Tips and tricks

I started writing this in a longer format and it sounded terribly smug, so I'll provide the short version. If you're reading this, you'll have a good idea of what's what anyway;

Assumed income - I travel a fair amount with work so my pay is never static, always different with expenses. It's further skewed by the pension contributions and healthcare etc, so it's a bit all over the place. To this end I started assuming my actual pay was what it was prior to my last raise. This means there's always a little more at the end of the month to put in savings!

Net worth - really glad I started monitoring this. It's not like I've suddenly saved a load of money, but it really keeps the discipline on watching the pennies as I found I was tricking myself to the upside and didn't necessarily deserve the pats on the back I was giving myself.

Savings targets - If I take the free money my company gives me towards my pension as free money (not unreasonable) then my automatic savings rate is just under 50% pcm using post tax income. Having learned the sky doesn't fall in if you push yourself a little more I've bumped up the pension contributions to hit this level. Now I'll take a pause and even, whisper it, maybe treat myself with whatever is left!

Looking at it another way, I am automatically saving two and a half months of spending every month. So, say my average personal spend per month is £500 - lunches, the odd drink or night out, new tyres for my bike, take aways etc, I'm automatically saving £1,250pcm. It's not just going to cash, I wouldn't be able to call on the money that goes into pensions etc if I needed it, but it's a nice way to think about it!

It's clearly massaging the numbers for impact, but when I think back to where I was a few years ago, it's a massive difference and goes to show what can be done when you focus.

Tie the above together and hopefully the snowball will grow just that little bit quicker.

The return of Gordon Brown thinking?

The more we get into this, the more that Brexit seems like a bad idea. The more the Tories obfuscate and delay, the more it seems they are either rubbish and ill-prepared, or realise just what a bad hand this is. I say Tories, what I mean is those having to deal with it, not the gang who are so fixated on leaving they would seemingly be happy to impoverish the whole country to prove a point, or increase their perception of self-worth.

Anyway, I’ve been thinking about the relatively infamous session of the select committee where David Davis said the dog had eaten his homework  when asked what the cost to the UK would be of leaving the EU without any sort of deal. He, sort of, admitted that crashing out in this way would mean, amongst other issues, loss of passporting rights for financial institutions, loss the European health card, open skies as well as a range of tariffs on goods and services. All things that would hurt us, but, you know… #takebackcontrol

His excuse to the teacher was that he needed to consider department by department, industry by industry what the impact could be and how it could be mitigated. One example of such mitigation was the a new computer system would be able to authorise goods moving across borders in a matter of seconds, not days or weeks as might otherwise happen, which to some companies would off-set any issue of tariffs which would also be imposed.

I see his point, I’m sure it would help and might even make the difference when it comes to a 10% additional tariff to sell into the EU. Would it against a 30-40% tariff as agriculture would get hit with? I don’t know, I don’t run my own international business, but it seems like a much larger hurdle to offset.

The other issue is you’re still selling into the EU so you have to meet the standards and rules set by the EU and a system which allows access into the EU in seconds, can also reject it in seconds too. So if you don’t meet the requirements, no trade, oh and we won’t have any say on those standards either, but, you know… #takebackcontrol

So how else could the Government mitigate these tariffs?

Something along the lines of the Government rolling out the lower corporation tax regime they are touting? The idea of lowering it would be to help attract companies to set up here and offset the tariffs raised from being outside the single market. A low rate also aims to reduce the benefit of legitimately avoiding paying tax. Apparently lowering tax rates, and presumably being consistent about their level into the future, increases the tax you receive as companies and people pay fewer accountants to find schemes to shelter their income from the taxman. The UK corporation tax level is currently 19% - too low, too high? Who knows, lower it further could see an increase, or it could start to reduce the tax take if it’s currently at the right level.

The other fiscal levers the government can pull is personal tax rates. They’ve already raised the tax free rate to £11.5k pa and you can stick £20k into an ISA.  There was a promise in the 2015 general election to raise the level where you pay the higher rate to £50k, though I imagine that might get lost in the upcoming manifesto.

If the government lower tax rates for the rich to incentivise them to stay in the same way as for companies, then the issue is what happens when the next recession occurs? Unemployment is very low, participation rates are really pretty high, tax rates are low and potentially going lower, but the deficit isn’t forecast to be gone for another few years.  

