Attitude and money are closely linked

Weakness of attitude becomes weakness of character.

— Albert Einstein

What personal trait will earn you money?

There are several traits we could add here, such as having a high risk tolerance and investing all in equities, or having the trait of delayed gratification, meaning don’t have your cake now, you save it and eat it later.

One trait that we can all do is work harder and smarter. Let’s say your job is to sweep roads. You go through your day, outside in the fresh air, getting lots of exercise and doing something that impacts everyone: you are removing litter from the pavements and roads and sweeping them clean. A noble job.

But, what if you just do an average job? What if you miss the odd crisp packet, leave a sheet of crumpled newspaper? In the day to day, probably not much will happen. But over a week, or a month or a year, your patch of land to clean will look like a drunken student’s bedroom. The residents of those streets will lose pride in them, they may start littering more and it gets worse and worse. Finally your manager is alerted and he or she gives you the sack and you no longer have a salary.

Now let’s turn this scenario 180 degrees. You’re the road sweeper that never leaves a crisp packet. You start work a little earlier than your colleagues and you leave a little later. You clean your equipment every afternoon before you go home so that tomorrow you can start immediately. You’re always friendly with the residents of the streets and they in turn don’t want to make more work for you, so they are more careful with their rubbish. Your streets are noticed by people not living in the area as to how clean they are. Someone even contacts your employer and your manager is told of the good work you do. When it comes to the pay review you are awarded a bigger pay increase and a bigger bonus. You’re promoted at a later date, which again brings a larger salary and bonus. You are asked to teach the new people who join, which you rightly do. They then have the same work ethic as you, and all of a sudden the entire village/town/city is sparkling clean. Your company wins awards and gets more contracts. You are singled out as the person who started this transformation. You’re given a bigger salary and a bigger bonus. Money rolls into your bank account in huge rubbish truck quantities. Life is excellent.

But why? Well, it’s because you have the right attitude. When you are first employed in a company attitude is the only thing you can control. If you have a bad attitude no one wants to give you a salary increase. If you have the right attitude and work hard every day and work smart every day then the pay rises will come. As a manager it’s a lot harder to refuse a pay rise to one of you top performers compared to the people in the bottom sector of performance. And, if the pay rise doesn’t come, or stupidly, gets rejected, you know that you’ve built this work ethic of having the right attitude and you can take that to any job and receive the salary you deserve.

Having the right attitude is something you can control and will help to fill up your bank account far easier than having the wrong attitude.

Try not to spend for a day… It’s bloody hard

“There is a gigantic difference between earning a great deal of money and being rich.”

— Marlene Dietrich

Well it was hard not to spend for a day, yes. At the start, yes. It was hard.

I wanted to reduce my spending on food. Over two months I spent a whopping £770 on food. But that’s not the worst part, it’s not £770 on the family weekly shop, no. This money was the money I spent, just me, on food: breakfasts, lunches, dinners, snacks. I spent a couple of months tracking every penny I spent, and seeing this figure was eye opening. On average £385 a month. Just for me. That money could be out working for me in a Vanguard S&P 500 index fund, going out and bringing its money friends back with it every single night. Yet, for some reason, I thought the money would be of better use spent in the restaurants around my work. Which, might I add on a side note, have doubled in number since my company relocated to our new offices. Even a food market now comes on Fridays to get a piece of my money.

What does that hotdog vendor say in The Simpsons when Marge asks him if he follows Homer around, “Lady, he’s putting my kids through college.”

My restaurant lunch habit has got so bad that if I’m out in the city on the weekend, waiters, on their day off, stop and have a chat with me. If they’re with their family, I know them by name as well!

I decided to force myself to not spend for a day. That would mean: no breakfast at work, between £1.15 to £5. This does not always mean I buy a lot of food on the £5 day, no. The man who serves the food at our work does all his calculations in his head. He’s like the stock market and offers a different price daily. Then I might have a £1 or £2 snack before lunch. Then I’m off to a restaurant where £7 is a cheap lunch, yet I frequent the £15 menu restaurants. Back at work, I’ll treat myself to another snack of around £2, and then if I’m hungry before cycling home, I’ll pop in the shop and grab another snack at around £2.

The day before I decided not to spend, I made sure enough of the dinner would be recycled and used as lunch. I hate eating yesterday’s dinner for lunch, but… £770. On food!

