EU vote

The longer this "leaving the EU thing" goes on for and the more events that transpire, the less likely I think is to happen in the way most people think, ie, someone triggers article 50 and two years later, off we go.

I don't go in for conspiracy theories, but the way the Tory leadership election and Labour coup have progressed you'd begin to wonder. Here is my guess on what happens next, just for fun!

- Theresa May (TM) becomes PM
- XYZ becomes Labour leader, who knows / cares at this stage, they're happily imploding by themselves.
- TM has no mandate but starts "tough" negotiations with EU.
- Some time passes
- TM gets "best" deal she can from EU, which will be better than the one Cameron got. It won't realise the free having and eating of cake of full access to single market whilst having total control over freedom of movement of people. The UK will still pay some millions of pounds into EU budget every month still.
- TM says it's a good deal, it isn't full EU departure but she feels the mood of the public has changed since June 2016. She needs a mandate to sign up to it, but rather having another referendum she calls a slightly early general election, because apparently parliament would need to vote to trigger Article 50, so is the logical choice to seek the will of the people to proceed.
- Then I hedge my bets, either the Tories win a fresh majority and sign up to the deal agreed, or the Tories are the largest party, but without an overall majority, and enter into a supply and confidence arrangement with Lib Dems (who are never going into Government again after last time). This assumes we don't leave because the price for Lib Dem support will be not triggering Art 50 because they will campaign on a pro EU ticket. I think this is quite likely given the way they were booted out by the Tories last time and the present wafer thin Tory majority - more voter remorse.

The deal:
The main reasons people voted to leave were immigration, paying into the EU and then the inability to trade more widely with the world (whether correctly presented or not).
1) Paying into the EU; this will be reduced by a token amount, maybe 85% ish of current totals. Contributions will be made to facilitate access to the single market on low / no tariffs.
2) Immigration; "tough" new guidelines will be agreed to allow us to stop anyone we like, aside from students, those with jobs, those with families living here, those EU nationals already living here, those who want to move here to start a business etc, all good positive reasons. But the theory will remain that we can bring up the drawbridge if we want to, but most people get in anyway.
3) Trade; probably still get access to the single market with some concessions (banks / financial services probably) on the back of the above and with a foot and a half out of the door we can negotiate our own deals with third party countries whilst making those deals in line with EU rules or with due consideration to them.

Downsides for the UK will be that we either have no influence in the EU institutions, or a proportionately reduced level of influence with no / a token few MEP's and only maybe a seat at extraordinary debates, or those which *should* be above politics - war / economic sanctions, climate change, intelligence gathering and sharing, crime / extradition deals etc.

This should allow the EU institutions to threaten enough stick to other Eurozone countries thinking about leaving; leave, but you still have to pay, accept freedom of movement of people, you get no decision making abilities and it's infinitely more complicated if you're in the Eurozone, so don't even think it, mate. Whether that will make any difference to Italy's failing banks who knows, those events may overtake all else.

At the end of the day a huge amount of distress and upheaval is created for marginal (but arguably beneficial) changes to our relationship with the EU and as always, it'll be the lawyers who win!

As an aside, in a bid to be positive rather than cynical, I do think it is to our remarkable general credit that a Muslim can be elected London Mayor and a female can be installed as PM with hardly any fallout. Yes TM doesn't have a mandate, but neither did Gordon Brown when he became PM in 2007. Well done us.

I see risks

Risk is a word bandied about a lot and, much like it’s cousin, investing, is one which is often used misleadingly or incorrectly. Risk has many different forms – market risk, inflation risk, liquidity risk etc etc, but actually these are more volatility risks, if you excuse the mixing of terms. When it comes to personal measure of risk I think that one of the better ways of thinking about it is the following:

Risk is a two stage affair – initially, the chance of the event happening, then secondly, the impact that event has, and it’s a consideration of those two which helps properly guide you in making decisions.

