How many pay days do you have left?

“Better three hours too soon than a minute too late.”

— William Shakespeare from The Merry Wives of Windsor

If you’re planning on dying the month after you retire, then there’s no need to read on. But, if you want to actually live and enjoy retirement, this article is for you.

Let’s say you’ll retire at 65 years old. Today, that seems years away, decades away. You’re not even thinking about it. You’re currently doing your best to keep your head above water. You don’t have the time to focus on retirement. That’s for the future. That’s for old people. Once you get the latest financial emergency out of the way, you tell yourself, you’ll start saving for retirement. You don’t need to start saving now because your 65th birthday is a long way away.

But… is it?

I’m turning 40 soon. That means, if I retire at 65, I have a quarter of a century until it happens. A quarter of a century sounds like it will never come. It is a long time, but let’s start dissecting that time frame. A quarter of a century is 25 years. That means in those 25 years there will be 300 months. If you get paid monthly you only have 300 more pay days.

If you save only £1 a month, then when you retire you’ll have a measly £300. Maybe enough to get you through the first week of retirement.

If you save only £25 a month, then you’ll have £7,500. Better, but if you live until you’re 100 that £7,500 needs to stretch for a long time. Impossible.

If you only save £100 a month, then you’ll have amassed £30,000. Better again, but not enough.

£250 a month.£75,000. This looks better. But if you currently earn £37,500 a year, that means it will only be 2 years of your full time salary.

£500 a month, £150,000.

£1,000 a month saved will be £300,000 sitting under the bed. Better, again.

So what am I trying to say with this post?

Time is short, and time is running out. If you’re not saving then you need to start now, and you need to start saving big. The more you save now, the better it will be for your future self.

If you are in debt at the moment, then get that repaid immediately.

If you don’t have an emergency fund of at least 6 month’s worth of expenses, then get saving now.

If your expenses are huge then you need to reduce them now and free up that money to helping with the above points.

If you’re not in a workplace pension, get in it now, enjoy the tax relief and pump as much money as you can into the pot.

As the screenwriter John Hughes wrote in his film Ferris Bueller Day Off, “Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.”

Your emergency fund is losing money

Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.

— Ronald Reagan

An emergency fund is a pot of money, at least 6 months’ worth of expenses, that you use to end a financial emergency. It stops you going into debt and keeps your financial life healthy.

Once people squirrel away their minimum of 6 months’ worth of expenses, people tend to forget about the emergency fund and move onto other parts of their financial life, such as saving for a house deposit, saving into a pension, saving into a stocks and shares ISA to invest in the stock market via Vanguard.

This “build and forget” approach to an emergency fund is, on one hand, a good thing as you don’t keep dipping into the fund when you want to buy some consumer crack such as a new TV, or new car, or holiday to hot, dusty Spain. You only reach for that fund in a real emergency, like losing your job.

But the problem with the “build and forget” approach is that inflation is attacking your emergency fund every day.

Inflation is the killer of cash. Inflation is the cost of products and services increasing over time. An example is in 1980 my dad purchased a three bedroom house in the south east of England for £18,000. In 2009 when we sold, it was worth £157,500. If he had saved the £18,000 in an emergency fund expecting to buy a house with it in 2009 he would have been shocked, and out of luck. That £18,000 in 2020, 11 years later, would be worth even less. It wouldn’t buy a bottom of the range VW Tiguan. Why? Inflation.

Over time, the cost of goods and services, usually, go up. Some things might go down. Such as a computer in 1980 would have cost a small fortune. In 2020 a computer is vastly cheaper, and more powerful. That’s because the producers of the computer and all its components have improved their processes to make computers cheaper, which allows them to lower the price, and instead of selling to thousands, they sell to billions of people.

Yet with most products and services, inflation drives the price up. When I was a child a Mars bar cost 10p. Nowadays, I’m lucky if I get a one for less that £1. That’s inflation. Same with services, I used to get my car cleaned for £5 in the late nineties, today, if I take it to the car wash, it’s £20+. Of course, at that price, I do it myself and bank the £20.

