Review of All About The Money podcast article.

I just had the displeasure of reading one of the most childish articles on personal finance I have ever read. It’s an article I wrote when I was aged 23.

https://www.bbc.co.uk/programmes/articles/4Gsq4lf46lWz2tB74LH9KQq/why-im-sick-of-being-told-to-save-money

OK, so I didn’t write it, but I probably had the same attitude to money as this young lady back then, and I know what happens when that attitude continues on as you get older. You get in huge debt believing that you will never get old and have plenty of time to make your first million.

As you are reading my site, and I’m sure you are interested in saving money, you are probably left baffled how such an article was published on a mainstream media site arguing against what is logical and reasonable.

On one hand, she is arguing that she has not saved a penny, but on the other has given no reasonable details of actually trying. The one feeble example given was not going on holiday for a year (or an academic year which is apparently 9 months). She attempts to compare a bus holiday to Butlins to going to Amsterdam or Lyon.

While describing her so called fruggal holiday to Amsterdam, she says she got 2 nights for £99. Yes well done great stuff. What about the flights, spending money and eating out (and well its Amsterdam right)? How can spending money to go on holiday be saving money compared to not going and not spending anything?

If you are in the habit of blowing £100 on a night out and eating out several times a week (she mentions running a failed nightclub business) you are not going to save much even if you go to Butlins. I know, I’ve done it (eating out I mean… I’ve never been to Butlins).

I find it particularly frustrating that she justifies having an overdraft because everyone has one. How can having an overdraft ever be justified as ok? I had an overdraft for many years and it NEVER felt fine. I hated paying the fee every month and being in debt to the bank. Being in debt NEVER felt fine to me so I struggle to see how anyone could honestly say they are fine with it.

I think this article is wholly irresponsible and should not be on such a site such as the BBC without a counter viewpoint. I do wonder if the BBC trying to condition young people to spend all their money by convincing them its ok to have zero savings and fall into debt?

I have had many times when I’ve had zero savings and been struggling to pay rent due to blowing all my money when I was in my early twenties. It never felt good! That’s why people say have some savings.

If you have read any of my other posts, you will know I had massive debt (£40k+) and it felt awful. Only once I grew up, stopped spending, and lost my FOMO did I start to feel secure about finances.

Her punchline is: “If I had listened to my bank manager my whole life, I’d be at zero balance in love, life and gallows humour”.

I find this a bizarre statement that tries to justify an immature attitude to life and money. Blame circumstances rather than yourself at your peril. I would be surprised if she has ever met a bank manager. 

The biggest faux pas in this article is her attempt to compare saving money to domestic abuse which I cannot fathom the jump in logic there. Surely saving your own money will mean you are less likely to fall into domestic abuse as you will not be dependant on others and means you can leave the situation you are in.

Establishing frugal habits early on in life such as saving can only snowball later as you gain more income and can save more compared to your expenses. If you don’t get used to a fake Instagram luxury life that you can’t afford you won’t ever miss it. I wish I’d known about FIRE 10 years ago because if I had, I’d be retired by now!

Maybe I’m privileged right now but I worked hard to get where I am – hell i’ve documented part of it on this blog. It’s taken years and years to develop a career that is paid well and I’m proud of what I’ve achieved. I can tell you that since I adopted a FIRE mindset my life has improved vastly. My balance in love, life and gallows humour is infinitely higher than when I was in debt up to my eyeballs and living paycheck to paycheck.

Pension Pondering

 

I had some time on the weekend to consider the best approach to my pension contributions. I found myself going down a rabbit warren of spreadsheets and tax legislation and thought it might be an idea to share what I found.

What are they?

Pension is a term used to describe money which is protected from tax and is intended for retirement. Currently, you may only access your pension funds once you reach 55 years old. Other features include:

  • Mandatory enrolment for all employees who are eligible.
  • Tax-free contributions are limited to £40,000 per year.
  • Max limit of £1,030,000 total lifetime contributions per person.

