Hello and welcome back to Mortgage Advisor on F.I.R.E. This week I will discuss opportunity cost, and its relationship to compound interest. Weekly Update
I want a holiday. I should be gearing up to travel to Romania in three weeks but that trip is not going ahead now. Even if the flights were running and there was not a quarantine on either side of the journey, none of us who should be travelling think it’s wise to risk getting on a plane. It’s not just the danger of catching the virus, but also the risk of passing it on. This is something that many people don’t seem to grasp when they talk about having their freedoms taken away from them. First of all, no democracy is completely free. If it was completely free, society would collapse into anarchy. Part of living in a democracy is giving up certain freedoms to the state so that the safety, well-being and prosperity of the group can be promoted. I had this argument with an American woman on Facebook recently. She was adamant that in the US, none of their freedoms are restricted by the state. My response was; what about the freedom to practice medicine without a licence? What about the freedom to kill someone you don’t like? Even in a “free” society, we’re never truly “free”. With this virus, we can’t be trusted to act responsibly as a nation because time and time again we have demonstrated that we don’t. Each individual person has a low risk of catching coronavirus, and an even lower risk of dying from it. However, some people will catch it, and those people will pass it on, and the people they pass on to will continue to spread the virus which means someone down the infection chain will die. It’s a similar concept to the lottery; each person has a tiny chance of winning the jackpot, but there is an overwhelming chance that someone will win it.
The search has now started for our first BTL property. I had a video call this morning with my JV partner and we’ve agreed on the criteria for our search. It’s frustrating that we will not be able to physically view properties any time soon. Although viewings have started up, it’s only for those from a single household, which means we would have to arrange different viewings. I’m hoping we can secure a property before the end of quarter-three which would then allow for at least six-months until the start of the new financial year. The six-month period is important because you can’t generally remortgage or borrow more money on an existing mortgage until you have had your current mortgage for six-months. Recycling the deposit is an important part of our business plan, and I’m working to a deadline of 31/12/2023 to be able to retire.
Current Weight: 116.8kg (down 1.9kg from last update).
Current Body Fat: 41.2% (up 3.1% from last update).
Weekly Goal: lose 0.5kg
Ultimate Goal: 90kg
The first week of my new health push has gone well. Although I’m using the principles I apply to my financial life to help with my health, there are some important things to consider. When I check my bank balance, or my investment values, I know that at that specific point in time the value is true. When measuring your weight, body fat percentage or BMI, the figures can vary minute to minute. Over the course of a day, it’s not unusual for your weight to fluctuate by a couple of kilos. So, care has to be taken when looking at small data sets. The key to measuring my health stats (weight, body fat and BMI) is to look at trends over time. I will not see the real impact of the changes to my activity levels and diet for several weeks.
Premium Bonds: £15,100 (up £25 from last update).
Stocks and Shares ISA: £8,143.38 (down £241.83 from last update).
Fuck It Fund: £5,025.49 (up £10.00 from last update).
Property Value: £181,626 (no change from last update).
Total Assets: £209,894.87 (down £206.83 from last update).
Residential Mortgage: £144,372.10 (no change from last update).
Total Debts: £144,372.10 (no change from last update).
Total Wealth Figure: £65,522.77 (down £206.83 from last update).
Investment Income in 2020: £31.44 (no change from last update) (target £2,000).
I’m pleased with my Premium Bond and Fuck It Fund values. Although I’ve hit the target for each, I am still drip feeding money into those assets. I’m continuing to invest in my ISA as well. Since the last instalment of this blog, I have invested several hundred more into the ISA but the value has gone down. I’m not worried in the slightest though. This is the ideal time to be snapping up shares and units in funds because the prices are so low. All those extra units will turbocharge the growth in value of my ISA once the stock market stabilises and starts to grow again.
I have been in two minds about whether to pay my mortgage down at a faster rate or use the money to invest. I keep coming back to the same conclusion; rates are very low and I’ll never have debt this cheap again. Also, over the next twenty-years, inflation will erode the value of the debt even if the cash total remains constant (it will actually also reduce as it’s a repayment mortgage). Think about it in these terms; £100,000 now will buy less than £100,000 would in 2000. Just as £100,000 will buy more now than what it will in 2040. The value of money does not remain constant over time. This is why taking out BTL mortgages on interest only makes so much sense. You might take out a £75,000 mortgage on a £100,000 property, but as inflation works over time, that £75,000 debt will be worth less in twenty-years and the value of the property will have increased as well. Also, paying extra on the mortgage has another important limitation when you consider the opportunity cost of the funds applied to the mortgage.
The opportunity cost is the potential loss incurred by ignoring one option in favour of another option. It’s best to illustrate with an example. I’m going to use a season ticket for Sheffield Wednesday, the club I support, as my example.
The cost of a season ticket for the area of the stadium I like to sit in is £555. For the £555 I get to watch every league game Sheffield Wednesday play at their stadium for the next season. The opportunity cost of spending £555 over the next five-years is £768. Over the next ten-years, and twenty-years it is £1,115 and £2,147 respectively. You’re probably wondering what the hell I’m talking about, so let’s break it down…
Instead of spending £555 on a season ticket, I could have invested that money in my Stocks and Shares ISA. Assuming 7% annual growth (historically it’s closer to 10%), that £555 would increase in value to £768 in five-years, £1,115 in ten-years and £2,147 in twenty-years without any further investment and allowing compounding to work its magic. The question isn’t really whether the season ticket is worth £555, but rather if it’s worth £555 spent now instead of having more money later down the line.
The principle can be applied to the daily latte that I used to enjoy pre-lockdown. The approximate opportunity cost of a £3.50 latte in twenty-years is £13.54. I’ve found that calculating the opportunity cost of a purchase is a good way of talking myself out of an impulse buy. It’s possible to go too far with this concept. Life should be enjoyed, and I like my daily latte. However, I’ve successfully talked myself out of learning to drive as I have no desire to own a car, and pay for petrol, tax, insurance and the up front cost of actually purchasing the car. I have no desire to regularly spend £50-£100 a week getting drunk. I like an occasional night out, but I mean occasional. I’m not suggesting people should be wandering the supermarket calculating the opportunity cost of choosing Heinz baked beans over the shop’s own brand; like I said life is meant to be lived and enjoyed. This practice is better applied to luxury or discretionary spending.
Another example; you are buying a new iPhone outright. You want the best and newest model; say, the iPhone 11 Pro Max, with 512gb of storage. Buying the phone without a contract will cost £1,499 (correct at time of writing). However, the iPhone Xs with 64gb storage will cost less than half that, at £710. I’m still using an iPhone 7 Plus that I bought three-years ago and it’s still going strong. The opportunity cost of opting for the more expensive model, in this example, is £789 now, and in twenty-years £3,053. I suspect some of the figures here will be surprising to some people. The power of the opportunity cost calculation comes from compounding, and it is through compounding that the door to FIRE is unlocked. In order to become financially independent you have to switch from working for money, to making money work for you. That is what compounding is; money making more money.
Why Rate of Return is Vital to Compound Interest
What I am about to say will contradict what I said in an earlier post, but I will explain why I am comfortable with the contradiction. I have my cash savings held in a bank account that has a rate of interest that is acceptable. It’s not the best rate I could get, but it’s acceptable. I like the interface with the bank’s app, and customer service and ease of account management counts for a lot. Also, it’s not a large sum in the grand scheme of things. Between my Fuck It Fund and the numerous other pots I have to save for holidays, service charges, home improvements and an emergency fund for my cat, being able to effortlessly manage the account is more important than earning an extra 1% on that balance.
However, when we are talking about large sums in the tens or hundreds of thousands, the rate of return can be so much more important. I will now demonstrate with some examples.
If £10,000 was placed in an investment returning 7% per year, after twenty-years your investment would be worth around £26,000. However, if you raise the rate of return to 9% then the investment would be worth over £38,000. Raising the rate of return to 15% means you would have over £163,000 after twenty-years. This is the power of compound interest.
Thank you for reading this week, and I hope you have a great week ahead. If you are following F.I.R.E. or would like to know more about it, please get in touch via Twitter (https://twitter.com/NowWeLive01) or leave a comment on this post.
Hello and welcome back to Mortgage Advisor on F.I.R.E. This week I will be sharing an interview with Luke, another follower of F.I.R.E. I will also look in more detail at my updated timetable for achieving F.I.R.E. Weekly Update
Until quite recently I had been coping fine with the lockdown. I’m still coping ok, but I can feel the strain of the day-to-day monotony starting to annoy me. The constant cycle of sleep-work-TV-sleep is getting old quite quickly. I’m also getting angrier by the day at the misinformation and conspiracy theories doing the rounds on social media, and yet angrier still by how accepting people seem to be of this clusterfuck of a government. There are a lot of good people in this country; people I care for, love and respect. There are also countless stories of normal people coming together to support their neighbours in these troubled times. In the face of this adversity, there is a lot we can look at and be proud of. All of this is in spite of the government, and not because of it.
I don’t understand the cult of personality around Boris and his party. There are many, many examples of the attitude they have to the working class people. Yet, they are seen as heroes to be celebrated by a large proportion of the population. I just don’t get it. Is there something I’m missing? From what I see everyday, anyone who questions the Tory government is met with the response “at least we don’t have Comrade Corbyn” or “imagine Abbott in charge of this mess lol” or “remoaners out in force again”. These types of responses miss the point; the whole political system in the UK is a joke. It’s a members only club, and any honest politician who tries to make a difference is ostracized and subjected to a media hate campaign. This is what wrecked Corbyn’s chances of being elected, well this and sabotage from within his own ranks. I don’t see the system changing anytime soon. I like the idea that one person can make a difference, and sometimes they can. The JFK quote is one that I try to follow;
It’s a simple rule to remember. “Try to make a difference.” Through this blog, I try to make a difference. It can be as small as bringing attention to a book that helps explain something. It can be as large as convincing someone to finally take charge of their finances. The key thing is to try and make a difference, and for that difference to snowball through society. If enough people make enough small differences, then maybe we can change society. People have to be receptive to change though, and social media, and the mainstream media, have processes in place to maintain the status quo. The problem is that everyone’s social media becomes an echo chamber, where they only see views that align with their own in a cycle of self-reinforcement. Some days I feel positive about the future of society. Days like today, I feel pretty pessimistic.
On a more positive note, in the past week I have started some light resistance work, seeing as though I am feeling uneasy about biking. I’ve lost so much strength in the past few months. I can’t wait to get back in the gym and start doing some proper weight training again. There’s something incredibly satisfying about lifting iron compared to using cables. The one muscle group I struggle to hit when exercising at home is my back. I don’t have anywhere to use a pull up bar, and I don’t have any free weights at home. Until the gym across the road opens back up again, I’m stuck as to how to exercise my back. I tried wrapping a resistance cable around my feet so I could do cable rows, but there was too much slack in the cable and it wasn’t doing anything.