I woke up early, easy for me as I’m an early bird. I went about making banana and oats pancakes for myself and the family. I bagged that and also last night’s dinner and cycled off to work. Luckily, I don’t drive to work, so didn’t spend a penny on petrol.

At work, I enjoyed the breakfast far more than the awful junk served in the kitchen. I was so full I didn’t even contemplate a snack during the day. 2 nil me. At lunch I reached for my wallet and stood up, ready to help some restaurant owner pay their mortgage. We have one French restaurant near my work that I go to so often, that I think, three more meals and I’ll become a major shareholder. But then I remembered I had lunch with me. I heated up my lunch and ate it all. It felt good to not spend and by the time I went back to work in the afternoon, I calculated I’d saved between £9.14 and £22 depending on my hunger. It felt like a £22 day as well. During the late afternoon I once again reached for my wallet, and then stopped myself from buying a snack. When I thought about it I actually didn’t need a snack. Instead I went and had a pint of water from the work kitchen tap. I cycled home, head down, doing everything not to look at any type of food establishment, hence I be tempted by the goodness it held. At home I kept my wallet in my bag and left the computer alone in case Amazon with its shiny wares tried to defeat my closed wallet ritual. Amazon! How you tempt me with your wide selection and excellent customer service!

At night, I reckoned I had saved £25 big ones! The enormity of it made me feel slightly ashamed of myself. I blew a lot of money on a lot of unhealthy food. I then calculated that if I did that only once every week it’d be £100 richer at the end of the month. At the end of the year: £1,200. After 20 years, you better sit down for this: £24,000. And that’s simple saving. If I threw it in a Vanguard index fund offering 8% a year returns, then I’d have £56,900!

Well, there we have it. A couple of months later and I’m having several spending free days a week. Little steps make a big difference. Food is one of the biggest expenses in a saver’s life. If you can cut down on eating junk and spending money on junk you’ll be healthy in your body, and your wallet.

How to be a millionaire, easily

“There is nothing around me but money, money, money.”

— Stephen Richards

In a previous article I wrote about how to make a million quid, the easy way. In this article I’m going to expand on that slightly and give the nuts and bolts of what needs to be done.

First, let me quickly explain what a workplace pension is. As you work, you contribute a portion of your salary, minimum 5%, to your pension so that in the future, when you retire, you can use this money to fund your life once you no longer have a salary coming in from a job. Great!

Secondly, your employer makes a contribution to your pension as well, minimum 3%. Wonderful!

Thirdly, the government give you lovely tax relief on your contributions, so it doesn’t cost you so much. Brilliant!

Now, let’s get on with what needs to be done to be a pension millionaire.

