Hello and welcome back to Mortgage Advisor on F.I.R.E. Weekly Update
Although I am feeling slightly better in myself following a few weeks of stress in my personal life, I’m not anything like back to normal. I’m feeling physically and mentally exhausted. In addition to working full time, I’m exercising, writing and studying for my first exam on the road to becoming a financial advisor. On top of that, there is the fact that some of the people in nearby apartments are not being particularly considerate when it comes to going on their balconies and shouting in the middle of the night.
We haven’t had any more success in finding a BTL, in part due to the pressures on my time mentioned above. Until I complete my first exam, everything else is of lesser importance. I completed a few mock exams on the modules I’ve covered so far and achieved a passing grade. Had I not mentally shut down for the last few weeks I’m sure I would be further ahead with my studying. Ideally, I would be better prepared at this stage but right now all that matters is passing the first exam, and then hopefully doing a better job of studying for the other five modules.
The property market is going to pass through a period of instability in the coming months, I think. With the furlough scheme coming to an end in October, and the ban on evictions ending at roughly the same time, I can see the market remaining steady until the end of 2020, possibly early 2021. However, as people see a drop in income and we potentially see a surge in unemployment, I can see a surge in people trying to sell. This will cause prices to drop and many investors with spare cash will start snapping properties up. The economic impact of Covid-19 is going to be felt for many years to come.
Health Update
Current Weight: 115.2kg (up 1.5kg from last update).
Current Body Fat: 36.6% (down 3.3% from last update).
BMI: 34.8 (up 0.5 from last update).
Weekly Goal: lose 0.75kg.
Ultimate Goal: 90kg.
Weekly Steps: 13,416.
A bad week, health wise. I’m not convinced that the weight gain is as significant as it could be part of the daily fluctuations that everyone experiences with their weight. It’s strange that my weight increased but my body fat percentage came down. I suspect that when I look back at this week, it will be something of an outlier. I haven’t had the best week in terms of diet; this week I did succumb to stress eating and the pressures of studying meant I could not go out for as many walks as I would have liked.
Financial Update Premium Bonds: £17,250 (up £750.00 from last update).
Stocks and Shares ISA: £12,009.26 (up £340.01 from last update).
Fuck It Fund: £1,854.94 (up £100.00 from last update).
Property Value: £185,248 (no change from last update).
Total Assets: £216,362.20 (up £1,190.01 from last update).
Residential Mortgage: £143,886.47 (no change from last update).
Total Debts: £143,886.47 (no change from last update).
Total Wealth Figure: £72,475.73 (up £1,190.01 from last update).
Investment Income in 2020: £61.36 (up £4.92 from last update) (target £2,000).
A good set of figures for this week with my salary being paid on Friday. My monthly investment into the stock market will not take place until early July, so the gains in my ISA seen here are a result of general stock market increases.
I received a small dividend from one of my stocks in the past week, which increased my investment income for 2020. Had my other stocks not cancelled their dividends following Covid-19, I would be roughly 30%-40% of the way to hitting my target. It’s frustrating, but then I remember that I could have worse problems to contend with.
Ideally, to achieve a comfortable lifestyle in Romania I need £26,100 p/a from my investments. I’m a long way off that, but I still believe it can be achieved by the time I’m 40. Even if I don’t achieve it in time, the things I’m doing now will mean I’ll be in a much better financial position than if I simply gave up.
Interviews
Over the next few weeks I will be posting a number of interviews I’ve completed regarding finance and gambling addiction. I was hoping to post the first part this week, but life (and my exam prep) has gotten in the way. So, this week’s blog is much shorter than usual. However, next week will see normal service resumed.
Final Notes
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 some thoughts on how society may adapt to a post-covid world, and how this could inform my investment strategy. Weekly Update
Although my last blog post was not written to attract attention, I was heartened by how many people got in touch privately to check I was ok. I’m still feeling angry and stressed, but I’m dealing with it better than I was. I’ve gone a few nights without sleeping tablets which has been a relief. I’m not working at the moment as I should have been in Romania. I decided to keep the holiday from work booked as I felt I needed some time out. I’ve spent much of the last few days finishing The Glass Hotel by Emily St John Mandel. Some of you may recognise the name from a previous blog post where I talked about her earlier book, Station Eleven. Both books by the author have smashed their way into my top-ten books of all time list. It’s difficult to assign these works to a specific genre. All I can say is that there are few books that have been so vivid, deep and atmospheric.
