Victims

In my travels I regularly come across 2 types of people.  The first are those that will set themselves a stiff challenge and then go for it.  The second are those that won’t because it’s not possible for some reason or another.  This second group I call the VICTIMS and I have little time for them.  Note here I am not talking about people who look at a goal, look at what it will take to achieve it and decide it’s not for them.  That is a conscious decision and admirable.

This week I saw the victim card being played on a couple of forums as a reason why the Save Hard, Invest Wisely and Retire Early strategy that we follow here wasn't possible:

“Forgive me if I am wrong, but isn't your entire savings strategy based on earning a top 1% income? Not possible for the other 99%.”

“Retirement Investing Today is probably the one to read if you're a captain of industry, he's very 'on' when it comes to reducing tax, expenses and coping in a high cost of living area. That said, he does have a fairly chunky salary from memory (£90k?) which makes everything flow a bit more smoothly.”

These comments frustrated me a little so what follows is a bit of rant.  If you’re not into rants I’d encourage you to move on to your next piece of regular Saturday reader.

So somebody believes that ‘my entire savings strategy is based on earning a top 1% income’.  The implication then being that because 99% don’t, the strategy can’t work for them, so they’re not going to try it.  A victim if ever I saw one.  Let’s clear this one up shall we.  The top level objective that I set myself way back in 2007 was simply that I wanted to Save Hard which would be achieved by both Earning More and Spending Less.  In the interests of full disclosure if I look back at my earnings when I started this journey and compare to some national statistics I can see that I was in the top 7% of earners in the country.  I therefore freely admit that I wasn't poorly rewarded but I was also a long long way from being in the top 1% of earners as I am today.  My strategy has allowed me to become an earnings 1%’er rather than my strategy becoming possible because I am a 1%’er.  A significant difference.

Orders of Magnitude

When it comes to spending I sweat the small stuff.

I’ll never buy a National Lottery ticket, even the £2 minimum, as I know that the probabilities say that I’m more likely to win significantly more by investing it rather than buying the ticket.  Even if there is a ‘£20.9M Rollover plus a guaranteed raffle millionaire’ tonight.  During the FIRE (financially independent retired early) accrual phase investing that £2 a week turns into nigh on £1,300 after 10 years (assuming a real 4% annualised return).  During the drawdown phase not feeding a weekly lottery habit, even a £2 a week one, means one needs £4,160 less (assuming a 2.5% withdrawal rate) wealth before FIRE becomes a possibility.  I know how hard I have to work to save £4,160.

Unlike many of my colleagues I also don’t pay to participate in a daily morning caffeine fix.  I was travelling on the company dime recently and purchased a coffee at one of these new fangled remote Costa stations.  Cost £2.10.  To feed a workday daily habit like that one is going to be spending £568 per year.  Take the free work supplied coffee; invest the money saved and all of a sudden you’re £6,800 closer to FIRE after 10 years.  Keep the habit up in FIRE and you’d need additional wealth of £21,840 (less a small amount of wealth to make one at home) before calling oneself FIRE’d.  I value earlier FIRE rather than an expensive cup of daily brown but I of course appreciate others might be different as they value it where I don’t.  Having different values is after all one thing that makes the world interesting after all.

I also sweat the small stuff when it comes to investing expenses.

Navigating the Never Ending Changes to Pensions

In recent years it feels like every Spending Review, Autumn Statement and Budget presented by our wonderful government includes pensions tinkering which is usually detrimental to what I and many others are trying to achieve.  I'm now at the point where prudence means I have to run some simulations to ensure I don’t fall foul of some new rule or other.  This has forced me to do some research and so in the spirit of sharing here goes.

Wealth warning.  I am not a pensions expert nor a financial planner.  I've also made investment mistakes in the past and will certainly make them in the future.  I also don’t know every pension rule and regulation out there.  I dread to think how long it would take someone to learn all of those.  Therefore this is not a recommendation of any type but instead hopefully provides some terms and tit bits that you the reader may not be aware of which will then encourage you to do some research like I have been.