  • Get a job – The first thing you need is a job to benefit from a workplace pension. Without a job you can’t benefit from this.
  • Get a good job – You want to get a job that pays a lot of money, and, remember, this is the important bit, you want to work for a company that contributes more that the standard 3%. My company contribute an amazing 7%. I have friends that work for companies that contribute 11% and 14%. Free money! I’ve even heard, although it can’t be true, The Bank of England contribute 55%!
  • Don’t opt out – When you begin work you are automatically enrolled into your pension and your company will move 5% of your salary into your pension every month. Some idiots, and I have done this so learn from my mistake, opt out of the pension, meaning they get nothing. Don’t do this!
  • Increase your contributions – The minimum you can contribute is 5%. As soon as you join the company tell them you want to contribute more that 5%. The more the better. Also, as you start a job you never really know how much you’re going to earn exactly. If you wait for the first couple of months to go by you’ll be used to earning a certain amount and won’t be able to go backwards and have less money a month. So contribute high, right away. Also, you should front load your pension as much as you can. More about that below.
  • Contribute bonuses – If you receive any bonuses, commission etc, then contribute all of that to your pension. The reason being is you live without that money anyway, so you can still live without it. Also, the main reason is the tax relief the government give you. If you’re a basic tax rate payer of 20%, and you get a bonus of £100 the government take £20 of that. If you’re a higher rate tax payer of 40% the government will tax £40. But if you put the £100 bonus into your pension then the government don’t take the money and it all goes to your pension! Now increase that bonus to £1,000 or £5,000 or £20,000. On a £20,000 bonus you’ll be paying £8,000 in tax! If you put it in your pension you keep the £8,000!
  • Move fund – If you’re not just about to retire, say 5 years off your retirement date, then you should move your pension into a more aggressive fund. This part scares people. But it shouldn’t. This is how your pension works. You contribute, your employer contributes and the government offers tax relief. That money get moved to a pension provider, like Legal and General, as an example. They then put your money into a default fund, which is in the stock market. The fund is made up of lots of companies or things such as government bonds or properties for example. These companies/properties, in the long run, go up in value and provide dividends, which means the money you contributed increases, resulting in you having more money when you retire. Now for the cool part. You can move into a more aggressive fund. By that I mean a fund that is 100% stocks. Stocks, historically, offer the best returns over the long run. So if you’re in a fund that is 100% stocks there is a better chance your money will increase to a quicker and higher rate, which, results in you having more money. This sounds difficult, but actually only takes a small amount of time and research. The fund I’m in has low fees, as fees eat into your money, plus the fund is a 100% stocks index fund, which is globally diversified, meaning it has companies in it all over the world. So if things go back in Japan, and I had all Japanese companies then my pension would temporary decrease. But as I’m globally diversified a problem in Japan does cause me a little blip, but nowhere near as much as if I was all in Japan. Do your research.
  • Front load – This is key to becoming a pension millionaire. If you do all of the above, you should think about still increasing everything. So if you get two bonuses a year but only contribute one, then add the second bonus to your pension as well. This is front loading your pension. You are getting as much money in there as soon as possible to allow it the maximum time to grow. When investing in the stock market, time in the stock market is key, not “timing” the stock market. The longer you’re in the pension fund the more time it grows and compounds. If you’re contributing 10%, decide to contribute 20% for an entire year. It might feel hard at the start, but you’ll soon get used to living off less. Plus, the more you contribute the more tax relief you get. Also, by front loading you protect yourself against the future. Let’s say you front load your pension for the first five years of your working life. They you decide to have a child and end up having triplets, you’ll need money, so you might decide to reduce your contributions. But as you’ve front loaded that isn’t so bad. Or, let’s say you front load for 10 years and then decide on a career change that doesn’t pay as well, then you’ve protected yourself as you’ve got a lot of money in the pension from the last ten years. Or, let’s say you go self employed. You no longer have the contributions of you employer, you only have your own contributions and the tax relief. So, squeeze every penny you can as soon as you can. Front load.
  • Carry forward – Each year there is an annual allowance of £40,000. So you can only contribute up to £40,000 in your pension per year. But, let’s say you’re a high flying sales person and you get a big bonus which will take you over the £40,000 annual allowance, but you do want to contribute it receive the tax relief. You can use the unused relief from the previous three tax years, starting with the oldest year. So let’s say three years ago, you only contributed £20,000 into your pension, then you could use that unused £20,000 annual allowance and add it to this year’s allowance, resulting in you receiving tax relief! Please note: I am aware that a lot of people won’t have this problem. But the question I ask to you is, why not? Go out earn more money. You work harder than most so you deserve more.

Do the above and when you retire you’ll be a millionaire, easy.

Money challenge

“Every once in a while you need to challenge yourself and learn new things.”

— Amit Ray

You’ve been reading this blog and have understood its lessons and taken action on them. You’ve done the below:

  • You’ve set financial goals.
  • You’ve repaid all your debt apart from your mortgage, if you have a mortgage that is.
  • You’ve reduced your expenses.
  • You’ve got 6 months’ worth of expenses saved up as an emergency fund.
  • You have life insurance and critical illness cover in place.
  • You’ve contributed as much as you can to your workplace pension.
  • You’ve contributed to a low cost index fund such as the S&P 500 from Vanguard via a stocks and shares ISA, in order to get all returns tax free.
  • You overpay your mortgage, if you have a mortgage.
  • Every three to six months you nudge up your contributions.
  • With the money remaining, you spend wisely and don’t blow it on £15 fish ‘n’ chips and a conservatory for the back of your house.

Now, you’re at a bit of a loss. What to do now? You’re in what they call “the long middle”. How do you keep hungry and focused once everything is set it place and ticking along? Well first of all, you’re luckier than the majority of the world. They don’t have the above in place.