The BTL search continues without success. I’m becoming increasingly frustrated with estate agents for a number of reasons. The first frustration is that I get the sense they sometimes don’t want to sell a property. The amount of agents that only conduct viewings in office hours is absurd. Many people who are wanting to view a property will be employed in some form, and finding time between office hours to view a property is difficult. If I had a property for sale, and it had been on the market for a year and the agent was just shrugging their shoulders when people ask for viewings after 5pm or at the weekend, I would be furious.
Another source of frustration is when the agents market the property in such a way that it is unrecognisable when viewing. The property I visited today looked nothing like the pictures in the listing. The advert stated that “some cosmetic refurbishment” is needed. This property needed; several internal doors replacing, complete redecoration, all carpets ripping out, walls plastering and possible total floor replacement in the bathroom. This is not “cosmetic”. The property was not habitable. The vendor was a nice guy, but he’s going to struggle to sell that property in the current condition and climate. The thing is, I’m not opposed to a property that needs major work, under normal circumstances, if the price is right. We are not in normal circumstances though. If I was to buy this property, it could take months to complete the work and in that time I would be responsible for the mortgage, council tax, utilities and making sure the property was secure.
I’ve had a chat with my investment partner and we’ve agreed that we are going to change approach and start looking at higher value properties, which will have a better chance of being let immediately. I don’t know what agents hope to achieve by deceiving potential buyers. If I see an advert for a property that looks to be in a good state of repair, and it’s actually a dump, it’s going to piss me off. If the advert was honest, it will attract the right type of buyer; i.e. one that wants a refurb project. It’s like seeing an advert for a two-year old car, but when you turn up to look at it, the car is ten-years old, rusting and missing a wheel.
Health Update Current Weight: 113.7kg (down 0.6kg from last update).
Current Body Fat: 39.9% (up 0.6% from last update).
BMI: 34.3 (down 0.2 from last update).
Weekly Goal: lose 0.75kg.
Ultimate Goal: 90kg.
Weekly Steps: 48,763.
Another positive week of weight loss, but my body fat is not really moving much. I need to make sure I’m losing body fat and not muscle, as muscle mass helps burn calories, where fat is just dead weight. I need to keep my protein levels up, but it’s difficult now I’m not having any protein supplements and keeping a mostly vegetarian diet so as not to increase my uric acid levels.
Financial Update
Premium Bonds: £16,500 (no change from last update).
Stocks and Shares ISA: £11,669.25 (down £194.77 from last update).
Fuck It Fund: £1,754.94 (no change from last update).
Property Value: £185,248 (no change from last update).
Total Assets: £215,172.19 (down £194.77 from last update).
Residential Mortgage: £143,886.47 (no change from last update).
Total Debts: £143,886.47 (no change from last update).
Total Wealth Figure: £71,285.72 (down £194.77 from last update).
Investment Income in 2020: £56.44 (no change from last update) (target £2,000).
The stock market has taken a hammering in the last day or two. I’ve lost almost £1,000 in value since Wednesday, as I’d just invested over £500 in to my ISA earlier in the week. It looks bad on paper, but it’s nothing to worry about. I’ve been saying for weeks that the market will dip several more times before the end of the year. 2020 is about buying stock whilst it’s cheap, and what I buy now could become vital to my retirement plans in the future. Every unit of stock I am acquiring will most likely be worth a lot more as the next few years pass by. At the risk of repeating what I’ve been saying for weeks, now is the perfect time to buy stocks (assuming you have done your research and are not getting into debt to invest). As I said before, you shop more when there are sales and offers on. Well, this is a massive sale with plenty of offers.
