Dumb Ways to Handle Your Finances

tumblr_md39anem0o1rk9vano1_r1_500

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.
Advertisements

Why Retire?

How do I like being an corporate drone? Let me count the ways.

The conventional delusion about self actualisation at work centres around the notion of The Gift. Turns out we all have a special gift – our creative contribution to the world – and if we want to be completely deliriously happy in life we must share this gift with the humankind. In theory this should render retirement redundant1. All you need to do is recognise what your gift is and then find a way  to make this into a career and be compensated for it. Which brings me to the 33rd annual British Social Attitudes Survey.

The Survey found that, in 2015, 71% of people in work said they had a “good job”, and 62% said they would carry on working even if they didn’t need the money. Blimey, looks like the 62% are living a dream.

If asked, I’d say that I have a good job, and, objectively, I do. It’s interesting a lot of the time, I spend my days in a warm, reasonably quiet, well lit office in a comfortable chair in front of a properly positioned screen – all vetted by workplace health and safety consultants – away from heavy mining equipment, jackhammer noise, flying bullets, and such. Would I continue doing it if I didn’t need the money? No.

I was therefore surprised by recent blog posts on Monevator and SexHealthMoneyDeath where folks put forward reasons in favour of working hard to achieve financial independence and then… carrying on working. Huh?

To each his own, I guess, and there’s no accounting for milkshake flavours, and if you have indeed found your gift and are sharing it with the world within the context of paid employment then more power to you. But in that case, why be financially independent? An intelligent chap with a marketable set of skills not opposed to learning some new tricks as times move on will never be in want of employment opportunities. There may be some compromises, but there are always compromises. If it were me, I’d take this and use it as an excuse for buying tickets and eating out. Alas, I hate shopping.

However since my gift does not lie in securitisation vehicles (which at least to some extent is a relief) it’s reasonably certain that I’m not going to have a “but I still have so much to contribute” moment when I reach FI. I’ll very happily give up this:

For more of this, this, and this:

All being well, it’s just nine more years left to go.

 

Notes:

  1. Bummer if your special gift is giving people retirement advice.

Three Peaks Challenge

IMG_0008
Aeneas climbs the mountain’s airy brow, And takes a prospect of the lands below

What’s all the fuss about climbing three small mountains in under 24 hours? Yours truly sets out to investigate.

It starts at 7am with a 40 minute train ride to Gatwick. After a short flight we arrive in Glasgow decked out in our Snow+Rock gear, and find our mountain guide waiting at the agreed pickup location. We’re going to be skipping sleep and climbing mountains for a full day. We’re rearing to go.

The clock starts at Ben Nevis. It’s sunny at the bottom and snowing at the top, and there’s mist, rain and sleet in between, in whichever order. We lose interest in photos about halfway up, then ski jackets come out of backpacks. It’s an August afternoon. We cross a field of hard packed snow and ice, climb up a little higher, and we’ve reached the summit. Or so our guide tells us; we can’t see anything through the thick cloud.

It’s a six hour drive to Scafell Pike, we reach it after midnight. At about a third of the way up there’s a knee deep stream, which we traverse before continuing the long haul on what is known as “the staircase”. Fuck the staircase. I’m tired, I’m freezing, my socks are wet, the mountain’s upper slopes are covered with loose scree, and it’s blowing a gale. In torchlight we make out the summit marker and stumble towards it like newbie zombies on their first walkabout. The marker provides a little shelter from the wind, we huddle together behind it and try not to whimper. But we have to move, the clock is ticking.

I nap on the way to Snowdon, it’s a much needed boost. The path begins on a gentle incline, then, as we approach the plateau, the terrain turns steep and rocky. My knees have formed a union and are threatening a strike. Finally we reach the top, take a photo on the summit, begin the descent. The timer stops when we return to the carpark: 24 hours and 27 minutes. It’s a fail.

Why couldn’t we make it back in time? The mountains aren’t that tall, the trails aren’t that difficult, even in bad weather. Climbing either of the three peaks is not that hard. The hard part is having to do all three in succession, tired, cold and bored (let’s face it, grass and rocks and trees and grass and rocks begin to look all the same after a while).

A quest for FI is in many ways similar to the three peaks challenge. Anyone can save money. The challenge is keeping it up month after month for years whilst dealing with life’s minor frustrations of wet feet, cold hands, achy knees and wondering why the hell I’m doing this to myself when most other people are warm at home sitting on a sofa in front of a telly eating Doritos. I like Doritos. Then there’s the weather factor: market adjustments, recessions. They might not happen from the outset, but it’s a question of when, not if.

Mind-over-matter only works for so long. Reading other people’s blogs, like the one that Monevator guy writes, certainly helps with staying focused. But what’s helped me the most so far was something LAFI once said about changing the mindset from “I’m saving money” to “I’m spending money on my future financial independence”. I’ve tried it. It works.

So I’m not trudging up some stupid mountain in the dark at 3am on a Sunday in a gale-force wind. I’m walking towards my sweet, sweet pack of guilt-free Doritos, which I shall wash down with sauv blanc as I’m showing my friends photos from the trip. It will be worth it.

Stocktake: Q2 2016

Screen Shot 2016-08-06 at 17.07.35
Ent’ring with cheerful shouts the wat’ry reign, and plowing frothy furrows in the main

What gets measured gets done, and so it’s time for a stocktake. There are no alarms and no surprises this quarter, as Radiohead would say, although savings rate warrants watching.

