Part 12

Introduction

Hello and welcome back to Mortgage Advisor on F.I.R.E.  This week I will be reviewing a couple of books I have read since the last post, and in addition to the usual financial update I will talk a little about how I have restructured my Stocks and Shares ISA.


Weekly Update

The past week has been a bit of a blur.  My day job, as a mortgage advisor, has been extremely busy but it has been a good kind of busy.  I have had some great conversations with people, and I have received several pieces of excellent feedback from people I have advised.  Helping people understand mortgages, and finance generally, is something I enjoy and it’s a large part of why I look forward to writing this blog each week. 

I have just finished reading The Little Book of Common Sense Investing by John C. Bogle, the creator of Vanguard and the first index investment fund.  Index investing is something I am a promoter of, and some of you may recall my earlier entry where I talk about the differences between active investing and passive investing.  With active investing, through managed investment funds, you are relying on a fund manager to consistently beat the market and in return you will pay them fees that can be at least twenty times that of a passive fund.  There is a wealth of research out there showing that index funds outperform actively managed funds over the long term.  Yes, there are exceptions in the short term but if you are investing in funds you are almost certainly concerned with returns over a ten year period as a minimum, and the chances of you selecting an actively managed fund that outperforms an index are similar to those of winning the jackpot on the lottery.  An index fund mirrors the market, so you can never beat the market but at the same time you can never lose to the market.  You simply track the market. 

​Although I did not learn a huge amount of new information in Mr Bogle’s book, as I’ve heard or read several summaries of his opinions, it was still a fascinating insight into Mr Bogle’s thoughts and beliefs.

So far in 2020 I have read some fantastic fiction, with two books impressing me and jumping straight on to my favourite fiction list.  The books are Station Eleven by Emily St. John Mandel and Normal People by Sally Rooney.  Station Eleven takes place in different times and looks at the lives of people before, during and after a flu pandemic ravages the world.  It’s not a typical end-of-the-world book though.  The flu pandemic is in the background, and what follows is a psychological piece that discusses everything from art and literature, to love and the morals of killing to stay alive.  It is a thoughtful and understated story and quite moving.

Normal People
 was a raw and unflinching look at two psychologically damaged teenagers, and their assorted friends and family.  Sally Rooney creates some of the most three-dimensional, flawed and realistic characters I’ve encountered in fiction.  Whilst reading the book, I experienced it so vividly.  I could not put it down.  When it was done, I just sat in silence for a while.  A very emotional story; melancholic but also hopeful.  I think it will be considered a classic in time to come.

​After I finished both works, I found out they are being made into shows for television.  In some ways, I’m excited to see what is produced, but on the other hand a poorly made show could threaten my memories of how I enjoyed the them.

Financial Update

Premium Bonds: £11,500 (no change from last week).

Stocks and Shares ISA: £7,805.71 (up £60.25 from last week).

F**k It Fund: £1,161.85 (no change from last week).

Property Value*: £173,501 (no change from last week).

Total Assets: £193,968.56 (up £60.25 from last week).

Credit Card Debt: nil (down £1.10 from last week).

Loan Debt: £3,800.49 (no change from last week).

Mortgage Debt: £134,279.11 (no change from last week).

Total Debt: £138,079.60 (down £1.10 from last week).


Total Wealth Figure**: £55,888.96 (up £61.35 from last week).

Investment Income in 2020 (Target £2,000): £0.00 (no change from last week)

*according to lender’s index.

**total assets minus total debt

I’ve amended the format of the financial update slightly.  I think the new layout makes more sense and is cleaner, and clearer. 

Financial News and Opinion


Restructuring my ISA

I’ve made some changes to my Stocks and Shares ISA since my last update.  I have sold my units in three funds because I felt that I needed to rebalance my asset allocation, and I’ve sold the three funds that had the highest fees, which were 0.2% and above.  My preferred ceiling for fees in a fund is 0.15%, but some of my funds have fees much lower than that.  For example, the Vanguard FTSE 100 Index has ongoing fees of just 0.06%. 

Another change I have made is to the way my fees are collected.  To date, I had simply gone with the default option for fee collection which takes fees from investment income first, and then collects from residual cash and finally from the sale of stock in your portfolio.  I spoke with an advisor at my ISA provider and he offered an alternative which I was extremely happy with.  I have set up a separate share dealing account which runs alongside my ISA.  I have credited that account with cash and my default fee collection option is to now take cash from the share dealing account.  This makes the ISA cleaner and all income generated in the ISA will stay in the ISA, and all fees will be collected externally.  This is no more, or less expensive, but it just feels easier.  Also, it makes it easier to monitor the fees as I only have to check the share dealing balance periodically. 

​I’ve embedded images from my Stocks and Shares ISA so that my asset allocation can be reviewed.  I am heavily weighted in favour of stocks, with over 99% of my ISA allocated to that asset class.  Almost 60% of my ISA is held in US stocks and funds.  The subject of stock to bond ratios has been debated at length with some experts calling for a 50/50 split, and others a 90/10 split in favour of stock.  There are also those who argue that the split should be based on age and that the older you get, the more you should lean towards bonds for preservation of capital and a more stable cash flow.  Another option is to start with the number 100, subtract your age in years and whatever is left should be the percentage of your portfolio in stock with the remainder in bonds.  For example, a 25-year-old would have 75% of their portfolio in stock and 25% in bonds.

I’m of the view that a more aggressive strategy is best, but that’s because I’m open to “risk”, whatever that means.  The concept of risk means different things to different people.  I’m in this for the long haul and so I’m relaxed about stock volatility.  If prices go down, I can buy more for my money.  I also have plenty of time to see my stocks bounce back.  If I was approaching my 60s or 70s, I would probably hold a different view.  I’m aiming for a rough 90/10 split going forward and will be rebalancing my ISA in the coming months. 

Gambling and Credit Cards

In a move that has needed to happen for a long time, gambling with credit cards is to be banned in the UK.  This is so far overdue it is just tragic.  I have posted before about issues I have had with gambling in the past and to my shame, I have used credit cards to gamble with.  This was a decade ago and I only stopped because my card provider blocked gambling from their end.  I gambled on and off for a few years with my own funds but never got into debt for it again.  Not everyone has been so lucky. 

There are countless stories of people who have gambled online, using credit cards, and found themselves heavily in debt.  Gambling is a social evil, and online gambling is the deepest level of evil.  You can open an account with minimal checks and lose thousands of pounds within minutes.  It’s a terrifying thought.  I haven’t gambled in a long time, but there is still something in the back of my mind that acknowledges in the wrong circumstances I could slip into the habit once more. 

What makes gambling so insidious is that unlike many other addictions, it can be almost completely hidden until the addict reaches breaking point.  Those who are addicted to alcohol or other drugs normally have signs of their addiction.  Gambling is an invisible addiction.  All the addict needs are a smartphone and an internet connection.  The fact it is so easy to open accounts with the dozens of betting sites out there and spend so much money without adequate controls is a failure of our society.  Responding with arguments such as “you can’t control how people spend their money” or “people should just pull themselves together” misses the point completely.  We are talking about companies spending millions on research about how to hook people into throwing their money away.  We are talking about teams of people working out how best to trap vulnerable people into a spiral of addiction.  With gambling addiction, we are talking about the behavioural addiction with the highest rate of attempted suicide. 

The figures for gambling are worrying.  In the United States, it is estimated that around 2-3% of the population has a gambling addiction.  That is roughly six-million people.  In the UK, it is estimated to be anywhere from a quarter to half a million.  Of those, one-in-five will attempt suicide because of their addiction.  This is not a case of people “pulling themselves together” but of people needing help from their society.  With any addiction, will power alone will not work.  If the means to act on the behavioural addiction are freely available, then it is more likely the behaviour will take place.  Banning credit cards for gambling is a step in the right direction, but it’s the first step of what should be a long journey. 

I am enough of a realist to acknowledge gambling will not be banned outright.  There is too much money being made.  In the UK, betting companies make billions in profit each year.  Denise Coates, who runs Bet365, was paid around £300,000,000.00 in one year.  Let that figure sink in for a moment.  What I would like to see is all gambling means tested.  You must sign up and provide photographic ID and be logged on a central database.  Then, once your finances are assessed, a decision is made on how much you can gamble across all licenced operators within the UK.  This would probably bankrupt several operators, but strangely I just don’t care. 

Final Notes

​Thank you for reading part twelve of this blog.  Next week I will have a closer look at financial myths, common misconceptions and how to budget for long-term expenses.  

Part 11

Introduction

Hello and welcome back to Mortgage Advisor on F.I.R.E.  We are now in the first full week of 2020 and it is still so bizarre to think we are in 2020.  In some ways it feels as though not much has changed in the world since 2000, which as a child I always thought was so futuristic, but we now have extremely powerful computers that fit inside our pocket with access to the history and entirety of human knowledge.  We have wearable tech such as watches and VR headsets.  Yet, despite decades of awareness we are still destroying our planet.  The fires in Australia are heart breaking and although the situation is more complex than Climate Change = fires, the fires are a stark reminder of how fragile our planet is.  For all the despair, I have some hope that technology will be our saviour.  Turning most road vehicles to electric with an increase in nuclear and green energy is the way forward.  It’s going to be a generational project and a race against time to see if the technology can integrate itself before we reach a critical tipping point in the planet’s ability to heal itself.

​This week I will be discussing another story I read in The Guardian about how to manage debt in the new year.  I will also discuss a concern regarding my upcoming purchase of BTL property with my business partner.  First, however, I will update you on my week and look at a significant improvement in my finances from last week. 

Weekly Update

I did something this week which some readers may see as controversial.  I placed a bet, but it’s not like any bet I’ve placed before.  It’s a bet on myself.  There is a company out there called Healthy Wage which allows you to bet on your own ability to lose weight.  You must have your weight verified through a video recording process and then you choose how much you want to lose and over what period, and Healthy Wage offer you odds.  I thought about whether this was something I was comfortable with, as someone who has had issues with gambling in the past, but as I thought through it, I realised that this type of wager has a fundamental difference to betting on football.  With a bet on the football, I have no control over the outcome.  It is a gamble in the truest sense of the word.  With this bet on my weight loss, I am totally responsible for the outcome.  It is completely on me.  There is no luck involved, just determination and effort.  I need to lose weight as the last couple of years have hit me hard.  In 2017 I completed a stationary bike ride for charity and by the end of that challenge I weighed in just under 95kg.  When I placed my bet with Healthy Wage, I was 119kg.  My aim is to lose 30kg in seven months; roughly a kilo a week.  If I succeed, I more than double my money.

To help me lose weight I am trying intermittent fasting and time restricted eating.  With intermittent fasting there will be days where I drastically reduce my calorie consumption and, on all days, I will adhere to time restricted eating.  With TRE you limit calorie consumption to a set window of time each day.  You can choose to do 12/12 where you eat within a twelve-hour window and fast for twelve hours, or 8/16 where you eat within an eight-hour window and fast for sixteen hours.  I am employing a 10/14 split.  I eat within a ten-hour window and fast for fourteen hours.  My fourteen hours start with my last snack of the day at approximately 10pm and ends at 12pm the following day.  When fasting you can drink as much water, or black tea/coffee as you want.  I’m finding it easy so far and, in a week, have dropped 3kg.  From what I’ve read this is quite normal for the first week or so.

Financial Update

Premium Bonds: £11,500 (up £1,575 from last week).

Stocks and Shares ISA: £7,745.46 (up £292.86 from last week).

Credit Card Debt: £1.10 (up £1.10 from last week).

Loan Debt: £3,800.49 (no change from last week).

F**k It Fund: £1,161.85 (up £10 from last week).

​Total Wealth Figure: £193,908.31 (total assets including residence valued at £173,501 by my lender) minus £138,080.70 (total debt including residential mortgage) equals £55,827.61 (up £2,297.68 from last week).

I received £1,800 that I was owed this week which allowed me to significantly increase my deposit fund held in my Premium Bonds.  The rest of the £1,800 helped to cover a couple of expenses that cropped up, but I’m in a good position to hit the amount needed to complete the purchase of our first BTL. 

Financial News

​Another story in The Guardian caught my eye this week.  The story is titled: New year money: how to regain control of your cash.

This story is another example of banal reporting when it comes to money.  I could have predicted the content with a high degree of accuracy before reading it. There is the initial set of statistics reporting how many people are in debt following reckless Christmas spending, a link to debt charities followed by advice about how to get out of debt. 