Post-Covid
It’s going to be a different world once covid-19 is under control. There are some aspects of “normal life” that I’m not sure will ever return to “normal”. One of the first things that comes to mind are gyms, especially the bigger 24/7 gyms. The gym I used to go to was a 24/7 gym and there were times when it was very crowded with multiple people waiting to get on each piece of equipment. That sort of environment will not be safe going forward. I can see gyms setting limits on the number of people allowed in at any time, which will inevitably lead to people cancelling memberships. Perhaps a system where people need to book a slot to attend a gym would be a way forward, but any system to manage attendance at a gym will result in a loss of revenue for the gyms.
Another type of business that may struggle is cinema. I’m not suggesting that cinema will be a thing of the past, but the days of huge screens packed with hundreds of people could be over. The obvious way to mitigate the spread of a virus in the cinema would be to make masks mandatory. I don’t have much faith this would work, as people can’t be trusted to keep their phones turned off despite warning after warning. Also, cinemas make a lot of money from food and drink, and wearing a mask will make it difficult to consume snacks and beverages.
International travel is going to take a long time to recover but people will still want holidays. The domestic travel sector could see a major increase in revenue in the next few months. People will want to travel to the coast, or countryside, and holiday lets, cafes and spas could very well see a surge in demand.
FIRE = Nihilism
I read an interesting discussion on Reddit where someone had expressed concern that FIRE equates to nihilism. Their argument was that by pursuing FIRE, they are seeking to exit the game of life and spend their time outside the system, and that without a job they will have no purpose. I get the argument, but I disagree. FIRE does not mean that you will never work again. It means that you have the ability to be selective about the work that matters to you. In some ways, it’s the opposite of nihilism; you think life is so important that you want to escape unfulfilling work so you can fully embrace your calling.
Final Notes
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 discuss our progress in looking for a BTL property, and talk briefly about long-term financial planning for major purchases. Weekly Update
Last week I wrote a little about the tough week I’d had. Sadly, it’s not improved. I’ve been in a state of constant stress now for almost two-weeks. I’m finding it difficult to concentrate and I’ve been prescribed sleeping tablets. I feel as though I’m in a permanent state of fight or flight. It sucks. I’ve been stressed before, but I don’t remember feeling this level of stress for this long with hardly any respite.
The thing is, I don’t know what the answer is. It’s human nature to try and fix things through action. Some things can’t be fixed. Some things can heal, but never return to how they were. Some things need time, and nothing else. There isn’t always a right answer; sometimes there are just wrong answers you can learn to live with.
I will be ok though. I know that I will get through this stressful time, and that in time it will not seem as though it was that bad. That’s the nature of time. One quote that has stuck in my mind recently; “If you’re going through hell, keep going.” The man attributed with this quote is a divisive figure, and I’m in no way promoting him through this quote. I do feel it’s a motivational quote though, and one that has offered me some support over the last couple of weeks.
One step at a time. One minute at a time. One breath at a time. BTL Update
A few days ago we viewed our first potential BTL property. It was not what we expected. I know that agents will make properties look good, but what I don’t understand is when the pictures and description bear absolutely zero resemblance to reality. I doubt anyone has ever turned up at a horrible property and thought “well, the advert was good”. All it does, in my eyes at least, is make the property seem even worse. If I knew a property was going to be an absolute hovel before viewing, I am prepared. Also, from the vendors’ perspective it means that any person viewing the property is aware of what they’re dealing with.
Within ten seconds of setting foot in the property, I knew it was a non-starter. The vendor seemed like a nice lady; friendly and welcoming. The house was a small, compact, three-bed mid-terrace. The construction was old-school and it would not pass a safety inspection as a new build. I think I described it as a “death trap”. There was also the smell. The property would have needed every carpet, curtain and all wallpaper ripping out. Some places smell, but a quick clean and some fresh air resolves the issue. This property had a smell that was embedded deeply in the property. During the viewing, we saw several dogs and smaller pets kept in the property. I love pets, and my cat is a source of support and friendship to me. Those who have pets will know how much joy they bring to life. I didn’t want to buy a property that had arguably been used as a kennel though.