As my NHS fundraising ground to a halt, I’m going to apply my financial philosophy to my attempts to get back in shape. I use this blog to help keep me honest, and on track financially. I’m going to do the same for my weight by tracking it publicly on this blog. What I’ve found in the past is that breaking down large goals into a series of smaller goals, makes for better progress. Rather than setting a goal of losing X number of kilos by the end of the year, it makes sense to me to go with smaller goals that allow for more immediate feedback. With my finances, I’m more focused on process goals i.e. investing regularly in assets that produce income. If I concentrate on the process, the outcome comes around naturally. Losing weight is a little different as feedback is not as immediate. A person’s weight can vary daily by a couple of kilos. A reference point is needed so that weight can be monitored under controlled conditions. If I weigh once a week and record it here, it provides that reference point. If I was to weigh every day and I see my weight fluctuate up and down from one day to the next, it will not provide motivation to continue eating and exercising sensibly.
At my fittest I was 90kg with a body fat percentage of roughly 12%. I am now 116.7kg with a body fat percentage of 38.1%. Before my health went well and truly off the rails, with a shoulder tear leading to the discovery I had a heart condition, I was not in bad shape considering. I don’t take many selfies, but this is the progress I was starting to make:
Now, I’m too embarrassed to post a photo of how out of shape I am.
Current Weight: 118.7kg
Current Body Fat: 38.1%
Weekly Goal: lose 0.5kg
Ultimate Goal: 90kg
Financial Update Premium Bonds: £15,075 (up £25 from last update).
Stocks and Shares ISA: £8385.21 (up £443.18 from last update).
F**k It Fund: £5,015.49 (up £14.34 from last update).
Property Value: £181,626 (no change from last update).
Total Assets: £210,101.70 (up £482.52 from last update).
Residential Mortgage: £144,372.10 (down £533.95 from last update).
Total Debts: £144,372.10 (down £533.95 from last update).
Total Wealth Figure: 65,729.60 (up £1,016.47 from last update).
Investment Income in 2020: £31.44 (no change from last update) (target £2,000).
The aim is to be able to retire by the end of 2023. I have forty-three full months to get from here, to there. My timeline is on my mind constantly. I’m always thinking of ways to try and speed things up, but I’ve not found any yet. So, the plan is to continue down the road of investing in property and recycling as much of the deposit as possible to fund the next purchase. Rinse and repeat.
One thing I have discussed with several people is why it’s important to try and buy below market value (BMV). It’s easier to explain with an example. First some background information.
In 1970, the average UK house cost around £4,975. In 2020, the average cost is £232,000. When you calculate the annual growth over those fifty years, it amounts to just under 10% per year. For ease of calculation with the following examples, I’m going to use 10% annual growth, although I understand growth rates very and really work on a smooth gradient.
Example 1 – Buying at market value
Purchase price: £100,000 Value: £100,000 Mortgage: £75,000 interest only loan Deposit: £25,000 LTV: 75% (mortgage loan as a percentage of the property value, and 75% is typically the highest you can get with most BTL mortgage providers).
In this example, the property has been purchased at market value. Assuming a smooth growth curve of 10% per year, the situation develops like this:
At this point, you have enough equity in the property to borrow more money and bring the LTV back up to 75%. The situation would now look like this:
Purchase price: £100,000 Value: £110,000 Mortgage: £75,000 interest only loan Additional borrowing: £15,750 Total mortgage debt: £90,750 Original deposit: £25,000 Money left in the deal: £9,250 (original deposit minus additional borrowing). LTV: 75%
Example 2 – Buying below market value
Purchase price: £90,000 Market value: £100,000 Mortgage: £67,500 interest only loan Deposit: £22,500 LTV: 75% (lender will almost always value at purchase price or lower on new mortgage). Refurb costs: £5,000 Value after refurb: £110,000 LTV after refurb: 61%
In the above example, you are looking for a property where the vendor needs a quick sale, or a situation where the property needs work, or both. You get an idea of what a similar property should sell for assuming it was in good condition. That’s the benchmark or “market value”. You then research the cost of the refurb and you are aiming for a scenario where your refurb adds more value. For every £1 spent improving the property, you want to see the value increase by £2. Then, after six-months you ask the lender to revalue the property.
At this point, you can look to borrow more money to bring the LTV back up to 75%.
Additional borrowing after refurb plus one year growth
Purchase price: £90,000 New market value: £121,000 Original mortgage: £67,500 interest only loan Original deposit: £22,500 Additional borrowing: £23,250 LTV: 75% Refurb costs: £5,000 Money left in deal: £4,250 (deposit plus refurb, minus additional borrowing).
Or, additional borrowing after refurb plus two years growth
Purchase price: £90,000 New market value: £133,100 Original mortgage: £67,500 interest only loan Original deposit: £22,500 Additional borrowing: £32,325 LTV: 75% Refurb costs: £5,000 Money left in deal: minus £4,825 (you have pulled all your money out of the deal).
The last example above leaves you in a position where you own an income generating asset with none of your money left in the deal. You are left with more capital than you started with, and the added bonus of a monthly rental income.
Buying BMV is so important to this strategy, but the deals are hard to find. It’s possible to review dozens or even hundreds of properties before the numbers stack up, but there are deals to be had.
A few weeks ago I signed up to Reddit, where there are several subreddits related to the FIRE movement. I have been talking with a few people from those groups and it’s been refreshing to be able to discuss FIRE with other, likeminded, people. One of those people is Luke, who has kindly agreed to be interviewed for this blog. Here is the transcript:
Hi Luke, thank you for agreeing to be interviewed. Please introduce yourself to the readers.
Hi, my name is Luke. I’m in my early thirties, I’m married and have a young daughter. I work in capital equipment sales which I have been doing for nearly 12 years.
How did you discover fire?
I wanted to try and find what others in a similar situation and of similar age as me were doing. I’d done some online research, listened to podcasts and been reading MSE forums for a little while but even within sub sections the posts were so differentiated. I’d seen a couple of reddit posts when previously looking into peoples thoughts on Index Funds and trying to scout out their journeys. Recently I decided to sign up and stumbled across “FIRE”. I had never heard the “phrase” before however in simple terms it is what I knew I was aspiring to. It’s funny really as since this I noticed one of the podcasts I started listening to “Meaningful Money”, had hosted Barney Whiter. As I had no idea FIRE was an acronym I skipped past it as I tried to dig out the most relevant podcasts in it’s 10 year existence. Otherwise known as the “Escape Artist” in his blog, Barney was a pioneer of UK FIRE after he discovered Mr Money Moustache’s blog over the pond in America. I have recently made a start of Barney’s blog.
What attracts you to FIRE?
I think the freedom to get to the point of having the option to work or not is what drives me most towards it. I would like to retire early and do aim to, but I do enjoy my job, so for me it isn’t just about retiring asap. I have a little girl who I want to provide for and as a family we enjoy the nice things in life. Oddly, I could happily Topcashback every purchase on a rewards credit card after scouting for a voucher code and reduce my spend in many ways, but I’d draw the line at sacrificing holidays and seeing the world! That’s something I’m willing to accept though and by sticking to the other 90% and investing wisely I trust we will be Financially Independent still long before most.
The freedom of choice is the big one for me as well. Can you tell me a bit more about your goals?
My goals are ever evolving and changing still. In my early twenties, regrettably I wasn’t interested in pensions or anything FIRE. I went from a £6ph job to earning relatively good money and was just happy to not have any worries of going near my overdraft. I think the turning point came when my daughter was born, like a switch flicked. Just before she was born I dipped my toe in investing in stocks via a friend’s recommendation. But when she was born shortly after I decided to leave the company of 10 years as I felt I was worth more than they paid me or valued me. I got serious about my pension and more importantly started to think about FIRE. A promotion at my current work is likely (I hope) in the next 2-3 years. I would like to be successful in my profession and this goes hand in hand with reaching FIRE.
I like to set shorter and medium term goals as I feel like just aiming for FIRE can feel a long time away. So this year I plan to have a total 50k invested total in the markets whilst I’d upped my pension contribution by 4%. The medium term goal (10 years) is to get to a crossover point whereby I have more invested or achieved greater net asset worth than the amount outstanding on mortgage. We took on a large mortgage so it still stands at around £250k. It’s likely I wouldn’t pay it off (unless interest rates rocket) but the thought of the weight off my shoulders to think I could be mortgage free at that point is quite liberating and an ideal goal for me.
How supportive are friends and family of your goals?
To be honest, not many people know of my goals. Not extensively anyway. My wife is relaxed and happy for me to effectively plan our family’s future by investing. She knows there is risk but she sees the time I spend researching and knows I am not essentially “gambling” it away. That said she doesn’t ask how it’s going very often at all! Despite my closest friends all being home owners and in jobs around or above UK average wage, most are either risk averse or not really interested as they don’t truly understand money. I would profoundly recommend everyone to read “Rich Dad, Poor Dad”. I think if 10 of my closest friends read it, almost all would change their behaviour toward money and their future.
Rich Dad, Poor Dad was a life changing moment for me as well. It seems to be a common starting point for anyone following FIRE. What type of investment would you like to learn more about?
Buy to let is probably the one that stands out. I had initially neglected Buy to Let, admittedly due to seeing some stories where people warned away and so I just buried my head on a path of index fund investing. I am open to learning though, especially if I see plans and success stories I think make sense such as the reason I read this full blog within a day or so! I’ve targeted myself to do more research on BTL, as I was shown how easy it is to dismiss something because some people have negative stories. In my opinion that’s half the reason the majority of our parents (who maybe could have) haven’t and daren’t go near the stock market for the fear of losing.
I believe with extensive research, I would back my skills to be able to see whether a BTL opportunity was going to make me money or not. And if the outcome was it would, why not go for it.
New types of investment opportunities are likely to come in the next 10-15 years. If it was robust and I genuinely believed it would help me towards FIRE I would be willing to at least learn about it. You have to be willing to adapt.
A fun question now. How would you invest £1,000,000.00?
After learning about compounding, I’d do the sensible stuff first(immediately after a nice family holiday!). I would continue to work until my revised FIRE plan was achieved. In year one I would max out mine and my wife’s ISA’s and LISA’s. I would put 40k each into our pensions and max out a JISA for my little one. I would invest it in index funds and I think I would plan to keep the same equity exposure plan. That’s £130k or so with the holiday. I would almost certainly in this instance certainly invest a lot of time into learning about BTL with the aim of receiving passive income, as the other options are then tax on investments or low bank interest rates. I would probably look to own 2 BTLs whilst still working. They’d be under £125k each, bought outright initially (plus costs and refurb) so I could set them up as a Ltd company. That’s £410k. I would probably look to overpay my mortgage, certainly in year one outside tax wrappers as banks pay so little, 10% overpayment would be £435k spent in year one. I would spread my money into separate accounts to be under the 85k insurance threshold (David’s note: In the UK, the FCSC protects customers deposits up to £85,000 with that bank, so that if the bank goes out of business your money is protected up to £85,000. Many people with large cash sums spread their cash across multiple banks to increase their protection).
I’d then replicate the tax free wrappers in year two onwards. Reviewing if BTL are making me good money I may look to expand whilst probably leaving a healthy £100k immediately accessible. Of course there would be a few more meals out but I wouldn’t drastically change our spending as it would be a real opportunity to FIRE early whilst living a comfortable lifestyle in the future.