How to keep inflation from killing your emergency fund?

There are three options to stop your emergency fund getting eroded by inflation. I recommend doing all three:

  • Decrease your expenses – If your monthly expenses are £1,000, that would mean you have a minimum of £6,000 in your emergency fund. You can reduce your expenses, such as cancelling the gym subscription, as you haven’t entered the gym since it was refurnished… four year ago. The lower your expenses, the further your emergency fund spreads. In our example, reducing your expenses to £900 would mean that you only needed £5,400, so you’d actually have £600 surplus. This is a bit of a cheat really, as your £6,000 is still getting eaten by inflation, but it definitely helps. Plus, reducing your expenses should be a lifelong practice. Any money you pay out on expenses is not being saved and not earning interest, which compounds and earns more money.
  • High interest ISA/savings account – Putting your emergency fund into a savings vehicle such as a cash ISA or savings account is wise, as it allows you to access it immediately. You should shop around for an account this gives you immediate access to all the money, which offers the highest interest. At the moment interest rates are lower than a limbo dancer’s balls, so finding a rate that equals or beats inflation is almost impossible. People use between 2% and 3% to measure inflation. If you get an interest rate in your savings account of 1% then if the inflation rate is 3% your emergency fund is only losing 2% rather than 3%.
  • Contribute more cash – Once you hit your financial goal of at least 6 months’ worth of expenses for your emergency fund, it’s time for you to move on and tackle another financial goal, such as investing or saving for a house deposit, but what you should do each year it top up your emergency fund by a certain percentage amount. If we use 3% as the inflation rate, then your emergency fund needs to increase from £6,000 + 3% (£180) = £6,180. If you have a good interest rate on the ISA of say, 1%, then you only need to top it up with 2% (£120). For my piece of mind, I’ll always top it up by 3% myself and let the interest the emergency fund is earning do its thing. I usually add this additional 3% right at the beginning of the tax year 06/04/20XX just so I can cross that financial goal off my list, forget about it, and then concentrate pushing all my money into my workplace pension and my Vanguard index fund. Plus the earlier I do it, the longer the interest has to build up until the end of the next tax year.

Conclusion

So there are just three simply ways to stop your emergency fund getting chewed up by inflation, with minimal contributions. The emergency fund is a beautiful thing. We work so hard to build it that we don’t want anything to happen to it. By contribution 3% a year you’ll help keep it in tip top shape.

How much should I save?

The first $100,000 is a bitch.

— Charlie Munger

10% is what most people will tell you is a good savings rate. And if you do that, you’ll retire at aged 65-70 with a good chuck on money. Well done.

But… you’ll soon be dead. Even if you have a good innings and make 100, that’s only 30 years. And probably when you’re 97 you’re not going backpacking around Australia, you’re probably doing very little.

So, how can you have tons of money at a young or youngish age? Answer: increase your savings rate.

11% is better than 10%, and 12% is better than 11%. But you should go aggressive. 25%. 40%. People in the FIRE (Financially Independent Retire Early) community do 50%+. Some as much as 85%. Sounds bonkers and not achievable, yet people are saving that much.

To improve your savings rate one thing you can do is look at all your expenses and reduce them. Do you need Amazon Prime, Netflix, Sky, Hulu or can you just have the best one or even the cheapest one? Or better still, how about none? Have you changed your service provider for your electricity, gas, internet etc and got a cheaper deal? Can you walk/cycle to work rather than using the car? Are you eating at restaurants for lunch every day like a mafia boss? Then cook more the day before for dinner and bring it in as lunch the next day. Take a look at all your expenses and see where you can shave some money off. And when you do shave some money off, don’t just use that money to buy a TV for your toilet, add it to your savings rate.

Another good thing to increase your savings rate is nudge it up by small increments regularly. If you’re saving 17% of your net income every month, in three to six months time increase that to 18%. Do the same again in another three months and get it to 19%, and so on until you can’t go anymore. You soon learn to live life comfortably without that additional percent reduction.