As I said before, the vendor was friendly and pleasant to speak with. I sincerely hope she finds a buyer. I do think that the agent perhaps needs to provide a reality check because I can’t see anyone paying close to the current asking price. Health Update
Current Weight: 114.3kg (down 0.8kg from last update).
Current Body Fat: 39.3% (no change from last update).
BMI: 34.5 (down 0.3 from last update).
Weekly Goal: lose 0.75kg
Ultimate Goal: 90kg
Total Weekly Steps: 46,123 (50,000 weekly target).
Another week with weight loss which has been a small positive for me. Normally when I’m stressed, I comfort eat. The fact I’ve managed to keep a decent diet and continued to exercise gives me increased confidence that I will push through this difficult time.
I’ve introduced a weekly step target to try and motivate me to walk more. I like walking. Being in the fresh air, and preferably the sun, whilst listening to a good audiobook or podcast is a simple pleasure. It’s also a low-impact form of exercise and the last thing I need is another injury. Financial Update
Premium Bonds: £16,500 (up £800.00 from last update).
Stocks and Shares ISA: £11,864.02 (up £3,278.66 from last update).
Fuck It Fund: £1,754.94 (down £3,295.55 from last update).
Property Value: £185,248 (up £3,622.00 from last update).
Total Assets: £215,366.96 (up £4,405.11 from last update).
Residential Mortgage: £143,886.47 (down £485.63 from last update).
Total Debts: £143,886.47 (down £485.63 from last update).
Total Wealth Figure: £71,480.49 (up £4,890.74 from last update).
Investment Income in 2020: £56.44 (up £25 from last update) (target £2,000).
It’s all changed this week with my finances. I cashed in £3,300 from my Fuck It Fund and used £800 to add to my BTL deposit, with the remaining £2,500 going into my ISA. It looks like I got my timings bang on as my ISA increased by £3,278 since the last update. Of the £2,500 I invested in the ISA, £2,000 went on a single stock which I believed to be extremely undervalued. Since I bought the stock, the price has increased by roughly 25% and I still think it’s trading low. Although I expected the stock to bounce back following Covid, I didn’t think we would see such a sudden recovery. This could be a false dawn though, as I suspect we will see another stock market blip before the end of the year. Even so, I’m in the stock market for the long-term and I believe this stock is a long-term winner.
Another change to my financial position is the value of my residence. I made some minor changes to my mortgage this week, and I was told the estimated value of my property has increased slightly. Property value is all hypothetical because it’s only worth what someone is willing to pay. However, it’s still useful to know that lenders think property values in my area are increasing.
There is a small element of risk involved in taking money out of my Fuck It Fund. On balance, I felt the reward was worth the risk. I can always draw money back out of the ISA in an emergency if it comes to that. Part of the reason I withdrew the money from the Fuck It Fund was because the rate of interest had been slashed for the second time in just a few weeks. I was earning 1.1% at first, which then dropped to 0.8% and in the last few days to less than half a percent. Earning interest was not the primary reason for the Fuck It Fund; ease of access is a major part of why I had a pot of cash on one side. There comes a point at which the interest is so low that the cash is losing value the longer it sits there. Despite all that, I will resume building my Fuck It Fund back up to the £5,000 level because there is a great deal to be said for the peace of mind of having a decent emergency fund.
Budgeting
A lot of people know what budgeting is but I don’t think a lot of people understand what budgeting is. There is a difference between knowing about it, and understanding it.
As a mortgage advisor I see a lot of people who want to borrow extra money on their mortgage. Often this is to consolidate debts that were built up as people paid for weddings, dream holidays, expensive cars and other luxury purchases. Sometimes, people just cut to the chase and apply to borrow money to pay for a wedding. Now, it’s important for you to understand that I just don’t get the concept of marriage. Do people actually want to be married, or do they just want a wedding? I don’t know. I’ve just never really felt the urge. I find the idea of marriage to be a bit bizarre, but I’m not going to judge anyone who wants to get married. What I am going to judge, however, is how people pay for their wedding. The average UK wedding costs approximately £15,000. According to the ONS, the average age of opposite-sex couples getting married is roughly 32. (Note: I could make this point with same-sex couples as well. I have no issue with same-sex marriage. It’s just simply that there is more data on opposite-sex weddings. The principle behind my point is identical for same or opposite sex weddings though).
