s normally a three-hour flight minimum. We arrived in two-and-a-half hours. I did some research and it turns out that you only get compensation if your flight is more than three-hours late arriving; not departing. My theory is that the aircraft was ordered to fly faster to get to Bucharest less than three-hours late as it’s cheaper to burn a bit more fuel than it is to pay compensation to a full flight. Although we were more than three-hours late departing, we were only two-hours and thirty-five minutes late arriving. We had to wait an hour for our bags, and then by the time we got to the house and showered it was after 8am in the morning. Like I said, I’ve been catching up on sleep since then.
Premium Bonds: £9,900 (up £400 from last week).
Stocks and Shares ISA: £7,408.71 (up £123.37 from last week).
Credit Card Debt: £196.90 (up £196.90 from last week).
Loan Debt: £3,831.26 (down £24.69 from last week).
F**k It Fund: £1,075.85 (up £75 from last week).
Total Wealth Figure: £191,885.56 (total assets including residence valued at £173,501 by my lender) minus £138,625.59 (total debt including residential mortgage) equals £53,259.97 (up £426.16 from last week).
As you might have noticed, I have credit card debt for the first time in weeks. In part 4 of this blog I set out some ground rules, of which I have broken two. I am not too concerned as there are explanations for both breaches. First, I have credit card debt because I am abroad and had to pay for some dental treatment. This will be paid off on my return to the UK. It is just that the publishing schedule of this blog, and my ability to pay the card off, have not quite lined up. The other rule I broke was that I would invest £100 every month into my F**k It Fund. I only invested £75 this month, but it’s Christmas time and I’m abroad and had to unexpectedly pay for dental treatment; I only have so much money each month. Into 2020 I might have to reign in the commitment to my F**k It Fund, but I guarantee that my credit card debt will return to zero by the next blog in this series.
Day Trading & Trend Trading
Before I discuss these trading types in detail, I think it best to start with a definition of both.
“Day trading is speculation in securities, specifically buying and selling financial instruments within the same trading day, such that all positions are closed before the market closes for the trading day. Traders who trade in this capacity with the motive of profit are therefore speculators.” Wikipedia.
“Trend trading is a trading style that attempts to capture gains through the analysis of an asset's momentum in a particular direction. When the price is moving in one overall direction, such as up or down, that is called a trend. Trend traders enter into a long position when a security is trending upward.” Investopedia.
There are many people who claim to have made serious money through these types of trading. One thing I always point out is that for every success story there are probably hundreds of people who have tried and failed, losing money in the process. I believe it is possible to make money this way, but only under very specific circumstances.
I believe that trend trading is a more realistic way to make money as it involves a detailed analysis of a stock before investing. The stock is assessed before the decision to invest is made and if the business is healthy and making money, then it makes sense to invest. However, the analysis of a stock is complex and there are often things the average person on the street will not find out even with a thorough analysis of the publicly available information. Trend trading is risky, but because it involves holding a stock for possibly days, weeks or months, it lacks the hyperactive nature of day trading.
What makes a lot of people lose money (day or trend) trading is that they lack the mental resilience to cope with immediate losses and if you trade with either of these systems it is guaranteed that you will lose money as soon as your trade completes. It is guaranteed because of trading commissions and stamp duty. I will illustrate with an example:
I’ve picked a stock at random, Centrica PLC, which is trading at 89.62 right now. If you invest £5,000, you will pay £25 in stamp duty (0.5% of the value of the trade) as well as commission from the company you are using to execute the trade. Costs vary here, but you are probably looking at between £10-£20. I will say £10 for this example. So, you have already used up £35 of your £5,000, meaning you have £4,965 to invest. This will buy you 5,540 shares. For you to recoup that £35 you paid in stamp duty and fees, you need the stock to increase in value to approximately 90.25. To make any sort of meaningful return, say 10%, you could be waiting a while as the average annual return of the stock market is around 7%-8% (it can vary wildly throughout the year though). In order to make a return you must pick the right stock, at the right time. As the saying goes, “it’s not timing the market, but time in the market that counts.” If you research your target stock, invest and hold, you will probably make money in the long-term. If you day trade with this example, for every 1p the stock value increases you will make £55 upon sale. Hardly life changing amounts.
So how do people make money through day trading? I will give another example.