So, take two games. First one involves throwing a dice, you call a number and throw the dice. The terms are; you win £1,000 for choosing a number which doesn’t land face up; so you call 3, roll the dice and if it comes up 1, you get a grand, but if you say 3 and roll a 3, you lose £1,000. Now whilst research tells us we feel losses twice as hard as we feel gains, the odds are surely worth having a go, if not several turns at it.

Change the game and make it Russian Roulette - make a successful call a win of £250k, a life-changing amount of money, but calling the number that comes up results in a fundamentally prejudicial life altering outcome. I can’t imagine many people, beyond Derren Brown, would play that game, the chance is the same as the first game, but the potential negative outcome holds a much worse outcome.

So to risk in investing. Equity exposure “normally” give the greatest returns, but carries proportionately greater risks. Spending 100% of your salary means any drop in income will lead you into (probably further into) debt and therefore losing your job has a dramatic and material impact – it’s not life threatening, but as one homelessness charity found in a study; most people are only three missed paychecks away from living on the streets. To offset this, we should seek multiple income streams which is diverse enough to see us through a dip or eradication of one and is a well-trodden path to FI.

I have one job (no side work) and various investments building up in various ways underpinned by a solid emergency fund. The fact that I have a good emergency fund allows me to put more money into my ISA and pension. The fact that I seek to limit my expenditure means I have money left over to buy more shares directly and if I were to be put on notice of redundancy I could save a few more thousand pretty quickly.

Taken as a whole, therefore, my equity allocation is probably at a level which would describe me as financially aggressive… but that doesn’t really reflect my, albeit self, perception. Zoom out and consider everything together and the picture changes. Going back to the two stage risk analysis the negative monetary events which could occur are matched or off-set:

Source of Risk	Negative event	Risk of event happening	Impact on me
High equity exposure	Market downturn / crash	Medium to high. Drawdowns happen, we’ve had a few since last summer already and are a fact of life with the markets being driven by emotional humans.	Low as I’m buying for the long term and am in no way reliant on that capital value or income day to day and £ cost averaging helps me in this accumulation phase
Employment risk	Redundancy	Low. Company and economy linked. I think the company risk of bankruptcy is low. On the macro scale, the company could be laid low by larger market forces tied to a recession, but it did okay in the last one, so considered low. My personal chance of being redundant is relatively low, but shouldn’t take that for granted!	Low in the short term, higher out to 12months. But generally I would hope I am employable within that time frame, so considered a low risk. Further mitigated by increasing ISA balance from regular investment which could be tapped for income if required.
Higher cash balance	Inflation	Low in the short term: I’m getting close to 0% interest, though inflation is close to zero too. But inflation is tricky and my personal rate may be higher than official stats, and surely in the long term the risk is medium to high.	Low because I have a higher equity exposure which should provide returns in excess of inflation and because I have other income sources which can top up these levels if needed.

Pensions is a funny one as a good chunk of my regular monthly saving total goes into it, but I wouldn’t be able to access it if I needed to in the short term and the above is about covering unexpected events impacting income suddenly. Whilst pensions don’t really fit in the sudden category, however, the tax benefits and company match make it a no brainer not to take full advantage.

If you combine two risks together – market crash and redundancy, then that obviously makes for a more difficult outcome, but hey, that’s why we’re in this FI game in the first place!

If I can add more lines in the future then that’s all good, a buy to let would be great (assuming Osborne doesn’t just outright ban them). Assuming you have enough equity it should be its own, self-financing, little business; income covers outgoings and retained cash to cover larger expenses. If there is a recession you should be insulated when letting it (potentially lower income in the short term, but higher demand as people can’t afford to buy their own places), and if you lose your job then it shouldn’t matter hugely in the short term, ie until you seek to refinance it.

When I’ve done those ‘attitude to risk’ surveys I come out pretty middle of the road, not terribly adventurous, but because I have a reasonable hold over my emotions when investing, and have the above safety nets built in, for me personally (standard caveat about how I am not a financial advisor and you should seek your own advice / make your own mistakes) I am happy with a higher, more “aggressive”, equity exposure level for my particular set of circumstances.

Would you make FI accessible to all?