Assuming that the people getting married both start saving for the wedding as soon as they turn 18, and save for 14 years, they will each have to save around £40 per month, every month, for those 14 years to be able to pay for a £15,000 wedding when they are 32. I challenge you to find me an 18 year old who starts saving for their wedding at that age.
What most people do is get their parents to pay, or get into debt, or their parents get into debt to pay, or even a selection of all these. £15,000 paid back at 4% interest over ten-years means you will pay back just over £18,000 in interest and capital. I’m talking about a wedding, but the principle applies to a car, or holiday. Very few people, in my experience, think about budgeting as a long-term exercise for things they really want.
Another example is someone who wants to save money for their child to have a deposit for a house when they finish university. If you want to have £50,000 saved to give your child a head start, then you need to be saving roughly £200 a month, every month, for twenty-years.
Thinking about large purchases in this way, and breaking them down into monthly saving commitments can help make the figures a reality, and help avoid debt in the future. This is almost like a reverse opportunity cost. If you work out what you need to have saved by a specific point in the future, it helps avoid the need for you to take out debt to fund your goal.
Final Notes
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 look at a possible change in my investment strategy, and discuss why FIRE is so important to a post-Covid world. Weekly Update
Despite my last week sucking, I have to remember it’s all relative. People are dying every day and I have less than no faith in this government to protect us. The whole Dominic Cummings issue is absolutely absurd. It’s the sort of news story one would expect to see in a former Soviet state, where they are transitioning from communism to democracy; not in a country that is heralded as a free and democratic state.
You might be wondering why my last week was so bad. Although I believe my blog should be open and transparent, there are certain things I draw the line at, especially where the privacy of other people is involved. So, apologies but no major drama here.
I stated last week that I would update following a viewing of a potential BTL. Well, we’ve had several viewings cancelled because the vendors have accepted offers before our viewing came around. Back to square one. However, a friend mentioned in passing that she might be looking to sell her BTL to use the equity for buying a bigger residence for herself. I’m waiting to hear back about what sort of asking price she feels is fair. Health Update
Current Weight: 115.1kg (down 1.2kg from last update).
Current Body Fat: 39.3% (down 1.9% from last update).
BMI: 34.8 (down 0.3 from last update).
Weekly Goal: lose 0.75kg
Ultimate Goal: 90kg
Overall a great week for weight loss. I’ve been eating well and doing resistance work. I’ve got to take it slowly though as I can’t afford another injury.
Financial Update Premium Bonds: £15,700 (no change from last update).
Stocks and Shares ISA: £8,585.36 (up £248.96 from last update).
Fuck It Fund: £5,050.49 (no change from last update).
Property Value: £181,626 (no change from last update).
Total Assets: £210,961.85 (up £248.96 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: £66,589.75 (up £248.96 from last update).
Investment Income in 2020: £31.44 (no change from last update) (target £2,000).
Another week where my ISA is moving up. I’m still not convinced we are through the worst of this crisis though. I suspect we are in a lull before the next wave of economic crises present themselves. I think as we approach the end of the year, we are going to see a reduction in house prices as the market becomes saturated with people trying to sell up following a loss of income.
I’ve had to laugh a little in the last few days as I’ve had a few chats with people who have stopped buying shares because of the state of the economy. Now is the perfect time to buy though. You make your profit when you buy, not when you sell. It’s amazing how the average person acts in exactly the opposite way one should when it comes to trading stocks. You buy low, you sell high. Granted, there are some other factors to consider such as the trend and performance of the share but you don’t stop buying when the price drops. It’s like seeing your favourite snack at the shop on offer and saying “no thanks, the price is too low”.
