Looking Back: Part 17

Introduction

Hello and welcome back to Mortgage Advisor on FIRE.  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. 

Weekly Update

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. 

This was such an annoying time and in some ways, it’s still playing out now. As I review this post I’ve been dealing with a long-running elbow injury that’s been causing pain for over two years. Part of it all is bad luck, but it’s also common for autistic people to have joint problems for some reason.

I don’t have much else to update you on this week.  It’s been a mostly uneventful week.  

Financial Update

Assets

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).

Debts

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 the 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.  Though the payments take a day or two to clear, it might not show up on the balance in time for 28/02.

Extrapolating from limited data…

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. 

Out of curiosity I worked out the percentage increase from Week 1 to Week 262 (the latest week at the time I’m reviewing this post). The increase is 353% give or take. If I project that forward to Week 524 my total wealth would be over £860,000.

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.

So what is the full story?

Being able to look at data and critically analyse it is a skill that many people lack. We are, as humans, optimised for speed of processing rather than depth of processing, and so it should not be surprising that we can be easily misled by data.

One great example is climate change. A common argument against climate change is when people look at weather records over 5-10 years, and exclaim, “Look, there’s no significant change in temperature”. However, when you look at a longer period the trend becomes undeniable.

In short, looking at a small selection of data and then using that range to argue for a trend over a longer period is dumb, and sometimes dangerous. Let me give you an extreme example; if I look at my weather app it says the temperature at 13:00 tomorrow will be 12 degrees C, and at 14:00 it will be 13 degrees C. If I take that one-hour window and argue for a trend projecting forward in time, I could claim there’s evidence that it will be over 100 degrees C just four days later.

This is what climate change deniers are doing. They are taking a snapshot of data that shows no change, and saying, well, there’s no change. If you take the long view and see a slow, but sustained, increase then you have more credibility when arguing that temperatures are increasing.

​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. 

Financial News

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 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?

One thing I’ve noticed looking back just a few years is that, although my income increased massively, I’m investing less now than I was in 2019 and 2020. The cost of living crisis really screwed things up. Everything from electricity to mortgage rates have increased, and it’s squeezed the finances of many people.

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 than 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 and 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.  

Different types of investing goals…

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 by clearing my loan, and increasing 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 the 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 can or increasing my deposit fund for future BTLs as quickly as I can.  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 my deposit fund, rather than spreading my money across the F**k It Fund and loan payments as well. 

The Plan

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. 

The studying for the financial advisor qualification did not work out as planned. From those of us selected I don’t think any of us saw it through to completion. I think the pandemic played a part in this for all of us, but 2020 ended up being a horrific year for me in a few ways. I hit a mental and emotional wall, and I don’t think I’ve ever really recovered. Imagine you are a marble sculpture and part of you breaks off. You can try sticking that piece back on, but it’s never going to be the same. The sculpture will always be diminished.

2020 is going to be a defining year in my plan to become financially independent by the age of 40, but it’s all looking positive. 

**Morgan Freeman voiceover** “It was not, in fact, all positive.

Final Notes

​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.