Weekly Update
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.
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.
Budgeting
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.
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.
Automating Finances
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.
Next Steps
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.
Mortgage Advisor on FIRE. 