And one more quick tip, if you ever get a pay rise, then move all of the amount you received in the rise and add it to your savings rate. The reason is you’ve been living comfortably without that extra money before, so why would you need it now? A 2-3% percent pay increase every year will soon snowball your savings into a Monopoly sized wad of dough.

And lastly, if you really struggle to save anything, then begin with just saving 1% of your net salary. Doing this is better than saving 0%. So if your net salary, the amount in your account after taxes, is £1,000 a month, and you save 1% of that, then you will save £10. When the next pay day comes, you do the same thing. You do this for three months and then move up to saving 2% and you keep increasing every couple of months until you have a high savings rate, and can live in comfort. And when I say comfort, I don’t mean you buy a new pair of trainers every week type of comfort.

Good luck and get saving.

The real cost of debt

If you think nobody cares if you’re alive, try missing a couple of car payments.

— Earl Wilson

Debt’s bad, debt holds you back, debt ruins lives, blar blar blar. I’ve banged on long and loud about debt and the problems it causes. But even with writing article after article and telling everyone I meet about how bad debt is, I discover debt is still around.

So let’s play a good game. It’s called “The Real Cost of Debt”, with a subtitle of “Money You Like to Earn Then Give Away Immediately to Other People so That They Can Become Rich and You Continue Working Until the Day you Die.” Catchy!

The rules are like this. Make a list of all the debts you have, mortgage, loans, credit cards, overdrafts, pay day loans, late library fees, everything. Put all the names in one column and in next column how much you owe in total. Then in the third column put the interest rate of each debt. Now we’ll work out how much each piece of debt costs us every month. To do this I used various calculators from the amazing calculator.net

For an example we’ll use a fictional person, Wayne, with some debt.

  • Mortgage – £280,000 – 3%
  • Car finance – £20,000 – 4.9%
  • Credit card – £10,000 – 19.9%
  • Bank loan – £5,000 – 3.6%
  • Total debt £315,000

Now let’s look at the amount of interest paid on each piece of debt.

Mortgage – £280,000 – 3%
The mortgage has just begun so Wayne will be paying the highest amount of interest as he has 32 years to repay his debt, and the interest is highest at the beginning of a mortgage.
The first year of interest will cost in total £8,327.59.
An average of £693.97 a month!

Car finance – £20,000 – 4.9%
With his new house Wayne also had to buy a new car that he’s financing over 5 years.
The first year or interest will cost in total £449.72.
An average of £37.49 a month!

Credit card – £10,000 – 19.9%
Wayne bought a load of junk to fill his new house, like a second TV for the kitchen and a rowing machine for the garage, although it’s already full of unused stuff from his previous house.
As Wayne is paying so much back on interest already, he decides that with his credit card he will only repay the minimum payment of £166.
Working out interest of a credit card crashes my calculators. That’s how big it is.
The first year or interest will cost in total £1,705.
An average of £142 a month!
Oh yeah, and just to mention, that £10,000 will take 35 years to repay and cost £59,678.30 in interest alone. Almost 6 times the cost of the initial debt. That 12 slice toaster better be worth it!

Bank loan – £5,000 – 3.6%
Wayne owed some people some money. Don’t ask. So he got a loan from the bank over 5 years.
The first year of interest will cost in total £94.
An average of £7.85 a month.

So let’s finish the game and add up the scores of how much each debt costs Wayne per month.

Mortgage £693.97
Car finance £37.49
Credit card £142
Bank loan £7.85
Total £881.31, just in interest! Remember I didn’t include the principal amount of the debt where he actually pays for his house and car.

That’s a yearly interest payment on debt of £10,575.72!

If you put that in the stock market, and got a 10% return for the next 30 years, and you never added another penny to it, after 30 years you’d have £184,539.99.

That, my dear friends, is how much debt is costing you. And remember, the above is only for 1 year! There’s loads more years of paying back interest when you’re in debt.

Imagine putting £881.31 a month into the stock market with the 10% return and 30 years. You’d end up with £1,818,004.

Debt. It’s a right git, I tell you. Do everything you legally can to get out of it as fast as you can.