The article has four pieces of advice:

  1. Cut your credit card costs
  2. Get a better overdraft deal
  3. Consider consolidating your debts
  4. Think about switching to a better current account

There are some obvious issues here.  There are two types of people that get into debt.  The first type of person is one that literally does not have enough money to cover their basic living expenses.  Each month, their debt increases until something gives.  This article does nothing to help them. 

The second type of person is bad at managing their money and often spends excessively using all their money and then some, which results in them getting in debt.  There may be the liberal use of the phrase “it’s only money” to support their spending habits.  This article does nothing to help them. 

This type of article is like having an article about how to lock your stable door after the horse has left.  If you are in debt, it is because you have spent more than you earn.  I’m not making a value judgement here; my definition is just a statement of fact.  Rather than telling people how to manage their debt, we need to be telling people how to avoid debt. 

In this country people do not generally like to talk about money.  It is seen as impolite to ask how much someone earns or whether they are in debt.  If we really want to tackle the debt crisis, then we need to talk about money more openly.  We also need to stop telling people how to rearrange the deck chairs on the Titanic, and teach them how to make ships that don’t sink in the first place. 

The problem with telling people how to spend money is that much of the advice is boring.  Read any article about financial planning and budgeting and you can guarantee that the article will contain one of the two following tips: ditch your morning Starbucks and/or take your own lunch to work.  For many people, having a lunch they buy at work may be the only time they get to have their food made for them.  For many people, their morning Starbucks is the only thing that keeps them going at work.  For many people who are struggling financially, these little treats are the highlight of their day. 

Tackling the debt crisis is going to take a lot of time, and it maybe a generational project, but we cannot rely on government to tackle this issue.  After all, the major banks make their money from interest charged on debt.  There are things that the average person can do to reduce their outgoings though.  Before I offer some suggestions, I must stress that I realise everyone’s circumstances are unique and I am not qualified to offer financial advice.  The following is for information only and does not constitute advice on my part.  If you are struggling with debt, then please contact StepChange or another debt charity.

The Car

Cars are expensive to buy or lease, but the cost of running a car can be just as expensive.  According to an article in The Express, the average monthly cost of a car lease agreement was £253 (February 2018).  Some additional google-fu suggests the average cost of running a car come in at £150-£200 per month.  Then, you have potential costs of parking your car at work if you don’t have a secured space.  It’s not unreasonable to suggest that the average person could easily spend £400 per month on car related expenses.  If you were to invest £400 into a stocks and shares ISA each month and achieve growth in keeping with historic trends, after 25 years your ISA would be worth £535,000.  In my city, Sheffield, a monthly bus pass costs around £60.

Even if you budget for the occasional Uber, not owning a car looks very attractive.  When people ask me why I don’t drive, I think about these figures but hold off on trying to explain as when I have in the past, the person I am talking to mentally switches off.  People don’t like to talk about money, and people think the figures sound too good to be true. 

For some people, owning a car is essential.  However, there are many such as me for whom a car would be an unnecessary burden but there seems to be a societal expectation that you should learn to drive and have a car. 

Review Your Spending

Sometimes the act of reviewing a behaviour with no judgement can prompt change.  This can happen when you record your eating habits and it can work with money.  Set aside an hour or two and go through your last three months bank statements and credit card statements and review what you are spending and where.  You could group spending into different groups such as household expenses, food shopping, eating/drinking out and so on.  Compare your expenses to your outgoings and see where you stand. 

If you want to be financially secure, you need to be spending less than you are earning.  It mind sound like simple advice but I have met many people in the course of my personal and professional life who have thought themselves secure because they are saving each month whilst refusing to acknowledge they were getting further into debt each month by subsidising their spending on credit cards. 

The Richest Man in Babylon by George S. Clason gives some very simple advice.  Clason suggests that you try to bring your spending to 70% or less than what you earn.  Of the remaining 30%, 20% should be used to repay debts.  The last 10% should be invested.  Once you pay off your debts, the 20% allocated to that could be invested as well.  This is good, simple advice. 

There will be some people who physically do not have enough money to cover their expenses.  Should you find yourself in this position I would strongly encourage you to speak with Stepchange who can offer more tailored budgeting advice.  

Planning for Death

As I have stated in previous posts my plan is to purchase properties with a business partner.  We know each other well and share the same ambitions and plans for the property and so, I am not concerned about disagreements with how we will manage the properties.  However, I have been thinking about what happens if one of us was to die before we had completed our exit strategy.

In the UK, when you buy a residential property, it will normally be owned as either Joint Tenants or Tenants in Common.  My understanding is that under Joint Tenants each owner owns 100% of the property, so that if one of the owners dies the property becomes the sole property of the surviving owner.  With Tenants in Common, each owner has a defined share of the property, typically an equal share each although it does not have to be.

Another complication is how mortgage lenders will allow a mortgage account to be administered if the property was purchased as Tenants in Common and one owner dies.  It can cause a lot of delays, stress and confusion.  The deceased will require an up to date will and it will take a long time to process the change of ownership.  Another concern with Tenants in Common, is that whilst I and my business partner are happy to do business with each other we do not necessarily want to do business with each other’s next of kin.   Also, it is not fair to expect our respective next of kin to share the same passion, drive and interest in managing property.  It would seem, therefore, that Joint Tenants would be the way forward.  The complication here is that we both want to provide for our next of kin, and although we trust each other, it is never advisable to take people at their word where potentially hundreds of thousands of pounds are at stake.  With Joint Tenants, if one of us dies, the survivor gets the property and according to what I’ve read, not even a will can overrule a Joint Tenants agreement.

I have been thinking about this issue for a while, and I think I have hit upon a solution.  I have proposed the solution to my business partner and, so long as we can get the agreement drawn up by solicitor in a legally binding way, we will proceed with this solution.
What I propose is that we purchase the properties as Joint Tenants but draw up a separate agreement that states in the event of one of our deaths, the surviving partner has X number of years to pay equity to the deceased’s next of kin.  This would be calculated as 50% of the equity at time of death, based on average market value.  For example, if we own two properties each valued at £100,000 with £50,000 debt on each, the total equity is £100,000.  The next of kin would then be entitled to £50,000.  By giving the surviving partner full control and ownership of the properties, it allows them to manage the properties without undue interference.  In addition to this, there would be a second condition that requires the surviving partner to pay the next of kin 25% of the net rent until the equity is paid back.  The other 25% would be kept by the surviving partner as a “management fee” for dealing with the properties on their own and to cover costs such as maintenance.  If the equity was not paid back within the agreed time, then interest would start being paid in addition to the 25% rent.

I am not sure that this type of agreement would be legally binding, and we will consult a solicitor first.  Assuming it can be done, it will probably cost some money to draw up the agreement, but it would be a sound investment to secure our respective financial futures. 

Final Notes

​Once again, thank you for reading.  If you have any feedback, good or bad, please leave a comment.  Also, if you spot any funny financial stories or poor financial journalism, please point it out in the comments section.  

Part 10

Introduction

Hello and welcome back to Mortgage Advisor on F.I.R.E.  We are now up to the tenth part in this blog, which is a satisfying milestone to pass.  Over the next few weeks I will be introducing a few new sections to the blog.  In addition to the usual weekly and financial updates, and the subject of the week, I will talk a little about finance related news.  Another section that I thought would be interesting is the word of the week, where I will pick a finance related word and attempt to define it.  They say that the best way to learn is to teach, so I hope to pick up some knowledge through this exercise.  The word of the week will start from next week, but I will be discussing a poor piece of financial journalism I saw in The Guardian today.

Weekly Update

The week between Christmas and New Year is a strange time.  I was away from work until the 30th and then had to catch up with a lot of emails and briefs as I had been away from the office since 12th December.  I’ve been finding work difficult as I have missed a lot of time in the last six months due to ill health and holidays.  Hopefully as we move into 2020, I will achieve some consistency.  As I write this on the evening of January 2nd my girlfriend is on her way back from Romania where she has been staying with her family for the past few weeks.  It has been a bit dull having Christmas and New Year away from her, but I’m happy that she has been able to spend this time with her family.  It’s the first time in over a decade she has been home for the holidays. 

New Years Eve was a bit underwhelming, even by my own low expectations.  The highlight came at 19:25 when I finished my 104th book of 2019 and hit my target of completing two books every week over the year.  I have blogged about this reading challenge here. 

It just seems that NYE is just an excuse to get drunk.  I’m not a big drinker; I have an alcoholic drink once every few weeks.  I’m not anti-drinking, but alcohol tends to exacerbate some of my health issues.  Also, over the last few years I have become increasingly bored by “nights out”.  I would much prefer sitting with a group of interesting people, over a nice meal.

​I’ve not enjoyed the holiday period this year.  I would go as far as saying it’s been one of the worst holiday periods I can remember.  It’s been nice spending time with family, but I’ve not felt more alone than I have in a long time.  I have always enjoyed my own company, but for spells of a few hours at a time.  I don’t think I cope well spending extended periods of time on my own.  The fact that I’ve felt quite ill for much of the time over Christmas has not helped, nor has the fact my sleep has been disturbed almost every night. 

Financial Update

Premium Bonds: £9,925 (up £25 from last week).

Stocks and Shares ISA: £7,452.60 (down £68.66 from last week).

Credit Card Debt: nil (no change from last week).

Loan Debt: £3,800.49 (no change from last week).

F**k It Fund: £1,151.85 (up £76 from last week).

Total Wealth Figure: £192,030.45 (total assets including residence valued at £173,501 by my lender) minus £138,500.52 (total debt including residential mortgage) equals £53,529.93 (down £70.26 from last week).

I believe this is a first; my Total Wealth Figure has decreased from one week to the next.  There is a simple reason for this, though, so I’m not too concerned.  December’s interest has been added to my mortgage balance, but because of how the publishing schedule for this blog has fallen, my mortgage payment was made today but has not updated on the balance on my statement.  Next week, the mortgage debt will drop by several hundred pounds. 

​Investment Income Received in 2020: £0. (Target: £2,000 by end of 2020).

Financial News

This story caught my eye on The Guardian website today, although it was published on 29/12/19.  These types of stories are a guilty pleasure/frustration for me as they often have me shaking my head and swearing at the computer screen.  The advice given is often unrealistic or completely banal.  This article managed to hit the full house of being unrealistic, banal, irrelevant to most people with a side order of offensiveness. 

Tip #1 – Don’t miss the tax deadline

You would think that the first tip would be something that applies to most people, but The Guardian takes the approach that something that applies to roughly one-in-nine adults is the most pressing issue on the agenda.  There is also the fact that if you need to submit a tax return, and you don’t do it, you are breaking the law.  Stating this as a financial resolution is just stupid.

Tip #2 – Watch out for currency shifts

One could forgive the first tip as being a little ill-judged, but this tip is practically offensive to many people.  The fact is that for 99% of the UK population, currency shifts are as low down the list of concerns as things like alien invasion or a zombie apocalypse.  With hundreds of thousands of people in the UK in food poverty, and food banks being used in record numbers, telling people to watch out for currency shifts is just offensive.  For many people that are going on holiday, tiny changes in currency conversation rates hardly matter.  By all means, shop around for a good rate of conversion but if your second biggest financial concern of the year is worrying about conversion rates then you don’t really have much to worry about.

Tip #3 – Shop around for savings deals

Once more, this suggestion from The Guardian is detached from the reality for most people.  The average UK household has around £2,500 of credit card debt.  General figures for the average amount of savings are more complex, but if you spend just ten minutes googling the situation you will see that for many people savings are a luxury. 

Tip #4 – Take stock to avoid debt & Tip #5 Make your mobile work for you

In Tip #4 the author explains that you should avoid credit card debt, and if you have credit card debt you should pay more than the minimum amount.  In Tip #5 the author suggests using a credit card to purchase your next mobile phone outright as opposed to taking it on a contract.  I think I have already mentioned that the article is detached from reality, but this is just absent all logic. 

Tip #6 – Fingers crossed for the budget

Are you f*****g me?  The Guardian has published an article regarding financial tips and one of those tips basically boils down to “hope for a lottery win”. 

Tip #7 – Look for energy bill deals

This is advice that has been doing the rounds for years now, and whilst there are some savings to be made it is hardly going to make the difference between poverty and comfort for many people who are struggling. 

The article from The Guardian was disappointing and made me angry.  Next week I will look at some more sensible suggestions that might be a bit more relevant for most people. 

