The overall FI progress stands at 65%. Thank the gods, the stocks are getting cheaper to buy, so shovelling my hard earned cash into the stock market is less painful than it used to be. The saving rate is quite healthy at 53%.
Though year to date my portfolio is down by about 8%, I’m feeling very still… and I think my passive investment strategy knows which way to go 😉
This is for when you’ve had enough of the horror porn that is the Russian war and want to see something heartwarming for a change, perhaps to remind yourself that the world is not (yet) completely and utterly shit in every way that matters.
Before I’m slaughtered by the social (in)justice shut-up-and-count-your-blessings-you-privileged-dickwad crowd, let me make one point: I don’t think all taxes are evil.
There is however one tax that I truly hate: the Capital Gains Tax.
Unearned income? I beg to differ. In my case at least it is very much earned. First I earned my salary, which was heavily taxed. Then, instead of blowing what The Taxman allowed me to keep on booze, horses and landfill fodder, I invested some of the money in various ventures where my capital was at risk.
It could have gone either way, but luckily for me the punt paid off, and — lo and behold — here I am keying my debit card details into the HMRC portal. And isn’t it ironic that, had I bet the same money on the winning horse at the races, my winnings would’ve been tax free?
That Monevator dude has written many articles on the Why and the How of the CGT management, so I’m not going to repeat it all here, but I shall attempt to provide an illustration of why a buy-and-hold strategy in taxable accounts is not the way to go, even if you are more favourably disposed to the CGT than I am.
Also, to my fellow landlords with rental properties I can say this — tough shit. You’ll just have to pay tax on inflation when you finally sell the property.
Commodities and non-dividend paying stocks are the easiest investments to use as examples when discussing the CGT; I’ll use an investment in gold (Au) in mine.
Had you invested £20,000 in the shiny-shiny in 1988 and kept your investment in a taxable account for 34 years, by the end of 2021 you would have made a gain of £96k. Fantastic! …Or is it? On closer inspection not all of the £96k is a real gain. Because: depending on which inflation index you use, between £25k and £37k of it is inflation. Also, as a higher rate tax payer, you have an uncrystallised CGT liability of £17k. This leaves you with a real after tax profit of £43k to £55k, again, depending on which measure of inflation you use.
Initial investment in 1988
Capital Gains Tax
Real gain / (loss) net of tax
Nominal value of the holding 2021
Here’s a nice graph to illustrate. Because: I’m a nerd and I like graphs.
But wait, what if, instead of holding your investment for 34 years, you had held it for only 20 years, say, till the end of 2007? The picture would be quite different: you would have made a loss in real terms, and you’d still have to pay the CGT on it.
Initial investment in 1988
Capital Gains Tax
Real gain / (loss) net of tax
Nominal value of the holding 2007
It gets worse as the initial investment amount and the inflation rate increase. With significant unsheltered investments in a high inflationary environment you don’t even need to hold your assets that long before you start paying tax on inflation.
Why is this relevant?
Inflation is coming has come.
Stealth taxes are currently fashionable, and the Conservative governments of the recent past, including the assholes we happen to be saddled with currently, have near perfected the art of increasing the tax take by deliberately failing to index tax exempt thresholds and allowances in line with inflation.
Moral of the story
I think there are two outtakes here.
First of all, the CGT is a tax on capital gains as well as inflation, and if you don’t want to pay tax on the inflationary growth that adds no real value to your war chest, you must take early and consistent steps to defuse the CGT liability.
Second (of all), for some folks with significant BTL portfolios — the Rental Property Is My Pension crowd — this will end in tears one day. BTL became very profitable and popular in a low interest rate, low inflation environment. If the inflation stays high, it’ll rout the capital gains element of the BTL return, in addition to what high non-tax-deductible mortgage interest will do to the net rental income.
I wrote a post a while back about the first rule of FI Club. Man, was I right!
I haven’t broken the rule. It was someone else, with me as captive audience. The experience was awkward to say the least.
What went down
A new colleague (let’s call him Vagina) and I are having our intro meeting. On Teams. Cameras on. He’s going commando — no virtual background, no blur — behind him is his actual home office. Not a very large one (mine’s bigger), but I am treated to a view of several guitars hung on his wall, his camera angled so as to show them off.
I wonder about his other wall, the one to his right. Is there a state-of-the-art sound system set against it? Maybe. Though most likely it’s just a messy shelf with stacks of paper, a few trinkets and such. Or, just outside the camera angle, there could be a Peloton bike. He has some of that mid-fifties-but-down-with-the-kids look. Urban. Fitted t-shirt. His exercise of choice won’t be hiking or proper cycling, or any of the rock or wind sports; he looks too pale for that, anyway. Yeah, probably a Peloton.