If you invest £50,000 in Centrica PLC using the figures above, you will pay £250 in stamp duty, but the fees will be roughly the same. As such, from your £50,000 you will have £49,740 to purchase 55,501 shares. In this example, for every 1p the stock value increases you could make £555 upon sale. Now, imagine you had £500,000 to invest and you can see how the money is made.
The difficulty for the average person is that you only have a limited Capital Gains allowance each year, and if you want to invest through an ISA you can only invest £20,000 per financial year as of 2019. It is difficult to raise enough money to trade frequently and effectively within the limits of an ISA. It’s not impossible, but it requires a healthy dose of luck.
I have tried my hand at both types of trading and lost money. There are ways to mitigate losses, such as a stop-loss. This is where you instruct your broker to automatically sell your stock if the price drops below a certain value. I have heard varying advice about how low you should set your stop-loss. If you set it too low, you risk losing more money than you need to. If you set it too high, you risk selling prematurely before a stock has chance to bounce back. For example:
You purchase a stock at 100 and set your stop-loss at 95. The stock drops to 95 and you automatically sell, losing 5 on each unit. However, the stock could then bounce back and climb to 120 over the next few weeks. If you had set your stop-loss at 90, the stock could drop to a low of 92 and then climb to 120 at which point you sell with a return of 20%. You could set you stop-loss at 85 and see the stock drop to 86 and then fluctuate between 86-89 for months though. It’s a tricky subject and one for which there is no definitive answer. The safer, wiser, choice for investing in stocks is dollar cost averaging. If you want to gamble, then day trading may be for you. If you day trade, though, understand that it is just an educated gamble and you risk losing a lot of money very quickly.
Dollar Cost Averaging
I will refer to Dollar Cost Averaging as DCA from this point on. Although it is called DCA, it does not mean you have to invest in dollars. The term DCA can be defined as:
“…a strategy in which an investor places a fixed [monetary] amount into a given investment (usually common stock) on a regular basis. The investment generally takes place each and every month regardless of what is occurring in the financial markets.” Investinganswers.com
DCA is at the heart of my investing strategy. I invest a minimum of £250 every month into my stocks and shares ISA. The £250 is then split across individual funds and stock, which can all vary in value day to day. For the sake of clarity, I will use a simple example to illustrate how DCA works. At the moment, EasyJet is trading at 1,440 per share. (Note: with regular investment plans, many ISA providers will not charge dealing commission. Stamp Duty is still payable, but this cost is the same each month and for extra clarity I will ignore the cost in these calculations to demonstrate the principle of DCA). £250 will buy 17 shares of EasyJet with money left over. (Further note: some ISA providers allow you to buy fractions of shares if your total investment will not buy a whole number of shares).
The following month on your scheduled investment day, EasyJet might be trading at 1,504. Your £250 will buy 16 shares. The month after, the price may have dropped to 1,380 and your £250 will buy 18 shares. Over time, the cost and value of your investment will smooth out. You get more for your money when prices are low and the value of the stock you own increases when prices go up. By investing on a regular and scheduled basis, it takes much of the worry out of investing. It’s impossible to regularly beat the market, so going with the flow of the market is how you build wealth in the long run. To take DCA to the next level, rather than investing in just individual stocks you can invest in funds that track a whole index, such as a FTSE100 tracker or a FTSE250 tracker, or a US equivalent. This is a hassle- and worry-free way to invest. It’s not flashy or exciting but it will work and build wealth given enough time, but you must be patient. This will not give you enough wealth to retire in a few years. Over a decade or two, it could create a serious pot of money for you.
There are a few instances when DCA may not be appropriate. One common debate is what to do when you have a substantial sum of money, say £10,000 or more. Should you invest it all immediately or spread your investment out into smaller sums throughout the year? Some people argue that it is safer to invest in smaller sums throughout the year. I disagree. If you are investing a finite amount of money, rather than a regular sum on an indefinite basis, I think you need to get the cash in the market as soon as possible. As I quoted earlier; “it’s not timing the market, but time in the market that counts.”
Rather than spreading the cash over time, I would suggest splitting the sum into two or more smaller amounts and spreading the money across different funds and stocks. If I had £10,000 to invest in a lump sum now, I would put £2,500 into the Vanguard FTSE100 tracker, £2,500 into iShares Emerging Markets Equity Index, £2,500 into the Vanguard US Equity Index and the remaining £2,500 into the Vanguard Global Bond Index. Yes, I like Vanguard.