Ground Rules Revisited

In Part 4 of this blog I set out a series of Ground Rules to help focus my investment efforts.  I now find myself having to revisit some of those rules as life has a habit of getting in the way.  Some of my targets were a little ambitious and with the expense of Christmas, my trip to Romania and an upcoming two-week trip to India, I need more free cash.  Also, we have had a few things go wrong in our apartment and need to free up money to deal with some repairs. 

A quick recap of the rules now follows:

Rule 1: Save a minimum of £400 each month in Premium Bonds.

Rule 2a: Invest a minimum of £250 each month into my Stocks and Shares ISA.

Rule 2b: Reinvest all dividend income from the ISA.

Rule 2c: Absolutely no withdrawals allowed from the ISA.

Rule 3: Save a minimum of £100 each month in my F**k It Fund.

Rule 4: Save a minimum of £30 each month in my Tech Fund.

Rule 5: If I use my credit card, pay it off immediately.

As you may remember I removed the Tech Fund from consideration in this blog, as I realised it would not be an ongoing investment and eventually the funds would be used to replace my phone and/or laptop when they eventually stop working. 

I am going to tweak the amounts in Rule 1 and 2a.

Rule 1 (updated): Save a minimum of £300 each month in Premium Bonds

Rule 2a (updated): Invest a minimum of £200 each month into my Stocks and Shares ISA.

All the other rules apply as normal. 

There will probably be many months when I invest more than the minimum, but I’ve realised that in life you must be flexible when things come up.  If you are rigid, you are brittle, and things that are brittle tend to break. 

Final Notes

A bit of a shorter post this week as I’ve been a bit busy.  Next week should be more in-depth as I look at some of my suggested financial resolutions.  I will also look at how realistic my £2,000 target for investment income in 2020 is.

Thank you for reading and I hope you have a great weekend.

Link to The Guardian story discussed in this blog: https://www.theguardian.com/money/2019/dec/29/top-financial-resolutions-for-2020

Part 9

Introduction

Hello and welcome back to Mortgage Advisor on F.I.R.E.  I hope you are all having a great time over the Christmas period.

I’m shaking things up a little off the back of reader feedback.  For the past few weeks I have followed the same format with sections in order; Weekly Update, Financial Update and then my financial subject of the week followed by Final Notes and a preview of the following week.  I am keeping those sections, but I will now introduce my posts with a section called Introduction.  I trust I do not need to explain what purpose this section will serve.

​This week I will talk a little about my Christmas experience and then have a look at my finances for the week.  The financial subject of the week will be a look back over some of the worst financial mistakes I’ve made.  This will be difficult for me as it will perhaps be the most I’ve opened about some subjects to the general public. 

Weekly Update

Christmas this year has been a little underwhelming.  I’m not generally a “Christmas person” anyway, but this year has been disappointing even by my own low expectations.  The highlights have been spending time with my parents.  I saw both my Mom and Dad on Christmas Eve, then had Christmas Day lunch with my Mom and it was the first time since I was a child that I’ve spend Christmas Day with just my Mom.  I then saw my Dad on Boxing Day in what has become a little ritual of going for brunch to exchange presents.  The company of my family (I class my girlfriend as family) is always the highlight of my Christmas.  The second highlight is food.  I love food but this year, the food has been a disaster. 

On Christmas Day we booked Miller and Carter, as we did last year.  It cost £75 per person, which is about the going rate for a full menu including starter, main, dessert and coffee.  The food started out ok and just got worse.  I had a fillet steak which I ordered medium.  I will happily eat steak rare and one of my favourite dishes is steak tartare so I’m not squeamish about raw meat but on Christmas Day morning I was not in a good way.  Without going into too much detail, I felt rubbish and had spent an hour in the bathroom before getting ready to go for lunch.  The joys of IBS…

​I did not feel like having blood on my plate after already seeing blood that morning (I know, gross).  So, I ordered my steak medium.  I class medium as charred on the outside with pink being the main colour through the middle of the cut.  The middle of the steak should have felt some heat from the kitchen, but it should still have colour.  There should not be a cube of raw beef that makes up the middle half of the meat.  I was not feeling great at all and no staff came to check how our food was.  I love a good steak; it’s one of my favourite meals and there are a few restaurants where I’ve had fantastic steaks.  In Syracuse, New York, the waiter insisted I cut into the middle of the steak to check it was cooked to my liking when the meal was served.  I experienced this on a cruise earlier this year, and in a fantastic steak restaurant in Valletta called Sciacca Grill.  For a steak restaurant to not cook your steak anything like how it was ordered is as bad as it gets.  The sides to my meal were also tired.  The onion loaf looked, and tasted, like scraps from the chippy and the fries were cold and stale.  A very disappointing experience.  When our plates were cleared, I mentioned to the waitress how poor my food had been and the chunk of raw beef on my plate confirmed my experience.  I left with an apology and a voucher for £26.50 – the price of a fillet steak.

Boxing Day was also a bit of a disaster in terms of food.  We went to a place called Graze Inn, which we have done the last two years.  It’s not the best food but it’s generally ok.  The location is the main reason for choosing there as it’s midway between my apartment and my Dad’s house without needing to navigate the city centre.  The restaurant has changed since my last visit on Boxing Day 2018, and not for the better.  The restaurant is much smaller now and all the tables are close to the bar where the sound of the coffee machine drowns out all conversations.  The brunch menu has a dozen or so options with bacon and sausage, a few sweet options and then a vegan option and then a halloumi sandwich.  Nothing was grabbing me, so I went for the halloumi sandwich.  I left most of it as it was a soggy, tasteless mush.  Out of the seven people in our group most of us were disappointed.

All in all, a poor food experience over Christmas.

Financial Update

Premium Bonds: £9,900 (no change from last week).

Stocks and Shares ISA: £7,521.26 (up £112.55 from last week).

Credit Card Debt: nil (down £196.90 from last week).

Loan Debt: £3,800.49 (down £30.77 from last week).

F**k It Fund: £1,075.85 (no change from last week).

Total Wealth Figure: £191,998.11 (total assets including residence valued at £173,501 by my lender) minus £138,397.92 (total debt including residential mortgage) equals £53,600.19 (up £340.22 from last week).

Not a bad week overall.  The ISA has increased in value once again following the election a couple of weeks ago.  It’s a nice feeling having the credit card back down to zero and I’ll feel even better when I eventually get the loan paid down.  That might have to wait a bit longer though as there are things in our apartment that need addressing. 

​Moving into 2020 it’s just a matter of waiting for funds to come together that will allow me and my JV partner to start searching for properties.  We will probably start looking mid-March.  It’s expected that we will have our deposit ready by May 1st, but we want to have a property or two in mind at the point we have the cash ready.

Financial Mistakes and Regrets

University

If I knew at age 18 what I know now, I would probably be a millionaire.  I would have snapped property up whilst it was cheap, and I would have invested in stocks as soon as I was able.  There is little point dwelling on this, as I’m not able to go back in time.  My hope is that my experiences will help other people avoid some of the mistakes I made from turning 18 until I started educating myself about money.

I went to University of Leicester in 2003 because everyone else I knew was going to university.  I did little to no research and ended up unhappy.  I dropped out early in the second year.  I was not mentally ready for university at that time.  In school and sixth form I had been reasonably popular with a large group of friends, but something changed as sixth form ended.  At the time I could not explain it, but I now know it was depression.  I was depressed for a long time.  I only snapped out of it when I took a job with Norwich Union (now AVIVA).  I have a lot of good memories from my time there and I started to come out of my shell again.  I made some friends and felt better about myself, and I made the decision to “finish what I started” and go back to university.  I did much more research and went to UCLan to study Sport Psychology.  For the most part, I had a great time.  I met my girlfriend there and missed out on a First in my degree by a narrow margin.  I did, however, achieve a First in my dissertation which is my proudest academic achievement.  I wrote a report on home advantage and stadium design in English professional football.  I had a great tutor who I am still in contact with a decade later.  Overall, my time at UCLan was a successful time.  Financially though, it was a disaster.

​My two stints at university as an undergraduate student have left me with almost £30,000 of student loan debt.  Every month I pay £100 back from my salary.  I don’t include this loan in my commitments because the payments are taken at source and I’ve mentally compartmentalised that debt.  The biggest frustration is that I’m now working with people who never went to university and did not get a degree, yet we are on the same money doing the same job.  In net terms, they are £100 per month better off than me.  If I had that £100 each month, I would be further along the line to financial independence.  Rationally, I know that life doesn’t work that way.  I had to have all my life experiences to get to where I am now.  But still, university remains my biggest financial regret, not only due to my undergraduate experiences but more my post-graduate experiences.

I have had many bad experiences of trying to complete a master’s degree.  I signed up with the Open University, but it quickly became clear that the tutors did not care.  When I tried to contact one tutor, they told me that their OU work was not their priority.  The following year I was accepted on to a course with another university, but as the course date drew closer, I did not hear anything.  I kept contacting them asking for enrolment details and was repeatedly fobbed off.  The day before the course start date they informed me they had messed up my enrolment and would not guarantee a place as the course was now full. 

​The year after that another university mis-sold a course to my girlfriend and me as an Occupational Psychology course, when it was in fact a business course.  I then started a masters with the University of Leicester but had problems with some of the tutors who unfairly marked some of my work.  I will not get into the details as it’s not that interesting, but I had definitive proof my work had been marked incorrectly.  They refused to engage with me regarding the mark, stating that I was not allowed to “question their academic integrity” or words to that effect.  I was then mistakenly CCd into an email chain where the staff were bad mouthing me.  I quickly exited the course.  At this point I was quite bitter but was still determined to get my masters because it felt like unfinished business.  I started another MSc with University of Derby but after just a few weeks I ran out of enthusiasm for formal study.  I was also not the same person who left UCLan on an academic high.  I was older, and in worse physical and mental health.  All in, I estimate that my unsuccessful attempts to study for a master’s degree cost me £10,000 on top of what I owe in student loans. 

The problem with universities is that they are incentivised to get as many bums in seats as possible and they are not answerable to anyone.  If you have an experience like I did at University of Leicester, as a student you are powerless.  The cost of education is absurd as well.  Tuition fees can now run into the tens of thousands when you then get ten hours of contact with lecturers each week, if you’re lucky.  There is also an issue with how university is positioned in our society.  Back in the day, you went to university if you were intelligent and wanted to specialise in a specific field.  Now, young adults go to university “for the experience” which is a euphemism for drink, drugs and sex.  Does one really have to sign up to thousands of pounds of debt for that “experience”? 

​My advice to any young adult thinking of university is don’t do it.  Take some time, a year or two as a minimum.  Experience the world of work.  Do some reading around different subjects that interest you and then if you decide you want to specialise as a lawyer, doctor, architect or engineer, go and do it.  If you want to go to university to get drunk and get laid, it’s not worth getting into that much debt for.

Gambling

I used to gamble on football.  A lot.  It all started when I was studying at UCLan, and like a lot of compulsive gamblers, it started small and with a win.  I won my first football bet and was hooked from that point on.  I gambled on and off for over a decade and had some good wins in that time, but the gambling was consuming time, mental energy and more money than I realised. 

The human brain and memory cannot be trusted.  It’s like the quote from Emo Philips; “I used to think that the brain was the most wonderful organ in my body.  Then I realised who was telling me this.”

I’m not going to lecture people about gambling as it’s not the point of this blog.  I am going to share my experiences though.  Gambling over the internet and in-play gambling, can so easily spiral out of control.  The money does not seem as real, and it’s harder to keep track of your spending in this way.  I would never walk into a betting shop and hand over hundreds of pounds in a few hours on in-play bets, but I have done that over the internet many times.  There is a wealth of research in psychology that shows addicts get their “hit” of feel good chemicals before engaging in the addictive act.  Gamblers get their “hit” when they place a bet, and not just when they win.  Drug addicts get their initial “hit” when they see their drug, not just when they use it.  I know a lot of people who gamble, some of whom have confided in me regarding their inability to control their gambling.  I know a few other people who I suspect are addicted but are either in denial or scared to face their addiction.  You’ll never know if you’ll become an addict or not.  I heard somewhere that total abstinence is easier than half measures.  So, a while ago I gave up all gambling.  I don’t even take part in raffles because it must be total abstinence.  If you allow yourself to take part in a raffle, then what about some informal football bets between friends?  Then it becomes easier to progress to a few pounds on an accumulator and from there it spirals out of control.

A few months ago, I spent a few hours going through my historic bank statements to see how much I had spent on gambling.  I had a rough idea in my head, and I wanted to see how accurate my estimate was.  It was not even close.  £5 here and £10 there soon adds up.  The second biggest mistake I ever made was placing that first bet.