I would probably start to look to set up a website selling something once I had set up those BTL’s. I could build this up with help from my wife and ideally get to a point I could work wherever I wanted for just a few hours a day which would give flexibility most likely become a semi retirement option. I’d invest in my health to get back in shape, with intention to stay in shape and stay healthy. Last but not least I would probably set up a small charity relating to Cystic Fibrosis. I am a firm believer that if you give and be kind, then it will come back around.
Do you find it difficult to get people to talk openly about money?
Yes, without a doubt. But I think most people find it difficult. I think from the side of offering information you are mindful not to be too open incase they bought an equity index fund you chose and (like now) it drops 20-30%. From the side of learning, for some they don’t fully understand money nor realise the importance of making it work for you so they aren’t interested. Friends seem to choose not to ask too many questions even if you tell them what you’re doing, especially as it is a long term goal, with risk.
It also means sacrifices need to be made and unfortunately with the generation of Instagram they want to have the £350 trainers, business class air tickets and the general perception of being rich means more to an ever increasing amount of people.
But this is why I enjoy talking to like minded people with an element of anonymity so I can be open with my plans and learn to get the most out of my financial journey.
What is the most difficult financial lesson you had to learn?
It started because I was very lucky and made some money too easily and too quickly when I tried AIM (alternative index market) in the first couple of months. It led to me following people in on stocks I didn’t complete due diligence with. I might as well have been betting on the 3rd division of Mexican football. I didn’t really understand the market and so had some stocks that lost money within hours. Others made profit and then a month later were down as I didn’t sell because I was greedy. It turned out to be a very good financial lesson, but had I used that money and put it into an index fund from 2015 I would be significantly better off financially now.
I’ve made those same mistakes too. I remember making money on an airline stock and getting too confident, and then losing money on a mining penny stock. I think this is the most important financial lesson people need to learn. If you don’t understand an investment, you are gambling. What is your biggest financial success?
As I am still relatively young on my FIRE journey I would probably define a success as being a “penny drop” moment. As mentioned above, there were two of these. Firstly was the birth of my daughter as that was what gave me my purpose for FIRE and to provide for her. The second was after I finished “Rich Dad, Poor Dad”. It was truly a penny drop moment of starting to understand about making money work for you. It inspired me to need to learn more and more. As Gary Player the golfer once said “The harder I practice, the luckier I get” and I think this is especially relevant in order to be successful in getting to FIRE.
I couldn’t agree more. Thanks for your time, Luke. I’d love to catch up with you again in a few months and see how you’re getting on.
Thank you for reading this week, and I hope you have a great week ahead. If you are following F.I.R.E. or would like to know more about it, please get in touch via Twitter (https://twitter.com/NowWeLive01) or leave a comment on this post.
Hello and welcome back to Mortgage Advisor on F.I.R.E. This week I will go back to basics and discuss what F.I.R.E. is and why it’s important to me. I’ll have a look at my hopes for the next six-months, and the rest of 2020 in general. First, however, an update from my biking challenge. Weekly Update
If you’re squeamish, I would probably skip the next few paragraphs.
On Sunday 26th April, I woke up early and had a coffee with a couple of digestive biscuits. I let the drink settle whilst watching a bit of news, and then I got ready for some peddling. I got on the bike and did a couple of hours. I didn’t feel any discomfort. I then went to the bathroom to take care of business before jumping in the shower. As you do, I looked down and saw blood everywhere. I stood up and realised blood was pouring from me but I felt no pain or discomfort. Blood was pouring from me. I used toilet roll to try and stop the blood soaking my bathroom floor, but the paper was soaked through within seconds. I was terrified. The bleeding slowed, and eventually stopped, and an ache came over me. I have felt worse pain, but I have never been so scared at my health. Even when my vision went blurry for a couple of weeks and there was the possibility of a brain injury I didn’t feel as scared as I was with this bleeding. It’s difficult to describe just how much blood there was. I thought I had popped an artery and that I was going to bleed out at home in my bathroom.
I went to A&E and the medical staff were fantastic. I was seen quickly and then admitted so that the surgeons could decide whether they needed to operate. The strange thing is, there was no obvious cause for the bleeding. As I started to feel better, and I was not bleeding anymore, the surgeons discharged me. I spent almost ten hours at the hospital. It was not a good day. I am now waiting for an endoscopy through my private insurance, but with the current situation I could be waiting a few weeks.
The result of all this is that I’ve had to withdraw from the biking challenge. I’m thankful to everyone who has donated so far, and I’ve kept the Just Giving page active. The generosity of people continues to surprise me. I’m an active member on a football forum and I received a private message off another member which was supportive of my efforts and my health issues. This man has just donated £60 to my fundraising taking the total raised so far to £200.
I’m so frustrated at having to withdraw as I wasn’t feeling physically tired. The saddle was uncomfortable but I had just received a better saddle cover. I just can’t risk a repeat of that level of bleeding. It’s not wise, nor is it fair on the NHS to take up their time and resources through an injury sustained whilst trying to raise money for them. The surgeons stated several times that they did not think the biking was to blame, but I can’t see what else it could have been.
Back to Basics – What is F.I.R.E.?
F.I.R.E., or the alternative formats of FIRE and FI/RE stand for Financially Independent, Retire Early. There are a few subtle variations out there such as Financial Independence, Retire Early. The meaning is the same though. So, the acronym has a definition but it doesn’t answer the question of what F.I.R.E. is.
Is it a philosophy? A way of life? A movement, religion or even cult? The answer to all these questions is “yes”, to an extent. There is F.I.R.E., LeanFire, FatFire and a range of other types of F.I.R.E. but the underlying concept is the same; you take control of your finances with a view to retiring early and in comfort. Money is not the goal; freedom purchased with money is.
I’ve recently joined Reddit and the F.I.R.E. group that posts on there. There are over 32,000 members of the subreddit and it’s refreshing to be able to talk openly about F.I.R.E. without the awkwardness that normally comes from talking about money in person. The great thing about F.I.R.E. is that the principles can work no matter the sum of money involved. It’s not always about retiring before 40. It can be about bringing retirement forward just a few years. Even if the journey takes longer than planned, following the method helps to teach good financial management and planning. There is no downside to following a F.I.R.E. lifestyle. The only sacrifice involved is putting your preconceived opinions about money to one side and being open to learning. There may be some financial sacrifices involved and that will depend on your own unique circumstances. Saving for the future does not necessarily involve scrimping in the present. It can be as simple as understanding that you don’t need to pay £50 each month for a top mobile phone when a slightly older model will perform just as well. It’s about understanding that you don’t need to spend £100 each month on a top TV package when you only half watch TV as you’re scrolling through Facebook on that overpriced smartphone.
To me, F.I.R.E. is hope. It’s about working towards a future where I don’t answer to a boss other than myself. It’s about being able to choose to walk away, or being able to jump at an opportunity knowing I have the financial security even if that opportunity is a dud.
BTL Deposit – Completed
Fuck It Fund – Completed
Stocks and Shares ISA: down 15.61%
No unsecured debt.
Residential Mortgage LTV: 79.81%
My ISA has made a slight recovery in the last week, but it’s hardly significant. I suspect that for the next few months the stock market will dip up and down with no major gains or losses. We are a long way from sustained recovery. I think there are a few companies circling the drain at the moment, and before this pandemic is over there will be some major companies going out of business.
My Fuck It Fund had monthly interest added for April which give it a nice boost, but I’ve just received word that the rate of interest is being cut by 0.25%. It’s hardly going to matter at this point. The fund is instantly accessible and I’m happy with the service from the bank who holds my funds. I could get a better rate elsewhere, but there’s the time, effort and energy involved in switching and I know there are some truly awful banks out there. For what would be a difference of a few pounds interest over the year, I’m happy to leave the money where it is.
My mortgage balance increased slightly this week as interest for the month of April was added on 30/04/2020. I pay my mortgage on the 1st of the month, but the payment that came out on 01/05/2020 has not yet been reflected on the balance for this post. This will come down next week.
The coronavirus pandemic has put a hold on normal day-to-day life, and as such it has delayed my investment schedule. The plan was to start viewing properties around Easter time with a view to completing a deal by June. I think that is unlikely to happen, but if the lockdown is eased in the coming weeks I might be able to push something through.
I had hoped to have £2,000 of investment income in 2020. I was expecting at least half of that to come from dividends, but the previously announced dividends were cancelled due to the outbreak. Although I understand the decision to cancel dividends in light of drastically reduced profits, it is personally frustrating. The one positive to dividends being cancelled is that many stocks are trading at much lower prices than they were six-months ago. Even if I successfully purchase a BTL by the end of Q2 and tenant the property quickly, I will still struggle to net £2,000 investment income by the end of the year. The aim now is to build a solid foundation so that going into 2021 I can be in a stronger position to earn more passive income.
There is going to be a delayed reaction to this pandemic and the economy will be reeling from this for the next 18-24 months as a minimum. We haven’t seen a flurry of large businesses go under yet, but it is still a possibility if this virus is not brought to heel soon. The government can only subsidise wages for so long, and the lockdown can only continue for so long until the treatment starts doing more damage than the disease. I’m not saying that the economy is more important than saving lives. The preservation of life must be the absolute priority, not just for the duration of the pandemic but at all times. So, what I am suggesting is that a strong economy can save lives. The last major economic crisis in 2008/09 led to an increase in suicide rates. If more people are out of work and isolated, we will see an increase in suicides again. If people are not keeping active through work, their physical health will also suffer. It’s a fine line to walk for the government and I don’t have faith in them to walk it successfully.
One possible result of all this could be the scrapping of the minimum wage. I would not put this past the Tory government. If we see a massive increase in unemployment, and businesses are struggling to pay wages, reducing the minimum wage could allow employers to offer jobs they otherwise would not be able to. I don’t think this is a viable, or correct, strategy but it’s just the sort of thing I could see happening.
What is more likely than scrapping the minimum wage is tax increases. The government is burning through money to support furloughed workers and business. Unless there is a magic money tree in Downing Street you can bet on tax increases; it’s going to happen. Also, I would prepare for another few years of austerity, although I can’t see how much more can be cut from public services without going full on to privatise the NHS. Fortunately for the NHS, I think the idea of privatising it now would be toxic for any government. What we have to be wary of is the stealth privatisation of specific services piece by piece until nothing is left.
Although I sound quite pessimistic with my outlook for 2020, I’m hoping for a quick resolution to this pandemic. As a race, we have advanced so much over the last few decades. I believe there are dedicated, hard-working scientists and doctors out there who will create an effective vaccine. It’s just a question of how long it will take. Once we have an effective vaccine, we can start returning to normal. There are some things pre-Covid19 that I hope we can leave in the past. What the past few months have shown is that many jobs can be done remotely. There is no need for millions of cars and buses to be on the road everyday. The Earth is showing signs of healing itself after just a few months of respite from human activity. This outbreak has also brought out the best in many people. Friendships have been formed between people who would not normally have connected. This crisis has also shone a spotlight on those who have previously been overlooked by society, such as trainee doctors and nurses, retail staff and those working in social care.