If you invest your lump sum as soon as possible, you might hit the market at a peak but it’s statistically unlikely. Even if you do, over time the market grows anyway. The key to investing, and the fundamental principle behind DCA, is that you cannot regularly time and/or beat the market. So, rather than swim against the tide, go with the flow.
I’m flying back to the UK on 20/12 and have an early start. I have to be at Otopeni airport for 6am Romanian time (4am UK time). I would rather have flown via Amsterdam or Paris but I’m flying into Heathrow before a connecting flight to Manchester. Then, a train journey back to Sheffield awaits. I don’t feel like I’ve had a lot of time to relax on this trip; it’s been very hectic, but I’ll be back in June.
My girlfriend’s parents have three dogs and a cat. One of the dogs, Nica (short for Veronica) is old now, but still very happy. I love her to bits. In the last year or so she has aged a lot. A couple of times on this trip, when we’ve taken her for walks, her legs have given way and she’s stumbled. The winter in Romania seems quite mild so far with temperatures around 6-10 degrees. This time last year it was -10 degrees at one point in the day. I hope Nica is still here in June when I come back, but I’ve said my goodbyes to her for now.
Me and my favourite Romanian lady, Nica.
Next week will be the last instalment of this blog for 2019. I will have a look back at some of my worst financial mistakes and regrets in the hope that it helps some of you avoid making similar mistakes. Thank you again for your time and I hope you all have a great Christmas.
Hello and welcome back to Mortgage Advisor on F.I.R.E. It’s a brave new world; or rather a depressing descent into a dystopian world. I’m very disappointed in the outcome of the general election. A Tory government is probably best for me personally but for the country over the next decade or so, I think it will be a disaster for the vulnerable sections of society. I voted for what I thought would help the country, as I believe that if the country does well, I will eventually do well anyway. I guess we will see over the next few years what the consequences of this election will be.
Later today I fly to Bucharest with my girlfriend to spend some time with her family in the run up to Christmas. I will fly back on 20/12 and my girlfriend will stay on until the New Year. It will be the first time she will have spent Christmas at home in a decade and I’ve told her she should take advantage of the opportunity. I will be spending the holidays with our cat, Sweep. He’s an older cat and last week we had his one-year adoption party. He is sixteen years old and for most of his life he was with an elderly couple. When they passed away Sweep was taken to Cats Protection where he stayed with a foster carer for several weeks. He was rehomed briefly but did not settle. Then, we adopted him, and it’s been great ever since. He settled in very quickly and is a loving soul. It’s always hard leaving him at the cattery when we go away but it’s only for a week and then I’ll be back with him.
This week I will be looking at employee benefits relating to pensions and share save schemes, and the composition of my Stocks and Shares ISA, but first it’s time for the weekly financial update.
A picture my girlfriend took of me and Sweep having a nap together.
Rex Meowjesty - one of my nicknames for Sweep.
Premium Bonds: £9,500 (no change from last week).
Stocks and Shares ISA: £7,285.34 (up £394.23 from last week).
Credit Card Debt: nil (no change from last week).
Loan Debt: £3,855.95 (no change from last week).
F**k It Fund: £1,000.85 (no change from last week).
Total Wealth Figure: £191,287.19 (total assets including residence valued at £173,501 by my lender) minus £138,453.38 (total debt including residential mortgage) equals £52,833.81 (up £394.23 from last week).
It’s been one of those weeks where not much happens financially. I get paid on the 20th of the month and most of my investments take place shortly after payday. In the last couple of days, my ISA provider executed my deals which saw the value of the ISA increase. There was also a little boost from the election result. Everything else has remained the same and will do until my next payday.
I would say this is the most common benefit that employees in the UK will have access to. At the time of writing (December, 2019), your employer must opt you into their pension scheme so long as you earn at least £512 per month (£118 per week/£472 per four weeks – source: gov.uk). Although there are minimum amounts that must be contributed by both the employee and employer, there are ways to increase the amount contributed and often these increases have a tax advantage.
Many employers will offer to contribute more than the minimum required amount to an employee’s pension. The exact amounts can differ, but some employers will match your contributions, so that if you pay 5% of your salary into your pension, they will also pay 5% from their own pocket. In effect, you are getting 5% of your salary again for free, paid into your pension. Some employers offer even more generous provisions, where they will not only match your contributions but double them. For example, you pay 5% of your salary and they pay an extra 10% on top.