Gambling is too lightly regulated and too easy to access.  You can open an account and gamble thousands of pounds in minutes.  It’s scary how easy it is.  If you’re tempted to gamble, don’t.  If you are just testing the water, stop.  It’s just not worth it.  If people could make money consistently through gambling, the bookies would have closed long ago. 

​Gambling addition is a serious issue.  Research has shown that gambling addiction results in more suicide attempts than any other addiction.  Not only is gambling a financial mistake, it’s a path to mental health problems and possible suicide.  It’s just not worth it.  The only way to gamble responsibly is to not gamble. 

Final Notes

The next part of this blog will be the first entry of 2020.  I will be starting the Investment Income Tracker and, as per an earlier part of this blog, I will track how much income my investments and assets generate throughout the year.  The aim is for my investments to produce enough income so that I no longer must work.  My aim for 2020 is to receive £2,000 in investment income. 

​Thank you for reading.  This post has been a little bit of a departure from the norm, but if you have any questions about this post please get in touch.  Now We Live is on TwitterFacebook and Instagram so feel free to contact me using any of those channels.  If you are concerned about your gambling, please contact a support group such as Gamblers Anonymous.

Part 8

Weekly Update

Hello and welcome back to Mortgage Advisor on F.I.R.E.  I am writing this in Snagov, a small village in Romania about forty kilometres outside of Bucharest.  It’s a quiet little place on the edge of a forest and lake; the perfect place to come and write.  Unfortunately, on this visit I have been very busy and playing catch up with sleep after a delay to my flight from the UK.  We were scheduled to leave Doncaster airport at 22:15.  Just as I was booking an Uber to take us to the airport, I had a message come through saying that our flight was delayed until 01:15 the following morning, but we still had to get to the airport as though the flight was on time to drop our luggage off.  This was absurd.

We arrived at the airport and were given vouchers for food and drink as the flight was delayed by more than two hours.  Anyone who has flown from Doncaster will know that choices for food are limited between a six-inch or footlong Subway, unless you feel like braving Wetherspoons.  Costa have now opened in the departure area so I was able to boost my caffeine levels just at the time I would normally be going to sleep.  We asked what time the Subway and Costa were closing and were assured it would be around 1am.  It was surprising then, that when we tried to get food at Subway, the staff told us they were not serving anymore sandwiches that evening.  Costa showed solidarity with their Sandwich Artist cousins by refusing to serve toasties or paninis warm.  We were offered them cold.  We refused. 

​The one silver lining was that we would be due compensation under EU law with the flights being delayed for more than three hours; we eventually left after 01:30. It was a strange flight though.  I’ve flown to Bucharest many times over the last few years and it’s normally a three-hour flight minimum.  We arrived in two-and-a-half hours.  I did some research and it turns out that you only get compensation if your flight is more than three-hours late arriving; not departing.  My theory is that the aircraft was ordered to fly faster to get to Bucharest less than three-hours late as it’s cheaper to burn a bit more fuel than it is to pay compensation to a full flight.  Although we were more than three-hours late departing, we were only two-hours and thirty-five minutes late arriving.  We had to wait an hour for our bags, and then by the time we got to the house and showered it was after 8am in the morning.  Like I said, I’ve been catching up on sleep since then.

Financial Update

Premium Bonds: £9,900 (up £400 from last week).

Stocks and Shares ISA: £7,408.71 (up £123.37 from last week).

Credit Card Debt: £196.90 (up £196.90 from last week).

Loan Debt: £3,831.26 (down £24.69 from last week).

F**k It Fund: £1,075.85 (up £75 from last week).

Total Wealth Figure: £191,885.56 (total assets including residence valued at £173,501 by my lender) minus £138,625.59 (total debt including residential mortgage) equals £53,259.97 (up £426.16 from last week).

​As you might have noticed, I have credit card debt for the first time in weeks.  In part 4 of this blog I set out some ground rules, of which I have broken two.  I am not too concerned as there are explanations for both breaches.  First, I have credit card debt because I am abroad and had to pay for some dental treatment.  This will be paid off on my return to the UK.  It is just that the publishing schedule of this blog, and my ability to pay the card off, have not quite lined up.  The other rule I broke was that I would invest £100 every month into my F**k It Fund.  I only invested £75 this month, but it’s Christmas time and I’m abroad and had to unexpectedly pay for dental treatment; I only have so much money each month.  Into 2020 I might have to reign in the commitment to my F**k It Fund, but I guarantee that my credit card debt will return to zero by the next blog in this series.

Day Trading & Trend Trading

Before I discuss these trading types in detail, I think it best to start with a definition of both.

“Day trading is speculation in securities, specifically buying and selling financial instruments within the same trading day, such that all positions are closed before the market closes for the trading day. Traders who trade in this capacity with the motive of profit are therefore speculators.”
 Wikipedia.

“Trend trading is a trading style that attempts to capture gains through the analysis of an asset’s momentum in a particular direction. When the price is moving in one overall direction, such as up or down, that is called a trend. Trend traders enter into a long position when a security is trending upward.”
 Investopedia.

There are many people who claim to have made serious money through these types of trading.  One thing I always point out is that for every success story there are probably hundreds of people who have tried and failed, losing money in the process.  I believe it is possible to make money this way, but only under very specific circumstances.

​I believe that trend trading is a more realistic way to make money as it involves a detailed analysis of a stock before investing.  The stock is assessed before the decision to invest is made and if the business is healthy and making money, then it makes sense to invest.  However, the analysis of a stock is complex and there are often things the average person on the street will not find out even with a thorough analysis of the publicly available information.  Trend trading is risky, but because it involves holding a stock for possibly days, weeks or months, it lacks the hyperactive nature of day trading.

What makes a lot of people lose money (day or trend) trading is that they lack the mental resilience to cope with immediate losses and if you trade with either of these systems it is guaranteed that you will lose money as soon as your trade completes.  It is guaranteed because of trading commissions and stamp duty.  I will illustrate with an example:

I’ve picked a stock at random, Centrica PLC, which is trading at 89.62 right now.  If you invest £5,000, you will pay £25 in stamp duty (0.5% of the value of the trade) as well as commission from the company you are using to execute the trade.  Costs vary here, but you are probably looking at between £10-£20.  I will say £10 for this example.  So, you have already used up £35 of your £5,000, meaning you have £4,965 to invest.  This will buy you 5,540 shares. For you to recoup that £35 you paid in stamp duty and fees, you need the stock to increase in value to approximately 90.25.  To make any sort of meaningful return, say 10%, you could be waiting a while as the average annual return of the stock market is around 7%-8% (it can vary wildly throughout the year though).  In order to make a return you must pick the right stock, at the right time.  As the saying goes, “it’s not timing the market, but time in the market that counts.”  If you research your target stock, invest and hold, you will probably make money in the long-term.  If you day trade with this example, for every 1p the stock value increases you will make £55 upon sale.  Hardly life changing amounts.

So how do people make money through day trading? I will give another example.

If you invest £50,000 in Centrica PLC using the figures above, you will pay £250 in stamp duty, but the fees will be roughly the same.  As such, from your £50,000 you will have £49,740 to purchase 55,501 shares.  In this example, for every 1p the stock value increases you could make £555 upon sale.  Now, imagine you had £500,000 to invest and you can see how the money is made.

​The difficulty for the average person is that you only have a limited Capital Gains allowance each year, and if you want to invest through an ISA you can only invest £20,000 per financial year as of 2019.  It is difficult to raise enough money to trade frequently and effectively within the limits of an ISA.  It’s not impossible, but it requires a healthy dose of luck.

I have tried my hand at both types of trading and lost money.  There are ways to mitigate losses, such as a stop-loss.  This is where you instruct your broker to automatically sell your stock if the price drops below a certain value.  I have heard varying advice about how low you should set your stop-loss.  If you set it too low, you risk losing more money than you need to.  If you set it too high, you risk selling prematurely before a stock has chance to bounce back.  For example:

You purchase a stock at 100 and set your stop-loss at 95.  The stock drops to 95 and you automatically sell, losing 5 on each unit.  However, the stock could then bounce back and climb to 120 over the next few weeks.  If you had set your stop-loss at 90, the stock could drop to a low of 92 and then climb to 120 at which point you sell with a return of 20%.  You could set you stop-loss at 85 and see the stock drop to 86 and then fluctuate between 86-89 for months though.  It’s a tricky subject and one for which there is no definitive answer. The safer, wiser, choice for investing in stocks is dollar cost averaging.  If you want to gamble, then day trading may be for you.  If you day trade, though, understand that it is just an educated gamble and you risk losing a lot of money very quickly.

Dollar Cost Averaging

I will refer to Dollar Cost Averaging as DCA from this point on.  Although it is called DCA, it does not mean you have to invest in dollars.  The term DCA can be defined as:

“…a strategy in which an investor places a fixed [monetary] amount into a given investment (usually common stock) on a regular basis. The investment generally takes place each and every month regardless of what is occurring in the financial markets.”
Investinganswers.com

DCA is at the heart of my investing strategy.  I invest a minimum of £250 every month into my stocks and shares ISA.  The £250 is then split across individual funds and stock, which can all vary in value day to day.  For the sake of clarity, I will use a simple example to illustrate how DCA works.  At the moment, EasyJet is trading at 1,440 per share.  (Note: with regular investment plans, many ISA providers will not charge dealing commission.  Stamp Duty is still payable, but this cost is the same each month and for extra clarity I will ignore the cost in these calculations to demonstrate the principle of DCA).  £250 will buy 17 shares of EasyJet with money left over.  (Further note: some ISA providers allow you to buy fractions of shares if your total investment will not buy a whole number of shares). 

​The following month on your scheduled investment day, EasyJet might be trading at 1,504.  Your £250 will buy 16 shares.  The month after, the price may have dropped to 1,380 and your £250 will buy 18 shares.  Over time, the cost and value of your investment will smooth out.  You get more for your money when prices are low and the value of the stock you own increases when prices go up.  By investing on a regular and scheduled basis, it takes much of the worry out of investing.  It’s impossible to regularly beat the market, so going with the flow of the market is how you build wealth in the long run.  To take DCA to the next level, rather than investing in just individual stocks you can invest in funds that track a whole index, such as a FTSE100 tracker or a FTSE250 tracker, or a US equivalent.  This is a hassle- and worry-free way to invest.  It’s not flashy or exciting but it will work and build wealth given enough time, but you must be patient.  This will not give you enough wealth to retire in a few years.  Over a decade or two, it could create a serious pot of money for you. 

There are a few instances when DCA may not be appropriate.  One common debate is what to do when you have a substantial sum of money, say £10,000 or more.  Should you invest it all immediately or spread your investment out into smaller sums throughout the year?  Some people argue that it is safer to invest in smaller sums throughout the year.  I disagree.  If you are investing a finite amount of money, rather than a regular sum on an indefinite basis, I think you need to get the cash in the market as soon as possible.  As I quoted earlier; “it’s not timing the market, but time in the market that counts.”

Rather than spreading the cash over time, I would suggest splitting the sum into two or more smaller amounts and spreading the money across different funds and stocks.  If I had £10,000 to invest in a lump sum now, I would put £2,500 into the Vanguard FTSE100 tracker, £2,500 into iShares Emerging Markets Equity Index, £2,500 into the Vanguard US Equity Index and the remaining £2,500 into the Vanguard Global Bond Index.  Yes, I like Vanguard. 

If you invest your lump sum as soon as possible, you might hit the market at a peak but it’s statistically unlikely.  Even if you do, over time the market grows anyway.  The key to investing, and the fundamental principle behind DCA, is that you cannot regularly time and/or beat the market.  So, rather than swim against the tide, go with the flow. 

Final Notes

I’m flying back to the UK on 20/12 and have an early start.  I have to be at Otopeni airport for 6am Romanian time (4am UK time).  I would rather have flown via Amsterdam or Paris but I’m flying into Heathrow before a connecting flight to Manchester.  Then, a train journey back to Sheffield awaits.  I don’t feel like I’ve had a lot of time to relax on this trip; it’s been very hectic, but I’ll be back in June. 

​My girlfriend’s parents have three dogs and a cat.  One of the dogs, Nica (short for Veronica) is old now, but still very happy.  I love her to bits.  In the last year or so she has aged a lot.  A couple of times on this trip, when we’ve taken her for walks, her legs have given way and she’s stumbled.  The winter in Romania seems quite mild so far with temperatures around 6-10 degrees.  This time last year it was -10 degrees at one point in the day.  I hope Nica is still here in June when I come back, but I’ve said my goodbyes to her for now.