At their heart defined contribution pensions are nothing more than a tax deferral scheme.  The deal is that you agree to lock up your money for the future and agree to follow the (continually changing) terms and conditions.  In exchange the government (currently) allows you to not pay tax on it now but rather when you unlock it in the future.  I agree to participate as for me it has the potential to be quite beneficial to wealth building as my current effective tax rate is now 47% (45% additional rate + 2% national insurance) and in the future that tax rate could be:

• 0% and maybe a bit of 20% if we stay in the UK.  On top of that current rules will allow 25% to be taken as a tax free lump sum (TFLS);
• 0%, 15% and 25% if we head to Malta; or
• 0%, 19.5% and 21.5% if we head to Spain

That is a big enough incentive for me to use pensions as part of my overall investment strategy.  To maximise the benefit I want to get as much into my pension wrapper as possible while ensuring I keep enough outside of the wrapper to cover all costs and government tinkering between early retirement and my private pension access age which is currently age 55.  I think the first is an easier thing to calculate than the second given current government form.

2015, Saved by Saving

Looking back on 2015 and I have to conclude that it was a good year for building wealth at a rapid rate.  All in I was able to increase net worth by 14% or £105,000!  That said in terms of the different ways I am using to build wealth it was unfortunately also a very binary year which is demonstrated nicely by the chart below:

Click to enlarge, RIT Year on Year Change in Wealth (Saving Hard + Investing Wisely)

Let’s look at the year in a bit more detail.  Before passing judgment on anything below it is also worth noting that the below represents everything that I have financially.  There is no Defined Benefit Pension waiting in the wings, no future inheritance and certainly no bank of mum and dad waiting in case it all goes pete tong.

As always we’ll focus on and score the three areas that I believe are essential to get over the Financial Independence line - Save Hard, Invest Wisely and Retire Early.

SAVE HARD

I define Saving Hard a little differently than most personal finance bloggers.  For me it’s Gross Earnings (ie before taxes, a crucial difference) plus Employee Pension Contributions minus Spending minus Taxes.  Earn more and one is winning.  Spend less or pay less taxes and you’re also winning.  Savings Rate is then Saving Hard divided by Gross Earnings plus Employee Pension Contributions.  To make it a little more conservative Taxes include any taxes on investments but Earnings include no investment returns.  This encourages me to continually look for the most tax efficient investment methods.

2015 was a brilliant year for increasing earnings thanks to a healthy bonus early in the year along with a good salary increase.  In total earnings were up 54%!  Of course this doesn’t come for free with my company taking a very large pound of flesh in return.  I do not expect and am not planning on something similar in 2016 particularly as the year starts with a dire bonus.  As far as building wealth goes it’s also not quite as good as it sounds as HMRC now takes the lion’s share however that said I am also certainly not complaining.

I’m now 8 and a bit years into my FIRE (financially independent retired early) journey and I can smell victory.  I think this is now further helping me to live well below my means in addition to the spending method I developed a long time ago.

An Interesting Week

Source: wikipedia

Rather than a particular focus this week my brain has been a little all over the place.  Maybe it’s the after effects of too much Christmas and New Year cheer...  What it means though is that instead of a detailed focused post today what you get is a smattering of random thoughts.  If that’s not your thing then you might want to move onto your next piece of Saturday reading.

Stock Market Fun

The big boys and girls seem to have come back from their Christmas vacations and (started to?) put the markets back in their place.  On the week:

• China’s Shanghai Composite Index is down 10.0%;
• The US’s S&P500 is down 6.0%;
• Japan’s Nikkei 225 is down 7.0%;
• Our FTSE100 is down 5.3%; and
• Our FTSE250 is down 4.0%

It’s only a week of market action but I thought it might be interesting to compare that action to a diversified portfolio that has different asset classes across multiple countries.  I hope I have one of those so comparing to my portfolio I’m down 2.3% on the week.  I’m not yet at FIRE but even now in pounds, shillings and pence that is a fall of £19,320 which is more than a year’s worth of post FIRE post home purchase living expenses.

London Housing

It’s all too rare that The Investor over at the excellent Monevator has a good rant but there was some good value this week with the post they don’t tax free time.  Like The Investor I've watched the London property market go insane so this comment

“But with London prices having moved from extreme to insane to “oh, so this is what my grandmother meant when she said flinched at 50p for a bag of chips that used to cost a ha’penny”...”

was particularly amusing.  Now every year I try and assess the house value of all the counties ofEngland and Wales so I already knew it was insane and really no longer a place for anyone who isn't an oligarch or money launderer.  Hell even the bankers can’t afford it any more.  In light of this throwing this chart together this week did make me smile:

Click to enlarge, London first time buyer gross house price to earnings ratios

Does this make my first picture today relevant?