With pensions, the earlier you start contributing the better. I am fortunate to work for a business that offers a fantastic pension and I have increased my contributions to take full advantage of what matching payments the business will make. It’s free money. Why would I turn it down?
Another benefit to contributing to your pension is that the money is taken from your salary before tax is deducted. For example, if you were to pay an extra £100 into your pension it would only cost you £80. The other £20 comes from the government’s tax relief. Further to this, if you work for an employer that will match your pension contributions, that extra £100 is doubled.
I would suggest that if you are unfamiliar with your employers’ pension, you take some time to research it and speak with your HR department to see how you can best maximise the opportunities available to you.
Company Share Schemes
I have worked for several companies that have offered share incentive plans. The most common one I have encountered is a monthly savings plan which matures after 2, 3 or 5 years. It has worked in the same way with each company I have opted into this benefit with.
The company will offer the chance for you to buy shares at a discounted price. This is often 20% lower than the average market price for that day. For example, if the average market price that day was 50p per share, the company would offer you the chance to buy that share at 40p share.
If you agree to take part, you choose how much you want to invest each month. Let’s assume you choose to invest £100 per month and you go with a standard three-year plan. Over the three-years, you will invest £3,600. When the three years are up, you have a choice. If the share price at the end of the investment is less than 40p you can choose to get all your money back. Your capital is secure, but it may be worth a little less due to inflation. The second option is you can exercise your option to buy the shares at 40p per share. The third option is you can buy the shares and immediately sell them.
The beauty of this type of plan is that if you work for a healthy business, it is likely that the shares will have increased in value over the three-years, especially as you bought them at a 20% discount. In this example, you would have purchased 9,000 shares at 40p per share. If we assume an 8% rate of growth per year (not an unreasonable rate of growth), you are looking at a share price at the end of the investment period being just over 50p per share. If you then sell those shares at 50p per share, you will return roughly £4,500; an increase of £900 on your original investment, or 25% return on investment over three-years.
A share save scheme of this nature is an easy way to accumulate shares, although you must be careful not to put all your eggs in this one basket. A few things to remember; unless you are high up in your business or privy to high-level knowledge, you are probably being fed the company line that all is well with the business. Do some research on your business first before committing huge sums of money.
If you take part in this type of scheme, you can often opt into a new scheme each year which means after three-years you will have a new scheme maturing each year. The worst that can happen is that the share price does not rise, and you get your money back. Well, thinking about it I suppose the worst that could happen is the business goes under, but should that happen you would probably have bigger problems to tackle.
My Stocks and Shares ISA
My ISA is my long-term plan for wealth, in contrast to my plans for BTL property which is very much concerned with immediate cashflow. Whenever I speak to people about my ISA, they seem unsure about what a Stocks and Shares ISA is. I don’t think these types of accounts have been explained well enough in terms that the general public can understand, but I firmly believe these accounts should form the foundation around which everyone’s wealth should be based.
For the purposes of this explanation, I will now refer to a Stocks and Shares ISA as simply “an ISA”. There are other forms of ISAs, such as a cash ISA. However, to save typing out the full name again and again, when I mention the word “ISA” I am referring to the Stocks and Shares variety.
The ISA can best be conceptualised as a shell within which assets are free from Capital Gains Tax (CGT). This is the main benefit of the ISA. The ISA, or shell itself, just not generate wealth though. You enter the shell, and from there you can access information about a variety of stocks and investment funds. You can buy individual stocks, for which you will still pay broker fees and Stamp Duty, but if you then sell the shares and make a profit, that profit is free from CGT. As a result, some day-traders favour buying shares this way. The downside is that you can only invest up to £20,000 per year into an ISA (correct at time of writing). So, if you draw money out of your ISA, you cannot necessarily invest it back in that same year.
I have a two-pronged approach to my ISA. I invest in several index tracker funds as well as a small selection of stocks I have picked myself. I would strongly advise you, before investing, to educate yourself about how to select funds and stocks. Here are a few good books to start with:
How To Own The World by Andrew Craig:
The Naked Trader by Robbie Burns:
I Will Teach You To Be Rich by Ramit Sethi:
For the general, long-term, investor, I believe it makes more sense to concentrate on index funds. These funds will track a whole index which means you ride out the rough and smooth. There are dozens, if not hundreds, of books about how to pick stocks but most of it is luck. There are things you can do to research stock in detail and I have had some success with it in the past, but it’s hard work and for all that work luck can screw you over or be your best friend. Trading individual stock is more of a gamble than taking a more cautious approach and investing in tracker funds primarily.