Well, to keep you hungry, how about the money challenge? The money challenge is a way to set yourself small goals with your remaining spending money and keep focused.

Try these ten challenges:

  1. Save a pound a day in a old jar and you’ll have £365 this time next year. Take that £365 and add it to your stocks and shares ISA and pump that money into the stock market to that it can make more money for you.
  2. If you’re about to make a silly purchase such as a 12 slice toaster for £50, don’t buy it, but pretend you’ve spent the money and move that £50 into your stocks and shares ISA. Not only have you saved £50, but you’ve improved the planet by not buying another item that had to be sourced, manufactured, packages and shipped. Win win.
  3. Same above but for taking transport. So if you were going to drive 2 miles to the local shops, jump on your bike or walk. The petrol might be £1. So take that £1, put it in a jar and for all trips you didn’t do, save the money, and at the end of the month add that to your stocks and shares ISA.
  4. Same as above, but now going out for dinner. Rather than paying for a babysitter, a taxi both ways, food and drink; stay in and cook food in the cupboard and have a night playing games. The £50 to £150 you saved, push that straight in the stocks and shares ISA.
  5. Give something up and bank the saving. Do you drink, smoke, have a chocolate bar at 3 pm? Whatever it is. Don’t do it, improve your health and save the money up to the end of the month, then put it in your stocks and shares ISA.
  6. If you buy anything, such as a t-shirt, which costs £15.50, round it up to the next £5 level, so £20. There will be a £4.50 difference which you save up until the end of the month and then add it all to your stocks and shares ISA.
  7. Don’t spend anything all week. What you do is you pick a day in the week to be your starting day. Then the night before you get all the food you need for a week. Then the next day you don’t spend anything, not on food, drink, entertainment, clothes, travel etc. You do that for the entire week. At the end take a portion of the money still in your current account and add it to your stocks and shares ISA.
  8. The doubling challenge. What you do is on the first day of the month you save 1p. Then on the next day you times the amount you saved yesterday by 2, so that will be 2p. The day after you times it by 2 again and that will be 4p. You keep doing that until the amount gets so high that you can’t double it anymore. You then take all that money, add it to your stocks and shares ISA.
  9. This is a drinking game, but can be used for saving. Get a pen and paper and watch the 80s classic The Lost Boys film. In this film Kiefer Sutherland’s character says “Michael” a lot. Make a decision or how much you will save every time he says Michael. It might be £1 or 50p or 20p. Then turn the film on and you put a cross on the paper every time he says Michael. At the end you add the number of crosses up and then multiple them to the amount you allocated for each mention. Example if you said 50p for each Michael, and Kiefer said it 20 times, that would be £10. Once you get the total you immediately move the £10 into your stocks and shares ISA. Be warned, he says Michael an insane amount of times. I reckon the scriptwriter was getting paid by the word.
  10. Lastly this is a health challenge. You reward yourself £5 for every session of fitness you do. So if you go for a run one night you pay yourself £5. If you cycle to work instead of the car you pay yourself £5. If you pull the shed out, clean it, put most things away and throw away any unwanted junk, you pay yourself £5, if you clean the car rather than going to the car wash etc etc. Add all that money up at the end of the month and not only will you be fitter, you’ll be richer and can move that money to your stocks and shares ISA.

Good luck with the challenges and remember to make sure you use the money for your future as soon as the month is over.

How to make a million quid… the easy way

“Before you can become a millionaire, you must learn to think like one. You must learn how to motivate yourself to counter fear with courage.”

— Thomas J. Stanley

Fancy making an easy million pounds? If so, keep reading. Actually the amount is just more than a million, it’s £1,055,000.

Hold on: £1,055,000? Haven’t we seen that figure before somewhere in this blog? Correct. On this article all about pensions. That’s right, you can make £1,055,000 via your pension… easily.

The £1,055,000 is the maximum lifetime allowance that you can have in your pension before you start getting charged additional tax on withdrawing the pension.

You might be thinking, £1,055,000! That’s insane. I’ll never earn that sort of money in my life. And I say, really? Are you sure? If you earn the UK national average wage of £28,000 at aged 20 and continue to earn that without ever getting an increase to age 65, then you would have earned £1,260,000. So already you’ve earned more that the lifetime allowance of a pension. You would actually have to cut back the closer you come to retirement to avoid the additional tax.