For more info on pensions in the U.K.; click here.

ISAs are slightly different investment vehicles which are protected from tax but limited to contributions of £20,000 per year. You will not pay tax on any gains on money in the ISA. You may have cash, help to buy or stocks and shares ISAs.  Some more info on ISAs can be found here.

My situation

I have roughly £100k in pension already. So I’m not starting from scratch. After reading a few FIRE blogs that recommend maxing out the pension contributions I built a spreadsheet which allowed me to play around with figures and % of my salary contributions.

Working on the basis that to get the maximum tax efficiency, I should put in all my income above £50,000 which is the level where I pay 40% tax. I would contribute £2533 per month and my employer would contribute £333 per month and it means I could stash away quite a lot very quickly.

Great I thought, let us do it. Then I realised two big problems.

  1. I can’t touch this money until I am 55 (likely to be 57 by the time I get there).
  2. There is a limit of £1030,000 in the pension overall across all funds.

Combined it means I have 21 years until I can touch that money again. It also has 21 years of compound interest growth meaning if I keep contributing to it at that rate, it will vastly exceed £1,030,000, attracting taxes of 45% on withdrawal by the time I get to 57. Not only was it surprising to see how achievable getting to £1m was by age 57, but it was also even more galling that I am having to look at ramping back my pension contributions to prevent investing in a tax-inefficient way.

I worked back to find out the point that if I maxed out my contribution when I should STOP investing. It turned out, based on a 7% annual increase, I would need to invest until I was 41 and then stop completely. The amount left there would grow to £1m by the time I reach 57 and I would not lose money to tax. Although as I will be working and likely contributing to a pension mandatorily, I would have to opt-out and not take up what is effectively free money. It would be foolish to forego that money at a later date. Yes, I understand that if I achieve FI, I won’t need to work but let us not kid myself here, things change and I will be doing something.

Alternatively, I worked out the monthly contribution that I could make until I hit 55 and working back I would pay £1200 pcm to reach the limit by 55. What I should probably do is have a target age for FI, work out the time and the amount I need to contribute to hit the £1m lifetime limit. At this point, I don’t know what age that would be and I am going to assume that I probably won’t really give up working simply because I am FI.

 

I have seen various FIRE bloggers talk about bridging to my pension. Bridging is where you have a pension pot you cannot access until the legal age but use up other funds to get you to the point you can use your pension. I am not convinced by this approach mainly because some of their ideas of achieving this would actually reduce financial independence (remortgage of house and drain resources until you reach pension age). All the time your pension is potentially being hammered by the punitive effect of the 45% tax above the lifetime allowance.

The other issue I have is that on a spreadsheet maxing out my savings like that that is fine, but things like life, family, wanting to buy a bigger home at some point, and actually achieving FI at a young age require money to be available to me at some point before I am 57. Doing these sums has had the unexpected effect of focusing my attention on future life goals and how to achieve them.

I want to be FI but I know that things in life change and what will work now may not work later on in life.

To conclude, for now I am going to contribute 15% of my salary to the pension and in addition, my employer will contribute 5%. I will also put £1666 pcm into my S+S ISA. Any extra (which I think is potentially about £1000pcm) will be saved or invested outside a tax-free umbrella and could make a contribution to a deposit for my next home. I believe that having money outside my pension and maxing out my ISA allowance I will put myself on a better path to FI at an earlier age. It will mean I have a boost from my pension later in life to really live it up! I may also investigate paying off my mortgage, but, as previously discussed, I believe this may not be the most efficient use considering the low-interest rate I am paying presently.
I would welcome any further discussion or advice!

October update

I haven’t done a net worth update post for a while, so now seems like a good time to get back into the habit. I have, however, been tracking my net worth in the background and can say that it has been quite motivating to see my progress.