Rejected by the Swiss. Interesting. What would the outcomes be like? Something like this could cause a massive immigration pull to the country but do you generate a second class citizen who doesn’t qualify, would such discrimination be enforceable? The belief that such a basic income would lead to a generation / nation of feckless loafers rather than one liberated from the shackles of enforced employment to forge new industries and innovate free from the risk of failure leading to penury and no social stigma for a universal benefit.

Would it be universal? There would be massive tax and spend implications, standard arguments of “loss of talent”, marginal income and taxation levels (there’s going to be a “sweet spot” where you pay a massive marginal tax rate as you lose the basic income but still aren’t earning huge amounts. The requirement for a large increase in administration to deal with it, generating a higher tax bill again to load onto those who choose to work still (and then keep a smaller share of what they earn).

One article I’ve read on this raised the positive thought that it means people can spend their time much more how they want, rather than to the highest possible earning capacity, but the negative side was a load of people who would misallocate capital in the form of pointless exercises – think Sinclair C5’s everywhere, destroying capital and the productive capacity of the economy, and by extension, causing the resources from which a basic income was drawn – the tax base – to be permanently eroded, also, what would be the point of education or higher learning generally?

However, people currently not enjoying their jobs are misallocating their energy and skills and the economy is missing out as a result. Lots of university degrees are handed out pointlessly already and this results in the same lower levels of productivity and potentially poorer mental health, further diminishing potential output.

What would be the government’s desired outcomes? More discretionary spending on goods and services in the economy, exacerbating the disposable society? Freeing people to pursue their dreams? Saving money on organising the welfare state? Or at worst a politically motivated move to outflank an opponent, a good reason to see such a policy fail to deliver positive outcomes and what a bad government gives at one point, they can take away at another when times are hard.

I think better education, flexibility and access to opportunities would be a better focus. Apparently societies which are more individualistic are happier as you feel more liberated to pursue what makes you happy rather than sticking to a broader societal expectation. Therefore to equip people to do that better would, I think, generate better long term returns for individuals and the wider economy – though I would add a mandatory course on finance to ensure people knew the basics, so would be in less need of excessive or extended amounts of state aid!

Things I’ve done since getting FIRE’y

As I move slowly up the lower foothills of financial independence I look back and realise I have come some way in the last couple of years. So if any other people stumble on this blog looking for answers to how to start moving in the same direction, hopefully the below will help.

-       Increased my savings rate – duh.

The first thing I did after I initially stumbled across MMM and the early retirement brigade was to increase my work pension contribution. It’s a classic tale, one told over and over again, it’s relevant, important and simple – and like the best stories can be copied easily and make a big difference.

My company doubles what I put in to the pension scheme up to 10%. So when I put in 5%, they put in 10%, I’m saving 15% without even trying. The silly bit was I was only claiming about 6% of my free money initially because I definitely couldn’t afford to put in more… then I read MMM, took the metaphorical punch, increased my saving rate and… the world did not end. Lessons here, as always: pay yourself first, and, you can afford to increase your contributions and you won’t even notice the lower salary after a few months.

-       Dropped my general monthly expenditure

I’ve monitored what I’ve spent for some time and thought I was doing okay, but monitoring and recording wasn’t enough. It was almost like I was taking notes for someone else as all I did was tot up the numbers in a spreadsheet. Like with most things it’s the action you take which matters.  Again, post MMM, I have cut out expenses like new phones every couple of years, lunches out every day and memberships of randomly visited gyms. Don’t just budget and then pat yourself on the back like I was doing, actually cut some fat, it’s there, but you need to change your mentality, not just update the spreadsheet.

-       Stopped updating my phone software

Slightly more obscure, as it doesn’t save any money up front, but it’s a mentality issue again. I find the planned obsolescence slows if you don’t update regularly. I used to update whenever the latest software was released, and by doing that, I became more tightly entwined with the phone upgrade cycle leading to spending money I didn’t need to. Cutting out the prompt upgrades has saved time, as I no longer faff about waiting for it to complete, and money as the current phone is a pretty old one, but still working fine and on a cheaper tariff than the new phone contract, so double win!