If something were to trigger a recession in those next few years, like, I don’t know, a botched negotiation by May, then how does the government stimulate without borrowing massively? What other levers are there to pull – interest rates, not at the moment, cutting taxes, apparently not, more government austerity, after 7yrs, seems unlikely to be successful. So they would have to borrow and spend, currency goes down further, inflation goes up more, but if taxes have to rise it removes the incentive for international companies to base themselves here anyway further reducing the tax take.

The UK leaving the EU might not trigger a recession by itself, it could even see the wonderful outcomes promised by team Leave… but it won’t mean there won’t ever be another recession, and to pretend otherwise makes you Gordon Brown. To go ahead with a hard Brexit and the fiscal measures and mitigation which have been hinted at in order to retain competitiveness is, on present course, leaving very little room for manoeuvre for when the next downturn comes.

To get a decent deal with the EU, whilst being able to trade freely with the rest of the world will require a level of skill in negotiation and diplomacy which seems utterly beyond the current government on current performance.

It was the best of times, it was the worst of times

This time a month ago was Christmas Day! I know, seems like longer.

In some ways Christmas is the perfect storm of conspicuous consumption, socially obliged spending and unnecessary unhealthy excess. On the other hand it’s a way to get two to three weeks off work easily with all the bank holidays and if you manage your family duties then you can spend a good majority of that time doing whatever you like.

A lot of the focus of PF blogs is about what you would do with the extra time if being a wage slave wasn’t a necessity. Well, what did you do over Christmas? Have a nice long break at home, not spending much by seeing friends for walks in parks or taking advantage of the quiet time by going to the gym when you want and taking in some free museums or other attractions in town? Did you work? Aiming to add some extra capital to add to the freedom fund?

Or did you go for it a bit and think, well, it is Christmas after all? Some FIRE’y types might say it should be cheap outings, enjoying the down time doing things in your way. Others might say unless you’re already rich you should stay working as hard as possible.

Assuming that you’re on The Path and have a good knowledge of personal finance I say, for what it’s worth, that you have to do what you want to do whether working or early retired. Taking Christmas as the example, if you are a massive fan then why deprive yourself of the things you love doing? Surely the point of aiming for an early retirement is to be able to focus on the things you love.

Not only that, but as I’ve said before, it can be counterproductive. If you’re driving your spending so your savings hit x25 annual costs but in so doing deny yourself the pleasure of those interests it means you will face extra costs post work… so your x25 figure must get bigger and  you risk running out of capital sooner.

I think you need to continue to indulge and work on your hobbies, interests and passions during your work life so you are better set up for your post work life and in a better place to pay for it. What would be worse; thinking you're signing out of the office for the last time, only to realise a year later you actually have to go back to work as you don’t have enough cash? Or working a bit longer, knowing really what makes you tick and that all your costs are genuinely covered allowing a smooth, stress-free, transition to early retirement whilst having enjoyed life more in the lead up?

So if your credit card bill is a bit bigger than normal, don’t let it get out of control, but don’t admonish yourself either, just factor it in to the bigger plan.

Is solar worth it?

Feed in tariffs, low or no electricity bills, limited reliance on the grid and ample opportunity to be a proper smug so and so to your friends! What’s not to love!

I’ve briefly looked into the possibility of solar in the past but it’s never been the slam dunk it’s advertised as, so I thought I would lay out my thinking here to try and get it straight and come to a conclusion, for now.

Previously I’ve gone so far as to have a couple of quotes put together, so the amounts below are roughly right tweaked for simplicity, and give a decent indication of the way the wind is blowing… or which way the sun is shining, to butcher a metaphor!

Assume we have a total gas and electric cost of £100, of which £70 is electricity, that’s £840 of electricity costs per year.

Against that we assume that however many panels we can cram on the roof will account for 65% of that cost, so a saving of £546, say £550 a year.

On top of that you get Feed in Tariff and export payments of maybe another £180 a year, so a total benefit of £730 per year (£550+180). Sounds good!

A couple of years ago the approximate cost was £8k to have this all installed, but a bit of a search on line shows the cost coming down to maybe £6k.