While I ponder why Vagina thinks it’s a good idea to transport his coworkers to his own rendition of MTV Cribs, the Midlife Crisis Edition, he shares what he considers the highlights of his CV. Upper middle management at one of the big four banks. Blimey. We’re hiring from the retail now? This Brexit-COVID people shortage must be worse than I thought.
I brace myself for an invitation to list some of my past job titles along with the names of the relevant firms as part of what’s shaping up to be a cock-measuring exercise. But the invitation never comes. Instead he proceeds to discuss his professional qualifications. I’m confused. Why should I givashit? Is he going to ask me about mine? What would be a group noun for corporate toadies? Well, a group of frogs is an army, so … a troop? No, a croak! A croak of corporate toadies. Sounds about right.
And then I hear this: “So, you see, for most of my career I have held senior positions at some of the City’s largest financial institutions. I don’t really need this job, I don’t need to work for a living.” There’s a pause. He interprets my silence as confusion about what it means to Not Need To Work For A Living, and helpfully explains, enunciating slightly to make sure it gets through my thick skull, “I don’t need the money, I could retire if I wanted to. I took this job because I like it.” The last time I cringed so much was when my mother told a dirty joke at her 70th birthday party. I worried then whether it could’ve been an early sign of dementia. Turned out it had been a sign of too many glasses of bubbles.
Vagina smiles. I don’t know what to say, so I stare at the camera, nod, mumble something about this being the best way. He registers my reaction as awe, appears satisfied.
You wouldn’t brag about your wealth to the Joneses. Because: the Joneses are more or less in the same boat and have approximately the same amount of dosh as you, give or take. It would be anticlimactic and weird. Like announcing to your next door neighbour “Zoopla says my house is worth a million!” Duh, so is mine.
The only time anyone would be moved to say something like this is when there’s a material disparity in the wealth of the parties involved. And — more importantly — the perceived disparity must be in the braggart’s favour.
If you’re right, pointing this out to a new colleague you’ve just met makes you a twat.
But what if you’re wrong?
The thing about living in the current age of Big Brother and massive digital footprint: nobody has any real privacy. It takes only a few keystrokes and five or so minutes to find out information that most people would rather keep private. Here’s how:
Type their name into the LinkedIn search.
Look through the list of past employers and any other interests. Have they every been self employed? A director of anything at all, present or past? Trustee of a charity?
A quick Companies House search and… bingo! Here’s their home address.
Type the address into Zoopla, and it’ll tell you what their house is worth.
Take Zoopla’s mid-range number then divide it by 0.33.
What you get is a pretty good approximation of their total net worth.
How much was my new friend Vagina worth? A little more than me, but not by much, and I’m more than 10 years his junior. Instead of impressing me or rousing my envy he had made himself ridiculous.
What to do?
Anything but what he did. Because: that shit is as attractive as a venereal disease, and there is a non-zero chance of you making yourself look like an ignoranus.
With sociopathic tendencies, zero class and a chip on his shoulder.
He said he could retire if he wanted to, hence I assume no mortgage. It is an approximation, but the level of confidence should be fairly reasonable.
Ignoranus [noun] someone who is both stupid and an asshole.
War in Europe, which has had remarkably little impact on asset valuations. Of all the blips on my FI progress chart, the 2018 monetary policy tightening appears to have been the most impactful.
Looking ahead, inflation shouldn’t do much damage to equities, and my exposure to fixed income is rather limited.
How’s the progress?
On track across the board. Even the savings rate is remarkably solid for this time of year at 52%.
As I’m moving into the final tertile of my FIRE journey, I’ve been pondering the meaning of (arbitrary) large round numbers. The number appeared on my spreadsheet last year and failed to have any impact whatsoever. Mainly because I knew it was all bullshit anyway — I hadn’t bothered revaluing the property part of the asset pot (can’t be asked), but had I done so, I would’ve seen the same or similar top number on the same spreadsheet ages ago.
The feeling was not at all what I thought it would be. Instead of elation, I felt flat. Meh. It’s just another number on a spreadsheet that shows how much is not enough.
My mortgage and I aren’t friends. The relationship was difficult from the outset, starting with Experian’s abject incompetence at keeping records (long story). Once that bullshit got resolved, there was a string of minor but annoying fuckups by my mortgage lender, and then, adding insult to injury, the 4.79% first-time-buyer-special interest rate at a time when everyone I knew was paying 1% or less. #bendoverhereitcomesagain
Then I lost my job and realised the true meaning of mortgage slavery: I had no option but to take whatever half decent offer of employment came my way, not because I wanted to do what the job spec said, but because I had a mortgage to pay. The Man had me by the short and curlies. This bred resentment. In the words of Henry II, I was ready to be rid of that turbulent loan. Steps had to be taken.