On pay day

Too many people spend money they earned..to buy things they don’t want..to impress people that they don’t like.

— Will Rogers

Pay day is the most important day of your financial month!

Here are some things I do on pay day to set me up for the rest of the month so that I don’t go over the limit of the spending planner.

Automate savings – You should have automation set up on your savings, and if you have it, paying off your debt too. As soon as I get paid I have a standing order that takes the money from my bank account and puts it into my stocks and shares ISA, which is held with Vanguard and I invest in one of their low cost index funds, I also automate the over payment of my mortgage.

Fill up the tank – To reduce expenses don’t own a car. Cars are a serious drain on your financial life. Just think, if you’re crazy enough to put a car on finance, please don’t, but if you did, you have the monthly payment along with the interest, plus you have monthly expenses like petrol, tax, insurance, and yearly expenses like MOT and service. And, all the problems that could go wrong with it, which will cost money to repair. A car is a money burner. Get a bike. I have a bike… And a car. Actually I have a SUV. Or the money pit as I like to call it. Anyway, I fill the tank up to the top so that I know, hopefully, throughout the month I won’t need to fill it up again, so I don’t need to think about petrol costs any more. There’s probably lots of studies about the optimum level of diesel in a tank to get most miles to the gallon, but I don’t have time for that.

A weekly/monthly shop – As I fill up the tank on the car, I then pop into the shops and get a weekly/monthly shop. I buy in bulk if possible, such as rice for the month, and if anything like toilet rolls are on sale I buy in bulk too.

Don’t spend – Then, once my savings have automatically left my account and I’ve filled up the tank and paid for shopping, I try not to spend anything for at least a day, and try and push that for as far as I can get it. The more days I go without spending the better it is for my bank account. If I’m really successful, and towards the end of the month I still have a good chunk of my spending money, unspent, I push a portion of that to my savings as a little bonus to myself for managing my money better. As Tesco say, “Every little helps”. And it sure does.

By doing the above it helps me to manage my money better during the rest of the month. I am able to work out how much I can spend and even break that down by day. It just sets me up nicely for the rest of the month. It works for me, hopefully it’ll work for you too.

Hold!

There’s a major market crash coming!!  And there’ll be another after that!!  What wonderful buying opportunities they’ll be.

— JL Collins’s The Simple Path to Wealth

Today I entertained myself by reading the 1 star reviews of a popular finance app that allows you to save money by rounding up your purchases to the next pound. So if you buy a cup of tea for £2.25 then it rounds it up to £3 and banks the 75p, adding it to one of their savings products. I don’t use, and have never used, this app, so I can’t disclose if it is a good product or not for building wealth.

What I want to talk about is this app has many 1 star reviews because the customers lost money. They are not complaining about the app functionality, which I would expect to see on a review website. From what I can gather these 1 star reviewers used the app and invested their surplus money into a stocks and shares ISA. Meaning they put their money into the stock market. It is apparent that these reviewers have not been educated on how the stock market works or how to invest. I assume that they invested their money in good faith and expected it to go up, like they see in Hollywood films or read in the newspapers about a postman who invested in Google on the day they floated on the stock market and is now doing his post round in a gold Bentley.

Unfortunately the stock market doesn’t only go up. It also goes down.

So what happened is these people invested their money for a couple of days/weeks/months and only saw it go down. They panicked and sold up taking a nice tidy loss. This is what a lot of people do when investing. This is wrong.

If you are thinking of investing or investing at the moment, before you do anything, read J L Collins’s book The Simple Path to Wealth. This is all you need to know, and if you follow the simple path you’ll be rich. If you can’t be bother to spend 8 odd quid on a book and read 200 odd pages then you should not be investing in the stock market.

Three great takeaways from this book are:

  • You should invest in low cost index funds. I invest in the S&P 500 via Vanguard. I like Vanguard. JL Collins loves Vanguard.
  • You should invest for the long term, 10,20,40,60 years. Don’t think you’ll be rich within 6 months. Investing is like cricket, a long game.
  • When the stock market has temporary drops… HOLD! Do not sell. This is the worst possible time to sell. Hold, hold, hold. If you were on a ship and a huge storm happened you wouldn’t jump overboard into an inflatable dingy and think you’ll be alright. Stay on the ship, ride out the storm and another day will come where the sea is calm and the weather is beautiful.