But, you say, I need to live off that £28,000. I can’t just put it all in a pension. And you’re right. But, to have £1,055,000 you don’t need to put all your salary into a pension.

Let’s quickly look at the nuts and bolts of a pension, specifically a workplace pension.

  1. You contribute a percentage of your salary each month, minimum 5%.
  2. Your employer contributes a percentage each month, minimum 3%.
  3. The government contributes tax relief of either 20% for basic tax payers and 40% for higher tax payer.
  4. All of the above goes into a pension fund, which is the stock market, and grows over the years until you reach retirement.
  5. When you decide to retire you can take 25% of your pension, tax free! Tax free everyone! The two loveliest words.
  6. The remaining 75% you can withdraw just like taking a salary and get taxed at the same rate.
  7. Die before 75? Great news, it all goes to your spouse tax free!

That’s it, simply put. You’ll have £1,055,000 in your pension when you retire. You’ll potentially take 25% of £1,055,000, which is £263,750, tax free. Over half a million big ones, tax free! Then with the remaining £791,250 you will leave that in your pension, so that it continues building money, and you just take out what you like each week/month and enjoy retirement.

But, you say, how do we actually get to the £1,055,000? It all sounds good, but I’ll never accumulate that amount.

Let’s see how by using the 20 year old earning £28,000. For simplistic sake, let’s pretend the 20 year old begins work on 1st January 2020, and will retire 1st January 2065.

The 20 year old will have 540 pay days in that time period of 45 years.

The 20 year old is auto enrolled into their workplace pension and decides to contribute a little more than the standard 5%. They go with 7%. This difference is not noticeable in their monthly salary.

Using the calculator from the amazing website The Money Advice Service we can do some predictions. With the 20 year old making a 7% contribution, and their employer making a minimum 3% contribution, and the government providing a 20% tax relief, the full amount going into the pension every month is £233.33.

The next thing the 20 year old does is move their pension from the default bitch fund their employer put them into, and find an index fund with lower costs, as the lower the cost of the fund the more money the 20 year old keeps; then they find a fund that is more aggressive than the default one, they find the fund that is 100% stocks, as they have lots of time for temporary dips in the market. The more aggressive the risk rating on the index fund, the higher the potential return.

Let’s say they’re in a fund that is 100% stocks, which provides, on average, an 8% return each year. Some years it will be lower than that, and some years higher, but it averages out at 8%.

Now, let’s use the amazing investment calculator from calculator.net and in the field “Starting Amount” we’ll add 0. Then in the “After” field we’ll add 45 years as that’s how long they will be contributing. In “Return Rate” we’ll add 8 to indicate the pension pot will be growing at 8% on average each year, and finally in “Additional Contribution” we’ll add £233,33 as that’s the amount we’ll be contributing each month. We then click “Calculate”.

Hmm. In the “Figure End Balance” we get £1,121,329.61. That can’t be right. For the next ten minutes we keep shutting down the browser and trying this again, yet we keep getting the same figure.

Yes! It’s correct. Way over a million pounds! All for the sake of adding £233,33, which, might I add, didn’t all come out of the 20 year old’s salary.
£70 of that came from their employer.
So that’s only actually £163.33 from the 20 year old.
And of that £163,33, there is tax relief of £32.67.
So that’s actually only £130.66.
Let’s divide that by 4 to get the weekly total and that’s only £32..66 a week.
Or £4.66 a day!
Plus there’s more that 28 days in a month, so it’s even less.

For less that £4.66 a day you can be a pension millionaire.

The amount above is above the £1,055,000 lifetime allowance, so they would be getting taxed more. But, three things can happen:

  1. The government will increase the lifetime allowance along with inflation, so in 40 years the lifetime allowance should be higher.
  2. As they get closer to retirement age they will want to move out of the aggressive fund and into a bitch fund, so if there’s a temporary dip in the stock market they won’t be hit so hard.
  3. The amounts might differ and all figures are only a projection for demonstration purposes, so the total figure might be higher or lower.

Okay, you say. Sounds marvellous. Now let me jump in my time machine, go back ten, twenty, thirty years and tell my twenty year old self to start saving into my pension. I’m forty now. What am I supposed to do?