Me and my favourite Romanian lady.

Next week will be the last instalment of this blog for 2019.  I will have a look back at some of my worst financial mistakes and regrets in the hope that it helps some of you avoid making similar mistakes.  Thank you again for your time and I hope you all have a great Christmas. 

Part 7

Weekly Update

Hello and welcome back to Mortgage Advisor on F.I.R.E.  It’s a brave new world; or rather a depressing descent into a dystopian world.  I’m very disappointed in the outcome of the general election.  A Tory government is probably best for me personally but for the country over the next decade or so, I think it will be a disaster for the vulnerable sections of society.  I voted for what I thought would help the country, as I believe that if the country does well, I will eventually do well anyway.  I guess we will see over the next few years what the consequences of this election will be. 

Later today I fly to Bucharest with my girlfriend to spend some time with her family in the run up to Christmas.  I will fly back on 20/12 and my girlfriend will stay on until the New Year.  It will be the first time she will have spent Christmas at home in a decade and I’ve told her she should take advantage of the opportunity.  I will be spending the holidays with our cat, Sweep.  He’s an older cat and last week we had his one-year adoption party.  He is sixteen years old and for most of his life he was with an elderly couple.  When they passed away Sweep was taken to Cats Protection where he stayed with a foster carer for several weeks.  He was rehomed briefly but did not settle.  Then, we adopted him, and it’s been great ever since.  He settled in very quickly and is a loving soul.  It’s always hard leaving him at the cattery when we go away but it’s only for a week and then I’ll be back with him. 

​This week I will be looking at employee benefits relating to pensions and share save schemes, and the composition of my Stocks and Shares ISA, but first it’s time for the weekly financial update. 

A photo my girlfriend captured of me and Sweep having a nap.
Sweep looking regal.

Financial Update

Premium Bonds: £9,500 (no change from last week).

Stocks and Shares ISA: £7,285.34 (up £394.23 from last week).

Credit Card Debt: nil (no change from last week).

Loan Debt: £3,855.95 (no change from last week).

F**k It Fund: £1,000.85 (no change from last week).

Total Wealth Figure: £191,287.19 (total assets including residence valued at £173,501 by my lender) minus £138,453.38 (total debt including residential mortgage) equals £52,833.81 (up £394.23 from last week).

It’s been one of those weeks where not much happens financially.  I get paid on the 20th of the month and most of my investments take place shortly after payday.  In the last couple of days, my ISA provider executed my deals which saw the value of the ISA increase.  There was also a little boost from the election result.  Everything else has remained the same and will do until my next payday.

Employee Benefits


Pensions

I would say this is the most common benefit that employees in the UK will have access to.  At the time of writing (December, 2019), your employer must opt you into their pension scheme so long as you earn at least £512 per month (£118 per week/£472 per four weeks – source: gov.uk).  Although there are minimum amounts that must be contributed by both the employee and employer, there are ways to increase the amount contributed and often these increases have a tax advantage.

Many employers will offer to contribute more than the minimum required amount to an employee’s pension.  The exact amounts can differ, but some employers will match your contributions, so that if you pay 5% of your salary into your pension, they will also pay 5% from their own pocket.  In effect, you are getting 5% of your salary again for free, paid into your pension.  Some employers offer even more generous provisions, where they will not only match your contributions but double them.  For example, you pay 5% of your salary and they pay an extra 10% on top. 

With pensions, the earlier you start contributing the better.  I am fortunate to work for a business that offers a fantastic pension and I have increased my contributions to take full advantage of what matching payments the business will make.  It’s free money.  Why would I turn it down?

Another benefit to contributing to your pension is that the money is taken from your salary before tax is deducted.  For example, if you were to pay an extra £100 into your pension it would only cost you £80.  The other £20 comes from the government’s tax relief.  Further to this, if you work for an employer that will match your pension contributions, that extra £100 is doubled.

​I would suggest that if you are unfamiliar with your employers’ pension, you take some time to research it and speak with your HR department to see how you can best maximise the opportunities available to you.

Company Share Schemes

I have worked for several companies that have offered share incentive plans.  The most common one I have encountered is a monthly savings plan which matures after 2, 3 or 5 years.  It has worked in the same way with each company I have opted into this benefit with. 

The company will offer the chance for you to buy shares at a discounted price.  This is often 20% lower than the average market price for that day.  For example, if the average market price that day was 50p per share, the company would offer you the chance to buy that share at 40p share. 

If you agree to take part, you choose how much you want to invest each month.  Let’s assume you choose to invest £100 per month and you go with a standard three-year plan.  Over the three-years, you will invest £3,600.  When the three years are up, you have a choice.  If the share price at the end of the investment is less than 40p you can choose to get all your money back.  Your capital is secure, but it may be worth a little less due to inflation.  The second option is you can exercise your option to buy the shares at 40p per share.  The third option is you can buy the shares and immediately sell them.

The beauty of this type of plan is that if you work for a healthy business, it is likely that the shares will have increased in value over the three-years, especially as you bought them at a 20% discount.  In this example, you would have purchased 9,000 shares at 40p per share.  If we assume an 8% rate of growth per year (not an unreasonable rate of growth), you are looking at a share price at the end of the investment period being just over 50p per share.  If you then sell those shares at 50p per share, you will return roughly £4,500; an increase of £900 on your original investment, or 25% return on investment over three-years. 

A share save scheme of this nature is an easy way to accumulate shares, although you must be careful not to put all your eggs in this one basket.  A few things to remember; unless you are high up in your business or privy to high-level knowledge, you are probably being fed the company line that all is well with the business.  Do some research on your business first before committing huge sums of money. 

​If you take part in this type of scheme, you can often opt into a new scheme each year which means after three-years you will have a new scheme maturing each year.  The worst that can happen is that the share price does not rise, and you get your money back.  Well, thinking about it I suppose the worst that could happen is the business goes under, but should that happen you would probably have bigger problems to tackle. 

My Stocks and Shares ISA

My ISA is my long-term plan for wealth, in contrast to my plans for BTL property which is very much concerned with immediate cashflow.  Whenever I speak to people about my ISA, they seem unsure about what a Stocks and Shares ISA is.  I don’t think these types of accounts have been explained well enough in terms that the general public can understand, but I firmly believe these accounts should form the foundation around which everyone’s wealth should be based.

For the purposes of this explanation, I will now refer to a Stocks and Shares ISA as simply “an ISA”.  There are other forms of ISAs, such as a cash ISA.  However, to save typing out the full name again and again, when I mention the word “ISA” I am referring to the Stocks and Shares variety.

The ISA can best be conceptualised as a shell within which assets are free from Capital Gains Tax (CGT).  This is the main benefit of the ISA.  The ISA, or shell itself, just not generate wealth though.  You enter the shell, and from there you can access information about a variety of stocks and investment funds.  You can buy individual stocks, for which you will still pay broker fees and Stamp Duty, but if you then sell the shares and make a profit, that profit is free from CGT.  As a result, some day-traders favour buying shares this way.  The downside is that you can only invest up to £20,000 per year into an ISA (correct at time of writing).  So, if you draw money out of your ISA, you cannot necessarily invest it back in that same year. 

I have a two-pronged approach to my ISA.  I invest in several index tracker funds as well as a small selection of stocks I have picked myself.  I would strongly advise you, before investing, to educate yourself about how to select funds and stocks.  Here are a few good books to start with:

How To Own The World by Andrew Craig

The Naked Trader by Robbie Burns

I Will Teach You To Be Rich by Ramit Sethi

For the general, long-term, investor, I believe it makes more sense to concentrate on index funds.  These funds will track a whole index which means you ride out the rough and smooth.  There are dozens, if not hundreds, of books about how to pick stocks but most of it is luck.  There are things you can do to research stock in detail and I have had some success with it in the past, but it’s hard work and for all that work luck can screw you over or be your best friend.  Trading individual stock is more of a gamble than taking a more cautious approach and investing in tracker funds primarily. 

However, there is something fun about researching stocks and picking ones out you think will perform well over time.  The four stocks I have picked are in different sectors and have a good track record of paying dividends.  I may add a few more stocks to the mix once I have built up a decent holding in the four stocks I have already. 

My ISA is made up primarily of funds (80.5%) with the remaining 19.5% comprising stocks.  Approximately 45% of my funds are in the US with around 20% in the UK.  The rest of my funds are split around emerging markets and Europe.  Most of my stock holdings are focused on one stock which makes up over 75% of my total; in effect roughly 15% of my total ISA value is dependent on that one stock.  I should probably dial back a little on that stock and concentrate on balancing elsewhere.  However, I believe that one stock is significantly undervalued and will improve over the next two to three years. 

From the new year I am going to diversify into bonds.  Currently, my whole ISA is based on stocks and many of my funds are wholly stock based as well.  Much of my research has suggested it is wise to keep a fraction of your total investment in bonds.  I am going to aim for a 10% share of my ISA being invested in bonds going forward. 

Final Notes

This has been a bit of a rushed entry, I’m afraid.  Sometimes life just gets in the way.  Next week, I should have much more time to put together a more polished article and I will be looking at day trading in more detail, as well as looking at the advantages of dollar-cost-averaging. 

Thanks again for reading and I hope you visit this blog again next week.

Part 6

Weekly Update

Hello again and welcome back to Mortgage Advisor on F.I.R.E.  I am writing this on Wednesday 4th December with a view to publishing on Friday as normal.  Over the past few weeks I have normally done the bulk of the writing on the Thursday before having the post checked over and published the following morning, but that routine will have to change.  I am now back at work and have to find time to write around my working hours, and so I find myself writing a day earlier than normal. 

Going back to work after a prolonged absence is always a strange situation.  When I walked into the office it felt like I had never been away.  Then, after several hours of catching up with emails and new policy it came time to start dealing with mortgages again.  I am frustrated at another spell on the sidelines in 2019 following shoulder surgery earlier in the year that saw me off work for almost two-months.  With a month absent with my ankle, I have had a quarter of 2019 off work through ill-health.  2020 must improve. 

Last week I wrote a little about my new approach to eating.  It is still going well and I feel different; better.  The most difficult part is learning to accept feelings of hunger and realise that those feelings will be addressed when the next meal time comes around.  It’s all about delaying gratification, which is something we, as a society, do not practice to any great extent.  I have a long way to go until I am back at my healthy weight, but at least I am now moving in the right direction.

I was due to discuss the election this week but I’ve changed my mind.  The whole subject of the election is saturating the news at the moment and it occurred to me that readers may want an escape from all things politics.  So, I will discuss budgeting and the idea of Paying Yourself First instead.  First things first, however, my Financial Update.

Financial Update

Premium Bonds: £9,500 (up £350 from last week).

Stocks and Shares ISA: £6,891.11 (down £177.03 from last week).

Credit Card Debt: Nil (no change from last week).

Loan Debt: £3,855.95 (no change from last week).

F**k It Fund: £1,000.85 (up 85p from last week).

Total Wealth Figure: £190,892.96 (total assets including residence valued at £173,501 by my lender) minus £138,453.38 (total debt including residential mortgage) equals £52,439.58 (up £495 from last week).

My stocks and shares ISA has taken a little hit in the last week, but I suspect this is due to ongoing tensions between the US and China.  It’s not unusual for the ISA value to fluctuate weekly or monthly.  As I’ve stated before, the ISA is a long-term investment and I’m confident that over years and decades it will increase in value. 

​I was able to free up £350 to invest in more Premium Bonds over the past week.  I had money on one side that was earmarked for a purchase which I’ve now decided not to make.  So, rather than leave it sitting there I decided to put it to good use and move closer to the £14,850 target for my share of a BTL deposit.  

Budgeting

Note: If you are in financial difficulty and/or have debts that you feel you can’t manage, seek help from one of the following sources: The Money Advice Service, Stepchange or Citizens Advice.  This blog is for information and entertainment purposes and does not constitute financial advice. 

There are lots and lots of books out there that go into detail about budgeting.  The common view of budgeting is that you have a spreadsheet that itemises every single penny of spending.  This can be time consuming and, in my experience, not sustainable long-term.  However, I use a spreadsheet to budget my household finances.  So, why the discrepancy between what I believe and what I do?

It comes down to detail and automation.  My budget does not try to itemise every single penny I spend.  My spreadsheet takes a high-level approach to finances.  It is broken down into three columns: my finances, my girlfriend’s finances (she requested long ago that I help manage her finances) and then our joint finances. 