Further to this, I feel the big tech companies used to make our lives better and did, dramatically, with the functions available on a smartphone. But now I think that as the “big” changes on each new handset become more incremental it’s less about making a great interface and making it work really well and more about making it more and more complicated (yes I may be getting too old for all these new-fangled gizmos!) so you are forced to openly or inadvertently, spend more. For example, did you automatically sign up to Apple music and then forget to cancel the subscription? Are now paying for it each month? Do you remember signing up for it or did the benevolent Apple corp. just deal with those annoying details for you? Did the system settings adjust so that you have all of a sudden filled up your memory so you *have* to spend money on a cloud based subscription? If so, you can, of course, have access to all the music and photos etc you want, you just need a bigger data deal to go with it, please sign here, just a few more pounds a month…

-       Started cycling

Stronger, fitter and lowering expenses is a triple win on this front.

-       Less news

I used to want to be up to date, but I’m less inclined now. Maybe a more conscious desire not to put myself in front of so much advertising and wanting to watch less TV generally and trying to do more worthwhile things. Maybe it’s all just getting a bit rubbish (old man alert, again). I wonder if I wanted to be bang up to date because I wanted to be busy and important and have shiny things, which is good and right according to mass marketing, but not what we’re after here thank you very much. I use Twitter to manage the noise and avoid reading papers which seem to be increasingly redundant. Article content and value seems to be in a race to the bottom, it’s increasingly click-bait which doesn’t do you any favours.

-       Proper emergency fund

Again, standard fare, but so important. I made a bit of a push to get the cash balance up to 6months of house expenses and six months of spending money. Having got there I’ve pulled back on the throttle, there’s still some cash going into that account each month, but not so much. As I result I’m up to between seven and eight months cover (by that I mean mortgage, bills, council tax and food shopping, not take home salary). Now I’m over six months part of me wants to stop these contributions and focus on putting that cash to work, but the conservative in me wants to get closer to 10months, which isn’t too much more.

On the personal spending front, ie bus fare to get to an interview the odd night out or home maintenance job, I’m leaving this at six months. If I get the bullet from work I can switch my personal shares to pay me, not to reinvest, and that should stretch that savings pot out to that 9-10month mark and means the cash sitting there is kept to a minimum on this front too. I would expect I could eke this out for longer as so many of my expenses are related to being in the office – who knows, if I were to be made redundant I could take a month or two off and not worry about it!

-       Reduced cash balances

I was clearly more risk averse than I thought. I used to hold higher cash balances than I do now and I am less afraid to put money to work than I was. Considering the above I could be said to still hold too much, but it’s a marathon not a race and that balance is going down whilst the ISA’s go up, so it’s heading in the right direction.

I also compartmentalise different accounts, which is apparently a standard psychological failing! (http://www.psyfitec.com/2014/07/m-is-for-mental-accounting.html ) However, here comes the excuse, I aim to have nothing in my current account by the end of each month, with all sums allocated elsewhere so if there’s a car repair / MOT it comes from the car account with contributions based on expected standard expenses and repairs over a five year period. If the car then has a more fundamental problem, in comes the emergency fund, otherwise the emergency fund becomes a more everyday account, when really it should just sit there and hopefully not get touched. As I write this I feel it’s sounding silly, but it works for me at the moment! I have reduced the amount of cash I hold generally and there’s probably room to reduce it further, so a work in progress!

Where I have made the most progress in this regard was against some money I inherited. It was enough to want to deal with it properly, but not enough to warrant putting with an IFA. So it just sat there doing not very much. I don’t think there was a crunch moment, but I just let go, stopped ring-fencing it in my mind and just invested it. There was no spiritual retribution so I presume my dear departed are happy with the decision too.

-       Give to charity

When you drop your expenses you realise you do have money to give to charity. You can tell the chuggers to do one and give money directly to the causes close to your heart and claw back a little of your black capitalist soul for the light side of the force!