You do the same above, but you contribute much more. We calculated 7% in the example, you have to contribute more. You have to go aggressive with your contributions. Your money needs to do the hard work, compared to the twenty year old, where time does the work.

If you’re on the same £28,000 salary and you’re 30 years old, you need to contribute 18% rather the 7%. Sounds a lot 18%, but let’s do the sums.

Full contribution to your pension would be £490.
But remember your employer pays £70 of that, so it leaves £420.
Of that £420, the government give you £84 in tax relief.
So £336 comes from you. Not as heave as the original £490.
That’s £84 a week,
Or £12 a day. Plus there’s more that 28 days in a month, so it’s even less. Some people spend £12 a day on lunch. Bring lunch if from home and that saving will make you a millionaire.

But don’t feel duped. Unlike the twenty year old, they’re a good chance you’ve purchased your property, so don’t have to worry about that. Also there’s a good chance you’re earning more than £28,000, so even if you did 7% your contributions, and your employer’s will be more than £233,33.

If you contribute, 10% or 15% or 20% or 50% then you’ll be pumping money into your pension, the government will be giving tax relief and the stock market will be churning your money into, hopefully, a nice million quid!

To wrap up, if you’re not in your pension, get in it today. Use the two calculators that are linked in this article to work out how much you need to contribute. And if you can, keep increasing the contributes, every three to six months, and especially when you get a pay rise or bonus.

Good luck and I’ll meet you in the millionaires’ club when we retire.

New UK tax law introduced!

“…but in this world nothing can be said to be certain, except death and taxes.”

— Benjamin Franklin

Start screaming and shouting. If the good citizens of the United Kingdom didn’t have enough tax to pay on their salary already. what with income tax and national insurance contributions, a new tax law has been introduced.

This means that people will have less money to spend. This will result in people being unable to by a new car every year that depreciates quicker than the Titanic sinking. This results in people being unable to buy a second TV for the shed. This means that people can only go on holiday three times a year.

Tax, how we do so hate you when we look at our payslip every month.

And now a new tax, which, would you believe, doesn’t even get taken from our gross salary, but our net salary!

This tax was introduced by the American motivational speaker, Tony Robbins, of all people. He doesn’t even work for the UK government.

So here’s how the tax works. From your gross salary the UK government tax a percentage for income tax, either 20%, 40% or if you’re doing really well 45%. Then they take national insurance contributions at 12% and then 2%. These taxes goes to frivolous things like hospitals, schools, fire departments, police stations, rubbish collectors.

Then Tony Robbins’s tax gets introduced. Mr Robbins says once you pay all your government taxes you’re left with your net salary. With this money you need to pay all your expenses and buy lots of consumer junk you don’t really need, like the ninth pair of jeans. But, Mr Robbins says, before you pay your expenses and buy junk, why not pretend you’re getting taxed again and save 20% of your net salary?

Who does he think he is? Taxing our hard earned money and stopping us from buying fidget spinners and singing fish. And what pray tell does Tony recommend we do with this 20% net salary tax? He only wants us to go and invest it in a low cost index fund. I like Vanguard by the way.

So let’s put that to the test just to prove that this is once again another tax that’s eating our hard earned money when we could be spending it on the third Chinese takeaway this week instead.

£1,000 is our net salary.
£200 is the dreaded Tony tax.
£2,400 is the yearly amount we’d get taxed. Disgusting.
£12,000 is the 5 year amount we get taxed. Horrendous.
£24,000 is the 10 year amount we get taxed. Lord have mercy.

So after 20 years the Tony tax would have taken £48,000 of our net salary. And that’s if we never receive a pay increase in 20 years. If we did, he’d tax even more!

Oh, and I forgot to calculate that he wants us to invest it rather than letting it die a death in our minute interest savings account. Let’s look at an 8% return and see how much our taxed money would grow to.

£1,000 is our net salary remember.
£200 is the dreaded Tony tax.
£2,486 for 1 year in the stock market.
£14,588 is the 5 year amount we get taxed.
£36,024 is the 10 year amount we get taxed.
£113,799 is the 20 year amount we get taxed.

I decided to look at the 40 year amount, just to really get riled up. Do you know that it would be £644,215. That’s well over half a million pounds. Almost two thirds of a million!

