Dumb Ways to Handle Your Finances

Remember when Dumb Ways to Die video went viral on the internets? Then there was a sequel, and then another, then a Halloween edition, a Christmas edition … All sorts of parody versions followed (Coll Things to Find being a personal favourite).

I wish someone had released an iteration entitled Dumb Ways to Run Yor Finances.

Over the years I’ve found that my borderline ADD personality registers a message easier when the message is accompanied by a catchy tune. There’s a real possibility that I might have made fewer money mistakes if only sensible financial advise had been dispensed in two-syllable words by likeable animated characters.

There’s extensive write-up out on the FI blogosphere pertaining to financial blunders. The most entertaining commentary tends to be penned by Ermine of Simple Living in Suffolk. Monevator and Living A FI have each issued a list of money mistakes to avoid. I doubt that I could surpass the pithy eloquence here, here, here or here, hence I shan’t even try. What follows is merely my bid for a place in the medals table of A Former FI Village Idiot competition. Or at least one of those Most Improved Over Summer gold stars. Here goes.

Dumb ways to handle your pension

Work for a few years abroad in a country where employer pension contributions are mandatory. Even though you have no intention of staying permanently, make sure you invest 100% of said pension in an XYZ Smart Alpha Equity Fund (managed, not tracker). Then, as you’re moving back, “repatriate” your pension at the end of a tax year thus ensuring you get a maximum possible tax whack. Make sure to effect said repatriation as the market is crashing (late fall of 2008, for instance) against written advice from the pension fund trustee. Instead of depositing the proceeds into a UK approved pension scheme, stick them in a non-interest bearing cash account when CPI inflation is running at 3.68% and use it as an emergency fund for emergency gadgets, emergency restaurants, emergency expensive holidays and emergency sports gear.

Even thought your employer offers contribution matching and even though you are in a higher tax bracket, make sure to not save a single penny into your UK pension until you’re at least 33. Ignore all five letters (followed up with emails and voice messages) from staff pensions team. If any of your more financially literate colleagues try to suggest that saving into a pension is a good idea and by not doing so you’re effectively refusing free money, reply with a jest; something along the lines of “lottery is my retirement plan, mate” will do splendidly. They’ll never broach the subject again.

Dumb ways to invest

Make your first ever investment experience is a highly leveraged real estate side gig where you provide certain niche expertise for a share of future profits, but as a partner also share in unlimited liability to capital providers. When the subprime drought rolls in and you barely break even¹ in a distressed buyout, use this as a limiting belief that any and all investment is best left to professionals (large corporates and institutionals). All debt is evil. A 100% reliance on full time employment is the only way forward for anyone sans a trust fund, and, given the sums in play, any notion of accumulating wealth by saving a portion of your employment income is beyond ludicrous. Which also renders saving redundant.

So what happens when your friends begin buying houses with deposits they saved up working jobs that pay less than yours? You don’t necessarily want a house just yet (because you can’t afford Belgravia and living anywhere else fills you with dread). However, you decide you should have some savings. An emergency fund of sorts, since Lehmans has collapsed and a global financial crisis is burning though the City and there’s carnage going on all around.

If you want to have some savings but don’t like the process of saving, have a dig through you records; you may just find you have a foreign pension you can repatriate (see above). You fill in a few forms and voila! savings magically appear from – literally – thin air. Though the proceeds may be only a third of the fund’s value you saw on the last statement, don’t worry: it’s a bird in the hand. Now stick that in a no-interes bank account and you’re sorted.

Fast forward a year or two. You’ve grown older and wiser and begun saving a portion of your income on every payday. According to the internets UK average saving rate is 8%, and you’re saving 20%. You financial genius, you! Well done. And there’s more. You’ve opened some of the mail your bank regularly sends you and found there’s a cash account you can get interest on.

Now, you’ve heard of a thing called a cash ISA, but there’s one tiny little problemo there: when your company moved your life and banking from overseas to the old Blighty, the bankers who handled the move obligingly stuck you into their international banking client division. Belonging to it offers perks such access of exclusive managed investment products² and extensive free insurance³. This international banking product is designed for non-doms, who by definition can’t have an ISA. But you’re not a non-dom. You could open an ISA with your bank if you transferred from their international banking division to a pedestrian banking division, but you like having access to perks you don’t use (just in case one day you might). Obviously, going to a different bank is out of the question. Having two online banking log-ins and passwords to remember is way too much hassle, no-one would suffer such inconvenience. Solution: you leave your savings in a taxable interest bearing cash account. Oh, and your marginal tax rate is 60%.

Dumb ways to buy a property

You’ve upped your “base” saving rate to 40% over the past couple of years. In addition, you’ve saved you last two (almost three) bonuses, and it turns out your employer, virtually unbeknownst to you, had given you some share options, which have now vested. A plus: you have enough for a house deposit. A minus: forget Belgravia, it’s 2011 and now you can’t afford even the fucking Fulham. Also, a thought of having a mortgage makes you break out in hives. The financial crisis has made you a gun-shy borrower: a grand or two on a credit card is OK so long as you pay it off at the end of the month, but woe betide anyone who borrows more.

Now even juniors in your team are buying properties. Everyone you know, including hedgies who got burnt on MBSs and had forsworn anything and everything House are talking of London’s resilience – as in the employment market, real estate, financial globalisation… Everyone says renting is for suckers.

So you decide on an area you can afford, where, incidentally, some of your friends happen to have moved to. It’s green, leafy and it’s on the A3. You can get to Portsmouth in under two hours, though you won’t be buying a boat after all.

Having seen a total of six properties the whiny five-year-old who lives inside you pipes up with a “cut the torture, let’s just be done with it already” and so you plump for the house with the largest patio, which should come in handy if you went kitesurfing and it started to rain so you’d have to roll up the kite wet to be dried at home later. You make an offer, but there’s a complication: someone else is also interested; he ups his offer. What to do, what to do? Well, I’m surprised you’d even ask, my friend. It’s a bidding war, of course, and it’s on. You. Never. Walk. Away.

Result: you have a house, but now your mortgage is both larger than you wanted it to be and more expensive because you’ve broken into a higher LTV bracket. You genius. You spend the next couple of years broke and stressed using every spare pound to overpay the blasted mortgage.

One good thing comes out of it though: you finally learn to save.

 

Notes:

1. You haven’t lost any money aside from a couple of grand on legal and taxman fees, etc., but any work you’ve put in on weekends and evenings after your day job has gone uncompensated.
2. Which would be useful if you had any intention to invest.
3. It covers everything you don’t own, e.g. a house, and excludes the things you need to insure for, e.g. third party liability for extreme sports.