However, there is something fun about researching stocks and picking ones out you think will perform well over time. The four stocks I have picked are in different sectors and have a good track record of paying dividends. I may add a few more stocks to the mix once I have built up a decent holding in the four stocks I have already.
My ISA is made up primarily of funds (80.5%) with the remaining 19.5% comprising stocks. Approximately 45% of my funds are in the US with around 20% in the UK. The rest of my funds are split around emerging markets and Europe. Most of my stock holdings are focused on one stock which makes up over 75% of my total; in effect roughly 15% of my total ISA value is dependent on that one stock. I should probably dial back a little on that stock and concentrate on balancing elsewhere. However, I believe that one stock is significantly undervalued and will improve over the next two to three years.
From the new year I am going to diversify into bonds. Currently, my whole ISA is based on stocks and many of my funds are wholly stock based as well. Much of my research has suggested it is wise to keep a fraction of your total investment in bonds. I am going to aim for a 10% share of my ISA being invested in bonds going forward.
This has been a bit of a rushed entry, I’m afraid. Sometimes life just gets in the way. Next week, I should have much more time to put together a more polished article and I will be looking at day trading in more detail, as well as looking at the advantages of dollar-cost-averaging.
Thanks again for reading and I hope you visit this blog again next week.
Hello again and welcome back to Mortgage Advisor on F.I.R.E. I am writing this on Wednesday 4th December with a view to publishing on Friday as normal. Over the past few weeks I have normally done the bulk of the writing on the Thursday before having the post checked over and published the following morning, but that routine will have to change. I am now back at work and have to find time to write around my working hours, and so I find myself writing a day earlier than normal.
Going back to work after a prolonged absence is always a strange situation. When I walked into the office it felt like I had never been away. Then, after several hours of catching up with emails and new policy it came time to start dealing with mortgages again. I am frustrated at another spell on the sidelines in 2019 following shoulder surgery earlier in the year that saw me off work for almost two-months. With a month absent with my ankle, I have had a quarter of 2019 off work through ill-health. 2020 must improve.
Last week I wrote a little about my new approach to eating. It is still going well and I feel different; better. The most difficult part is learning to accept feelings of hunger and realise that those feelings will be addressed when the next meal time comes around. It’s all about delaying gratification, which is something we, as a society, do not practice to any great extent. I have a long way to go until I am back at my healthy weight, but at least I am now moving in the right direction.
I was due to discuss the election this week but I’ve changed my mind. The whole subject of the election is saturating the news at the moment and it occurred to me that readers may want an escape from all things politics. So, I will discuss budgeting and the idea of Paying Yourself First instead. First things first, however, my Financial Update.
Premium Bonds: £9,500 (up £350 from last week).
Stocks and Shares ISA: £6,891.11 (down £177.03 from last week).
Credit Card Debt: Nil (no change from last week).
Loan Debt: £3,855.95 (no change from last week).
F**k It Fund: £1,000.85 (up 85p from last week).
Total Wealth Figure: £190,892.96 (total assets including residence valued at £173,501 by my lender) minus £138,453.38 (total debt including residential mortgage) equals £52,439.58 (up £495 from last week).
My stocks and shares ISA has taken a little hit in the last week, but I suspect this is due to ongoing tensions between the US and China. It’s not unusual for the ISA value to fluctuate weekly or monthly. As I’ve stated before, the ISA is a long-term investment and I’m confident that over years and decades it will increase in value.
I was able to free up £350 to invest in more Premium Bonds over the past week. I had money on one side that was earmarked for a purchase which I’ve now decided not to make. So, rather than leave it sitting there I decided to put it to good use and move closer to the £14,850 target for my share of a BTL deposit.
Note: If you are in financial difficulty and/or have debts that you feel you can’t manage, seek help from one of the following sources: The Money Advice Service, Stepchange or Citizens Advice. This blog is for information and entertainment purposes and does not constitute financial advice.
There are lots and lots of books out there that go into detail about budgeting. The common view of budgeting is that you have a spreadsheet that itemises every single penny of spending. This can be time consuming and, in my experience, not sustainable long-term. However, I use a spreadsheet to budget my household finances. So, why the discrepancy between what I believe and what I do?