That Tony tax would live in a stocks and shares ISA, which for once, is tax free… So, £644,215 would be ours, tax free… Oh. Right. Maybe this Tony tax isn’t such a bad thing after all.

Okay, I’m on board. I’m a believer.

Home ownership vs investing

Make of thy dwelling a profitable investment.

— George S Clason’s The Richest Man in Babylon

The title of this article should be, “Why I’d always buy my own home over investing in the stock market”, but it was too long.

I invest in the stock market. On a monthly basis I purchase units from a low cost index fund via Vanguard, which by the way, are a superb company. I also have a workplace pension, which I invest in, again, using a low cost index fund.

I know that the stock market is a prime place to make money over the long term. The two other avenues to make money over the long term is buying rental properties and starting/owning your own business.

There’s often a debate of what is better financially, invest in the stock market or pay off your mortgage. At the moment with interest rates so low and mortgages as cheap as they may ever be, the financial return you receive by paying off your mortgage is nowhere near as good as investing the money in the stock market.

But, for once, I just don’t care.

Why? Because my house is my home. It’s where I live. It’s where my family live. It’s the place I come home to at night and the place I wake up in every morning. It’s where I sleep when I’m ill, and where I invite family and friends to visit.

I feel a home is so personal that no roaring bull market returns can equal what a home offers.

A home that is mortgage free, and all yours, is more part of your life than hundreds of thousands of pounds in a Vanguard index fund can ever be.

So at this moment, if I discovered I had a spare £100 a month, would I put it into my index fund and contribute more, or would I overpay my mortgage? The head says index fund, but the heart… of course says, I’d increase my over payment on my mortgage.

There are several financial benefits to this.

  • The first is by overpaying, you pay less interest in the long run.
  • The second is you pay the debt off early, so you stop making mortgage payments earlier, which reduces your expenses considerably.
  • The last and most important is the peace of mind you receive from knowing the home is all yours and you no longer have to pay for it.

Conclusion

Sure, you’ll get better returns in the stock market, but the inner peace a paid off home offers is priceless.

Pensions are for risk takers

“If you’re not willing to risk you cannot grow”

— Les Brown

Pensions are for old people, right? They’re the puny amounts of money old dears have in their purses that’s just enough to buy them a newspaper, right?

Ah… no. Dare I say it, pensions are sexy… Alright, no, they’re not sexy. But they are pretty awesome. I wrote about the dazzling benefits of pensions here, but in this post I wanted to stress what a pension can do for you.

Personal finance is a lot about taking calculated risks. When we hear the word risk immediately we go into defence mode and want to avoid risk. But risk is what creates wealth. If you saved £100 a month for 45 years and stuffed it under your bed, you’d have a nice sum of £54,000. Not bad. But inflation, which is the increased cost of goods and services, would have eating into the £54,000. As I wrote before, my dad purchased our family home for £18,000 in 1980. Today, 2020, £18,000 won’t get a two year old VW Tiguan. But, if you were to put that £100 into a low cost index fund, such as one from Vanguard, and did that every month and got a yearly average return of 8%, then your £54,000 would be approximately £480,576. That’s over £400,000 difference just by taking a calculated risk.

And remember, you’re doing exactly the same with your pension. You’re putting money in each month and over the years that money is increasing and building more and more money with the compound interest it creates.

So, let’s get back to why pensions are for risk takers.

Let’s assume that age 20 you started putting in £210 into your pension each month for 45 years. Now if you are employed that £210 will be made up of at least 3% from your employer, and the government will give you either a 20% tax relief or 40% tax relief depending on your salary. So that £210 will actually cost you a lot less. Now after 45 years in a fund paying 8% average yearly return, your pension will be… wait for it… approximately £1,009,211.

Yes, you read that right. Your pension will be in the region of one million pounds!

How did that happen? It’s a combination of time, contributing every month, and compound interest.

So how are pensions for risk takers, if the above all seems pretty standard stuff? Well, that’s just it. The pension is an amazing safety net. If you contribute regularly over a long period of time it just keeps building and building. You don’t even notice it. But, because it’s building and building in the background and you know that if all else fails when you hit retirement you can live comfortably, then the world is yours to take.

Want to start a side business? Then do it. The business might be a success and you make millions, or it might be a complete failure. But because you’ve got the pension bubbling in the background you can afford to take that risk and seize the opportunity.