Some basic maths says £730 / £6,000 = 12% yield – again, pretty good, much better than the FTSE!

So, if you stop there, that’s all good. Money invested £6k, return 12%, lower bills, greener planet.

Reversing the maths (6000 / 730) gives 8.2, ie, just over 8yrs to get your money back on the initial outlay. However, whilst this is an investment, in that it provides a return, it is not one which can be assumed into perpetuity because this is a piece of machinery which will fail.

So, if you want perpetually low electricity costs you would need to save the money from the reduced bills for 8yrs to pay yourself back for solar kit number 1, and then wait another 8yrs until you have enough to replace the system… in theory, 16yrs until you actually realise your “free” energy…

If the system can run perfectly for 20yrs, and some give guarantees for 25yrs to match the feed in tariff contract, then you’re looking at 4-8yrs of free energy.

Is it worth it?

Maybe, but life may get in the way. You probably won’t stay in the same house for 20yrs. You could keep all the savings looking to move after 7 or 8years hoping the person buying your house will be happy to inherit an aging solar system and happy to pay for replacement kit when the time comes… but that’s not the reason why you move house is it. Ignoring general house price inflation do you get premium for having solar and cheaper energy bills… maybe… enough of a premium? Who knows. But what happens when you move to another place with no solar – do you give up and pay more or shell out again for another new system?

The alternative to subsidise your bills would be to put the same money in the market and use the dividends to pay the electric bill. But you aren’t going to get 12%, or not sustainably anyway, so to get the same reduction to your bill (£45pcm) you would need £18.2k (assuming a 3% yield and no tax), or £13.6k if you’re happy with the 4% rule. Or live in darkness in the winter…

The initial fag packet conclusion is either the cost of the panels has to drop a lot more to a pay-back period of 5yrs or less, or it’s simply better to save the extra and stick it in the markets?

I would certainly be interested to hear if anyone has looked into it more closely, or thinks any of the above is wrong. Please let me know!!!

This...

https://ofdollarsanddata.com/2017/01/02/how-hedge-funds-get-rich/

You might not be investing in a hedge fund, but a reminder of the pernicious impact of fees.

Brexit thoughts

There are so many moving parts when it comes to Brexit; how will it work, what will Germany and France to, what will the EU do, what kind of a deal do we want, what might we actually get and was it the right decision to vote leave?

To my mind everything comes down to negotiation, anything else, especially at the moment, is hot air. The referendum, in my opinion, got it wrong. It would have given us a much stronger negotiating position with 52% in favour of remaining, but apparently it’s wrong to rig these things. A 52% remain vote would have allowed us to continue to be the stroppy spoiled child in the room demanding toys and treats and kicking up a fuss. There would be future concessions, the odd rebuke, but generally we would have got what we wanted.

Any Brexiteers reading this they will say that in voting out, we have regained control – of borders, migrants, laws and sovereignty with Elgar’s greatest hits drifting in behind them. It is true to an extent, but we lose influence, which I feel will have more of an impact over the long term.

The truth is we trade a lot with the EU, like it or not. It follows the same pattern everywhere – you trade more with your neighbours than those further away and so all parties should want to agree a trade deal between the UK and the EU quickly, a drawn out painful affair would harm everyone. Some EU officials / Eurozone countries say that the UK should be punished for leaving and that we have to be punished to dissuade anyone else from doing the same. Others say how ridiculous this punishment talk is given how the EU 27 are our allies and trading partners and it would be an act of self-harm to do so… though making that argument means the UK voting to trade with the rest of the world is an equal and opposite act of self-harm among trading partners and allies.

That aside, I think, this initial deal take too much of the focus. The results of Brexit will be felt over decades rather than days and coming back to the loss of influence, it is that loss which will be more keenly felt and more demonstrative of why it’s a bad idea to leave the club.

The reason is that the EU project is a slow moving behemoth, not a one off negotiation. If the UK “wins” this negotiation it will not, and cannot, force the EU into stasis, never changing again. It will change again soon – new laws, regulations, members, directives will continue to flow from Brussels, the important point from the UK’s points of view is that we will have no influence over those future decisions. So, the EU should agree a reasonable deal quickly for two reasons. Firstly to facilitate ongoing trade and not putting an unnecessary brake on the EU’s economy, because goodness knows it doesn’t need that… no one does. Secondly, post deal they can change some things that the UK would have always vetoed and move on to demonstrate that you have to be at the table to best protect your interests.

