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.
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.