Screenshot 2019-10-05 at 12.19.18

From when I started tracking this a year ago, I have seen a 20% increase in my net worth, which I think is fantastic. It is almost all from paying off debt and increasing savings.

I have three pensions which have increased by about £9k in the past year. I am looking to consolidate these into a SIPP so I may control how they are invested and cut the fee I am being charged. I am waiting until I finish at my current job (in one week!) so I can take them all at once.

I have been focused on paying down debts and building up my buffer. I now have 3 months ‘buffer’ in place which I built up much quicker than expected (thanks to selling my car), I can start investing as it is now safe to do so. I view this as a huge achievement and very comforting to know I could stop working for 3 months and have no worries.

I should note that I do include my equity in my flat into this calculation and that stands around £200k. It is a net worth calculation rather than a FIRE fund calculation.

Screenshot 2019-10-05 at 12.29.44.png

I am going to look at different ways to calculate this and track so any suggestions would be welcome. I didn’t bother tracking it much as I have been so focused on debt paydown and savings that it did not matter much until now.

Holidays and fun

I have just returned from what seems like a month of holidays. I went to San Francisco to visit my good friend and his girlfriend, with my girlfriend. We stayed in their lovely flat in amongst the fog in Richmond, SF, near the Pacific ocean.

They then came to the UK and stayed at our place for a few days before we all went to Munich for Oktoberfest.

This is the first big holiday I have done while on my FIRE journey. It was always going to be expensive but I think it was totally worth every penny.

Having spent several years living overseas, I am no stranger to travelling. However, in the past, it may have been done by loading up a credit card and forgetting about it. I was also ‘great’ at booking things last minute and paying a premium for it.

This time was different…

What did I do to reduce the costs of this holiday? Firstly, planning it many months in advance. We first talked about going in January. Planning so far in advance is not something I am comfortable with, but I did it this time. Having so much time to look forward meant I had time to buy things like flights early and mentally prepare to go on holiday.

The timing was dictated by my friend’s birthday, and also Oktoberfest. so not much room to wriggle. However, it meant that the dates were fixed early and we knew what we had to do. It also happened to be just after the summer peak, so I think that helped with the pricing.

Flights

I bought the flights for San Francisco about 3 months before I went. I have found that often this is the optimal time to book as airlines know people like to book early or last minute. This sweet spot meant I got flights for £400 return from London to San Francisco. If I ditched the hold luggage and had a stopover, it could have been £300 return, but it didn’t make sense to waste time doing that.

Flying to Oktoberfest was a different matter. London to Munich at this time is astronomically expensive. To get around this, I flew to a different city and booked a high-speed train into Munich. It saved about £200 each.

sf

Accommodation

San Francisco is possibly one of the most expensive cities for accommodation in the world. It had the highest rents (double London’s) and the hotels are not cheap. We were able to save a fortune by staying on an air bed in my friend’s home. It was a great way to do it and meant we got to spend more time with them.

Oktoberfest again required a different approach. I don’t have a friend I can stay with in Munich. However, I was acutely aware that accommodation is vastly overpriced around Oktoberfest. I booked a hotel in January and paid upfront to secure the best price. It was also further from the festival, with my plan being to get the metro or taxi’s. Our friends stayed in a grotty hostel near the festival for 235 EUR/night, where we paid 150 EUR/night for an actual hotel room. The cab home from the fest was 25 EUR so a substantial saving! It had the added benefit that it was in a quiet suburb away from the busy areas, something I have come to appreciate at my age.

Spending

To be honest, in both scenarios, I made little effort to save money while on holiday. I wanted to eat what I wanted, and drink what I liked and go where I felt. It was all good. The best thing was I knew all the money I was spending was not on credit. I used a Monzo card to withdraw currency and pay for items which saved on bank charges.

I learned that planning in advance, spreading the cost of the holiday over the year, and being reasonably frugal can lead to big savings with little impact on enjoyment. I realise this is not rocket science or new to anyone, but thought I’d share my experience.

oktoberfest