Hello and welcome back to Mortgage Advisor on F.I.R.E. This week I will look back at my progress over the past year and discuss whether it is right for banks to charge fees for having a bank account. First, as always, we start with the Quote of the Week.
Quote of the Week
Is anyone actually happy? Is happiness a sustainable, long-term emotion? I don’t think it is. I think that modern life is difficult, mentally more than physically for those of us in the UK. I’m looking at this through my own lens, of someone in a professional, well-paid job, who has little to worry about in terms of food, shelter and so on. I mentioned a few weeks ago that I could not fully understand the struggles on non-white people when it comes to racism as I’ve not experienced that situation myself, and it’s the same principle here. I can only understand my own situation. Happiness is not something that modern life makes easy to achieve.
For the vast majority of people, life is a daily struggle of routine and monotony broken up with the occasional social gathering and many hours sat in front of a screen of one form or another. Work and maintaining a home, not to mention children or other dependents, cut into our time so that we have little energy to do anything other than eat, sleep, work and repeat.
The key to happiness is not physical possessions, as Heath Ledger states. I believe the key to happiness is time, the most valuable commodity we have. Time is something that we all have an equal amount of, in so much that there are 24 hours in a day. However, not all people have the same amount of free time due to demands of work, child care, commuting and so on. The only way to obtain more free time is to have enough money so that you can work fewer hours and/or delegate your household responsibilities by hiring cleaners, drivers, housekeepers and other employees.
The key point here is that whilst money cannot buy happiness, it can buy all the things that lead to happiness. It’s also important to remember that more free time and money can’t magically cure depression. However, having more free time and money does open up doors to treatments that might not otherwise be available.
It has just been announced that the UK is entering a month-long lockdown of sorts. It still does not go far enough in my opinion, as schools and universities will remain open. I would go much further and close those institutions and begin a partial curfew in the evenings so that only those working in certain jobs are allowed to be outside their home at these times. This pandemic is testing everyone’s mental health and resolve, but the virus hasn’t gone away just because we are frustrated. The virus is still out there, and we still have the same problems in the NHS.
We are going to be dealing with the virus for a long time yet. We have to find new ways of working and living rather than engaging in partial shutdowns every few months. I’m not sure what the answer is, and although I think a system of living with this virus is possible, I think it’s beyond the capabilities of our government to create and implement such a system.
I’ve kept my weight the same this week which is better than gaining more. However, it is still something that causes a lot of frustration. My weight is also a source of concern where this pandemic is concerned as it has been suggested that those who are overweight are more likely to suffer complications if they are infected.
I’ve had an appointment with my shoulder surgeon regarding the return of shoulder and neck pain. His view is that the pain should not require any scans or surgery, and that physio should resolve the problem. I’m not convinced. Over the years I’ve had a lot of physio and with just two exceptions I’ve found most physios to be useless.
Premium Bonds: £20,700 (no change from last update).
Stocks and Shares ISA: £12,876.88 (down £483.74 from last update).
Fuck It Fund: £100.00 (up £100.00 from last update).
Property Value: £187,554 (no change from last update).
Total Assets: £221,230.88 (down £483.74 from last update).
Credit Card: £133.76 (up £19.23 from last update).
Residential Mortgage: £142,456.43 (no change from last update).
Total Debts: £142,590.19 (up £19.23 from last update).
Total Wealth Figure: £78,640.69 (down £502.97 from last update).
Investment Income in 2020: £164.81 (up £3.45 from last update) (target £2,000).
The stock market has taken a hammering this week with many economies showing signs of worry over future lockdowns. Anyone who has spare cash to invest would do well to investigate the stock market for opportunities, with the assumption they complete thorough research over any investment. There are bargains to be had, of that I’m convinced. I’ve made a point to not recommend specific stocks because I don’t want that responsibility on my shoulders. Also, I’m generally opposed to investing in specific stocks as I believe it’s safer to look at index trackers for the long-term. Saying all that, I have recently started selling off some of my index funds that have made substantial gains and using the proceeds to snap up a particular stock that I am convinced is trading way under value. When the market does recover, I’m convinced this stock will triple or even quadruple my investment. I can’t talk about it in more detail without giving the game away, but if you do the research, there are bargains to be had.
Annual Financial Update
Premium Bonds: £20,700 (up £12,450 after 52 weeks).
Stocks and Shares ISA: £12,876.88 (up £6,357.88.74 after 52 weeks).
Fuck It Fund: £100.00 (down £750.96 after 52 weeks).
Property Value: £187,554 (up £15,054 after 52 weeks).
Total Assets: £221,230.88 (up £33,110.92 after 52 weeks).
Credit Card: £133.76 (up £133.76 after 52 weeks).
Residential Mortgage: £142,456.43 (up £8,177.32 after 52 weeks).
Total Debts: £142,590.19 (up £8,311.08 after 52 weeks).
Total Wealth Figure: £78,640.69 (up £24,799.84 after 52 weeks).
It’s now one-year since I started my FIRE journey in a methodical way and I’m pleased with the progress made. The only negative is that I’ve not been able to move my first BTL purchase over the finish line. The deal is still in progress but this new lockdown is probably going to delay things further. I’d be surprised if we complete in 2020.