This pandemic has been horrific for so many people. Estimates range from 40,000-50,000 UK deaths due to the virus, and each of those deaths is a person who was linked by blood or friendship to many others. Society will feel the impact of this for generations to come. I’m not trying to downplay the severity of what has happened, and what is happening. For those of us who are still fit and healthy there is an opportunity to use this period of isolation to work on our own development. Whether that is strengthening relationships with those in our household who we would normally only see for a couple of hours after work. It could be watching your children grow and adapt to this new situation. It could be using this time to work on that book you always wanted to write, or learning how to cook from scratch for the first time.
Now that my Fuck It Fund and BTL deposit is saved, I’m looking at ways to turbocharge my investments in the remaining months of 2020. I don’t think that I’ll be travelling out of the UK for the foreseeable, so saving for flights or cruises is not a priority. I will still put a little away each month for this purpose but it’s safe to scale it back. Ideally, I would want to invest 75% of my net income. Right now, I’m investing 48% of my net monthly income. Realistically, there is not much more I can trim from my outgoings. I don’t have a child. I don’t do drugs. I rarely drink. My phone, TV and broadband packages are basic and cheap. The only way I can increase my investment budget as a percentage of my income is to earn more. Every extra pound I earn goes straight into the investment fund. What I really need is another income stream, especially now that my dividend income has dried up and I don’t yet have a property to let. Everytime I go over this, I keep coming back to the same conclusion; overtime at my day job. I don’t really have an excuse if I’m isolating at home, do I?
Even with overtime, achieving the goal of 75% of my net income being invested is going to be very difficult. I can get to approximately 60% with a few extra hours of work each week. If I can find a way to trim more off my outgoings, then I may be able to push past 60%.
Thank you for reading once again. Next week’s post will bring something a little different to the blog as I will be interviewing another follower of F.I.R.E. Check back next Sunday, and in the meantime stay safe.
Hello and welcome back to Mortgage Advisor on F.I.R.E. This week I will discuss the impact of coronavirus on the airline industry. I will also look back over the past six-months since this blog started and analyse the progress made. First of all, there is the weekly update and a quick note about my biking challenge to help support the NHS.
The biking challenge is going well. I’m up to 1,160km, which means I’m about 40% of the way through. When I started, I needed to complete just over 45km a day to be on track to complete the distance by the deadline. I’ve averaged just over 55km per day, and because I’m ahead of the game my required daily average has dropped to 40.5km. The plan is to try and motor through another week to bring that required daily average down further. Then, I can start to ease off towards the end of the distance and resume studying for my Financial Advisor exams.
The most difficult part of this fundraising has not been the biking itself. My legs have not felt that tired as I have good muscular stamina in them. The problem has been that the saddle is so very, very uncomfortable even with padded cycling shorts and a new cover for the seat. Rather than completing a full hour at a time, I have to peddle for half an hour, take a break for five minutes and then start again just so I can get some feeling back. I’m pushing through though and if I continue with the 55km daily average I should complete in 31 days.
If you can afford a few pounds to donate to the cause, please do. If you can’t afford a donation at this time, please share my Just Giving page around. The link is here:
Financial Update Premium Bonds: £15,050 (up £50 from last week).
Stocks and Shares ISA: £7,942.03 (down £84.12 from last week).
F**k It Fund: £5,001.15 (up £520 from last week).
Property Value: £181,626 (no change from last week).
Total Assets: £209,619.18 (up £405.88 from last week).
Residential Mortgage: £144,906.05 (no change from last week).
Total Debts: £144,906.05 (no change from last week).
Total Wealth Figure: £64,713.13 (up £485.88 from last week).
Investment Income in 2020: £31.44 (no change from last week) (target £2,000).
When I first set out on this journey I had two short-term targets in mind for my finances; to get £14,850 saved in Premium Bonds, which would form my half of the deposit for a BTL property. The second target was to have an emergency fund of £5,000, so that if things got bad I could just say “Fuck It” and I’d have money to live for at least six-months. It just so happens that this week’s post is part twenty-six and the blog is now six-months old, so it’s fitting that I finished saving for my Fuck It Fund this week. I will still put money in there from time to time but it’s no longer a priority.
When I look back at my financial position in the early days of this blog, I was in a very different place. My first financial update looked like this:
Premium Bonds: £8,250 Stocks and Shares ISA: £6,519 Fuck It Fund: £850.96
My credit card and loan debt was nil at week one, but in the first few weeks it ramped up to several thousand due to holidays, Christmas and other expenses. In the space of six months I’ve increased the value of my savings and investments by around £12,000. I think that’s good progress considering everything going on in the world right now.
Now that I’ve hit the target for my Fuck It Fund, and the only debt I have is my own mortgage, my priority is to start earning more income from investments. To really earn serious money from investments, I need property. The only issue is, while ever this pandemic is active it’s going to be difficult to complete any property purchases. My focus will be to increase my BTL deposit fund further, and to accumulate more shares in my ISA. Property and stocks are the two pillars which will financially support me when I choose to transition from paid employment into the next chapter of my life.
To try and turbocharge that transition, I’m keeping a soft-target in my mind which is to invest at least £1,100 each month, as well as reinvesting any investment income I receive. I’ve been investing around £800-£900 per month so far, which means I need to free up cash elsewhere and/or earn more. I’ve been doing a few bits of overtime here and there recently as it only takes a few hours a month extra to earn that additional £200-£300.
There have been a few news articles in recent days that state most major airlines are breaking the law due to the impacts of Coronavirus. In brief; airlines are required to give refunds if your flight is cancelled. What’s happening now is that airlines are facing unprecedented demand for refunds as a result of the sheer volume of flights being cancelled globally. If the airlines were to refund everyone, many of them would go out of business.
I get the argument that airlines should have been better prepared and have bigger cash reserves. That can be said about pretty much every business at the moment. It seems like the only major businesses that are doing ok are food retailers. Normally, when I see businesses fail I feel sorry for the front line staff who face losing their jobs, whilst being critical of the senior management for presiding over the failure of the business. This situation is a bit more complex though.
I’m no expert in the airline industry but there are a few things I’ve observed. The first thing is that airlines are highly reliant on constant cash flow. They sell lots of units (seats on planes) for relatively little money per unit. Compared this to some businesses that can survive on one massive sale per week. Also, airlines often make little or no money on the price of a seat on a plane. Some airlines even make a loss on some seats. The profit comes from baggage fees, upgrades, food and drink, and so on. The margin for airlines has decreased over the years because the public have demanded cheap air travel. I believe those days are over for the time being.
Social distancing is going to hit the airline industry hard. New laws could mean that aircraft capacity has to be reduced. Despite what people commonly think of air quality on planes, modern aircraft have extremely advanced air filters. The main issue with travelling in cramped conditions is that you could breathe in contaminated air before it has a chance to be filtered. This means capacity will have to reduce. As capacity reduces, prices go up as there are certain costs of airlines that are going to be pretty static whether you are flying fifty passengers or two-hundred. I’m thinking about pilot and cabin crew wages as an example, as well as airport fees for the airline.
Although there will be people itching to fly off to the beach when this pandemic is over, there will be a substantial number of people who will be hesitant to travel. The airlines will be looking at a smaller customer base, with potentially reduced capacity on their aircraft. Prices will have to go up. It’s inescapable if airlines want to survive.
How does this all relate to airlines breaking the law? Well, if airlines were to give refunds out to everyone now, they will run out of money before refunding everyone. The numbers just don’t add up. We can debate all day long about whether they should have managed their money better, but it doesn’t change where we are at now. I have a flight coming up in around six-weeks and it’s almost certain I will not be travelling. I’m also expecting to be offered a credit voucher instead of a refund. I want my money, but I also want the airlines to survive as I enjoy cheap travel. I’m looking at this almost like delayed gratification. It’s like the marshmallow experiment in psychology. Children are left alone with a marshmallow and are told that if they don’t eat it, when the scientist comes back they can have two. If they eat it before the scientist comes back, they do not get another.
I have another fear that airlines could struggle for another reason completely. This pandemic has raised serious questions about how porous many borders are. When the virus was just starting to hit our shores, I was in India. All it took to enter the country was a form and a stamp. It was not necessary to provide any medical history, apart from confirming I had not travelled to China recently, or undergo any routine medical checks. On the way out of India just a couple of weeks later we had our temperature checked. In a globalised society with ease of travel across borders it’s not difficult to see how easily the virus was able to spread. I would not be surprised if many countries adopt a more strict border policy requiring people to present proof of vaccination (assuming a vaccine is developed) and a full medical history prior to entry. Far from being too strict, I think it’s quite sensible. The only drawback is that the checks would have to be done prior to boarding the aircraft, or else you risk spreading the virus to everyone else onboard. Combined with more expensive tickets, stricter border controls could make it even more difficult for airlines to survive the next few months.
Thank you again for reading and I hope you and your loved ones are safe and well. Next week I will look forward to the one-year mark and give an overview of where I would like to be on my journey to financial independence at that time.
Hello and welcome back to Mortgage Advisor on F.I.R.E. This week I will be talking about the complexities of mortgage advice. I will also touch on the politics of the coronavirus and the NHS. First of all, in the weekly update I will be talking about my biking challenge to raise money for the NHS in Sheffield.
I have now completed 712.77km of my biking challenge. I am using my home exercise bike to cycle the distance from Sheffield, UK (my home city) to Snagov, Romania (my girlfriend’s home village). It’s a total distance of 2,858km and I have a deadline of June 7th to complete this. So far, I’m ahead of the game having completed roughly 25% of the distance in a little under two-weeks. I needed to average 45km a day to complete the distance on time, but I’m averaging 57.97km a day so far. My JustGiving page sits at £100 as I type this, so I’m just £20M behind Captain Tom, give or take a few thousand.
What more can be said about Captain Tom? A true example of British resilience, courage, humility and charity. His efforts have been nothing short of heroic, and his efforts have raised a huge sum of money for the NHS. What he has achieved is phenomenal. It shouldn’t have been necessary though.
A meme has been doing the rounds on Facebook, although it apparently originated on Twitter from an unnamed nurse:
The NHS is a huge organisation, and something that should be a shining beacon of our country. It’s failing though. There are all sorts of measures and data that can be used, and they can be spun to fit any agenda that you want. If we break it all down, one thing becomes clear – the NHS needs more money. It needs more money to run. It needs more money to train new doctors and nurses. It needs more money to grow and develop to face new changes. This money can either come through a bigger budget, more efficient use of its existing budget, or a combination of both.
When the NHS was created in 1948, the life expectancy in the UK was 66 for men and 70 for women. The current UK life expectancy is 81. I’ve not spent a huge amount of time searching for this, and my quick google-fu did not present separate data for men and women in 2020, but for the purposes of my general point, it doesn’t matter too much. The point I am making is that the NHS is having to cope with an aging population. It’s having to cope with much higher levels of obesity related ill-health than in 1948, and it’s also having to cope with providing mental health support.
The NHS should not have to rely on charity, that much I agree with. But if the money is needed in a time of crisis, it’s needed. If the NHS was to be abolished and private healthcare was the only option available, I honestly think I would be done with the UK. I don’t trust the political establishment not to fuck it up, and I don’t trust the mega corporations not to fuck it up. I look at what the healthcare system is like in the United States and it’s terrifying. We need to avoid that. The NHS might cost a lot, but it has such an important purpose. The cost of not having the NHS will be much, much higher.