Fuck It Fund Woe
In the last few months the rate of interest on my Fuck It Fund has dropped from 1.1% to 0.5%. Although earning interest is not my primary concern, I don’t want to be taken for a ride. I’m thinking about reallocating some of the funds in that account into other asset classes. My current thinking is to withdraw £3,000 and place £2,000 in my ISA and £1,000 in Premium Bonds. That would still leave me with just over £2,000 in liquid cash. It’s definitely a good idea to keep some cash completely liquid, but with those rates being more than halved, I have to think about whether that cash is pulling its weight. Many investors have likened each unit of cash to a worker, working to make you more money. Well, with rates that low, it’s like my Fuck It Fund has gone on strike.
If I was to withdraw cash from the Fuck It Fund, I would need to replenish it. I want to have at least six-months of expenses covered from my emergency fund, and leaving £2,000 would cover 2.5 months of basic living costs. So why not just keep the Fuck It Fund where it is if I’m just going to build the fund back up again? If rates were low and the stock market was not depressed, I would probably just keep things as they are. The stock market is so attractive at the moment though, and I might not get to invest again at these levels for a long time. Overall, I think it makes sense to reallocate my resources.
Beyond Covid-19
It’s important to explain what Covid-19 actually stands for. It’s CoronaVirus Disease 2019. It’s a catchy name but the thing that’s important is that we are almost half way through 2020 and we’re still not past the peak of the Covid-19 outbreak. Some parts of the world, such as Brazil and the US, are still not over the worst of this first wave. Then, we will probably be hit with a second wave further down the line.
As we see the economic impacts of Covid-19 unravel over the next few months and years, we will probably see businesses go under, people struggling financially and pension policies suffer poor performance. When people, and businesses, struggle for money it is common for the immediate needs to be met at the expense of long-term needs, such as retirement planning. People who were otherwise putting money away for their retirement may need to use that money in the present just to meet their basic living costs. I’m not saying this is necessarily wrong; people have to eat and they have to pay their bills. What this could mean is that these people may not have the same level of retirement provision in place by the time they retire if they are raiding their savings and investments now.
Many people take a passive approach to their financial future by handing cash over to their employer’s pension plan. These plans vary in quality. Some employers will match an employee’s contributions whilst others will pay 2% for every 1% the employee pays. These types of policies are great because they are basically giving you free cash. However, not all employers provide such schemes and it pays to research what type of plan you are paying into. Also, another fairly cheap investment people can make during this time is an investment in their financial education. A library card can open up access to a whole world of financial education books. This can help people to take a more active role in their financial future, and this active role might help mitigate the losses people are experiencing now as they are no longer tied to investments that were a mystery previously with all sorts of fees attached.
Well, it’s been a much shorter post than normal this week, but to be honest I didn’t feel like writing much of anything. Hopefully next week will be a return to normal.
Final Notes
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 talking about overpaying on your mortgage. Weekly Update
It’s often difficult to know what to write for this part of the blog, now that we have been in a lockdown for several months. Life has taken on a routine of working, sleeping and eating. I miss restaurants, and holidays. I miss being able to sit in a cafe and have a conversation with someone that is not taking place via a video call. I do wonder how life will look in six-months or a year, and whether we will ever go back to “normal” again. A lot will depend on whether an effective vaccine can be developed, but there is not just the health impacts of this virus to contend with but the economic and societal impact as well. Those impacts will last for years, if not decades.
In the last few days it was reported that the UK government borrowed £62 billion in April 2020 to help with the economic impacts of the coronavirus. Further projections suggest the government may have to borrow almost £300 billion by the end of 2020. I doubt the UK is alone in this, but the money will have to be repaid at some point in the future. One of the main ways the government borrows money is through issuing new bonds. Investors buy bonds which pay a coupon (interest) every six months and when the bond matures, the government pays the value of the bond back to the investor (note: it’s generally more complicated, and the value of bonds is not always static and can change with inflation, for example).
All this money will have to be paid back somehow, and I think it’s inevitable that taxes will rise in the future. I don’t think we will see major tax increases in the near future though, as if people are not working they can’t pay income tax. I think it’s more likely that the debt will continue to increase for another 5-10 years, at which point we will see those taxes increase. The tax increases may come in the form of an increase the percentage rates for each band, or what I think is more likely is that the bands may shift with the threshold for the higher rates of income tax coming down. It’s going to be a tough time, economically, over the next decade.