In each column is a list of our direct debits and regular payments.  The joint finance column has our mortgage, utility bills, food shopping and so on.  Next to each commitment I enter (rounded up to the nearest £5) how much that commitment is.  We are paid a flat salary each month.  The difference between our commitments and our income is our spending money.  It’s that simple.  So rather that itemising how much we have for going out, buying coffee, lunches and so on, the spreadsheet looks at general areas of spending. 

Another aspect where my budget deviates from what many people do, is that my investment contributions are treated as financial commitments.  In my personal column I have an entry for “BTL deposit” and another for “ISA”.  Those are the first things to be paid when my salary is credited.  Rather than finding room to save after I meet my living costs, I find room to meet my living costs after I Pay Myself First.

Paying Yourself First

I first came across this phrase in Robert Kiyosaki’s Rich Dad, Poor Dad, the book that changed my life.  The phrase is common amongst investors and it encapsulates a mentality of a seasoned investor.  You make you your main priority.  Now, I can hear the grinding of teeth from some people who, rightly, argue that in order to pay yourself first you need to have spare money each month.  That’s right, you need to have surplus cash to be able to save or invest.  When you dig a little deeper, you discover that it’s a bit more complicated.

I have worked in finance for a long time; over a decade between mortgages and personal banking.  When I worked in a branch of a UK high street bank, I had access to many accounts and the vast majority of people were perpetually in their overdraft and had a collection of direct debits that made for scary reading.

Telling people how to spend their money is an emotionally charged subject.  I’m not going to sit here and say that if you have a premium entertainment package or a few beers at the weekend you need to stop.  What I am going to encourage is more mindful spending.  In the age of austerity under the rule of the Evil Empire and Darth Cameron, May and Johnson, the UK has seen an increase in poverty.  I can’t do much or recommend much when your basic cost of living exceeds your income.  It’s a tragic situation and one that should be unacceptable in a 21st century, first-world economy.  The next few paragraphs are not directed at that part of society but rather the segment of society that has an average (for the UK) income but still has no surplus cash each month.  

Hierarchy of Financial Needs

A little over a year ago I devised a Hierarchy of Financial Needs in another blog post.  This was modelled on the Hierarchy of Needs put forward by Abraham Maslow in the 1940s.  The Hierarchy of Needs is a pyramid which has five levels of needs that humans have.  At the base of the pyramid are psychological needs, then safety, love/belonging, esteem with the tip of the pyramid being self-actualization.  My Hierarchy of Financial Needs is based on shelter, warmth and food, with the next level being clothing and personal grooming.  The middle tier is utilities, followed by entertainment and the tip of the pyramid being luxuries.  From what I’ve witnessed in the course of my career in finance, many people do not conceptualise their spending in this way.  Luxuries are viewed as necessities by many.  I have had a few people ask me how I’m able to take as many holidays as I do.  The answer is simple.  I rarely drink alcohol.  I don’t smoke.  I don’t have a subscription to Sky, Virgin or BT.  I don’t drive.  I don’t have kids.  

Some brief google-fu suggests that the average UK household spends £72 per month on alcohol, the average smoker may spend as much as £50 per month on cigarettes (often more), a subscription to Sky can easily cost £50 per month as well.  The cost of running a car, not including the purchase of the vehicle, is estimated at £160 per month and although figures vary, it’s suggested that the cost of raising a child is around £700-£1,000 per month depending on child care.  I’m not telling people who smoke and drink to stop; that’s not my place.  What I’m encouraging people to do is be more mindful of what their money is being spent on.  If you are an average drinker and smoker, with a car and a premium TV subscription, you can very easily be spending almost £350 each month which is almost a fifth of the average UK net salary. 

Small Changes and The Latte Factor

I recently read a book called The Latte Factor by David Bach and John David Mann.  The book is financially educational but framed as a work of fiction.  The story unfolds through a series of conversations between a young woman and an older coffee shop owner.  It was very basic for someone who has read extensively around finance and investing, but it is an ideal entry point for anyone starting to invest.  The title comes from the idea that forgoing small, daily, purchases and investing that money instead can have huge long-term rewards.  I’m not the sort of person that argues you should cut your cloth until there is no cloth left, rather that you should be more mindful with your spending.  For example, I used to buy three lattes a day as a minimum.  That was costing me almost £10 a day, five days a week.  I spent £20 on a good quality thermos and started making my own coffee to take into work.  The cost of buying coffee in bulk and taking it to work is significantly lower than buying three lattes a day. 

Sudden, extreme change is never sustainable.  This is the case with anything from throwing oneself into an intense workout regime with no build up to crash dieting.  Small, gradual change is more sustainable and more likely to lead to good, long-term habits.  This is also the case with financial management.  If you are the average person who drinks, smokes, has an expensive TV package and runs a car, and subsequently finds you have no money to spare, are there any areas where you could free up some money?  What would you do if you had to free up £1 per day (£30 per month).  What about £2 per day?

£1 per day might not seem like it would make a difference and you may be thinking that saving £1 a day would be pointless, as it’s just £1 per day.  Well, if that’s the case, why not save it?  Assuming you have 30 years until retirement, if you commit to investing £30 per month and achieve a reasonable return on your investment in line with historical averages, you could amass £65,000 in 30 years.  £60 per month sees the potential reward more than double to £135,000.  If you found yourself with £5 per day free to invest, you could amass over £330,000 in 30 years.  £5 per day is what the average household spends on running a car.  

Automating Finances

One piece of advice I came across early in my financial education was that the process of accumulating wealth should be mechanical or automatic.  The money works for you, not the other way around.  Almost all my spending is automatic.  All my bills are on direct debit.  My investment contributions are taken automatically each month.  Furthermore, the vast majority of these bills and investment contributions are timed to come out of my account in the day or two following my salary credit.  Two or three days after I am paid, the money left in my account is my money.  The best advice I can give to anyone wanting to budget effectively is to automate as much as possible through direct debits and arrange for those payments to come out just after you are paid.  There has been a huge campaign over the last few years from various sources telling you to contact your utility providers, mortgage lender and media providers to check if you can get a better deal.  If you haven’t done this in a while, you might as well be throwing money in the bin.  Even if between your electricity and media providers you only save a tenner a month, it is still a tenner a month you could be investing whilst not changing your net monthly income/outgoing balance. 

“I’ll Get Around To It”

As a mortgage advisor there are certain things I hear all the time.  One of these things is “I’ll get around to it” or “I will set that up later”.  I’m talking about overpayments, but the principle could just as easily apply to reviewing your finances and/or investing.  For some reason, when it comes to money, most people seem to bury their heads in the sand and accept the status quo.  I speak to many people who claim to be financially comfortable, in so much as they have more money coming in than going out.  I will often demonstrate to these people how increasing their mortgage payments slightly can have a huge impact on the term of the loan.  This is more apparent with long-term loans and generally with younger customers.  I will explain that rounding their payments up to the nearest £10/£50/£100 per month could knock years off their mortgage.  The common reply is “Yeah, I’ll get round to that just after XYZ has happened/passed etc.”  When it comes time to review their mortgage again a couple of years later, I will review the notes on the account from our last interaction and check if extra payments have been made.  In almost every instance, those payments have not been made.  If you don’t do something in the moment, the chances are you will forget about and lose the impetus to act.  

Next Steps

I would strongly suggest that if you have not reviewed your finances for some time, that you take some time out to do it.  I would start by reviewing all your direct debits and regular payments that leave your account.  Go back over the last month and add up how much money you spend on household shopping.  Ground your spending into broad categories.  The key here is not to cut down your spending, but to get an accurate idea of what you are spending.  Until you know what you are spending, you don’t know what and where you can cut down on unnecessary spending. 

Once you have reviewed all your direct debits and regular payments cancel the ones that you are not tied into and that you feel are unnecessary.  The ones for services you want to keep, give them a call and ask for a lower payment.  Don’t skirt around the issue; be clear and to the point: “I want a better deal.”

If you have nothing saved or invested already, challenge yourself to find £1 per day in your finances that you can free up and use to invest. 

Note: If you are in financial difficulty and/or have debts that you feel you can’t manage, seek help from one of the following sources: The Money Advice Service, Stepchange or Citizens Advice.  This blog is for information and entertainment purposes and does not constitute financial advice. 

​Thank you again for reading this blog.  Next week I will look at employee benefits and pensions and ask whether you are maximising what opportunities are available to you.  

Part 5

Weekly Update

Hello again and welcome to Mortgage Advisor on F.I.R.E.  I am in good spirits at the moment.  The pain in my ankle and foot has reduced considerably.  I have been able to take a taxi to the city centre and have lunch, but I still cannot walk for more then a couple of minutes before needing to rest.  My other leg still hurts but the pain is not anything like as severe as the problems that have kept me holed up inside my apartment for almost a month. 

I wrote last week about my weight and how it has increased due to comfort eating and my not being able to exercise.  Just over a week ago I started a new type of diet.  It is something I have done before with some success, but I did not stick with it long-term.  It’s nothing too revolutionary; I simply have three meals a day and one snack.  Between meals I do not eat anything.  No grazing or snacking allowed.  I am, however, allowed to drink water or coffee between meals.  I keep myself on track between meals by setting a timer on my phone.  A typical day looks like this:

8am – breakfast.  Timer set for 4 hours.

12pm – lunch. Timer set for 7 hours.

3pm (ish) – latte.

7pm – dinner. Timer set for 3 hours.

​10pm (ish) snack.

I’m not too concerned with the content of each meal, within reason.  The point is not to count calories but get out of the habit of pointless grazing and snacking.  In the last ten days or so I have lost a kilogram doing this whilst being physically inactive.  I do get hungry, but glancing down at the timer on the phone and seeing it ticking down second by second is motivating me in a bizarre way. 

From next Tuesday, 3rd December, I should be back at work full-time.  I have the rest of that week, and the first part of the following week before going to Romania for a week to spend time with my girlfriend’s family.  Then, I have a decent schedule over Christmas and before we know it, it will be 2020. 

I am thinking that in the New Year, I will be making a slight change to the blog.  The whole point of this blog is to chart my course to financial freedom through passive income.  So, from 2020, I will keep a running track of the passive income received that year.  The aim, as mentioned in the first instalment of this blog, is to get to £1,000 per month passive income.  At first, I expect a slow start, but it should be encouraging watching the income snowball over time. 

As for this week, I will start with my weekly financial update and then discuss the concept of Safe Withdrawal Rate (SWR) and look at how short-term goal setting can help one stay on track for the long-term goal; financial independence. 

Financial Update

Premium Bonds: £9,150 (no change from last week).

Stocks and Shares ISA: £7,068.36 (up £177.61 from last week).

Credit Card Debt: nil (no change from last week).

Loan Debt: £3,855.95 (up £5.95 from last week due to initial interest).

F**k It Fund: £1,000 (no change from last week).

I am removing the tech fund and surplus cash from the equation, as those figures will eventually be spent and not invested.  This is still a new blog and I may make changes like this going forward.

​Total Wealth Figure: £190,719.36 (total assets including property now valued at £173,501 according to my lender) minus £138,774.78 (total debts including mortgage) equals £51,944.58 (up £772.66 from last week).

Safe Withdrawal Rate

The SWR is a rule, or guideline, as to how much of your investment you can withdraw each year whilst making sure you do not run out of money in retirement.  There is much debate about what SWR is correct and it will vary according to your age, expected remaining life, inflation and the economy in general.  I have heard figures ranging from 3% to as much as 8% from different authors and experts. 

The SWR assumes that in retirement you will draw down a percentage of your investments to live off.  The remaining investment should continue to compound and if you get the SWR right, you should have enough money to live off for the remainder of your retirement. 

Although the SWR is an interesting way to conceptualise how one will fund retirement, I think it’s looking at the issue backwards.  The SWR assumes that you will be selling the assets you have and then using the cash received to fund retirement.  Once the asset is gone, you can’t get it back.  Once the cash is spent, it’s also gone.  Operating from a passive income perspective assumes that the assets will remain in place indefinitely and the income they generate will fund retirement instead.  There is, however, something to be taken from SWR and applied to my own situation.  When I do achieve F.I.R.E., I will want to continue investing in some form.  I don’t want my assets to simply stand still.  I want them to continue to grow so that my position improves over time instead of just treading water.  By factoring in continued investment once I have obtained financial independence, this helps to safeguard against a stock market crash.  When the next crash comes, and it will come, if I continue to buy stock, I will be buying it at a lower price and getting more bang for my buck. 

My interpretation of the SWR will be somewhat different as a result.  Instead of asking myself “how much do I need to sell to maintain my standard of living?”, I will be asking “how much of my passive income is it wise to spend?”

