Am I an outlier or could most people do it?

I don’t think there would be much argument that millennials have it pretty tough financially with their plight now starting to make it into the mainstream media (FT link or search “Why millennials go on holiday instead of saving for a pension”).  After all:

• They’re graduating with big chunks of student debt that their grey haired work colleagues didn't have to contend with, while their even greyer haired fellow countryman are being protected with triple lock state pensions;
• They’re unlikely to receive anything better than a defined contribution pension with no hope of a defined pension; and
• They’re graduating into a housing crisis where houses are today priced in such a way that ownership, particularly in the South East, is almost beyond reach.

While this is going on as a Generation X’er I'm starting to get comments that my current personal financial approach has become a little extreme.  To me it doesn't feel like it but I'm also conscious of the boiled frog analogy.

So with both of these in mind I thought today I’d run a simulation to see if a millennial graduating today, who didn't want to be as extreme as I am, but also didn't want to roll over and be a victim could still FIRE (financial independence, retired early)?  So a Saving Hard'ish, Investing Wisely, Retire Early simulation.  In short the uncomfortable maths suggests that the answer is yes...

Click to enlarge, A millenials journey to financial independence

Let’s look at the story in detail.

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.

My Spending

Saving Hard has thus far been one of the biggest contributors to my reasonably rapid FIRE (financially independent retired early) Number progress.  For me this has never been about simply spending the least amount possible but instead always about maximising the answer to the formula Earnings – Taxes – Spending.  This results in a twofold approach:

• Living Well Below Your Means (LWBYM) where that spending has no impact on Earnings; and
• Being prepared to spend where it means Earnings – Taxes – Spending are greater than £0.

With this in mind I suspect my spending profile will look quite strange when compared to many, but hey we’re all different and that’s what makes the world an interesting place.

In July 2015 I spent £1,926 (an annualised £23,112) and 2015 Year to Date I've averaged £2,068 per month (£24,816 annualised).  This covers all family spending, whether for fun or just too live, plus any personal spending that I desire.  The only thing excluded is my better half’s small personal spending.  Given this is hopefully my final full year before FIRE I want to track my full 2015 average spending as well as monthly for a couple reasons:

• It gives me a floor of spending at which the family are happy with the lifestyle that we are living.  This will help tell me when I’m FI (financial independent), which will be before FIRE’d.  It will also help me understand how much overhead my 2.5% wealth withdrawal rate, at the start of FIRE, combined with my £1,000,000, actually provides me with.
• We are still torn between early retirement in The Mediterranean vs Old Blighty and this will also help us understand our average spending profile when in different countries.

Click to enlarge, Retirement Investing Today July 2015 and Average 2015 Spending

Now the detail:

Increase Earnings to Accelerate Progress to Financial Independence

UK pay or earnings seems to have reached the main stream media again.  By my calculations Average Whole Economy Annual Earnings are increasing at a rate of 1.7% with inflation over the same period at 2.0%.  So on the whole the average punter’s purchasing power continues to be eroded.  To be honest I can’t say I'm surprised and think this is going to continue for a long time yet.  As the world continues to globalise then the difference between poorer salaried and richer salaried countries must close.

The Private Sector is fairing a little better than average and has kept pace with inflation having risen by 2.1%.  Austerity does look to be biting the public sector though with increases of 0.8% which is well below inflation.

The chart below shows the wider real adjusted for inflation UK earnings story.  The summary is pretty simple – real UK earnings for both the public and private sectors are still well below those of 2007 to 2009.  Though is that a sustainable uptick I can start to see beginning to occur before me?  Given what I’ve said above I’m not convinced.

Click to enlarge

For anyone seeking Early Financial Independence, giving the option of Early Retirement, finding methods to increase earnings is extremely important.  Importantly this does not have to mean increasing your day job earnings but instead can involve a new business, a second job, a side hustle, even selling stuff you no longer need now that you’ve opted out of consumerism so think creatively. So why is it important?  I believe there are 3 elements to reaching the Financial Independence – generating cash savings, investing those savings to gain a return and then understanding how much wealth you need to accrue and how to manage it before calling it a day.

Earn More by "Asking for More"

So where have I been I hear many of you asking?  Let me start from the beginning...

Regulars will know that my strategy is to retire as soon as possible.  To be more specific I'm actually still on the fence as to whether I will actually Retire Early, leaving paid employment altogether, or only go as far as Financial Independence, leaving the high stress day job and side hustling some pocket money doing something I love.  At current run rate I’ll be presented with the FIRE (Financial Independence and Early Retirement) option before my 45th birthday which will see retirement in about 10 years from when I woke up, started to do my own research and settled on Early Retirement way back in 2007.