We have finally started booking viewings for potential BTL purchases. It’s an exciting time, but dealing with some agents has been challenging to say the least. There really is a massive range in quality when it comes to agents. Some of them are knowledgeable, friendly and efficient. I’m sure at some point I will speak with one of these mythical creatures. In all seriousness though, some of the agents I’ve spoken with this past week have been very helpful. There have been a couple that have tried my patience, especially when it comes to their Covid-19 viewing policy. My JV partner and I live in different households and we are keen to make sure the viewings are as safe as possible. We are happy to enter the property one at a time (we are primarily looking at empty properties for now) and most agents have agreed to this, on the condition only one of us is in the property at any one time (sensible) and that we wear masks and use hand sanitizer (sensible) and that any discussion around the property takes place outside or over the phone (sensible). One agent has stated we need to book two different viewings and that he will have to make two different journeys to the property (not sensible – fucking stupid). I’ll let you know how the viewing goes next week. Health Update
Current Weight: 116.3kg (down 0.5kg from last update).
Current Body Fat: 41.2% (no change from last update).
BMI: 35.1 (down 0.2 from last update).
Weekly Goal: lose 0.75kg
Ultimate Goal: 90kg
I’ve lost 0.5kg this week which is a step in the right direction. My body fat and BMI hasn’t really changed though. I want to increase the rate of loss, but I’m aware that crash dieting is not the answer. I’m going to try losing 0.75kg each week moving forward. That rate of loss should see me hit my target weight in 36 weeks. Again, I’m fully aware that weight loss rarely follows a linear path. The key is to keep making progress week on week.
Financial Update Premium Bonds: £15,700 (up £600 from last update).
Stocks and Shares ISA: £8,336.40 (up £193.02 from last update).
Fuck It Fund: £5,050.49 (up £25.00 from last update).
Property Value: £181,626 (no change from last update).
Total Assets: £209,894.87 (up £793.02 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: £66,340.79 (up £793.02 from last update).
Investment Income in 2020: £31.44 (no change from last update) (target £2,000).
I hit the initial target for my Fuck It Fund a few weeks ago, but I’m still continuing to drip feed money into that pot. It makes sense to build up a decent cash reserve, so I will continue to put a few pounds in here and there. The main thing is that I don’t dip into that pot unless it’s an absolute emergency.
The stock market, or at least the parts I’m exposed to, appears to have found some sort of stability. The value of my ISA has remained fairly constant for a few weeks now with just minor gains and losses from week to week. I’m happy to see it continue at a low level for the next few months as I’m able to buy units for a lower price. Over the next few years and decades, I’m sure that my financial comfort at that point will be due to having the means to snap up shares at a lower price now. As the saying goes, you make your profit when you buy, not when you sell.
Overpaying on your Mortgage
Note: the next section uses hypothetical examples, and although I argue in favour of not overpaying on your mortgage, I don’t know your individual circumstances. This is for information only, and does not constitute advice or a recommendation. Before committing to a particular course of action, whether that be overpaying on your mortgage or investing the money you would have used to overpay, seek expert advice from a qualified finance professional.
Conventional wisdom dictates that paying your mortgage off early is a wise move, because it decreases the interest you incur and leaves you in a better financial position. In isolation, this statement is true; paying your mortgage off early reduces the interest charged over the life of the mortgage. However, your financial life does not operate in a vacuum. Last week I talked about opportunity costs and how spending money on one thing reduces your ability to invest and see returns on the money years later. It’s a similar concept with overpaying on a mortgage. As is often the case with financial concepts, it is best explained with an example.
Let’s look at a typical mortgage of £200,000 that is taken out over a 25-year term on a rate of 3%. For the purposes of the example, I’m going to assume that interest rates remain the same over the term of the mortgage. This is unlikely, but as inflation and rate changes apply to both debts and assets, it balances out.
The mortgage payments will be £948 per month, with a total amount payable of £284,478. Assuming that you increase your payments to clear the mortgage in 15-years, you will have to pay £1,381 per month; an increase of £433. The total amount payable would reduce to £248,583. Paying the extra £433 per month, saves almost £40,000 of interest and you’re mortgage free in 15-years rather than 25-years.