​Once I achieve F.I.R.E., I am thinking that the property income will be the backbone of my regular income and the income from stocks will supplement the rental income.  I may not need to spend the dividend income from stocks, and so that money would be reinvested.  

There may be a time at which my total wealth is large enough that it hits critical mass.  What I mean by critical mass, is the point at which the investments are compounding at such a rate, it is possible for me to safely sell some assets and still have my investments intact.  However, if I was to sell stock in the future, I think it would only be for reinvesting that money in another asset such as property.  Selling off assets to live off the proceeds feels a little too much like killing the goose (the investments) that produce golden eggs (the passive income).  If you have only invested in assets that produce capital growth, then you will not have much, if any, income from them.  This is one reason why I prefer income generating assets over capital growth.  There are some exceptions to this.

​Within my Stocks and Shares ISA there are several funds I invest in, such as the Vanguard FTSE100 Index and US Equity Index.  My holdings are of the Accumulation class.  This means that profit earned through the fund is reinvested to increase the value of the units owned within the fund.  No income is produced as such.  Once I get to a certain age, I will transfer those Accumulation units into Income units which means my holding within the fund will produce an income.  I could, in theory, continue with Accumulation units and then sell them off bit by bit in retirement and follow SWR guidelines, but that just seems so counter intuitive.  I think it would be better to transfer those Accumulation units into Income units and live off the income generated. 

​In addition to the value generated through those types of funds, I do invest in a selection of individual stocks that have an established record of dividends.  As per the rules I posted last week, any dividend income received over the next few years will be reinvested.  However, once I achieve financial independence, I may choose to keep half the dividend income to spend and then reinvest the rest.  The balance I achieve at this point will be by personal equivalent of the SWR.  

Goal Setting

Goal #1: My goal for the first six months of 2020 is to save another £5,700 towards my BTL deposit. 

The first goal is to get that first BTL.  It will be a huge psychological boost to have that first property bought and let out.  Once I see that rental income coming in, this whole journey will feel like it’s underway.  Now, I feel like I’m in the queue waiting to drop my bags off at the airport.  Once I have that first property let out, it will feel like I’m hurtling down the runway.  To get the first BTL, I need to finish saving my deposit.  So, my first goal is to gather £14,850 – my share of the money needed to fund the deposit, legal, tax and refurb costs associated with buying a property to let out.  My JV partner will be contributing an equal amount.  I need my share by the end of May’20, giving me six months to accumulate £5,700.  I’m currently saving a minimum of £400 per month towards the deposit, although this month I saved £500.  Even at £500 per month, I would still be £2,700 short.  However, I will receive £1,800 in December as well as a bonus in March’20. 

Assuming a worst-case scenario and I only save £400 per month for the next six months, I will be £3,300 short.  The £1,800 received next month reduces that deficit to £1,500.  Typically, I would expect my bonus to raise my salary by around £1,000 net for that month.  So, the deficit is roughly £500.

Goal #2: My goal for 2020 is to receive at least £2,000 in passive income. 

Passive income is the name of the game.  Ultimately, I am aiming to receive £12,000 per year in passive income.  My goal for 2020 is more modest.  Based on my calculations for anticipated rental income from the first BTL, for the latter half of 2020, and considering projected dividend income it is not unreasonable to aim for £2,000 in passive income in 2020. 

Final Notes

As we are only a couple of weeks away from the election, next week I will discuss how the new government could impact my plans.  I will also look at some contingencies I have in mind if BTL becomes a non-starter.  So, check back next Friday for part six of Mortgage Advisor on F.I.R.E. 

​Thanks for reading, and if you have any questions, comments or feedback, I would love to hear from you in the comments section.

Part 4

Weekly Update

Greetings all and thank you for returning for part four of Mortgage Advisor on F.I.R.E.  I’m still in pain but have reduced the number of painkillers I am taking.  My ankles are both in a bad way.  My right foot hurts when the ankle moves in certain directions, mostly twisting motions.  The left Achilles tendon is sore generally. 

​I’m in between a rock and a hard place because I need to lose weight to put less strain on my joints, but I gained weight when my shoulders were operated on and I stopped exercising.  Diet is the key to everything, and I really need to be more disciplined with what I eat.  The problem is, being side-lined once more through ill health has made me feel down and when I feel down, I comfort eat.  It’s a frustrating cycle. 

I have an MRI booked in for 29/11/2019.  This will be my eleventh MRI which should mean the one after is free.  

Financial Update

Premium Bonds: £9,150 (up £500 from last week).

Stocks and Shares ISA: £6,890.75 (down £21.64 from last week).

Credit Card Debt: nil (down £3,899.99 from last week).

Loan Debt: £3,850 (up £3,850 from last week).

F**k It Fund: £1,000 (up £149.04 from last week).

Surplus Cash: £400 (up £105 from last week).

Tech Fund: £50 (up £50 from last week).

Total Wealth Figure:* £51,221.92 (up £832.39 from last week)
*(total assets including residence valued at £172,500) £189,990.75 minus (total debts including mortgage) £138,768.83 equals £51,221.92.

As you will have noticed I have taken out a loan to pay off my credit card.  This was something I had been thinking about for a few weeks.  My decision was forced when I realised that much of the credit card balance was now being charged interest and the APR was more than double what I could get on the loan.  The loan is not going to be a long-term debt.  I fully intend to have it cleared by the end of Q2 2020.  I have £1,800 coming in December, as well as a bonus in March.  Between those two lump sums and some overpayments, I should have the debt cleared by April/May time.  It’s unfortunate, from a financial point of view, that I’ve started to automate my finances just as we approach Christmas.  I will be spending a week in Romania with my girlfriend’s family just before Christmas and need to allow a little extra spending money than normal for the trip.  Once Christmas and New Year are out of the way, I can start to concentrate on building passive income in 2020. 

​I am still working to a timeline that will see the first BTL being completed by mid-2020.  We cannot move faster because the deposit money for my JV partner is tied up in investments until mid-2020.  We can start searching for properties ahead of time, and I think we will probably start looking around Easter 2020.  By the end of 2020/early 2021 we should have our second BTL and depending on house values I may have enough equity at that point to release funds from my main residence to fund the deposit on a third BTL with my girlfriend.  It really does look positive.

Ground Rules

This is a four-year plan and I’ve stated before that the best advice for building wealth is to “pay yourself first” and, as much as possible, make the process of building wealth as automatic as possible.  To that end, I thought it would be a good idea to get down some ground rules for how my investment strategy will look in 2020. 

Rule 1: Save a minimum of £400 each month in Premium Bonds.

The deposits for the BTLs are the base on which this whole endeavour is built.  There are several places I could store those funds but with interest rates generally being low, I still prefer keeping the money in Premium Bonds.  The funds are not being kept long enough to be eroded by inflation to any significant degree, but I may need access to them at short notice which rules out a longer, fixed-term savings account.  There may be some savings accounts out there that will offer 1%-2% more than the accounts I have researched, but then there is the time and effort involved in researching and setting up those accounts, and then moving the money around.  For the sake of a few pounds, I feel more comfortable keeping the deposit money in Premium Bonds and having the small chance of a significant win.  My return on Premium Bonds has been pretty good with prizes in fifteen of the last eighteen months. 

Rule 2a: Invest a minimum of £250 each month into my Stocks and Shares ISA.


Rule 2b: Reinvest all dividend income from the ISA.


Rule 2c: Absolutely no withdrawals allowed from the ISA.

The second part of my plan for long-term wealth is my Stocks and Shares ISA.  This is a separate project to the property investment and is aimed more at looking after my financial interests in the 15-20-year time frame.  Some of my holdings are already providing a modest income that will only grow over time, but this ISA is very much a long-term work in progress. 

Rule 3: Save a minimum of £100 each month in my F**k It Fund.

I have another pot of money that I call my F**k It fund, which is self-explanatory.  It’s a pot of money that is there for if/when I decide “f**k it”.  It’s also an emergency fund and I will continue to grow this pot little by little until I have enough money to live comfortably for at least three months, and a little less comfortably for another month or two after that. 

Rule 4: Save a minimum of £30 each month in my Tech Fund.

My MacBook gave up the ghost a few weeks ago and now all my writing is done through my girlfriend’s laptop or through my phone.  I will need a new laptop at some point, but I will not go into debt for it.  Instead, I have started a small “tech fund” to save for my next laptop and then my next smartphone.  My current iPhone was bought for cash in July’17 in New York as it was significantly cheaper than buying in the UK.  This is probably the longest I have had a smartphone and I hope to get at least another two years out of it.  The phone still holds a charge, has no cracks and performs like it did out of the box.  No need to replace it just yet, but the time will come.

Rule 5: If I use my credit card, pay it off immediately. 

​Although I have paid my credit card off, I like the fact it earns airmiles.  I will continue to use the card for spending on the condition that I pay the card off as soon as I spend on it.  I have maintained this habit for the last few days and I hope that writing here about this will help keep me honest. 

Investment Funds

I had some feedback last week that I did not explain in enough detail why I prefer Index Trackers to funds that are actively managed.  I will attempt to explain in a little more detail why I prefer Index Trackers.

Human Psychology

No doubt there are plenty of honest fund managers out there who act with integrity and diligence.  However, even the most trustworthy and dedicated fund managers are at the mercy of their own mind.  I heard a phrase recently which I have modified slightly: the brain cannot guard against itself.

The point I am driving at, is that people generally do not like to lose.  When they lose, they tend to try and reclaim those losses.  The concept of chasing losses is what the whole gambling industry is based upon.  Stocks and funds can go up and down and if a fund was having a particularly bad time of it, an active fund manager may be tempted (consciously or not) to try and chase those losses by making riskier and less well researched trades.  This rarely ends well for the fund, the fund manager or the investors. 

If you take a bit of time to research investment funds you will see a mixture of research that shows active funds can outperform tracker funds.  This is true; active funds can outperform tracker funds, but this is the exception and not the rule.  Many reports that claim this will, one way or another, be trying to sell you a fund and the research will cherry-pick those funds that are performing well. 

​Several (audio)books I have read or listened to have reported that it is not unusual for fund managers to have several funds on the go at once, and that they quietly close down the funds that are not performing well so that they can concentrate on the funds that are performing well.  Then, once they have just the top-performing funds in place they can claim that their actively managed funds outperform index trackers.

Churn

The practices I have mentioned above are frustrating, but churn is something that is illegal and that there are some brokers and managers out there that do this makes me very angry. 

Churn is where a broker or fund manager excessively trades to earn more in commission.  Most brokers earn money on every trade they make for a client and this comes out of the money the client invested.  The conflict of interest here is obvious; it is in the interest of the broker to trade as often as possible. 

There is another way for fund managers to act with integrity and Guy Spier talks about this in his book The Education of a Value Investor when he refers to how Warren Buffett would charge fees.  I forget the exact figures, but the principle was the epitome of honest, ethical fund management.  The fund manager would only take a fee if the fund achieved at least 6% (I think it was) growth.  Anything above 6%, the fund manager would charge a percentage against the surplus growth.  In short, the fund manager only gets paid if the fund performs well. 

Churn is something that can have catastrophic consequences for investors.  Here is an example to illustrate, which draws on all the typical human psychology. 

You invest £10,000 with a stockbroker and give them discretion to trade on your behalf.  The broker charges 0.5% for each trade and then there is Stamp Duty at 0.5%.  On the first trade, you are charged £50 in broker fees and £50 Stamp Duty.

The broker buys 19,800 shares of Company A at 50p per share for £9,900.  The stock then immediately drops to 47p per share.  The holding is now worth £9,306. The broker decides to trade again.  The shares in Company A are sold at 47p but the broker takes a further 0.5% (£46.53).  The investor now has £9,259.47 from an initial £10,000 investment.

The broker explains to the naïve investor that Company B is a sound investment.  The broker places a trade for 7,000 shares in Company B at 130p per share (share prices are always in pence).  7,000 shares at 130p is a trade of £9,100 in addition to Stamp Duty of £45.5 and broker fees of £45.5.  The investor has £68.47 of residual cash. 

The shares in Company B drop to 120p per share and the broker sells them and explains to the investor that this was necessary to “cut losses”.  7,000 shares are sold at 120p per share, resulting in £8,400 being recouped.  Once the broker takes his fee of £42, the investor is left with £8,426.47 with the residual cash included.  After just four trades, the investor has lost over £1,500 (more than 15%) of their investment. 