As for my biking challenge, it’s not entirely altruistic. I needed a reason to get off my ass and get back in shape. If I can raise money in the process, so be it. You will see links throughout this blog to my JustGiving page. If you can afford to donate, please do.
Premium Bonds: £15,000 (no change from last week).
Stocks and Shares ISA: £8,026.15 (down £72.86 from last week).
F**k It Fund: £4,481.15 (no change from last week).
Property Value: £181,626 (no change from last week).
Total Assets: £209,133.30 (down £72.86 from last week).
Residential Mortgage: £144,906.05 (no change from last week).
Total Debts: £144,906.05 (no change from last week).
Total Wealth Figure: £64,227.25 (down £72.86 from last week).
Investment Income in 2020: £31.44 (up £2.77 from last week) (target £2,000).
The week before payday is always a little uneventful. My monthly investment into my ISA is complete and nothing else happens on my financial calendar until my next payday. I had a small dividend payment from a bond fund I started investing in a short while ago, but I’ve not got many units in that fund yet. The coronavirus is going to impact on my dividend income this year, but that’s a small issue in the grand scheme of things.
I always brace myself when I tell a person I’ve just met that I’m a mortgage advisor because I know what’s coming next. More often than not, it’s a request for advice. This in itself is not frustrating. The frustrating part is when people want advice without disclosing anything about their circumstances. A couple of weeks ago a woman sent me a message on social media out of the blue. She had seen me posting something in a group about mortgages and asked me if I felt she should have a two-year fixed rate or a five-year fixed rate. I answered “it depends” and then listed a number of factors that can determine what is best. I did not get a reply.
What I’ve found from speaking to friends, family and just random people I meet in day to day life is that they want an easy answer, and they don’t want to have to think too much. I’ve known people spend hours comparing what mobile phone to buy next, but then just shrug their shoulders and fail to give their mortgage the attention it deserves. In any setting where professional advice is given, the advice is only as good as the information it is based on. If you don’t work with your advisor, you’re going to get a lesser quality of advice. There is something about mortgages that freaks a lot of people out, and I don’t understand why. For the vast majority of people, their mortgage is the biggest financial commitment they will ever make, but people don’t understand how they work, what they are and what their obligations are.
What is a mortgage?
“It’s a loan from a bank used to buy a property.” No. It’s not.
A mortgage is the security for the lender’s debt; in most cases the property purchased with the loaned funds. For the sake of everyday discussion, most people refer to the loan as the mortgage. That’s fine for everyday discussion, so long as we understand it’s not technically correct. For ease of discussion, I will refer to a mortgage in the way that most people understand it; as the debt itself.
When you have a property with a loan secured against it, many people assume they can just do what they want with the property. This is not correct either. Mortgage terms and conditions booklets are not that long. I would put good money on the fact that less than 1% of people with a mortgage have actually read their T&Cs. It blows my mind. It’s a commitment that could last the majority of your adult life. It will probably be the biggest debt you ever take on. It’s the means for you to have a home you can call your own. Why wouldn’t you want to know what you’re signing up for?
If you have debt secured against your property, you have to understand that the property is not simply yours to do with as you want. With a mortgage agreement both sides get something in return for abiding by T&Cs. The customer gets the money to buy a house. The lender gets interest on the loan.
Back to Mortgage Advice
There are many factors that can determine what is most appropriate for you to do with your mortgage, ranging from your employment status, how long you plan to live at the property, how many children you have, and the age of your children, and your retirement plans. Many people are purely fixated on the headline rate because that determines the monthly payment in the present. With a mortgage that can potentially run for decades you have to be smarter than that. An example:
Mr and Mrs Customer are a young couple who are buying their first home. They have decent jobs and earn a combined £50,000. They are borrowing £250,000 to buy a house and are putting down a £25,000 deposit. The purchase price is £275,000 and so they are taking out a loan that is for 90% the value of the property. We call this calculation loan-to-value or LTV. The lower the LTV, the better the rates you get.
Mr and Mrs Customer want to take the maximum term so their payments are as low as possible. Let’s assume a typical rate of interest of 2% (this will probably not age well as rates change over time, but the principle is the same). Many lenders will now offer a mortgage over forty-years, and so their payments will stack up as follows:
£250,000 over forty-years at a 2% rate of interest results in a monthly payment of £757. The total cost of the mortgage is estimated to be £363,391.
What happens if they pay more each month? Well, the term comes down. Increasing the monthly payment by £100 would pay the mortgage off over six years early and save in excess of £20,000 interest. Sounds like a good idea. Well, it depends…
With the above calculation you are paying off the mortgage six-years and eight-months early; which means you still make thirty-three years and four-months of payments. To pay the mortgage off early you have to keep paying those £100 extra payments each month. Are you starting to see the issue? Those extra £100 payments each month over the term of the mortgage add up to 400 x £100; a result of £40,000. You are paying £40,000 to save £20,000 of interest.
This is where the calculations become complicated and subject to what is best for the person in question. It’s important to remember that the £40,000 “extra payment” is actually an “early payment”. People talk about “extra payments” and “overpayments” but you are simply paying part of the original debt back ahead of schedule. So, it’s not an “extra” payment as such. It’s just an “early” payment, hence why mortgages have “early repayment charges” for when you pay too much, too soon, and reduce the amount of interest the bank earns from the mortgage. Granted, you are saving yourself over six-years of payments of £757, but that’s where the £20,000 saving in interest comes in. For people who are averse to risk and investing it’s fine. If you are wanting the biggest bang for your buck, then there are other ways to look at this.
I used to think that paying off your mortgage early was the golden rule of mortgage advice. The earlier you pay the mortgage off, the less interest you pay. In isolation this statement is true. Finances do not exist in isolation though. If we look at this another way and assume the extra £100 each month was being invested in a low cost index fund, you see the following outcome:
As stated earlier, £250,000 over forty-years at a 2% rate of interest = £757 per month. The total cost of the mortgage is estimated to be £363,391.
£100 per month invested in a low cost index fund for forty-years, assuming a 7% annual return (historically it’s closer to 10%), means you will have accumulated a fund worth £248,550. Instead of spending £40,000 to save £20,000 interest, you have spent £48,000 and earned £248,550 interest. Which scenario looks more appealing?
You can even mix and match the strategies and use some of the compounding from your investment to pay off the mortgage early. As always, seek independent advice from a financial professional before starting any investment.
Mortgage advice operates in a vacuum but it shouldn’t as it is impacted by lots of other factors. I’ve explained a fairly complex issue here, but most people don’t think about it this deeply. Many people are just concerned with the headline rate and do not take into account longer-term plans. A lower rate is not always a better rate. A higher rate can make more sense in some circumstances if it secures a payment for a longer period. Some people are obsessed with as long a rate as possible, even though a shorter deal would suit them fine.
A slightly longer post than normal this week. I hope you enjoyed this post. Please leave a comment and if you can, donate to my NHS fundraising effort. Stay safe and see you next week.
Hello and welcome back to Mortgage Advisor on F.I.R.E. This week I will be talking about a new personal challenge I’ve started to raise money for the NHS in Sheffield. I will also discuss the importance of being socially aware when talking about your own achievements, especially in light of what is going on in the world right now.
On April 5th I embarked on a biking challenge to raise money for the NHS. This is almost like a sequel to a similar challenge I completed a few years ago when I raised money for the Movember Foundation. Back then, I used an exercise bike at my local gym to cycle the distance from Land’s End to John O Groats; a distance of just over 1,400km according to what Google terms the “traditional route.”
The new challenge is to use my own exercise bike to cycle the distance from Sheffield, UK, to Snagov, Romania; a distance of 2,858km. I chose Snagov because my girlfriend’s family lives there and we visit several times a year. Our next visit was scheduled for June 7th and so I’ve set that date as my deadline. It just so happens that it is exactly nine-weeks away from the start date of my challenge.
There were two things that my Movember challenge highlighted when it comes to cycling for hour after hour on a stationary exercise bike. It hurts your ass and it numbs your brain. I’ve always had a lot of muscular stamina in my legs. I could cycle for hour after hour without complaint, but for the fact the seat is very uncomfortable after a while. I purchased some padded cycling shorts which helped, but when my health worsened a while ago, I got rid of them. I’ve ordered more, but they will take time to be delivered. The other challenge is boredom. I try to keep my mind active through audiobooks, podcasts and occasionally parking the bike in front of the television. It still gets boring after a while.
As most people should know by now, I like to approach any challenge methodically. The numbers for this biking epic look like this:
2,858km / 63 days = 45.37km per day
It takes roughly 90 minutes to cycle 46km. So, I’m looking at approximately 95 hours of cycling. Four full days of cycling, more or less.
When I completed the Movember challenge, my plan was to hammer the cycling in the first week or so, so I could bring the daily required average down and then tail off as my endurance lessened. I’m approaching this in a similar way, but the numbers involved mean I can’t go all out to begin with or I risk blowing out and not being able to recover. My average daily count so far is 59.38km. So, I’m ahead of the curve. I want to bring the required daily average down to 30km as soon as possible, at which point I will start trailing off a little.
Any donation, no matter how small will be gratefully accepted. If you can’t afford to donate, I get that. Please share the page instead as someone you know might be able to donate something.
Financial Update Premium Bonds: £15,000 (no change from last week).
Stocks and Shares ISA: £8,099.01 (up £1,222.97 from last week).
F**k It Fund: £4,481.15 (up £150 from last week).
Property Value: £181,626 (no change from last week).
Total Assets: £209,206.16 (up £1,372.97 from last week).
Residential Mortgage: £144,906.05 (no change from last week).
Total Debts: £144,906.05 (no change from last week).
Total Wealth Figure: £64,300.11 (up £1,372.97 from last week).
Investment Income in 2020: £28.67 (target £2,000).
It’s good, in a way, to see my ISA recovering. However, a few more months with lower stock prices wouldn’t not have been a disaster for me as I could have scooped up more shares at a lower cost. I’m not too upset by this though. I keep reminding myself that behind each stock or fund, are businesses struggling and that behind each business there are employees struggling to make ends meet. I appreciate that this blog might not be something that everyone wants to see right now, but it’s as much for me as anyone else. Writing and reflecting on the past week keeps me focused on my goals. In the six-months or so this blog has been running, I have also tried to share information and experience. My goal is to become financially independent, but my other goal is to help people improve their financial education.
I often wondered if I was money obsessed. I think about money, talk about money, obsess about money for much of the time. The thing is, money is just a tool. I realised after reading many books on the subject, that money is just a means to an end. The end result is freedom. It’s freedom from doing what other people tell you to do. It’s the freedom to be able to say “fuck it” and walk away without worrying about a mortgage, food or survival in general. It’s part of the reason I call my emergency fund my “Fuck It Fund”. Money is important to me because it leads to the one goal I have in life; to be free.