It really gets interesting though, when you look at what happens if instead of overpaying £433 per month, that money is invested. It’s widely accepted that annual stock market returns over time average out at around 8%. Obviously, some years are better than others. I’ll be conservative and assume a 5% annual return. After 15-years of investing £433 each month, and assuming a 5% annual return, that investment will be worth over £120,000. If you were to keep investing the £433 for 25-years, your investment would be worth around £260,000.
Which scenario looks more attractive? Option 1; overpay and save approximately £40,000 in interest and ten-years of mortgage payments. Option 2; pay the mortgage off over 25-years and take the hit on the interest, but have investments worth over a quarter of a million pounds? Well, before you decide, there’s something else to consider and it’s an important part of the calculation that people often overlook. I’m talking about the other opportunity cost.
If you pay your mortgage off 10-years early by paying the £1,381 each month, which means for the 10-years after the mortgage ends you can invest that money instead. £1,381 invested each month for 10-years with a 5% return will produce an investment value of £215,000.
Let’s compare the two examples side by side:
Example 1 – paying the mortgage off over a standard 25-year term Mortgage debt: £200,000 Monthly payment: £948 Total amount paid: £284,478 Investment monthly contribution: £433 Total amount invested after 25-years: £129,900 Projected value of investment: £258,930 Total payments towards mortgage and investment: £388,830 End result: property owned outright and investment worth £258,930.
Example 2 – paying mortgage off over 15-year term Mortgage debt: £200,000 Monthly payment: £1,381 Total amount paid: £248,583 Investment monthly contribution: £0 for 15-years, then £1,381 for 10-years. Total amount invested after 25-years: £165,720 Projected value of investment: £215,338 Total payments towards mortgage and investment: £414,303 End result: property owned outright and investment worth £215,338
Bang-for-Buck
In example 1 your investment increases in value by 99.33% In example 2 your investment increases in value by 29.94%
In example 1 your investment increases in value by £129,030 but you pay £35,895 more interest on your mortgage. In example 2 your investment increases in value by £49,618 and you save £35,895 in interest.
For me, in this example, it’s crystal clear which option is more favourable. However, this is based on the numbers alone without considering the unique circumstances for each person. A married couple with three kids, might want the security and peace of mind of paying their mortgage off early. I get that. Perhaps for that couple, a middle of the road approach would be better, such as paying the mortgage off in 20-years and investing the difference.
Consideration also needs to be given to the relative rates of interest. I based my examples on a mortgage rate of 3% and an investment return of 5%. At the time of writing, it’s possible to get a new mortgage with a loan-to-value of 85% for 2% or less. The historic rate of return from the stock market is closer to 8%. I’ve rigged the numbers in favour of support paying the mortgage off early, but even after doing that it still becomes clear that it’s generally better to invest rather than paying your mortgage down. I cannot stress strongly enough that this example does not take into account your own specific circumstances. Before you make any decisions, seek expert advice and crunch the numbers yourself.
Final Notes
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 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.
Health Update
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.
Financial Update
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.
My Mortgage
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 space between the lines is the equity in the property; the money that can be released through sale of the property or by remortgaging. This is how property generates capital growth without the debt being paid down.
Opportunity Cost
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.
Final Notes
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.
Health Update
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).
F.I.R.E. Timeline
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.
Final Notes
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.
Financial Update
BTL Deposit – Completed
Fuck It Fund – Completed
Stocks and Shares ISA: down 15.61%
No unsecured debt.
Residential Mortgage LTV: 79.81%
An overview of the make up of my funds.
Industries represented within my funds.
My exposure to different currencies through my bond investments.
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.
Forecasting 2020
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.
How my current budget looks.
Turbocharging F.I.R.E.
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?
Investing 75% of my net income is a tall order. For now, I’m going to aim to get to roughly 60%,.
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%.
Final Notes
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.
Weekly Update
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.
Priorities
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.
Airlines
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.
Final Notes
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.
Weekly Update
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.
Financial Update
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.
Mortgage Advice
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.
Final Notes
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.