This is a very basic example and you might be thinking, “but what if the share price goes up?”  Have a look at any stock and you will see that the buy price is normally higher than the sell price.  So, whenever you buy a stock you immediately lose value.  Take Apple for example, I’m looking at the live prices now and the buy price is $262.85, and the sell price is $262.22.  Once you factor in commission, fees and tax you immediately lose value when you buy shares.  Brokers that are engaging in churn will not care if your stock goes up or down as either is an excuse to sell.  “Hey, your stock in Company A is up 10% and so I sold to lock in your profit!” and “Company A is trading 7% down so I sold to cut your losses.” 

The previous few paragraphs contain value for novice or naïve investors.  Trading stock is risky if you go into it with no education.  Although there are some out there that claim to make money day trading, I am sceptical of anyone who claims to make serious money this way.  The only way I think you can make money by high frequency trading is with huge sums of money where tiny changes in the stock price result in significant return. 

Index Trackers

A basic index tracker would be something like a FTSE100 tracker.  This fund would have shares in all FTSE100 companies and so the value of the fund would mirror the collective performance of the FTSE100.  There is limited trading within the fund, and this would only happen as and when a business is relegated from the FTSE100 and another business is promoted to take its place.  These are generally more passive in nature with lower fees and because the human element is removed there is no risk of losses being chased or of churn. 

Final Notes

It’s been a detailed post this week, but I enjoy discussing all things money and investment related.  If you have any suggestions for topics you would like me to cover, please leave a comment.  If you are enjoying this blog, please recommend it to a friend.  Finally, if it’s not too much trouble, please follow Now We Live on FacebookTwitter and Instagram

Thanks for reading and enjoy your weekend. 

Part 3

Weekly Update

The short version of the story is that I’m still in pain.  My ankle/foot is still hurting a lot but the tramadol is taking the edge off and leaving me pretty spaced out.  I’ve seen a consultant who thinks I could have a stress fracture or possibly something called Complex Regional Pain Syndrome (CRPS).  The consultant did go to great lengths to explain that CRPS is rare and that it is diagnosed through a process of eliminating other diagnoses first.  If it is CRPS I could be left in pain for months and as there is no known cure, the treatment is a case of pain management.  I really hope it is not CRPS.

I don’t like being trapped inside due to health problems.  Since the 5th of November I have been outside of my apartment four times.  Each time was to visit hospital.  I would love to head out and chill in a café or bar for a little while, but the pain is simply too intense.  So here I am, curled up on the sofa dictating this blog whilst watching the rain hammer down outside.  I do enjoy the sound of rain though.  Water generally produces relaxing sounds, apart from the roar of a tsunami.    

​So, here we are: Part three of Mortgage Advisor on F.I.R.E.  I am going to discuss a few things in this update.  I will have a closer look at some of the best books I have read on financial independence and investing.  I will post links to those books on Amazon and if you are interested in buying them, clicking the links embedded in this article and buying them this way will help support the running costs of this website.  I will also have a brief look at BTL mortgage affordability, and Stocks and Shares ISAs.  First things first though, I will look at my weekly financial update.

Financial Update

Premium Bonds: £8,650 (no change from last week).

Stocks and Shares ISA: £6,912.39 (up £31.19 from last week).

Credit Card Debt: £3,899.99 (down £37.24 from last week).

F**k It Fund: £850.96 (no change from last week).

Surplus Cash: £295.00 (down £5 from last week).

Total Wealth Figure: £189,208.35 (property valued at £172,500) – £138,818.82 = £50,389.53 (up £486.53 from last week).

Not a bad week overall.  Some weeks will see very little change but the week when I get paid will see more change as I move money into investments and pay larger sums off my credit card and mortgage debt.  

Book Recommendations

If you are just starting your journey of financial education, then the best book I can recommend to start with is Rich Dad, Poor Dad by Robert Kiyosaki.  There is limited practical information in this book, but it will change your mindset for the better.  It will make you think about money in a completely different way.  Most people think of money as a taboo subject.  In many households money is seen as a source of stress and some google-fu will demonstrate that financial issues are one of the main reasons couples split.  There are two aspects to this; the first is that people do not talk about money enough.  The second aspect is that people are generally not financially educated enough to talk about money in an informed way.  Rich Dad, Poor Dad will put you on the right path but it is only the start of the journey.

Another book I would thoroughly recommend to advance your journey would be Money by Rob Moore.  This book looks at the concept of money in a bit more detail.  Again, it’s a bit thin on the ground in terms of practical advice but the book will keep you thinking in the right way about money.  Rob Moore made his fortune in property and so the book is coming at you from that viewpoint.  To balance things up a little I would then suggest reading How To Own The World by Andrew Craig.  This is a fascinating book that will help explain how stocks and shares ISAs work.  It also looks in more detail at the mechanical, automatic way in which wealth can accumulate if you set up the right systems and processes.  Another book looking at this is I Will Teach You To Be Rich by Ramit Sethi, although this is focused on the US many of the lessons can be applied to the UK as well.  

​If you find books like those mentioned a chore where you feel you are being lectured to, then I would recommend The Latte Factor by David Bach and John David Mann.  I have just finished listening to the audiobook.  At my level of financial education, it was a very basic listen.  However, it approached the subject matter in an interesting way.  On the surface, The Latte Factor is a work of fiction.  However, through the events described there are several financial lessons learned.  The Richest Man in Babylon by George S. Clason uses a similar method to teach financial wisdom.  If you are interested in any of these books, please use the links in this article to purchase them from Amazon and help support the running costs of this blog and Now We Live.

BTL Mortgage Affordability and Eligibility

The eligibility criteria for the BTL mortgage are different for an owner-occupier mortgage.  When you buy a property to live in yourself, you generally need to satisfy three things; affordability, credit worthiness and the property needs to be suitable for mortgage purposes.  It does not matter if you are a first time buyer, a homemover or raising money on a property you live in and own outright.  The three pillars of mortgage eligibility are the same; you need to be able to afford the mortgage payments.  You need to have a good credit record.  The property needs to be adequate security i.e. it can’t be a wreck that is about to collapse and it needs to be in a habitable condition.  

BTL criteria is somewhat different and these criteria are generally correct across the market although some of the specifics for the criteria differ between individual lenders.  

  1. You need to own the property you live in, either outright or with a mortgage.
  2. You need to earn a minimum amount, normally £20K-£25K (although it varies lender to lender).
  3. You need a deposit of at least 25%, although some lenders accept less, the rates of interest will be much higher.  The deposit source cannot be a loan.
  4. The anticipated rent needs to exceed the mortgage payments by a certain amount.  You will hear a lot of figures thrown around regarding “stress tests” on mortgage affordability.  A bit of google-fu shows some lenders are stress testing at 5% and require the rent to be 125% of the mortgage payments at 5%.  
  5. There are rules around who you can let the property to.  Letting to a family member opens up a can of worms, for example.

Although I am looking at BTL properties being the foundation of my financial independence, I am a qualified mortgage advisor and have taken years to educate myself financially.  If you are thinking of taking on a BTL mortgage, I strongly advise you to seek advice from a qualified professional who can look at your specific circumstances and tailor advice accordingly.  I take no responsibility for your own actions. 

​Using the above criteria, if you are earning enough money and have a deposit saved, it can be quite easy to obtain a BTL.  The biggest barrier myself and my JV partner will encounter is when we get three BTL we may be considered portfolio landlords.  At this point, some lenders get a little more cautious about offering further BTL mortgages.  However, a lot could change in the year or two it will take us to obtain that many BTL mortgages.  Once you are a portfolio landlord, you generally need to approach more specialist lenders to obtain new BTL mortgages.

There are costs associated with BTL that many amateurs do not consider when buying their first rental property.  As of 14/11/2019, Stamp Duty Land Tax is payable on all BTL regardless of purchase price.  If you are buying a rental property for less than £125,000 then you pay 3%.  This is one of the reasons why many landlords accumulate properties in the £70K-£100K bracket.  There are costs to bring the property up to the safety specs needed to rent it out, as well as agent and management fees.  If you do not educate yourself first, you will almost certainly lose money on a BTL.  

​What I like about BTL is that the income is regular, and the underlying asset is stable.  Over time, property prices increase.  This is demonstrable over decades, if not centuries.  There are risks with BTL such as a tenant not paying on time or simply refusing to pay altogether.  However, there are steps you can take to mitigate this risk such as enhanced tenant screening, using guarantors or even insurance against tenants not paying rent.  Although BTL is at the foundation of my plan for F.I.R.E., there is another important part; my stocks and shares ISA.

What is a Stocks and Shares ISA?

A stocks and shares ISA, sometimes known as an investment ISA, is a tax efficient way to invest in individual stocks or investment funds.  There are many share dealing accounts out there but not all of them have ISA status.  A basic share dealing account will allow you to buy and sell shares.  Each account provider will charge fees in one way or another.  Some have a flat fee per trade, whilst others allow a certain number of free trades per month before you are charged.  In a stocks and shares ISA, these charges are still applicable.  The main advantage to a stocks and shares ISA is that you are exempt from Capital Gains Tax on any profit made.  If you are looking for long term capital growth, then you need to protect your gains within the ISA bubble.  

Within the ISA you can choose to invest in a vast range of funds or individual stocks.  There have been countless books written on how to pick funds or stocks, but the best advice I have received is to make the process as “hands-off” as possible.

There are many types of investment fund and there are several ways to categorize them.  You can look at accumulation or income funds, or actively managed funds or passively managed funds.  There is a lot of information to take in.  However, as I stated a few sentences ago, my research suggests that the key to long term growth and wealth is to make the process as passive as possible.

Before I go into further detail, it is perhaps important to first explain what a fund is.  An investment fund is where a group of people put their money into a pot.  That collective pot is then used to purchase shares in other stocks or funds.  You then see your money increase or decrease in line with the assets the fund has invested in.  This is, obviously, a very basic definition and entire books are written on the subject.  What I have found is that much of the complexity is unnecessary.  My approach is to invest in passive index trackers. 

These funds are not actively managed and as a result, have much lower fees and charges.  I invest in funds that track the FTSE 100, FTSE 250 as well as a US Equity Index tracker from Vanguard (my preferred fund manager).  Like with property, the stock market increases over time.  There are peaks and troughs and some of those troughs are major, but over time the stock market has always bounced back and it tends to outpace inflation.  

Over the last century or so, the stock market has shown average year-on-year growth of 8%-10%.  I am investing £250 per month at the moment into my stocks and shares ISA.  Assuming an 8% rate of growth, in ten years time my stocks and shares ISA could be worth £60,000.  At a rate of 10%, we would be looking at almost £70,000.   Over twenty years, at a growth rate of 8%, the fund would be worth £180,000.  If you google a compound interest calculator and play with some figures, you will see just how scary compound interest can be. 

A couple of examples:

  1. You are an eighteen-year old and want to be financially comfortable by the time you reach 50.  You have a decent job and don’t go crazy with your cash.  You invest £10 a day into a stocks and shares ISA.  After 32 years, at a rate of just 5% growth you would have over £250,000.  If the rate of growth was 10%, you would have over £750,000.
  2. You are a twenty-five year old in a good job.  You have plenty of disposable income and are just putting that money into a cash savings account.  If you were to invest £20 a day with a view to retiring at 60, assuming 5% growth you would have around £670,000 to help when you retire.  Assuming 10% growth you would have over £2,000,000. 

Compound returns are so, so powerful.

Exit Strategy

You might be thinking of my own figures “£180,000 is not a lot of money to live off.”  You’re correct.  It is not.  The point here is that the ISA is just one part of how I plan to create enough wealth to retire early.  I will have the properties generating income on a monthly basis as well as the capital growth that comes with property.  The ISA is a different animal. 
​In addition to the different funds I invest in, I also have holdings in individual stocks.  These stocks pay dividends either two or four times a year.  At present, I reinvest my dividends to increase my holding in those stocks.  However, as I get to retirement I may look at splitting the dividends so I use some of them to live off and reinvest some of them.  It is a similar principle with the investment funds.  I mentioned earlier that there are accumulation and income funds.  An accumulation fund is concerned with accumulating more value, which means gains in the fund are thrown back into the fund to increase the overall value.  Income funds take the income generated by the fund and pay it out as dividends to those who own shares of the fund.  Most of the major funds will allow you to switch from accumulation to income, so that when you are ready to live off your investments you move from the accumulation phase to the income phase.  There is a part of this puzzle I have not yet discussed, which is the concept of Safe Withdrawal Rates.  I will cover this in next week’s blog.  For now, thanks for reading.