The figures over the last year make interesting reading. My mortgage debt increased by £8,000 but this was countered by the increase in the lender’s valuation of my property which increased by over £15,000. My credit card debt has fluctuated throughout the year as I use my card for day-to-day spending to collect air miles, and sometimes my payments to clear the card do not complete in time for the next part of my blog. In general, I aim to run my credit card with a zero balance. My Premium Bonds and ISA values have increased significantly, and it’s reassuring to know that when the market recovers my ISA will increase even further.
Looking ahead another year, I have some thoughts on where I would like to be. I would hope that by the second anniversary of this blog, I will have two tenanted BTLs at a minimum. I would also hope that my passive income for 2021 is much higher than for this year. Had the pandemic not struck, I would have received much more dividend income in 2020. Hopefully, 2021 sees a return to normal.
Bank Account Fees
Ask yourself the following question; are banks right to charge fees for customers to hold bank accounts?
I’ve asked this question to a few people in recent days and the initial response has always been “no, banks should not charge fees for people to have bank accounts.”
However, when I follow up with the question, “why?”, people generally pause and think before acknowledging that it’s probably fair for banks to charge for bank accounts.
Before we take a deeper dive into this question, it’s best to look at the history of banking. However, the subject is very complex so I will do my best to break it down. A full accounting of the history of banking would take up thousands of pages, but it is a fascinating subject.
Imagine you are a farmer in Europe hundreds of years ago. You want to sell your crops or livestock. Instead of trading wheat for cows, for example, you need money. So, you take your merchandise to the market and you sell your stock. Now, you have a substantial amount of money. You set off home but are robbed along the way, and you lose all your money. If only there was a secure place in the town centre where you could store your money…
Banks serve many purposes and one of the major purposes is security; banks act as a secure storeroom for your wealth.
Using the above scenario, let’s assume that the farmer has sold his stock and instead of going home with his money, he visits the local bank and deposits his cash. In return, he is given a receipt for his funds. Our farmer has a long journey ahead of him, as he now wants to use those funds to purchase more stock. Travelling with a small receipt is much more secure than a wagon full of coins, which would attract attention. Our farmer arrives at his destination and agrees to purchase more stock. He hands the vendor a slip of paper that the bank has provided guaranteeing payment upon presentation of this slip at the local branch. The farmer leaves with his stock, and the vendor takes the slip to his bank where he exchanges it for cash, which he then deposits in his own account.
Banks not only store money, but allow for safe, secure transfers of wealth.
As banking developed, these financial institutions used the money they held on deposit to lend to those who needed to borrow. Now, I could get into Fractional Reserve Banking, but it’s early in the morning and I’ve not had much coffee, so I’m going to keep this simple. The banks use much of the money they have to lend to other customers, and it’s common for banks to only keep a fraction of what they hold on deposit for customers to withdraw. The assumption is that not all customers will turn up at the same time to withdraw their cash. The vast majority of the time, this system works well. Without bank accounts, banks would not be able to offer loans, overdrafts or mortgages.
Access to Banking
Banks are not charities, and the services they offer are with a view to making money for the owners and shareholders of the bank. Access to banking is not a right; it’s a service which needs to be paid for, as the bank needs to pay for staff and secure systems to protect funds on deposit. All these things cost money.
There are, broadly speaking, two types of fees that banks will charge; direct fees and indirect fees.
Direct fees are when banks charge a fee on a regular basis for you keeping your account open. This is now typically monthly or annually. In addition to keeping your money secure, the bank may offer other services such as travel insurance or emergency breakdown cover in return for the regular subscription.
Indirect fees are when banks charge different rates of interest on balances that are in credit and those that are in debit. Generally speaking, banks make money by charging higher rates of interest when you are overdrawn than the rate of interest offered when you are in credit. The difference between the two rates is one way in which the bank makes money. This is also applicable to the rates of interest banks charge on loans, which are typically much higher than the rates offered on credit balances.
Banking is not a right; it’s a service that needs to be paid for. Without banking, there are many ways in which life would be more difficult. For a start, you would have to carry cash everywhere. Not only is this not secure, it’s inconvenient. It’s so easy now to use contactless payments for your morning coffee or your weekly shop. Internet shopping would be impossible without banks. Without banking, large-scale regulated lending becomes impossible which means the vast majority of people would not be able to buy their own home. A lot of people look at banks and think they are responsible for the transfer of more wealth to the wealthy. This is one way to look at it, but one could argue that without banks responsible mortgage lending would be impossible. There are currently just over ten-million residential mortgages in the UK. A large proportion of those mortgages are owner-occupier and not BTL. Without mortgages, those people would have to rent, which would also transfer wealth from the poor to the already wealthy.
Where finance is concerned there is rarely a simple answer. Global banking is interconnected like never before, and when you dig deeper you find all the ways in which banking is at the heart of modern life. So, next time you complain about banks charging fees, just remember that you are not just paying for your bank account but also making a contribution to maintaining our society.
A Quick Request
I know there is a small group of people that read this blog regularly and I enjoy the engagement I have with those readers through email and social media. I would love for this blog to take off and grow through 2021. Gaining readers is the hardest thing for any blogger to achieve. I enjoy writing this blog and want it to grow, so if you are enjoying this content, please take a moment to share it on Facebook, Twitter, Instagram, Reddit, Whatsapp or any other social media. Shares are the ultimate sign of success for any blogger. If you have any feedback, comments or questions whether positive or negative, please leave a comment below.
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Finally, have a look at Darren Scothern’s blog at darrenscothern.com.