It comes down to detail and automation. My budget does not try to itemise every single penny I spend. My spreadsheet takes a high-level approach to finances. It is broken down into three columns: my finances, my girlfriend’s finances (she requested long ago that I help manage her finances) and then our joint finances.
In each column is a list of our direct debits and regular payments. The joint finance column has our mortgage, utility bills, food shopping and so on. Next to each commitment I enter (rounded up to the nearest £5) how much that commitment is. We are paid a flat salary each month. The difference between our commitments and our income is our spending money. It’s that simple. So rather that itemising how much we have for going out, buying coffee, lunches and so on, the spreadsheet looks at general areas of spending.
Another aspect where my budget deviates from what many people do, is that my investment contributions are treated as financial commitments. In my personal column I have an entry for “BTL deposit” and another for “ISA”. Those are the first things to be paid when my salary is credited. Rather than finding room to save after I meet my living costs, I find room to meet my living costs after I Pay Myself First.
Paying Yourself First
I first came across this phrase in Robert Kiyosaki’s Rich Dad, Poor Dad, the book that changed my life. The phrase is common amongst investors and it encapsulates a mentality of a seasoned investor. You make you your main priority. Now, I can hear the grinding of teeth from some people who, rightly, argue that in order to pay yourself first you need to have spare money each month. That’s right, you need to have surplus cash to be able to save or invest. When you dig a little deeper, you discover that it’s a bit more complicated.
I have worked in finance for a long time; over a decade between mortgages and personal banking. When I worked in a branch of a UK high street bank, I had access to many accounts and the vast majority of people were perpetually in their overdraft and had a collection of direct debits that made for scary reading.
Telling people how to spend their money is an emotionally charged subject. I’m not going to sit here and say that if you have a premium entertainment package or a few beers at the weekend you need to stop. What I am going to encourage is more mindful spending. In the age of austerity under the rule of the Evil Empire and Darth Cameron, May and Johnson, the UK has seen an increase in poverty. I can’t do much or recommend much when your basic cost of living exceeds your income. It’s a tragic situation and one that should be unacceptable in a 21st century, first-world economy. The next few paragraphs are not directed at that part of society but rather the segment of society that has an average (for the UK) income but still has no surplus cash each month.
Hierarchy of Financial Needs
A little over a year ago I devised a Hierarchy of Financial Needs in another blog post. This was modelled on the Hierarchy of Needs put forward by Abraham Maslow in the 1940s. The Hierarchy of Needs is a pyramid which has five levels of needs that humans have. At the base of the pyramid are psychological needs, then safety, love/belonging, esteem with the tip of the pyramid being self-actualization. My Hierarchy of Financial Needs is based on shelter, warmth and food, with the next level being clothing and personal grooming. The middle tier is utilities, followed by entertainment and the tip of the pyramid being luxuries. From what I’ve witnessed in the course of my career in finance, many people do not conceptualise their spending in this way. Luxuries are viewed as necessities by many. I have had a few people ask me how I’m able to take as many holidays as I do. The answer is simple. I rarely drink alcohol. I don’t smoke. I don’t have a subscription to Sky, Virgin or BT. I don’t drive. I don’t have kids.
The Hierarchy of Financial Needs based on Maslow's Hierarchy of Needs.
Some brief google-fu suggests that the average UK household spends £72 per month on alcohol, the average smoker may spend as much as £50 per month on cigarettes (often more), a subscription to Sky can easily cost £50 per month as well. The cost of running a car, not including the purchase of the vehicle, is estimated at £160 per month and although figures vary, it’s suggested that the cost of raising a child is around £700-£1,000 per month depending on child care. I’m not telling people who smoke and drink to stop; that’s not my place. What I’m encouraging people to do is be more mindful of what their money is being spent on. If you are an average drinker and smoker, with a car and a premium TV subscription, you can very easily be spending almost £350 each month which is almost a fifth of the average UK net salary.