I’m all for motivational quotes and inspiring stories, but there are times when it’s just wrong to put people under pressure. You have to pick your moments to try and be inspirational. We are in a strange, somewhat horrific, time. People are dying out there every day by the thousand. People are locked in their homes, frightened to go outside for fear of spreading or catching this awful virus. People are scared for their families and their friends. Jobs are being lost. Debt is increasing. There are people out there struggling through the worst times of their lives. And then someone goes and posts shit like this:
The guy who posted this on Facebook is a well known property investor and author. I’ve read several of his books and in general find him a decent guy. I find some of his posts to be a little annoying, especially ones that suggest the only difference between success and failure is effort. It’s not that simple. Effort counts, I agree. The thing is, sometimes life just happens. It can beat you down so badly that simply surviving is a victory. Making people feel bad because “someone took that same situation you been complaining about and won with it” is insulting, and ignorant. Now is not the time to make people feel inadequate. Now is not the time to beat people down. This sort of meme looks inspiring on the face of it, until you spend more than half a second thinking through the different ways it can be interpreted.
The guy who posted this told me he did not mean to insult. I accepted his statement but replied that one can be insulting without intending it. Someone can offer insult because they innocently failed to realise how their words, or actions, could be perceived by other people. We are all guilty of this from time to time. The important thing to remember is you don’t get to choose how your words are interpreted. You can choose your words carefully, thinking about many possible outcomes but it’s always possible you could inadvertently offend.
With the coronavirus showing no immediate signs of slowing down, the purchase of a BTL is on the back burner. This raises the question of what to do with my half of the deposit that is currently in Premium Bonds. With the stock market being so low, there is the option of lumping the money into shares and hoping there is a recovery by the time I need the deposit. I could potentially double my money. I would go as far as saying I am pretty much certain I could double my money with the only question being the timing. I could need the money when the market has dipped and I might not have enough value at that point to release enough funds for the deposit. There is also the question of tax.
The great thing about a stocks and shares ISA is that it’s tax free. No capital gains tax and the dividends are taxed at source at a modest level. It’s a great, tax efficient way to invest. However, you can only invest around £20,000 per year and if you withdraw from the ISA, you are not always allowed to reinvest the money later that year. For example; if I invest £15,000 as a lump sum, I would have £5,000 allowance left over. If I withdraw the £15,000 a few months later my allowance does not increase by £15,000. I would still only have the £5,000 allowance. The safest thing to do for now is to just keep that deposit on one side, and continue to invest monthly into my ISA.
From my next salary I will have met another financial target. I already have my first BTL deposit saved and from next month I will have £5,000 in my Fuck It Fund. I need to start thinking about how to allocate my investment budget moving forward. I will continue investing in my ISA; that’s a given. The real decision is whether to hammer my residential mortgage or start saving for a second BTL. I’ve decided to go with the latter. My mortgage is a Bank of England tracker and it’s a very good tracker, meaning I hardly pay anything above the base rate. On a mortgage of approximately £144K, I’m paying roughly £30 interest a month. It’s the cheapest debt I will ever have. So, for the time being I will allocate the bulk of my remaining investment budget into a second BTL deposit. I will still drip feed some money into my Fuck It Fund as well as investing in my ISA. If/When the base rate starts to climb again, I may reassess. I’ve got a soft limit of 1% in my mind, meaning that when the base rate hits 1%, I would then look to allocate more money towards paying off my residential mortgage. When I took my extra borrowing out a couple of weeks ago, I reduced the term of my mortgage by nine years, so I’m already on track to pay it off in a reasonable time frame. Final Notes
Thank you for reading and I hope you have a safe week.
Hello and welcome back to Mortgage Advisor on F.I.R.E. This week I will discuss the impact of coronavirus on my strategy in respect to the stock market. Also, I will have a look at my 2020 reading challenge and highlight some of the best, and worst, books I’ve read so far this year. First, the weekly update.
For the past few weeks there has only been one topic to discuss; the coronavirus. We have still not yet peaked and I fear that even when we do peak, there will be a second wave in the autumn and winter months. In the last few days I have managed to get set up to work from home, and so my plan is to fortify myself here and only leave when absolutely necessary for food and medicine.
I had some good news this week. I spoke with my cardiologist on the phone and he confirmed that the tests I had done in February show my heart function is now normal and that the stretching and distending of the heart has gone. I have to continue taking the medication for my heart for now, but my doctor suggested we can review that situation in a few months. This definitely feels like a victory as for the last few years it has felt like every update regarding my health has been a set back.
Those of you who follow me on social media will know that I set myself an annual reading challenge. Last year it was to finish 104 books; 2 per week. This year, I had the same target for the number of books read but I also wanted to read outside my comfort zone. I realised, when I looked back, that I had not read much by female authors. Also, I am embarrassingly ignorant of the classics. My additional goals for 2020 are to read more works from female authors and more of the classics.
As of the end of March, I had finished 25 books. Here is the list with ratings out of five for each:
Station Eleven by Emily St John Mandel.*****
Things We Never Said by Nick Alexander.****
The Fast 800 by Michael Mosley.*
The Paradox of Choice by Barry Schwartz.*
Normal People by Sally Rooney.*****
Property Magic by Simon Zutshi.***
The Little Book of Common Sense Investing by John C. Bogle.****
I Thought It Was Just Me (but it isn’t) by Brene Brown.*
The Psychology of Time Travel by Kate Mascarenhas.**
Naked Statistics by Charles Wheelan.****
The Happy Brain by Dean Burnett.**
Conversations with Friends by Sally Rooney.****
The Outsider by Stephen King.***
How To Get Rich by Felix Dennis.*
11.22.63 by Stephen King.*****
You Then, Me Now by Nick Alexander.*****
Rent to Rent: Getting Started Guide by Jacquie Edwards.***
The Complete Guide To Property Investment by Rob Dix.*****
Principles by Ray Dalio.****
The Man Who Solved The Market by Gregory Zuckerman.***
Leviathan Wakes: The Expanse Book 1 by James S. A. Corey.*****
Caliban’s War: The Expanse Book 2 by James S. A. Corey.*****
Abaddon’s Gate: The Expanse Book 3 by James S. A. Corey.*****
Cibola Burn: The Expanse Book 4 by James S. A. Corey.*****
Nemesis Games: The Expanse Book 5 by James S. A. Corey.*****
I started the year with some excellent fiction. Station Eleven and Normal People are two of the most moving and compelling stories I have ever read. The first of those books takes place across different times; before, during and after a flu pandemic. The world is ravaged and the story is told from the point of view of different characters. It’s an exploration of what it means to be human. Station Eleven is about philosophy, art, literature, community, friendship and love. A remarkable piece of writing.
Normal People is less epic in scope but with similar themes. Taking place in Ireland and focusing on two teenagers as they grow into adulthood, it is a story about normal, but damaged, people. The characters are vivid, with depth and subtlety. The writing style took some getting used to, but after a while I stopped seeing the words on the page and became immersed in the story and in these characters. When I finished it, I had to just sit and process what I’d read. Another fantastic book.
There have been a few disappointing reads as well. The Paradox of Choice was not just bad, but insulting. The idea is great; that too much choice can lead to distress, anxiety and stress. I know I always get stressed with too much choice. I hate going to restaurants that hand you a menu the size of the Argos catalogue and much prefer a single side of A4. This book was pure verbal crap. There is no effort to provide analysis and debate. It’s mostly a series of lists and examples of choice that apply to a small segment of society. I actually returned the book for a refund. Complete and utter garbage.
As was I Thought It Was Just Me (but it isn’t). This is a strange book. The blurb seems to be describing a different book entirely, as it makes no mention of the fact it covers the topic of shame in women. The blurb talks about how “The quest for perfection is exhausting and unrelenting.” I find psychology interesting, so I can see why I would buy a book on this subject, but I did feel like I had been misled. A quick glance over the reviews on Amazon shows I am not alone.
I have placed links to Amazon for some of the books mentioned. Purchasing the books through those links will provide a small contribution to the cost of running this blog, with no extra cost to you.
Premium Bonds: £15,000 (no change from last update). TARGET MET.
Stocks and Shares ISA: £6,876.04 (up £259.52 from last update).
F**k It Fund: £4,331.15 (up £2451.64 from last update).
Property Value: £181,626 (no change from last update).
Total Assets: £207,833.19 (up £2,711.16 from last update).
Credit Card Debt: £0 (down £2,216.24 from last update).
Loan Debt: £0 (down £2,871.56 from last update).
Residential Mortgage: £144,906.05 (up £11,232.21 from last update).
Total Debts: £144,906.05 (up £6,144.41 from last update).
Total Wealth Figure: £62,927.14 (down £3,433.25 from last update).
Investment Income in 2020: £28.67 (target £2,000).
There is a lot to unpack this week from the financial update. With interest rates being so low, we decided to release some of the equity in our property. We borrowed an extra £11,500. Some of that we used to pay off our credit cards and our loan. The rest we divided up so that my girlfriend has some cash in reserve. We also put money on one side for another holiday and towards some work we want to complete in the apartment. It also clears the deck somewhat. In addition to borrowing the extra money, we have reduced the term on our mortgage by nine years. The plan is to build up some more emergency funds and then start hitting the mortgage hard whilst putting money to one side for another BTL. I already had the £15,000 saved for a BTL with my business partner. However, I would like to get a BTL with my girlfriend as well. My plan for financial independence is based around rental income and I will need five or six rental properties by the end of 2023 to make it work.
The stock market is an important part of my plan for financial independence. Although I invest heavily in index funds, I also have a small selection of four individual stocks that I invest in for dividend income. These stocks have a good track record of healthy dividends and I’m satisfied with what I’ve seen when looking at their financials. Then, the coronavirus happened. Two of those stocks have cancelled their dividends for the rest of 2020. Another is strongly rumoured to be cancelling in the coming days and the fourth seems ok for now, but I expect it to also cancel. This sounds like a bad news story. Well, it is and it isn’t. I will explain.
Dividends are going to make up a substantial part of my income once I eventually give up my day job. The dividends being cancelled throws a spanner in the works but no one could really predict when the next pandemic would hit. This is a risk you take, and it could happen again in the future. I could also lose my job in the future, or be hit by a bus crossing the road. One cannot avoid risk, but you can mitigate it. That’s why I always put my phone away and check the road before crossing. That’s why I try to develop my professional skills whenever possible. That’s why I will not be relying solely on dividend income.
There are ways to protect your money and ensure a good return in the current climate. It reminds me of the stock market just after the Brexit referendum, although I expect it to take longer for the stock market to bounce back this time. The four stocks I have individually picked are currently trading at the following levels according to their 52-week high:
All four companies should survive this crisis. We are looking at a major, global bank. A defence and aerospace company. An oil and gas company and a telecommunications company which operates globally. All four should survive. The question is more about how quickly, and how far, these shares will bounce back. The banking sector is quite safe, or should I say the major players are safe. I don’t think the government will let them fail in the UK. I do think those that have a major share of the mortgage market may be in for a rough time in the next 18-24 months as they deal with payment arrears. However, I can’t see any of the major players embarking on a wave of repossessions. It will do too much damage to their brand. Instead, we will see a lot of mortgages increase as the arrears are rolled up into the debt. There will be some exceptions, but by and large I think most people will be safe.