In a Brexit debate recently David Davis stood up and said that he thought the trade talks should go more quickly than with other countries (Canada, 7yrs and counting) because of the current common regulatory regime, which all sounds good David, but let’s extrapolate a little. What happens on the next round of regulatory discussions? The UK will have at best a vastly reduced influence, at worst, no influence; we will be outside the room waiting to be told what to do. Those regulations will be brought into force and UK firms will adopt them in order to keep on trading. We could choose not to follow them (hurrah for Brexit!) but where would be the sense or logic? Maybe India is a bigger market in general, or China, but they will have their own rules – are we going to follow all of them separately? No, you follow the one which will net you the best result, which will be lowest cost to the biggest client, which at the moment, and following generally accepted trading patterns, is and will continue to be, the EU.

The same would apply to services, especially financial services which France and Germany would particularly like to make a fairly sizable land grab. The passporting which allows us to transact in the EU could be withdrawn the moment our regulations don’t meet EU ones at the potential loss of jobs, tax and the multiplier that provides. 

It’s not a zero sum game, jobs lost from London wouldn't move directly to Paris, New York would probably benefit the most, but the power of incentives is ever present and the French, German and Luxembourg leaders would be trying their best to coax as much of that work to their shores away from London and that means actively trying to worsen the UK's position. 

Before we take the holier than thou attitude Remember when Boris said he would lay out the red carpet to Parisian entrepreneurs and bankers when their 75% tax rate was about to be introduced, well it’ll be the opposite from now on.

Moves will generally be slow and steady, a bank here, a decision not to increase capacity of a factory there. Changes will take time so the power shift represents the other reason why the EU should do a quick and ‘nice’ deal now. It will show where the power really lies – not in this one off negotiation, but in all the little ones coming up over the years where the UK will lose out again and again because we’re not at the table. It will impact on manufacturing and services, but hey, at least the twenty thousand odd UK fishermen will be free from the yoke of EU tyranny…

Can you tell the truth?!

This is an interesting blog and prompts a few immediate thoughts – the principal ones being, that’s a lot of money to have and still be working. Surely most people would have their feet up at that level of wealth? But hey, the question is being asked by the boss, and it’s a hypothetical, so it’s understandable that they would smile, tug the forelock and say yes sir, of course I’d still be here bright and early tomorrow morning! On the other hand it may highlight how much of a disparity there is between how much you need to actually stop working and the perils of lifestyle inflation.

That aside, it shows how people want to work in creative and interesting roles doing things they love, even when money isn’t an issue, which is at the heart of FI. It makes me happy that some employers must be getting it right in attracting the right people to the right jobs and keeping them engaged and interested. However, every job surely has to entail the boring bits, the admin has to get done otherwise the systems don’t work and no one has a clue what’s going on. I also heard that research showed entirely free thinking work was very draining and having some repetitive tasks to tick off the list gives us little dopamine hits, so an ideal job has a balance of both elements.

But if I didn’t have to slog through the boring admin and was liberated to spend more time being creative and apply higher thinking to situations, would I give up on FIRE, buy myself some sleek glasses and black turtle neck and stay in the workforce until 70years old?

It’s a no from me. A job still means sitting in an office for hours per day, commuting, suffering train delays, tube strikes and eating plastic wrapped sandwiches. It’s because of those reasons that I am pushing for, and will continue to push for FI.

I wonder what the reaction would be if the answer to the initial question was; work half as many hours? Saying it would make you more productive for being better rested and coming in seeking stimulation and challenge rather remaining stressed through overwork…

Would such a statement only demonstrate that you are not a good worker bee? If you couldn’t possibly say such a thing without severely limiting your career for such failure of loyalty, are you in the right job? If you can’t escape such a job, but it’s paying the bills nicely, then surely the answer is to put yourself in the position where you can look your boss squarely in the eye and tell them the truth (which isn’t the same as shouting obscenities and flouncing out the door) without fear. It means having an ‘F’ you pot if necessary and passive income.