Small Changes and The Latte Factor
I recently read a book called The Latte Factor by David Bach and John David Mann. The book is financially educational but framed as a work of fiction. The story unfolds through a series of conversations between a young woman and an older coffee shop owner. It was very basic for someone who has read extensively around finance and investing, but it is an ideal entry point for anyone starting to invest. The title comes from the idea that forgoing small, daily, purchases and investing that money instead can have huge long-term rewards. I’m not the sort of person that argues you should cut your cloth until there is no cloth left, rather that you should be more mindful with your spending. For example, I used to buy three lattes a day as a minimum. That was costing me almost £10 a day, five days a week. I spent £20 on a good quality thermos and started making my own coffee to take into work. The cost of buying coffee in bulk and taking it to work is significantly lower than buying three lattes a day.
Sudden, extreme change is never sustainable. This is the case with anything from throwing oneself into an intense workout regime with no build up to crash dieting. Small, gradual change is more sustainable and more likely to lead to good, long-term habits. This is also the case with financial management. If you are the average person who drinks, smokes, has an expensive TV package and runs a car, and subsequently finds you have no money to spare, are there any areas where you could free up some money? What would you do if you had to free up £1 per day (£30 per month). What about £2 per day?
£1 per day might not seem like it would make a difference and you may be thinking that saving £1 a day would be pointless, as it’s just £1 per day. Well, if that’s the case, why not save it? Assuming you have 30 years until retirement, if you commit to investing £30 per month and achieve a reasonable return on your investment in line with historical averages, you could amass £65,000 in 30 years. £60 per month sees the potential reward more than double to £135,000. If you found yourself with £5 per day free to invest, you could amass over £330,000 in 30 years. £5 per day is what the average household spends on running a car.
One piece of advice I came across early in my financial education was that the process of accumulating wealth should be mechanical or automatic. The money works for you, not the other way around. Almost all my spending is automatic. All my bills are on direct debit. My investment contributions are taken automatically each month. Furthermore, the vast majority of these bills and investment contributions are timed to come out of my account in the day or two following my salary credit. Two or three days after I am paid, the money left in my account is my money. The best advice I can give to anyone wanting to budget effectively is to automate as much as possible through direct debits and arrange for those payments to come out just after you are paid. There has been a huge campaign over the last few years from various sources telling you to contact your utility providers, mortgage lender and media providers to check if you can get a better deal. If you haven’t done this in a while, you might as well be throwing money in the bin. Even if between your electricity and media providers you only save a tenner a month, it is still a tenner a month you could be investing whilst not changing your net monthly income/outgoing balance.
“I’ll Get Around To It”
As a mortgage advisor there are certain things I hear all the time. One of these things is “I’ll get around to it” or “I will set that up later”. I’m talking about overpayments, but the principle could just as easily apply to reviewing your finances and/or investing. For some reason, when it comes to money, most people seem to bury their heads in the sand and accept the status quo. I speak to many people who claim to be financially comfortable, in so much as they have more money coming in than going out. I will often demonstrate to these people how increasing their mortgage payments slightly can have a huge impact on the term of the loan. This is more apparent with long-term loans and generally with younger customers. I will explain that rounding their payments up to the nearest £10/£50/£100 per month could knock years off their mortgage. The common reply is “Yeah, I’ll get round to that just after XYZ has happened/passed etc.” When it comes time to review their mortgage again a couple of years later, I will review the notes on the account from our last interaction and check if extra payments have been made. In almost every instance, those payments have not been made. If you don’t do something in the moment, the chances are you will forget about and lose the impetus to act.
I would strongly suggest that if you have not reviewed your finances for some time, that you take some time out to do it. I would start by reviewing all your direct debits and regular payments that leave your account. Go back over the last month and add up how much money you spend on household shopping. Ground your spending into broad categories. The key here is not to cut down your spending, but to get an accurate idea of what you are spending. Until you know what you are spending, you don’t know what and where you can cut down on unnecessary spending.
Once you have reviewed all your direct debits and regular payments cancel the ones that you are not tied into and that you feel are unnecessary. The ones for services you want to keep, give them a call and ask for a lower payment. Don’t skirt around the issue; be clear and to the point: “I want a better deal.”
If you have nothing saved or invested already, challenge yourself to find £1 per day in your finances that you can free up and use to invest.
Note: If you are in financial difficulty and/or have debts that you feel you can’t manage, seek help from one of the following sources: The Money Advice Service, Stepchange or Citizens Advice. This blog is for information and entertainment purposes and does not constitute financial advice.
Thank you again for reading this blog. Next week I will look at employee benefits and pensions and ask whether you are maximising what opportunities are available to you.