Part 22

Introduction

Hello and welcome back to Mortgage Advisor on F.I.R.E.  A week is a long time. When I posted last week, the coronavirus was raging and it’s only worsened since then.  I’m not going to focus too much on the virus itself in this part, but rather look at the opportunities the virus presents for investors whilst discussing the different things people can do to protect themselves financially during this crisis.

Weekly Update

Lots of people are worried about their mortgage at a time like this, and so I’ve spent most of the week reassuring people.  It’s felt rewarding, playing a small part in helping people with their mortgage. I’m not helping anywhere near as much as those on the front line such as medical professionals, retail workers and those in public transport.  We’re all playing our part though, or at least we should be. Just because your part might not be as immediately important or significant as what a doctor or nurse is doing, it does not diminish what you are doing. In a time like this, you are either helping or hindering; there is no middle ground.  

There have been reports of people coughing and spitting at police and emergency service personnel.  I’m constantly surprised, although I shouldn’t be, at just how low some people can be. Pandemic or not, if you deliberately cough or spit in the face of another person, you don’t deserve any treatment or protection – you deserve to be prosecuted.

The scale of this pandemic is horrifying.  It’s amazing how quickly your mind adjusts to a new reality though.  In the last few days I’ve seen groups of three or four people walking together and my opinion of them is formed, although they could be part of a shared household and have every right to be out together.  When I listen to my audiobook, and I hear about people in crowded areas like bars and restaurants, I have a strange feeling of nostalgia mixed with a sensation of a world we no longer know.  

It’s going to be interesting to see what the long term impacts on society and culture will be once this pandemic is defeated.  Will there be a release of people into the cities? Will there be street parties to celebrate the end of our social isolation? Will there be a greater sense of community?  Or, will things revert to “normal”. Another possibility is that society maintains its social isolation. That is a depressing thought.

This virus will result in many changes to everyday life.  It’s probably going to change in ways we can’t predict. There may be new types of jobs created.  New industries even. There could be new technology, apps and games built through our enforced social isolation.  We could even see new belief systems or philosophies developed. 

One way or another, it will be a very different world we wake to when this virus is beaten.

Financial Update

Premium Bonds: £15,000 (no change from last update).

Stocks and Shares ISA: £6,616.52 (up £262.68 from last update).

F**k It Fund: £1,879.51 (no change from last update).

Property Value: £181,626 (no change from last update).

Total Assets: £205,122.03 (up £262.68 from last update).

Credit Card Debt: £2,216.24 (up £484.10 from last update).

Loan Debt: £2,871.56 (down £35.28 from last update).

Residential Mortgage: £133,673.84 (no change from last update).

Total Debts: £138,761.64 (up £448.82 from last update).

Total Wealth Figure: £66,360.39 (down £186.14 from last update).

We are still seeing the instability in the markets due to the coronavirus.  Since last week I have invested a further £660 into my ISA. Soon after, the stock prices dropped a little.  I’m not concerned though, as I’m playing the long game. Those stocks I bought were massively undervalued and in time I will see gains far greater than the sum invested.  

You will notice that my credit card balance increased significantly.  My girlfriend’s phone died and she needed a new one. I can’t complain as she had her old phone for the best part of seven years.  She tried buying one using her card but for some reason the retailer kept declining it. It’s strange as we both have our cards with the same card provider, and when I tried mine the order went through without issue.  

I’m working on something which should see my loan and credit card balances reduced to zero by the next update.  However, the coronavirus might delay my plans. I’m having to take that possibility day by day at the moment.  

Other News

The financial impact of coronavirus is going to be staggering.  A lot of people are going to lose their jobs or businesses. Many people are going to deplete savings.  Even more people are going to run up debts on credit cards and short-term loans. The financial consequences of this pandemic are going to run, and run.  We will still be dealing with this into the latter part of this decade. My grim prediction is that we will probably see a surge in suicides in the months that follow the virus subsiding as people face up to the financial reality of the new world.  It’s a terrifying time. I would hope that human goodness prevails and lenders take a sympathetic stance towards those with credit cards and short-term loans. A good first step would be to drastically reduce interest rates on those products, or possibly grant zero percent terms for the next twelve months or so.  I doubt this will happen. I think we will instead see eligibility criteria for loans and credit cards reduced and interest rates hiked.

If you are struggling with debt, I strongly advise you to seek help and support from a qualified organisation such as StepChange (https://www.stepchange.org/) or the National Debtline (https://www.nationaldebtline.org/).  If your mental health is suffering, please reach out to one of the support lines listed on this NHS page:https://www.nhs.uk/conditions/stress-anxiety-depression/mental-health-helplines/.