Goal 1: 60% savings rate

The monthly savings rate wobbled in May and June, but the in-year average stayed just below the 70% mark, mainly due to bonus salary sacrifice in Q1. I’ll give it a pass.

2Q16 Savings rate

Goal 2: 10% mortgage overpayments

Hasn’t happened and is not going to. Instead of overpaying the mortgage I’ve been channelling money into the SIPP, because: tax.

Goal 3: Pension

In Q1 the bonus went into my company pension as salary sacrifice. Also, since I’ve now abandoned Goal 2 in favour of ramping up pension contributions, the SIPP balance has increased by a little under 50%.

In the beginning of the year the amount of savings I was holding in tax advantaged pension accounts was significantly suboptimal. I’m still not where I should be, but it’s going in the right direction. Pass.

2Q16 Asset allocation

Goal 4: Emergency Fund and Freedom Fund

Neither the Emergency Fund nor the Freedom Fund have grown significantly, but I have manage to add a small amount of savings to each. Pass.

Decisions … Decisions

Atlanta USA 145 - Version 2When I first embarked on this FI project I felt like a kid in a candy store with very little money: want everything can afford next to nothing. I wanted to pay off that ridiculously large mortgage asap, use all my annual ISA allowance, stash away more moolah for the rainy day, and contribute more than the bare minimum into a workplace pension. But I also wanted a (very expensive and completely unnecessary) basement conversion because, y’know, nowadays basement conversions are all the rage in London, and alcove shelving, and a drip irrigation system for the patio, just a regular one, not a green wall or anything, no need to be extravagant, and a new kitesurf board since mine is rather old… soon it became apparent that I needed to prioritise.

I zeroed in on overpaying the mortgage; there’s a consensus on the FI blogosphere that debt repayment comes before investing, and I didn’t have any non-mortgage debt. It turned out to be an ok decision, albeit ridiculously tax inefficient. My marginal tax rate is such that I can’t even think of it without swearing [1]. So overpaying the mortgage was not a completely shite move, however, now that its balance has reduced and a mere sight the annual mortgage statement no longer brings on a tachycardic attack, I’ve decided to give it a rest and focus on the pension.

In the UK at least, a pension, be it a workplace pension or a SIPP, is the most tax efficient FI vehicle on offer. The only downside is having to wait until you are  56  58 before you’re allowed to get your mitts on the loot. But given how low interest rates are at the moment it makes no sense paying 40%-60% income tax and then overpaying the mortgage from after-tax income. I’m timing my Mortgage Free Day to coincide with my FI Day. Virtually all my savings are going into the pension so as to reduce income tax. I have enough carried over pension allowance to last me until 2018. When that runs out pension contributions will be limited to £40k p.a., and I’ll have to decide on what to do with any additional savings. I suspect that it’ll be a tossup between mortgage overpayments and ISA contributions. I also suspect that I’ll choose to fatten up my emergency stash in the form of a cash ISA first and put the rest into S&S ISA. I’ll need a freedom fund to live on between early retirement and the ripe old age of 58.

Some might say that investing in S&S ISA with an outstanding mortgage is a somewhat risky proposition. Perhaps it is, but then again, that’s what an emergency fund is for. I’ll go out on a limb here and say that I don’t think interest rates will rise from where they are now in foreseeable future. First world economies are creaking under a mountain of cheap debt; they’d outright collapse if that debt became expensive. The more cheap debt gets accumulated in the system, the less possible it will be for those in charge to ever raise the rates back to normal levels where markets can function as mechanisms for moving savings into productive investments. Everyone knows it, but events (dear boy) keep rolling in. The GFC ended, but then Brexit happened, and when that shitshow gets sorted out [2] then China’s bubble will pop with a bang [3]… China will have to lift capital controls at some point. Hence given a mortgage rate of c.1.3% vs a tax rate of 40%-60%, it’s a no brainer. Maybe.

Notes:

  1. I can swear in 6 languages, and when you do it quietly in your head there are no forbidden words. It is Known.
  2. Don’t start on it and I promise to do my utmost to not disintegrate into a rant about the stupid, xenophobic, irresponsible, stupid, economically illiterate, intellectually dishonest, stupid brexiteer twits, to whom I usually refer as ze clusterfuck implementation committee, ya?
  3. China is a qualitative constraint on my early retirement plan. The current goalpost is c.£1m (depending on  the rate of inflation between now and 10-or-so years from now), but only if the Chinese bubble has burst in the interim. Otherwise I’ll consider carrying on at the salt mines until it does, because when it does I might just get a redundancy payout.

Fookin Taxes

03488e18aeb08678f2889a6f956d11a962f2fed75c36d1c093eb6ba828a84acc
Hello little guy! It’s the tax man coming!

My P11D has finally arrived, and now I have no more excuses to procrastinate; it’s time to complete my SA. With this in mind I immediately began to trawl through my records for something to listen to when doing taxes.

Here’s what’s in the Tax 2016 playlist:
“Taxman” – The Beatles
“No Money” – Kings of Leon
“Yes Sir, No Sir” – The Kinks
“You Never Give Me Your Money” – The Beatles
“Money Maker” – The Black Keys
“Hold On To What You’ve Got” – Dennis Brown
“Poney Honey Money” – CSS
“Box Full Of Letters” – Wilco
“Money For Nothing” – Dire Straits
“Money” – The Drums
“Nothing To Hide” – Yo La Tengo
“What If We All Stopped Paying Taxes” – Sharon Jones and The Dap-Kings