The opportunity in the stock market relates to something I have mentioned several times before; pound-cost-averaging. Simply put, you are getting more shares for your money right now. When dividends do resume, you will have more units of stock to receive payment on. Now is the time to invest, but choose your stocks wisely. If you are starting out, go with a FTSE index tracker and a US equity tracker from Vanguard.
They’re going to drop. It’s pretty much a certainty at this point. The only question is how bad it will be. As people lose their jobs and families are forced to operate on reduced incomes we are going to see people struggle. A combination of the gig-economy and high levels of unsecured debt means we were always on thin ice. This pandemic is taking a sledgehammer to that ice and a lot of people are going to find themselves in the cold water. If you’ve stretched yourself to get the biggest mortgage so you could get that three-bed detached house instead of that two-bed semi, you are probably worried right now. I’m not surprised – I would be worried too and I’m a mortgage advisor. If you work with your lender, they will work with you.
In recent years the banks have relaxed lending criteria. Contrary to what some people believe it is possible to get a 95% mortgage. If you have taken out a mortgage with a 10% deposit or less, especially on a new-build, in the last couple of years I would be preparing myself for a few years of negative equity (where your mortgage balance is higher than the property value). I can see this happening as, when the pandemic is over, a lot of people will be looking to sell. This will increase supply and there will not be as many people in a position to buy. The drop will not happen immediately as people will struggle to accept their house has dropped in value, but the drop will happen. It will be the professional landlords and investors who will start snapping up properties and we will see a further transfer of wealth from the poor to the already wealthy.
Should You Buy Now?
Absolutely not. Anyone buying a house now, unless it’s an absolute steal, should be hanging on to their cash. In a year, that property will be 10% cheaper at a minimum. Also, we are facing a recession and I can see many major employers going under in the coming months. People need to be asking if their jobs are secure and preparing for the worst. Even if your job is secure I would still hold off on buying. Prices are going to drop and there will be bargains to be had. I’m not suggesting that you should take advantage of vendors with derisory offers, but at the same time there is no need to pay more than what something is worth.
Thank you for reading and I hope you stay safe and healthy. If you have any comments or suggestions for future posts, please leave a note below.
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.
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.
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.
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.
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.
Hello and welcome back to Mortgage Advisor on F.I.R.E. There’s a lot to discuss this week. I will talk a little about conspiracy theories and why they are dangerous, and then move on to my financial response to the Coronacrisis.
It’s been my first week back in work following my return from India. I’m so relieved that I made it back to the UK, as had I been any later there is a very real chance I would still be stuck abroad. It must be so frustrating for all those who are trapped away from their homes at the moment. I know my girlfriend is feeling the distance from her family.
In terms of distance, the importance of social distancing at this time cannot be overstated. It should not even be that difficult in an age of video calling and social media. It’s annoying that so many people have not heeded advice until now, purely thinking of themselves instead of thinking how they may be the carrier that passes the virus on to other, more vulnerable, people. Tragically, people will die because of this thoughtlessness. One of the best pieces of advice I saw was to act as if you were already infected. If you were already infected you avoid contact with other people and become a hermit for a couple of weeks, or at least I hope you would.
“IT’S ALL A PLOY TO GET US MASS VACCINATED!”
I keep seeing people posting things like this on social media, claiming that the coronavirus is all a ploy to get us mass vaccinated. The thing I’m not clear on, and after questioning the people posting this, I don’t they are clear on it either, is what we are supposed to be getting vaccinated against and also, why?
“Why?” is a question that shuts down most crackpot theories. Another conspiracy theory I’ve come across is that this is all a hoax to force society to self-isolate. I ask again, why? What would be the point? What would be achieved?
Another way to shut down these theories is to ask people what their sources are. Most of these conspiracy theories come from unverified sources lacking general credibility, and this is just a polite way of saying “some dude off Facebook.”
Conspiracy theories can be fun. There are several theories which I’ve gone down the rabbit hole with, including the 9/11 theories, the sinking of the Titanic, the Phantom Time hypothesis, and even Flat Earth theories. The thing is, for me it is entertainment and a way to sharpen my critical thinking skills. There is a host of research in the psychological literature that shows if you believe in one conspiracy theory, you are more likely to believe in other conspiracy theories. For the most part, it’s pretty harmless to society as a whole. If you choose to believe the Moon landings were faked, or that the Earth is flat you aren’t really harming anyone, with the exception you might be socially isolating yourself (although Flat Earth has a large community now). There are some conspiracy theories, though, which can be extremely harmful to the extent they can cause death.
Anti-vaxxers are fucking idiots. Let’s just get this out of the way first. There is not a shred of credible, peer-reviewed, evidence that links vaccines to things like autism. Every single argument from anti-vaxxers can be deconstructed quite easily by the medical establishment. Vaccines are safe, and they save lives every day.
A few days ago, someone I know shared a status on Facebook which was one of the typical “things were better back in the day” posts. It described how their parents used to use the same knife and chopping board to cut fresh chicken and then butter bread. It described how their packed lunch for school was not kept cool. It also described how they were not given antibiotics and sterilisation kits for bee stings (I think it’s rare that a bee sting gets infected, but I digress). Anyway, it was one of those posts that got my back up a bit because on the face of it, it’s pretty inoffensive but when you drill down it has the potential to be dangerous.
Let’s take a trip back through time. According to the ONS, Infant (aged under 1 year) mortality has dropped from 9.4 to 3.9 per 1,000 live births over the last three decades. Life expectancy has also improved substantially in the last few decades, as per the charts below from the ONS.
There is a survival bias when people look back at the past. People can look back now and say “well, I survived so cross contamination from food preparation was not dangerous” or “I survived playing in the dirt” and so on. The thing is, of course you survived because you’re here to say it. What about all those that did not survive?
So, coming back to my point a couple of paragraphs ago. Why are statements on Facebook, promoting the unhygienic past, dangerous? It’s because it subtly promotes a return to that way of life. If just one parent decides to make their child’s cheese sandwich with the same equipment they prepared raw chicken, there is an increased risk that child will die at an early age. The same principle applies to those who do not vaccinate their children.
How does this relate to the coronavirus conspiracy theories? Well, if people are posting BS theories that are not backed up by credible evidence, it runs the risk of convincing other, uninformed, people to disregard government and medical advice. If people do not practice social distancing then we are in this for a longer period of time. For most people, the virus will be an inconvenience, but if you are one of those people disregarding medical advice you risk passing the virus on to the elderly or those with compromised immune systems such as cancer patients.
Another thing to remember, if you think the actions by the government are heavy-handed, is that it’s easier to scale back an overreaction than it is to ramp up an underreaction. These measures might be extreme, but I have little sympathy when we are having to explain how you should wash your hands in the year 2020. I wash my hands regularly and thoroughly, and I’ve had people comment on it before. The thing is, for the last twenty years or so I have always washed my hands according to NHS guidelines. I see people come out of bathroom stalls and then just flick their hand briefly under a tap. This is not washing your hands.
Now that I have vented, let’s move on to the financial update.
Premium Bonds: £15,000 (up £1,275 from last update). Target Met.
Stocks and Shares ISA: £6,353.84 (down £725.71 from last update).
F**k It Fund:£1,879.51 (up £265 from last update).
Property Value: £181,626 (no change from last update).
Total Assets: £204,859.35 (up £814.29 from last update).
Credit Card Debt: £1,732.14 (down £27.80 from last update).
Loan Debt: £2,906.84 (down £29.38 from last update).
Residential Mortgage: £133,673.84 (no change from last update).
Total Debts: £138,312.82 (down £57.18 from last update).
Total Wealth Figure: £66,546.53 (up £871.47 from last update).
The ISA is continuing to take a pasting, but I’m not worried. This is a good thing for long-term, regular investors as it means we get more from pound-cost-averaging, which I will come back to shortly. I have now hit my target of £15,000 in Premium Bonds, which was going to be used for a BTL deposit. However, those plans are on hold. I’ve spoken with my business partner and we’ve agreed to hold our plans until there is more clarity about the impact of Covid-19 on the property market.
In my last post I argued for the need for flexibility when investing. I have also promoted the concept of process goals over outcome goals, as I believe if you stick to a general process (i.e. regularly investing and continual financial education) you will achieve financial independence. I still believe that. I have small outcome goals that help direct the path my process goals will take me on, such as raising enough money to pay my half of a BTL deposit. The outcomes are just signposts though, that I’m on the right path.
With Coronavirus spreading as it is, many people are finding themselves in uncertain financial times. There are many resources out there to help if you are struggling with debt, or budgeting. These include:
Do not suffer alone if you are struggling. If you are in financial difficulties, please contact one of the above organisations for help and advice. If you are going to struggle meeting your mortgage payments, please contact your lender as soon as possible. In the first instance, use their website. I know some lenders are offering payment holidays you can apply for over their website. This will help reduce the strain on those working in the offices who are dealing with long queues of calls. If you do apply for a payment holiday, please make sure you understand the implications of this before agreeing to it.
Although the Coronavirus is primarily a physical issue, the impact it will have on the mental health of the nation should not be underestimated. Although we are to remain socially distant, it does not mean we should be emotionally distant. Talk to those around you. Be kind. If we continue to be there for each other emotionally we may end up saving lives.
If you are struggling with your mental health, please reach out to your friends and family, or to one of the organisations listed on the NHS link here:
I have seen more than a few BTL portfolio landlords, and Rent-to-Rent landlords state they are struggling as their tenants are unable to pay rent having lost their jobs due to the Coronavirus. I made a point, which caused some controversy, that if you are in financial difficulty because your tenants have missed one payment, then you have overstretched yourself and are guilty of the same lack of contingency planning you accuse your tenants of. I see many landlords who operate under the mindset of “more, more, more” and will leverage to the maximum degree to obtain as many properties as possible. I hope this will be a wake-up call that more isn’t always better. One thing I have discussed in depth with my business partner is the need for a significant contingency fund should anything go wrong with our first BTL. I would not be able to sleep at night if I did not have at least six-months of funds behind me.
Pound Cost Averaging
A few weeks ago I explained this concept, and I think now is a good time to revisit it. The stock market is taking an absolute hammering at the moment with many shares tanking. There are some signs that the collapse may have bottomed out, but it’s my personal view that stocks could fall even further. We are only in the first few weeks of the Coronavirus impacting business in the UK, and Europe as a whole. As more businesses close their doors and more people lose their jobs, I suspect we may see more than one high-profile casualty in the stock market as well as significant further falls across the board.
The basic concept of pound-cost-averaging is that you spread your investment in stocks out over time. The frequency isn’t all that important, you could spread the investment out weekly, monthly, quarterly etc but remember that trading fees can impact on the overall cost of each stock. Personally, I invest monthly as it matches the frequency of my salary.
An Example (trading fees and taxes ignored for simplicity)
Month 1: You invest £1,000 in a stock priced at £20 per unit. You purchase 50 units.
Month 2: You invest £1,000 in the same stock which is now priced at £17 per unit. You purchase 58 units, and have £14 left over.
Month 3: You invest £1,014 in the same stock which is now priced at £18.50. You purchase 54 units. You have £15 left over.