This grew; I gave commands.
It’s been almost 10 years since I signed on the dotted line trading my freedom for a set of keys, and I now find myself in a position where I have more than enough money in my savings an investment accounts to kill my mortgage once and for all. Yet I hesitate to pull the metaphorical trigger. We’ll get back to this later, but first let’s review the journey so far.
If you’ve ever run a marathon you’ll find the experience rather similar.
1. The cheery start
Oh the excitement of crossing the starting line! Willpower reserves were full, I had read a gazillion success stories on the internet, I had fantasised of what it was going to feel like to be mortgage free and it felt great. The finish line was so far away that at that point it was an abstraction. And, as every abstraction that’s ever existed, it lent itself to be applied, appropriated and modified to represent a solution to everything and anything I would’ve liked to be different about my life — freedom, total control over my time, success, a partner in life, winning the Fastnet, absence of boredom and broken fingernails, a boiler that doesn’t require an annual service, a pint that never goes flat — as soon as the mortgage is repaid, everything else will fall into place.
I rang my bank, set up regular overpayments and then I chucked every annual bonus I received into my mortgage account, smugly watching the interest charge decrease each month. That lasted for three years, give or take.
2. One third done. Two. Thirds. Left. To go
I repaid a third of the mortgage in under four years and realised it was going to be harder than I had expected. What to do, what to do.
What was I thinking?!
Enter: excuses and rationalisations. This is the cheapest loan I’ll ever have, everybody has a mortgage and nobody obsesses over it, what’s the hurry with this repayment scheme? Perhaps I should invest the money instead? If I generate a tax free return that’s higher than the interest on my mortgage, I’m quids in. Inflation will repay my mortgage if I only wait long enough.
It was at around this time that I discovered the Monevator, spent a few weeks months 😉 reading old posts and came to a conclusion that the investing angle might not be completely bonkers. But I was not able to embrace it with the enthusiasm it deserved.
My problem is that I have a poor person’s money mindset. I was born poor. My family only came into (rather moderate amounts of) money when I was a teenager — it was too late for me by then. I had already experienced being the poor kid at school, which came with such perks as having the crappiest sports kit at PE and missing foreign school trips because my family couldn’t afford to pay for them. My core beliefs were set. Rich people were “them” not “us”, a sparrow in hand was preferable to a dozen in the bush, and debt was a thing to be feared rather than a tool to be used.
There’s a guy in the FI blogosphere, FIRE v London, who used a margin loan to buy his house; his target asset allocation features negative cash. I know exactly why that is sensible, and I even have the necessary tools at my disposal to pull off something along those lines myself. What I lack is the balls. You see, financial risk aversion runs along the class divide much the same as the dental health. Because: getting back on your feed after a hard knock is so much harder when you’re poor.
So when it came to mortgage repayment vs investment, the best I could do was compromise, and that was only because I hated the tax more than I hated debt.
3. Tax planning
There is one valid excuse to invest in lieu of repaying the mortgage. If your job is secure and especially if you are in the higher tax bracket, it makes sense to use up your annual pension allowance. Then, having reached a ripe young age of 58, you can take your 25% tax free lump sum and hand it over to your bank to clear any outstanding mortgage balance. So long and thanks for all the fish, Pinstripes, it’s been a pleasure I don’t care to repeat!
On paper, yes, that makes sense. In the real world though a great many things can happen before your 58th birthday. You can lose your job or become ill, or both. The property market can crash and you can end up in negative equity. Tapping into your pension before the minimum pension age attracts punitive tax charges, whereas a mortgage free house can be sold or mortgaged to release home equity. Repaying a cheap loan now gives you a call option on a cheap loan later; you can’t do that with a pension.
Luckily my tax bracket was such that I could not justify anything other than maxing out my pension allowance. As for the ISA, I just bit the bullet and did it, kept some of it in cash at first, called it my emergency fund. It was a good call.
4. The final stretch
Now I only check my mortgage balance when I update the scorekeeping spreadsheet, which is once or twice a quarter. Overpayments are coming out on direct debit, I hardly even notice it anymore. And the balance has decreased to less than a third of the original amount. And, as I might have already mentioned, I have more than enough funds now to kill it once and for all, if I wanted to.
So that’s when you tether the fucker to a chariot and pull it around Troy, right?;
Maybe. Maybe not. I find I’ve grown accustomed to my mortgage, the glimpse of its balance on the mobile banking app no longer frightens me, nor does it keep me up at night.
I now wonder perhaps the problem was not the mortgage itself but rather the size of it compared to my then nascent net worth? I think I’ll keep it for a few years yet, till I’m ready to retire, and then pull the plug on both The Mortgage and The Man at the same time. The two assholes have a lot in common after all.