To achieve this I'm of course living the motto of this site - Save Hard, Invest Wisely to Retire Early.  With data from 2008 my first chart shows that while both Saving Hard and Investing Wisely are both having a big impact on my annual wealth growth it’s actually Saving Hard that seems to have its nose in front even after accounting for the Miracle of Compound Interest.  Saving Hard can be achieved by Earning More and/or Spending Less and given its contribution to my financial plans is something I am unrelenting in trying to improve.

Click to enlarge 

Using a Credit Card to Save Hard (+ UK Average Weekly Earnings)

The Office for National Statistics reports that the Average (Gross, before tax) Weekly Earnings of those that choose to work in this great country of ours is rising by 0.6% per annum.  David Cameron might even spin this into a demonstration that Strivers are starting to get ahead but we have plenty of more work to do if we are to lock in the recovery.  Of course nothing is further from the truth as while that increase has taken place our “strivers” purchasing power has been reduced by 3.1% through inflation (RPI).  This means that on the average all those “strivers” out there have actually taken a gross pay cut of 2.5%.

This is not a new phenomenon.  Real (post inflation)Gross Earnings have been falling for a number of years now.  This can be seen in the chart below which takes the average weekly earnings, multiplies these earnings by 52 weeks to get an annual figure and then corrects for currency devaluation caused by inflation.

Click to enlarge

If you’re a “striver” you’re probably thinking this all looks a little bad but it’s actually worse than this.  We all know our politicians continually like to make promises they (we?) can’t afford and love to waste our money on pet follies but don’t like to tell us what that all really costs.  So to hide some of the cost they use that inflation to their advantage by combining it with our Progressive Tax system and Fiscal Drag to tax us more without having to even tell us.

Let’s demonstrate with an example.  Our average “striver” was earning a gross £471 per week and was then given that 0.6% annual increase taking his earnings to £474 per week.  Using a PAYE Tax Calculator we can see our “striver” has seen his net (after tax and national insurance) earnings rise from £374.47 to £376.51.  So as far as the “striver” is concerned it’s not an increase of 0.6% at all but actually 0.5%.  After correcting for inflation the pay cut is then actually 2.6%.

Valuing the Property of England and Wales at County Level

When we, or indeed many websites, look at what is generally called UK House Prices, House Value or House Affordability it tends to be at a high level covering either the whole United Kingdom or England and Wales.  This is fine if you are looking for macro trends but doesn't give us much of a view at what is happening locally.

Given that we are hearing a lot about the North to South divide or even the London to rest of the UK divide let’s therefore deviate from that traditional macro view and get a bit more local by calculating House Value down to a County level.

To Value the market we are going to stick with our previous definition which is a simple Price to Earnings Ratio (P/E).  Regular readers will know that for Price we normally use Nominal House Prices as published by the Nationwide and for Earnings the Office for National Statistics KAB9 Nominal Earnings which are both published monthly.  Unfortunately these aren't available down to County level and so we need to introduce two new datasets.

For House Prices we will use the Land Registry House Price Index.  As a reminder this index uses repeat sales regression on houses which have been sold more than once to calculate an increase or decrease.  As it analyses each house and compares the latest buying price to the previous buying price it is by definition mix adjusting its data also.  This is then combined with a Geometric Mean price which was taken in April 2000 to calculate the index.  It is seasonally adjusted and covers properties from England and Wales.  It covers buyers using both cash and mortgages.  We are using the latest published data which comes from March 2013.  The analysis is arranged according to the Regions and County’s defined by the Land Registry and is shown in the Table below.  Unlike the mainstream media we are going to call high house prices bad (the County with the highest house price is London at £374,568 and is shown in dark red) and low house prices good (the County with the lowest house price is Merthyr Tydfil at £66,511 and is dark green) with all other prices shaded between red and green depending on house price.

For Earnings we are using the Annual Survey of Hours and Earnings (ASHE) which provides information about the levels, distribution and make-up of earnings and hours paid for employees within industries, occupations and regions in the UK.  Unfortunately, as the name implies, it is only published annually and so we will use the 2012 dataset.  To ensure that our Earners and Houses are located within the same County we’ll use the Earnings by Place of Residence by Local Authority.  This dataset presents weekly Earnings at both median (the middle point from each distribution) and mean (the average) levels which we have arranged into each Land Registry Region and County in the Table below.  We then multiply the data by 52 weeks to convert it to an annual salary.  We are calling low earnings bad (the lowest average earnings are £17,794 in Blackpool and are dark red) and high earnings good (the highest average earnings are £40,466 in Windsor and Maidenhead and are dark green) with all other earnings shaded between red and green depending on earnings.