No doubt there are other more subtle changes, but those are the main ones. The main take away from all the above waffle is: if you’re looking to make changes to your day to day life style, change is hard and unsettling. Doubly so when you see nice safe cash leaving your account and going to one where the balance changes every day and not always in an upward direction! Trebly so when you’re ramping up your savings rate from a steady 5-10% to a much more hardcore level. The good news is having done it, the world doesn’t end, the sky doesn’t fall, in fact your stress levels should fall as your short term security from the emergency fund builds and you start earning more FIREy stripes.

Preaching to the converted.

But worth a read still:
http://theirrelevantinvestor.com/2016/05/19/how-to-stack-the-odds-in-your-favor/

April irritation

Okay, MMM, enough is enough, well done for saving enough to retire in your 30’s, a tip of the hat for creating a website that rakes in cash for you. You will always have my thanks for opening my eyes to FIRE, but please, please stop the April Fool’s posts. They’re not funny, and I find them more than a little crass. I know you’re in a wonderful financial position, but to use that to make a joke is pretty poor taste really, especially when most people reading will be aspiring to achieve what you have.

Doom, you should know better, don’t make a habit of it.

What I want to know about senior politicians finances.

Gosh hasn’t there been a lot of good oxygen wasted over Cameron senior and junior’s finances! The organ grinder inside the Westminster bubble continues to make the monkeys dance for their supper!

According to the BBC Cameron’s tax payments have increased only once since he became Prime Minister, from tax year ending 2011 and tax year ending 2012 his total taxable income rose from £157k to £200k – this coincides with his Mother giving him £200k. The rest of it seems pretty tame, apparently he sold all his shares on becoming PM so there wouldn’t be any conflicts of interest, which is all jolly good, oh and he owns a house worth £2m in Notting Hill.

Looking at this through a FIRE’y lens the question I would like to ask is “how much do you keep?” Why hasn’t his tax bill been increasing – what exactly does he spend his money on? Downing St is free, the work of being a MP / PM is covered through expenses and I think he’s kept pretty busy generally in his current role, so not much free time to indulge expensive hobbies. In fact what could he spend his money on? Watches, suits, rare stamps? Maybe he gives it all to his wife and children… that would be a bigger political question… but as he has to appear whiter than white on these issues I can’t see that being the case – where does the cash go?

The PM earns just over £143k, equating to c£6k pcm (assuming 13% pension contribution, post normal taxes and no student loans!), I would think he spends virtually nothing, but say he somehow spends half, that’s £36k a year post tax to be saved.

Coming back full circle we know he owns no shares, so all he’s getting is bank interest, which we all know is paltry – if he gets a preferential “Eton old boys” special rate of 3% he’s paying just over £400 in tax each year on that. So he’s actually a victim of the Bank of England’s financial repression and the restrictions and intense scrutiny of being PM. Taking into account inflation and the report that he is also, apparently, thinking of sending one of his children to public school he’s going to be in a much worse financial position having been PM that if he’d kept his head down in the private sector. I know, I know, poor little Dave, however will he cope?!

To me it’s an interesting thought exercise as it demonstrates how pathetic interest rates are, how seven years of 0.5% interest rates has caused so much pain for older people without the benefit of a decent financial education relying on more limited savings. At the same time these rates are “artificially” impacting assessments for investments being at such historic lows. We’re then pushed to hunt for yield, particularly shares, post dividend and SDLT tax rates changes – potentially building a bubbly problem for the future.

Finally just think about the level to which we hold our public officials – that they can’t invest in anything, that they have to be seen to be so far beyond reproach that they damage their financial health in doing so. This leads to perverse and underhand reactions like Duck Pond man and mucky moat guy. Yes, they should be focussing on public service, not self-enrichment, but I also agree with the argument that MP’s should have wider experience and shouldn’t just be party drones. Imagine the monster that would be created if you put together all the elements of a perfect politician from the media responses and party political focus groups, even Frankenstein would say things have gone too far. If that means a combination of greater disclosure and allowing them to own some shares and know what’s it’s like to be impacted by the decisions they are making instead of relying on statistics of the population, then it’s probably worth letting them buy a few index funds – it might even lighten the load on the tax payer stumping up for their pensions…