Additionally, what you should do when the stock market has a temporary decline is buy more more more. Everything is on sale. If your job was to buy TVs and they sold for £500 each, then one day when you went to the TV warehouse and you found they were selling the exact same TVs for £250 would you stop buying them? No, you’d buy twice as much as the sale will soon be over. That’s the same with stocks. If they drop to a lower price, buy more! If you’re not retired, and still investing for the future, a stock market temporary decline is like your Christmas and birthday all rolled into one. Buy as much cheap stock as you can get your hands on.

Everything must go!

What happens when you get rich slowly?

“Because no one wants to get rich slowly.”

— Warren Buffett

The answer to the question in the title of this post is simply, “You get rich.”

Jeff Bezos, Amazon CEO, and richest person in the world, asked the greatest investor in the world Warren Buffett why doesn’t everyone copy Warren’s simple method to investing and subsequently become the third richest person in the world like Buffett. Warren answered, “Because no one wants to get rich slowly.”

How true. In a world where food is delivered in minutes, we can fly to the other side of Europe in hours, we can watch anything we want in a couple of seconds and a couple of clicks, we can pop to the local shops and get the most exotic out of season fruit and vegetables 24 hours a day, we can see and talk to people in other continents as if they were in the room with us, as a society our patience is non-existent.

So if we decide one day we want to be rich, then we want to be rich that evening, or tomorrow at the latest. We don’t care if we’re drowning in debt, have expenses like an American socialite, and not a penny saved. We want to be rich, right now!

So instead of doing our research about how to become rich and finding out that almost every single rich person got rich slowly, we try and get rich with schemes like: the lottery, pyramid schemes, franchises, investing in individual stocks that we know nothing about, investing in bit coin or whatever is the latest tulip craze, gambling, stealing, selling Buckingham Palace to wealthy idiots who think you’re a member of the royal family.

Successful get rich quick schemes are as rare as men giving birth to chickens.

So, we’ve established that it is almost impossible to get rich quick, that then leaves us with only one alternative, and that is to get rich slowly. And how do we do that?

This is how:

  • Financial goals – set financial goals. How much money do you want, by when and how will you do it?Financially organised – get financially organised by knowing how much you receive in income, how much you spend in expenses, how much debt you’re in, and how much you spend with the money left.
  • Debt – pay off all debt as fast as you can. Debt is a right git.
  • Expenses – reduce or eliminate expenses, every pound you reduce an expense by, that’s another pound you can save to get rich.Save – set up automatic saving (standing orders) so that money leaves your bank account as soon as you get paid. The more money you can save, the quicker you’ll get rich.
  • Increase contributions – If you’re saving 15% of you net income, in a couple of months move that up to 16%. Then a couple of months later, 17%. Keep nudging it up as much as you can. And when you get a pay rise increase it again.
  • Increase income – ask for a pay rise, learn more skills, move jobs, get a second job, get a third job the earns passive income. Earn more and save the difference.
  • Invest – invest in the stock market every month, forever. Use low cost index funds like those provided by Vanguard or other low cost providers.
  • Own other assets – own rental properties or businesses to get other passive income.
  • Reinvest – Dividends you earn from investing should be reinvested.
  • Compound interest- as above. The rich person’s magic formula is compound interest. It means the money you earn in interest goes on to earn more money and then that money then earns more money and so on like that forever and ever. An army of money working for you 24 hours a day, every day of the year.

If you do the above, as the years fly by, you’ll discover all of a sudden you’re rich and you’ve enjoyed the process, which also gives you a path of how to continue to build and retain your vast wealth. People who get rich quick don’t understand about building wealth and retaining it. A shocking statistic I heard is that you’re more likely to go bankrupt when you win the lottery than you are if you never won it.

Get rich slowly. It’s a life choice.