Financial Repression and UK Average Weekly Earnings – May 2013 Update

We live in interesting times.  The government and mainstream media would have us believe that these are times of austerity.  Of course we live in no such thing.  The miniscule efforts made by the government thus far has already resulted in much gnashing of teeth and yet for the 2012-13 financial year the UK government still borrowed £120.6 billion that it didn’t have.  Every UK based man, woman and child just added a further £1,925 onto the tab.

So if we don’t live in times of austerity what are we living in?  I think I’ve managed to find the answer.  It’s officially called Financial Repression.  Please do click on the Wikipedia link and let me know if you agree?  It looks to be a method that allows the masses to be a slowly boiled frog as most won’t notice what is going on due to a money illusion.  What makes me think this is the route chosen by our politically masters?

We all know that the Bank of England has been ignoring the 2% inflation target for a long time now but the new Remit for the Bank of England Monetary Policy Committee dated 20 March 2013 now explicitly sanctions it with the statement that “The remit recognises that inflation will on occasion depart from its target as a result of shocks and disturbances. Attempts to keep inflation at the target in these circumstances may cause undesirable volatility in output. This reflects the short-term trade-offs that must be made between inflation and output variability in setting monetary policy. It therefore allows for a balanced approach to the objectives set out in the remit, while retaining the primacy of price stability and the inflation target.”  This gives new Governor Carney official free reign to keep the Official Bank Rate at near zero while continuing to Quantitative Ease (QE) like there is no tomorrow.  The aim here seems to be to keep inflation running without allowing it to run away.  It will be interesting to see if they can walk that tight rope.

So we now have the inflation.  Next you need to control and drive interest rates, such as on government debt, to a value that is less than the inflation you are creating.  QE is and will come to the rescue here by creating a major buyer, in this case the Bank of England.  Basel III then creates another buyer, in this case Banks, by requiring Tier 1 capital levels to be increased from 4% to 6%.  Banks can count government debt as Tier 1 capital creating an additional domestic market for government gilts.  Lots of buyers means rising prices and falling yields.  This has also created a captive domestic market for government debt which Financial Repression requires.

I feel we now have most of the Financial Repression boxes ticked.  Interest rates are controlled, the government owns plenty of banks, reserve requirements are rising and we have the domestic market for government debt.  The one that is missing is capital controls but our Cyprus friends have shown us how easy that is to implement when the time is right.

UK Average Weekly Earnings – February 2013 Update

Over the past couple of weeks the mainstream media seem to finally have discovered that in real inflation adjusted terms average earnings are falling and that this is putting a squeeze on household finances.  They’re a little behind the curve given we’ve been talking about it here since April 2010 with the last regular update here.  This doesn’t really surprise me given that the Press today rarely published any investigative journalism instead choosing to publish whatever press release a political party or corporation is trying to push that day.  I guess it keeps running costs down but I digress...  Let’s not follow the same path and instead run some analysis to understand what is really going on.

Let’s firstly look at the nominal data. The Office for National Statistics reports that the Average Weekly Earnings for:

• The Whole Economy including bonuses and allowing for seasonal adjustment is £472.  This is stagnant against last month and up £6 (1.3%) year on year.
• The Private Sector earns less than the average Whole Economy at £468 per week.  Private Sector Earnings have also gone nowhere since last month and are also up £6 (1.3%) year on year.
• The Public Sector earns more than the Private Sector at £489 per week and is also doing better when it comes to securing pay rises.  Month on month we see an increase of £1 (0.2%) and year on year an increase of £10 (2.1%).  Given that we are supposedly living in times of austerity, albeit a version where the government spends more than they did in the prior year, I’m amazed that the Public Sector is seeing year on year increases that are more than 50% higher than that of the Private Sector.

Unfortunately, while we were seeing those nominal annual increases of 1.3%, 1.3% and 2.1% respectively inflation according to the Retail Prices Index (RPI) was 3.1% during the same period.  This means that whether you are working in the Private or Public Sector it is likely you are taking a real terms pay cut. I know I am.  At my company’s last pay review I received a grand total increase of £0.  Meanwhile I know that essential items that I buy are increasing in price.  I’m continuing to learn frugal habits but I’m also sure that prices rising combined with stagnant earnings is putting pressure on my savings rate which at last check was only 55% of gross earnings against a target of 60%.  I’m working hard to find spending savings to get that back on track but given I’ve been at it since 2007 there is not a lot more to find. 

