Hello and welcome back to Mortgage Advisor on F.I.R.E. This week I will be looking at my investment plans once I have finished saving for my first BTL deposit. I will also revisit the differences between process goals and outcome goals.
I’m feeling better this week. I’m not all singing, all dancing, but I’m better than I have been both mentally and physically. There is still a way to go, but I’m feeling more positive now that I seem to have bottomed out and am starting to climb out of the funk I’ve been in.
In the last few days I have been able to leave home without crutches. I struggle to walk or stay on my feet for too long and take frequent breaks, but it is such a good feeling to have some degree of independence back. I have just finished wearing a 24-hour heart rate monitor, and it is a relief to have it disconnected. Whilst not as distracting as a 24-hour blood pressure monitor which inflates on your arm every thirty-minutes, the stickers and wires over my chest were annoying. I have an ultrasound on my heart tomorrow (Friday 21st) and then a follow up with my rheumatologist next week. I’m hoping to have some more concrete news about my health then.
I don’t have much else to update you on this week. It’s been a mostly uneventful week.
Premium Bonds: £13,725 (up £725 from last week).
Stocks and Shares ISA: £8,613.42 (up £5.25 from last week).
F**k It Fund: £1,613.11 (up £100 from last week).
Property Value*: £181,626 (no change from last week).
Total Assets: £205,577.53 (up £830.25 from last week).
Credit Card Debt: £0.00 (no change from last week).
Loan Debt: £3,370.33 (no change from last week).
Mortgage Debt: £133,960.57 (no change from last week).
Total Debt: £137,330.90 (no change from last week).
Total Wealth Figure**: £68,246.63 (up £830.25 from last week).
Investment Income in 2020: £0.00 (Target £2,000)
*valued at £181,626 according to lender’s index.
**total assets minus total debt
Another positive week with my assets increasing. By next week’s instalment I should have made another overpayment off my loan which might just bring it under the £3,000 mark. As the payments take a day or two to clear, it might not show up on the balance in time for 28/02 though.
Since I started this blog sixteen weeks ago, I’ve seen my Total Wealth Figure increase from £49,903 to £68,246; an increase of 36%. I’ve graphed out that growth rate until the end of my project and, assuming the same rate of growth, it should see me with a Total Wealth Figure of approximately £1,800,000.
The thing is, I don’t think that figure is realistic. 36% growth is insane. Have you spotted the problem with my calculation? I’ll explain with a basic example.
Let’s say that you start with £0 invested. In the first month you invest £500. The second month you invest a further £500. You have doubled your savings. If you add a further £500, you don’t double your investment again, you increase it by 50%. If you add another £500 to take your total from £1,500 to £2,000, you have increased your savings by 33%. The next £500 invested increases your savings total by 25%, and so on. If you only look at a small window and then project outward it will magnify the misunderstood growth rate. Another example will illustrate the point more clearly. The increase from £49,903 to £68,246 is 36%, but in cash terms it is £18,523. The difference between £249,903 and £268,246 is also £18,523, but it’s only around 7.3%. Percentages do not always tell the full story.
It’s an interesting exercise and should serve as a note of caution when looking at limited data and then scaling the data up or projecting it into the future. The moral of the story is that if the return seems too good to be true, it’s probably too good to be true. Always crunch the numbers until they make sense.
I’m so close to having my BTL deposit (£14,850 in Premium Bonds) that I can taste it. Once I get to that point, I have a decision to make about how to structure my investments going forward. My original plan was to just continue saving, but I’m thinking of taking a different approach. My residence is increasing in value and rather than saving for my second BTL deposit each month, I think I will let my equity in my residence increase and then use that as the deposit for my second BTL. Assuming we don’t have a property crash, I should have enough equity to raise that deposit in the latter part of 2020 or the early part of 2021.
Assuming I take this approach, this will free up at least £500 each month. So how do I allocate that money?
Process Goals and Objective Goals
I was asked this week about my approach to goal setting, and I discussed this in a recent instalment of this blog. I’m of the view that process goals lead to better outcomes that objective goals. For example, rather than saying “I want £10,000 saved in a year”, you can set the goal of saving or investing each month. By aiming to complete the process, the objective takes care of itself. Also, by focusing on the process you are less inclined to give up if something happens that makes achieving the objective unlikely by the deadline.
Despite all that, objective goals are still important. They provide the direction and focus for your process goals. It’s fine to say you are going to save each month, but unless there is an overall strategy you might not get the best returns on your investment. My end goal is financial independence. My process is saving and investing regularly. My strategy is made up of several things: maximise investment returns, minimise fees, avoid unsecured debt, and leverage as much as possible without too much exposure.
How does this relate to my extra £500 per month? There are two smaller financial factors that I want to draw a line under as soon as possible. I want to clear the decks, so to speak. As soon as is possible I want to clear my loan and increase my F**k It Fund to £4,500.
Between the outstanding amount on my loan (£3,370) and the amount needed to increase my F**k It Fund to £4,500 I need to save approx. £6,000. I’m already clearing £30 per month off the loan through the regular payments and saving £100 towards the F**k It Fund. My budget allows for overpayments to the loan of £300 per month on top of the £500 I could free up from the Premium Bonds contributions. In total, I have £930 that is being put towards the F**k It Fund and to pay off my loan. It’s not beyond the realms of possibility that I could achieve these two smaller goals within the next six months when I factor in dividend income that will be received throughout the year.
Allocating my money in this way means that I will not be increasing my Stocks and Shares ISA as quickly as I could or increasing my deposit fund for future BTLs as quickly as I could. However, it does mean that I will be trimming the fat. I will be paying off a smaller commitment that will then free up even more money to direct to other things. Also, by getting my F**k It Fund up to £4,500 I will no longer have to contribute to that monthly. I will be free to allocate the entirety of my monthly income to my ISA and to my deposit fund, rather than spreading my money across the F**k It Fund and loan payments as well.
The plan, as it stands, assumes that I continue in my current role with my current salary. However, there is a possibility that I could be in for a new job. My employer is paying for me to study to become a Financial Advisor, and I’m not sure if I would rename the blog as the thought has only just occurred to me as I type this. Taking up this new role would mean more money and would mean I would relocate from Sheffield to Manchester. I would then rent my apartment out (it would achieve £950-£1,000 per month in rent, against a mortgage of approx. £450), and initially rent in Manchester whilst I look for somewhere to buy. This would mean I would have my soon-to-be-purchased BTL, and my current residence both providing me with rental income.
2020 is going to be defining year in my plan to become financially independent by the age of 40, but it’s all looking positive.
Thank you again for reading this blog. Next week I will be discussing values and principles and how they are the foundation of my investing strategy, and I will be looking ahead to my two-week trip to India. If you have enjoyed reading this blog, please share it on social media.