Month 4: You invest £1,015 in the same stock which is now priced at £22. You purchase 46 units. You have £3 left over.
In total you have purchased 208 units at a cost of approximately £4,000. The average (mean) cost of each unit of stock was £19.23. This is pound-cost-averaging.
If you had instead saved your £4,000 and invested in month 4 in one lump sum, your £4,000 would have purchased just 181 units.
As the quote goes; “It’s not timing the market, but time in the market that counts.”
Now that I’ve saved my deposit for the first BTL, I’m going to switch my focus to investing aggressively in the stock market. Although I invest heavily in index funds, I also have a small selection of individual stocks that I invest in. I believe in the long-term future of these stocks and some of them have lost 50% of their value since the start of the Coronacrisis. There are bargains to be had. Even if you look at index funds only, the Vanguard FTSE100 Index Fund has lost approx 25% of its value in the last month. It may drop further, but I firmly believe it will bounce back in time. The Vanguard Global Bond Index has remained fairly static throughout the last month, but in the past week or so it has started to drop but by a much smaller amount than the stock market.
As I stated before, I firmly believe this is a great time to invest in the stock market as long as you have done your research. If you invest without research, you are just gambling.
The most important thing now is to stay calm, and be prepared. This applies to your finances, your health, and your work. We are in uncharted waters and we don’t know for certain how this virus is going to impact us in the short, medium and long-term. The only way we get through this is together. Be there for the people you care about and please try not to scaremonger.
I hope you have found this part of the blog interesting and if you have any questions or feedback, please leave a comment.
It’s been a few weeks since I last updated this blog. Part 17 was posted on 21/02/2020 and I’m frustrated at the gap between posts. This week I will explain a little about the reasons for the gap. I will also look at the impact of the coronavirus on my investment strategy. First of all, the weekly update.
I was thinking I should rename this section “Weekly Updates” but I did not want to confuse matters unnecessarily. In Part 17 I explained that I would be leaving for India, but what I did not realise was that I had the departure dates mixed up. I thought I was flying on Saturday 29/02/2020 but I was flying the day before, and Friday is the normal posting day for this blog. Part 18, as a result, was lost in the mix. To be honest, I had a draft of Part 18 ready but it was not my best writing and I think it’s best to just leave it in my saved files. The plan, as mentioned in a previous post, was to have a guest blogger post an update whilst I was in India but that did not come to pass either. With a very limited internet connection in India I was not able to post anything. So, apologies for the gap between posts. I have not given up on this blog and am still passionate about the project and the journey to financial independence.
India was quite the disappointment. I am going to write a separate blog detailing the trip for another part of this site, and so will not go into too much detail here. In brief, the main issues stemmed from the agents messing us around. We had booked a “luxury” package but it was far from luxury. Also, we knew this was a trip that involved some travelling between cities but in the eleven days we had in India I calculated that we spent approximately seventy hours on the coach. The hotels ranged from adequate to terrible. In one hotel we had an issue where our room had no hot water and it took over two hours for the hotel to move us to a different room. This was late at night after a long day in dirty streets. The hotel’s conduct during this issue was disgraceful. Another hotel had no power or water from the time we checked in at around 19:00 until almost 22:00. This meant after a long day on the road we had no toilet facilities, showers or even lighting. Another hotel marketed as five-star could not accept card payments, something not disclosed at check-in, which meant that when it came to pay bills, many guests were having heated conversations about paying their expenses.
The Tour Guide was spineless as well. There was a group of thirty-six travelers and there was a real division within the group. One of the travelers insisted on sitting next to the driver in the forward cabin of the coach, and we could see him distract the driver several times. We narrowly avoided accidents on multiple occasions but the Tour Guide said he could not do anything about it. We challenged the other traveler but he refused to change seats. I was quite vocal about this issue and another traveler started making comments about me to other members of the group. I was told about this, and I calmly confronted the woman to ask if she wanted to clear the air. She became abusive and I told her to mind her own business in future. She then sent her husband to speak to me, but I made it quite clear to them both I would not tolerate their nonsense further. All of this made the trip pretty underwhelming.
Initially, I quite liked our Tour Guide but after just a couple of days my opinion of him shifted. Early on in the trip we were offered an upgraded meal plan that would include dinner at the hotels in addition to breakfast. This would be at the cost of £10 per person, per night. We accepted the offer. Nothing was mentioned in detail about payment, so I assumed that it would just be a card payment to the travel agent or local tour operator. Now for a little tangent….
The Indian currency is the Rupee. You cannot buy the Rupee outside of India. The currency is highly regulated and you are not permitted to transport the currency across India’s borders. I have cash across three banks, as well as a credit card. Two of my bank account providers do not charge for using their debit cards abroad or for foreign ATM withdrawals. However, I had to try many different ATMs to find one that would work. When they did work, the daily withdrawal limit was 10,000 Rupees, which is roughly £110. This has to pay for general expenses, lunches and so on. It does not leave much room to accumulate the cash needed to pay for the meal plan in Rupees. Also, it was not just me having an issue with ATMs not working. On several occasions there was a queue of people from our group all trying to draw money from Indian ATMs but they would not work for any of us. I called my banks and they stated they had no record of attempted withdrawals, which meant the issue was probably that the connection timed out between the Indian banks and the UK banks. The card readers in shops and restaurants were no better. Our Tour Guide was well aware of all these problems.
When we were in Jaipur, one of our last destinations, we were told that we needed to make payment in cash. We ended up being driven round the city in a Tuk Tuk trying to find an ATM that would work. We did not succeed. I explained this to our Tour Guide; he would either have to find a way to allow a card payment or online transfer. After some debate, I was sent a link to make an online payment. However, the hotel we were at by this point had no wi-fi. On the coach the next day, the Guide used his phone as a hotspot. I spent an hour, as we were driving through the Indian countryside trying to make the payment but the signal kept cutting out. I eventually gave up. I was only able to make the payment on the last day. The Guide kept pestering me to give him the money. I ended up asking him if he thought I have some magic power to summon cash out of thin air, and I think he got the message.
On the positive side, my girlfriend and I spent time together away from the pressures of day-to-day life. We made the best of our time together and got to experience another culture and way of life. We saw the Taj Mahal, and several forts and temples steeped in history. We also made some great friends in our group including Jane and Melvyn, a retired couple from the Birmingham area. We met Tess, a lady living not far from us in South Yorkshire. We also spent time with a lovely Indian family, and our joint dinners at several of the hotels were great fun. I also spoke briefly with some other members of the group who seemed like interesting people whom I would like to have known better, but the time pressures of such a trip made it difficult. I hate being so negative about travelling. I love travelling, and even when things don’t go to plan, there are normally ways to rescue the situation. Both my girlfriend and myself agree though, this was our least enjoyable trip in the thirteen years we have been together. We feel like we need a holiday just to recover from this trip.
Premium Bonds: £13,725 (no change from last update).
Stocks and Shares ISA: £7,079.55 (down £1,533.87 from last update).
F**k It Fund: £1,614.51 (up £1.40 from last update).
Property Value: £181,626 (no change from last update).
Total Assets: £204,045.06 (down £1,532.47 from last update)
Credit Card Debt: £1,759.94 (up £1,759.94 from last update).
Loan Debt: £2,936.22 (down £400 from last update).
Residential Mortgage: £133,673.84 (down £286.73 from last update).
Total Debts: £138,370.00 (up £1,039.10 from last update).
Total Wealth Figure: £65,675.06 (down £2,571.57 from last update).
You will notice two massive changes since the last update. My credit card balance has increased significantly. As I’ve stated previously, I normally run my credit card at a zero balance where it is paid off as soon as it is used. India threw a spanner in the works as we had to spend much more than expected. Also, with my bank cards not working properly in India I had to rely more on the credit card even though it charged me a fee for non-sterling transactions. It’s probably going to take a couple of months to reduce that balance back down to zero, but it will get there.
My ISA has taken a pasting with the stock market slump due to the coronavirus. I’m not concerned though; it’s actually an exciting time. It’s like Black Friday for stocks and there are many, many deals to be had. For short-term investors, day-traders and speculators, this sort of drop in the stock market is terrifying. For long-term investors it’s a great time to start snapping up shares. The stock market will bounce back; it always does.
A Soft Reboot
“No plan survives contact with the enemy.”
~ paraphrased from quote by Field Marshal Helmuth Karl Bernhard Graf von Moltke.
I’ve spoken before about the need for flexible plans and goals that are process based rather than outcome based. Our trip to India ended up being a bigger speed-bump in the road than expected. Also, the rise of Covid-19 is something that I could not realistically plan for. I need to reassess my financial priorities and look to streamline as much as possible over the coming months. I have a devised a new plan of action which involves ticking off the financial goals that I’m closest to achieving first, thus freeing up the money that would otherwise be committed to those goals.
Finish saving for my BTL deposit. The initial goal was to save £14,850 to match my JV partner’s contribution to our first BTL. I said a while ago that I’d rounded this up to £15,000. I need to save £1,275 to hit that figure. I should do this from my next salary credit.
Reduce my credit card to zero. Once I had my BTL deposit saved I can allocate money that was being saved towards that, towards paying my credit card off. I should pay more than half the balance off in my April salary, with the remainder cleared in May.
Clear the remaining loan balance. Initially I had hoped to have this clear by June, but that’s looking a little less realistic. Once the credit card is back to zero in May, it will probably take June, July and August to clear the loan.
Throughout all this I will also be investing in my stocks and shares ISA. Depending on dividend income I may be able to hit the targets mentioned above a little earlier, but I’m not counting on that.
Investing in Stocks: Now is the time to buy.
“The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.”
~ Warren Buffett.
Investing can be complicated. It can involve detailed analysis of economic trends, balance sheets and dozens of other factors. Sometimes though, it is very simple.
These mass selloffs which we see in the stock market at times of crisis are a case in point, and amateur investors need a reminder of just what the stock market it. What I’m about to say, sounds like common sense. However, the more you let the point sink in, the more relevance you will observe to the market right now. Here goes;
When you buy stock, someone else is selling. When you sell stock, someone else is buying.
The stock market is a middle man. You don’t buy or sell stock to or from the stock market as an institution but rather through the stock market to another individual or business. When you choose to sell stocks in a panic, someone else is rubbing their hands together as they sense the opportunity for a bargain. The cynic in my thinks that a lot of the experts you see on the news promoting stock market catastrophe are the ones who will be logging into their trading accounts shortly after to start hoovering up shares that have plummeted in value.
When the stock market falls, it’s a chance to make money. I did this just after the Brexit Referendum in 2016 and made a tidy profit. I will probably make some money from this plunge as well. You make your money in stocks when you buy, not necessarily when you sell, as a long-term investor may not sell. My strategy is to buy, hold, and take the dividends. When the stock market falls, I get more for my money; more units of the stock and more dividends further down the line.
Apologies again for the gap between posting on this blog. Normal service should now resume. However, I am making a change to the posting schedule from next week. Instead of posting on a Friday, I am moving the posting day to Sunday each week. I have a few things on at the moment with studying for my Financial Advisor qualifications and posting on a Sunday just makes more sense for my circumstances. Thank you for reading.