The long term erosion of spending power can be best seen with a couple of charts.  The first chart takes the RPI and Average Weekly Earnings and then converts them into an Index that starts in 2000 with a value of 100.  Whenever the gap between Earnings and the RPI is increasing earnings power is increasing.  The chart shows this stopped happening around 2008 meaning we have been seeing spending power erosion since then.  Today the spending power of the whole economy is back to levels last seen in May 2001.

Click to enlarge

UK Average Weekly Earnings – November 2012 Update

Are you one of the 29.58 million people over the age of 16 working in the United Kingdom?  Do you feel like it’s getting harder to save or survive to payday depending on your goals in life?  Worry no longer because the answer is that it is.  If you are an average earner your salary is now back to levels last seen in September 2001.  As always on Retirement Investing Today let’s look at the data.

The Office for National Statistics reports that the Average Weekly Earnings for the Whole Economy including bonuses and allowing for seasonal adjustment is now £471.  This is nominally £2 less per week than last month and is the nominally similar to that of April 2012.  Annualised this is £24,492.  Breaking this figure down between the Public Sector and the Private Sector reveals the Public Sector to be still coming out on top by some 4%.  The Average Public Sector employee earns £488 per week (up 2.1% year on year) compared to that of the Private Sector which funds those earnings (of course in conjunction with a lot of government borrowing) at £467 (up 1.7% year on year).

UK Average Weekly Earnings – June 2012 Update

The Office for National Statistics reports that the Average Weekly Earnings for the Whole Economy including bonuses and allowing for seasonal adjustment is now £467.  This is £1 more than the previous month and annualised is £24,284.  Breaking this figure down between the Public Sector and the Private Sector reveals the Public Sector to be still coming out on top by some 3%.  The Average Public Sector employee earns £479 per week compared to that of the Private Sector which funds those earnings (of course in conjunction with a lot of government borrowing) at £465.

Where is the summer rush – UK property market – July 2010 Update

It’s at this time of year that I thought it was a tradition for the British people to head out to the Real Estate Agents and start bidding up the prices of already over priced housing. This summer though it’s starting to look like that might not happen. Even the new coalition government don’t seem keen to ramp up property and property prices. Of course they are acknowledging that the country no longer has any money however the previous government seemed to always find some way to ramp prices and keep the plates balanced and spinning. This month has seen both prices and mortgage approvals turn down. Who knows if this continues for a couple of years maybe we might even get to the point where instead of the government forcing builders to build “affordable housing” (or as I have eloquently seen these properties referred to elsewhere, slave boxes) instead maybe we might just get housing that is affordable. What a novel idea.

The Real Pay Cuts Begin – Average UK Earnings – July 2010 Update

My first chart today shows that as of April 2010 the non seasonally adjusted average earnings index (LNMM) year on year rising by 0.5% and the seasonally adjusted average earnings index (LNMQ) rising by 1.9%. This all sounds great until you look at the inflation figure also shown on the chart which in April 2010 was year on year increasing at 5.3% and today is still increasing at 5.0%.

Gold Priced in British Pounds (GBP) – May 2010 Update

In absolute terms gold continues to climb in value reaching a new high of £839.93 (when compared with my monthly historic dataset which goes back to 1979) since gold started its upward climb in 2005. In the last month gold is up £90.32 an ounce however in real (inflation adjusted) terms as shown in today’s chart gold it is up ‘only’ £83.32 per ounce. In real terms that’s an increase of 11%.

Average UK Earnings – May 2010 Update

As we know inflation according to the retail prices index (RPI) year on year is currently running at 5.3%. This is the highest it has been since July 1991. Looking at historic RPI inflation data shows the average year on year RPI annual change since 1991 at 2.9% and the trendline since 1991 shows inflation year on year trending downwards. My chart today shows these RPI figures in blue.

Average UK Earnings – April 2010 Update

As we know inflation according to the retail prices index (RPI) year on year is currently running at 4.4%. Looking at historic RPI inflation data shows the average year on year RPI annual change since 1991 at 2.8% and the trendline since 1991 shows inflation year on year trending downwards. My chart today shows these RPI figures in blue.