1. Just kidding. I like Hector, it was shabby of Achilles to do that to him. I’m certain, had they had Instagram back then, Achilles would’ve apologised afterwards for such unacceptable and inexcusable behaviour, acknowledging that violence in all of its forms was poisonous and destructive. I trust we can all see clearly now that the Trojan War was too much for him to bear and he reacted emotionally. He was out of line, he was wrong, and his actions were not indicative of the man he wanted to be 😀 .
Wedlock. Yours Truly has joined the Married Persons Club, on a budget, obviously. I think the low cost of our wedding warrants a separate post. Perhaps. Perhaps not.
How’s the progress?
Overall progress to financial independence stands at 65%. Nothing to write home about. I hope the pace picks soon, for I am well and truly ready to retire. Going back to the office in mid-2021 was torture.
I failed on Savings Rate goal (again), but managed to use up all my pension and ISA allowances, and I’ve overpaid the mortgage as planned. The emergency fund is still where it should be. All things considered, I’ll give me a C+.
I need to focus on the Freedom Fund – the pot of money that Mr & Mrs HoSimpson will live on until I can get my hands on my pension. Not to worry, I have a plan for that… now that I have two ISA allowances to use!
Once upon a time ZeroHedge was a cooky libertarian finance blog with a weird fetish for precious metals. It was my guilty pleasure which I indulged in from time to time.
I used to have a conspiracy theory about ZeroHedge’s perma-hardon for the shiny-shiny and it went something like this. One night in December 2011 Tyler Durden got blind drunk and invested all his savings in EKWAX. Tyler thought he was buying into Emanuel Kalisto’s new male waxing studio. He was certain this was going to be the Next Big Thing.
In retrospect, Tyler was onto something with the male waxing, I guess, in a way. Alas, EKWAX turned out to have nothing to do with either Kalisto or follicle removal. And thus it came to pass that poor Tyler had to try his utmost to drum up the price of gold and silver on his blog, hoping it would get just high enough for him to offload his dud fund with a 1.2% expense ratio, to free up the money for an anal bleaching venture with Johnny Depp.
Or maybe ZeroHedge’s appreciation for shiny metals was merely a factor of their permabear bias? If the stock market collapse is imminent, physical gold and silver might be the only way to save some of your wealth from the forthcoming? I guess we’ll never know which of these two theories is closest to the truth. There are good people on both sides.
But that was then, and those were altogether gentler times. For a few years now – at least two, but probably more like four – it appears ZeroHedge has been taken over by nutcases. Their permabear outlook has morphed from stock-market-is-overpriced-and-is-about-to-blow to stock-market-is-rigged-by-The-Man-and-they’re-about-to-blow-it-on-purpose-in-order-to-defraud-you.
I wouldn’t call this difference subtle. Also, they have branched out into politics. The sort of politics where people endorse and develop conspiracy theories and speak in strange code calling a former US president Grey Wizard and shit like that.
It’s scary. Because: now I can’t tell whether the nutcases have indeed come and taken over, or if the place had always been run by nut jobs, conspiracy theorists and neo-nazis and I just hadn’t noticed. I don’t know which is worse.
Remember when I did the No New Stuff Year? Well, that particular year lasted 8 months. Whatever.
This year I’ll try something that – I hope – is going to be more achievable. The rule is quite simple: whenever I buy or allow someone to gift me any physical object, I must throw another physical object away. It doesn’t have to be in the same category, or of similar size, or anything like that. Simply whenever an item enters my house, another must leave my house at the same time.
Leave means leave, as opposed to being taken to the loft or the shed.
Sets count as the number of individual items in the set.
Consumables such as food and toothpaste are excluded.
To celebrate this new resolution I have just bought a set of 24 acrylic paint brushes, and am now scrambling for 24 pieces of random junk to throw away 😳.
I don’t expect this will help me declutter, but hope it’ll halt the steady accumulation of clutter, help bring the need vs want into focus and reduce impulse buying… which should benefit both my soul and my wallet.
Overall progress to financial independence stands at 56%. Not great, and I can’t even blame COVID for it.
I failed on Savings Rate and Mortgage goals (again), but managed to use up all my pension and ISA allowances. The emergency fund is where it should be. All things considered, financially this year has been nothing to write home about.
Having said this, my overall investment return was better than for most people. Because: I was lucky enough to have a bit of cash when the market was crashing in March, and I happened to invest most of that cash in VWRL. Luck more than skill, methinks.
But money is not everything. Despite me not making much progress towards financial independence this year, I think 2020 was awesome! We got engaged, sorted out some building work that was in need of sorting, and even managed to have three foreign holidays in between lockdowns. I have a lot to be grateful for, and grateful I am indeed.