The Importance of an Emergency Fund and Budgeting

The only way to financial security and independence is through budgeting.  I’m not talking about scrimping and saving. I’m talking about having a full and clear picture of your spending.  I can tell you from memory how much all my bills are and when they are collected by direct debit. I can tell you, to within ten-percent or so, how much we spend a month on household shopping.  I know all my expenses, and I know my income. That’s the first step of budgeting.  

There’s a theory in dieting that the simple act of recording what you eat changes your eating behaviour.  I suppose it’s like the Observer Effect in physics; the act of observation changes the observed. I believe this can be applied to money.  I always suggest people take it a step further though, or should I say a step backward. For those looking to get a handle on their spending, it’s best to look back over previous spending.  Have a look at your last month of spending (three months would be better, but not everyone has the patience for that) and categorise it into things like household shopping, leisure/recreation, take-aways/eating out etc.  The figures can be a revelation. Then, be more mindful of your spending going forward. I don’t generally subscribe to the belief that you have to cut down on your morning latte or a weekly take-away, so long as it all fits into the bigger picture.  A latte once a day is not going to break the bank so long as you are not throwing £200 away at the weekend on heavy nights out. It’s all about context.  

​If you don’t know what you’re spending, you don’t know what you need to survive a week, month or year without income.  I’ve heard wealth defined not as a monetary amount but as a function of time. Your wealth is how long you can survive at your current standard of living without any income.  My wealth is two-years, give or take a month or two. It’s reassuring to know that if push comes to shove, I could get by for a while without worrying about the mortgage or food.  This outcome is a result of following the process (something I have talked about before).  By following a process of budgeting I knew where I needed to cut down and where I needed to deploy my money.  This has led, over time, to the accumulation of a decent sized pot of capital. It’s why I don’t sweat paying a few hundred pounds for a new phone for my partner.  I know that this can easily be clawed back. Personally speaking, I’m not in negative equity. I only got to this point by following the process.  

Layers of Defence

The first step to defend yourself against a sudden drop, or complete loss, of income is to have an emergency fund of liquid cash.  I call my pot of money the F**k It Fund. I know that if the shit hits the fan, I can call upon that cash with just a working day of notice required.  For anything that requires an instant financial response, I have a credit card with a very respectable credit limit. This is the first line of defence.  

My second line of defence is made up of stocks and bonds.  These are income generating assets that I would rather not cash in, but I know I can still raise a decent sum from them; enough to survive for months if necessary.

The third, and final line of defence, is my financial education.  In many ways this is the most important line of defence. I understand how finance works.  I know from my job that many people think they know how money, debt and investments work, but they don’t.  There is a term for this inflated sense of expertise; the Dunning-Kruger effect. I’m not saying I’m an expert but I have enough knowledge and experience to navigate the financial system.  I also have enough knowledge and experience to be fairly confident that if I had to seek employment in the world of finance, I would probably be successful. The most important thing about this line of defence is that it can only grow stronger.  You can’t lose your knowledge and experience like you can money, stocks or bonds. Your knowledge and experience can only grow; it can’t diminish.

Tending the Garden

Imagine you have a garden ready for planting.  You plant a seed that over time grows into a fruit tree.  You take more seeds from the fruit and plant those. You have two more trees.  The three fruit trees provide more fruit, and from their seeds you grow another six trees.  Those six trees allow you to plant more seeds, and so your garden grows. This is how methodical investment works.  Each unit of currency buys a stock. That stock grows and pays dividends. Those dividends are reinvested, buying more units of stock.  Over time, your holding grows. At first, the growth is small, but over time the pace of growth accelerates. There will be times when the pace drops off, when the market stalls or when a strong wind blows a fruit tree over.  But the market, like nature, bounces back. Tend to your investments like you would a garden. Trim and prune where necessary, but don’t go digging your garden up every few weeks as you will never give anything a chance to grow and yield fruit.  

With the current economic crisis, those seeds are cheap to buy; as cheap as they’ve been in years.  Now is the ideal time to plant seeds. It might take time for the fruit to grow and the longer you let it grow the juicer it will be when you pick it.  If you invest in FTSE100 index trackers and US equity trackers (I would suggest using Vanguard as their fees are low), then I’m confident that we will see gains in the coming months and years.  

As always, do the research and make sure you can afford to invest.  There is no point getting into debt to invest. Any investment comes with the risk that you could need that money further down the line and when you cash your investments in the value could be lower.  If you get into debt to invest, or invest without understanding the investment you are just gambling and when you gamble the house always wins. With any investment, there are two parties; the person buying the investment and the person selling.  In any game there is a winner and a loser. If you don’t fully understand the investment, guaranteed you are the loser.  

I hope you have a safe week.  Until next time, thanks for reading Mortgage Advisor on F.I.R.E.  

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