Want to invest in the stock market? Then do it. If you invest in low cost index funds you’ve got a great chance of making money in the long term, just like your pension.

Want to invest a lump sum on a single stock, such as Tesla? Then do it. There’s a chance you stock will race up, but, don’t forget there’s a chance it won’t, but if you’ve got the pension to fall back on when you retire than maybe take the risk… Note: this is hard for me to say the above as I’m not a single stock picker, but an index fund man.

Want to change jobs and do something less stressful? Then do it. As long as you keep contributing to your pension then the safety net is there for you.

Just from those four options above, they would halt most people into not taking action. The risk of losing money is just too risky. But most people don’t think about the pension safety net. Most people only think about what is in their bank now, what is in their wallet or purse now. They don’t think long term.

Personal finance is a long game. A long journey. If you have a pension that you contribute to every month, and you increase those contribute amounts on a regular basis, worst case every year, and you’re in a pension fund that offers good returns, by the time you retire you’ll be rich.

So why not take a risk? Life it there to be lived. You can’t afford not to take a risk.

Workplace pensions are for mugs

Motivation is what gets you started. Habit is what keeps you going.

— Jim Rohn

Workplace pensions are for mugs.

One of the basic rules with creative writing is to hook your reader with an exciting opening sentence. “Workplace pensions are for mugs” sparks interest for a type of person. This person is contributing into a workplace pension and is now panicking that they are a mug.

Well, the opening sentence was a trick. Actually, a lie. A bit like sending an email to your colleagues with “free lunch” in the subject, you just wanted to make sure they read it. I think workplace pensions are bloody amazing!

Below are the things I know about pensions. Please note, I’m no pensions expert. Please do research yourself, I might be wrong.

What’s a pension?

A pension is something your grandparents had. It’s a pot of money that gets saved up over their working lifetime, and they used it to pay for their retirement years once they stopped working and earning a salary. Pensions are about as sexy as a mauve, velour tracksuit.

There are three types of pensions… that I know of anyway.

The New State Pension – This is the pension the government gives you. It is currently £168.60 a week. I hear people moan about how low this is, but I’m not too sure. If I wasn’t getting robbed each month with my extortionate mortgage repayments, I think £674.40 a month covers a good number of my expenses: electricity, gas, water, council tax, internet, TV licence, petrol, internet, line rental, mobile phone and still I’d have about £140 spare. That’s not bad, but I do work hard on keeping those expenses low. Now of course, I can’t survive on £140 a month, £35 a week, £5 a day; well I could, but it wouldn’t be much fun and there’s only so many Tesco’s value price beans a man can eat. My windows would be constantly open and I’ll spend a fortune on Febreze. Anyway, don’t knock the new state pension. There are rules to getting the full amount of £168.60, such as you need to have paid National Insurance Contributions for 35 years, but over a normal working life that should be achievable. When writing this I’m 39 and when I calculated this on the government website I should have reached my 35 year target in about 12 more years. One other plus point is the pension rises with inflation, which as we should all know, inflation is the killer of savings in the bank.

Personal pensions – These are pensions you set up without your employer contributing. An example would be someone who is self employed, like a trades person. They don’t have an employer, they are their employer, so they open a pension and add money in there every month.

Workplace pensions – This is a type of pension where you contribute money every month and so does your employer. It all goes into your pension pot. This post is all about the workplace pension.

What’s a workplace pension?

Pensions can be complicated beasts, but don’t let that stop you reading, I’m dumbing this down to a level that I can understand. If you need more information on pensions, go to the government’s amazing website The Money Advice Service. The work that department have done is superb. If you read everything on their website you’ll be set for life. One thing that is often mentioned with pensions is when you’re approaching your retirement age, you should consult a financial adviser to help you make a decision.

Alright then, a workplace pension is a beautiful thing.

But let us first work out what “contributions” means. A contribution is an amount of money you contribute (put it) to your pension “pot”. So when someone says, “I’m contributing £100 into my pension” they are putting in £100 a month into their retirement pot. If they did this every month for a year they would have contributed £1,200 in their pension.

Now, with workplace pensions your employer (the company you work for) has to also contribute to it. And they have to use their money, not your money. Result! So, if they contribute £50 a month, they are putting in £50 a month into your retirement pot. If they did this every month for a year they would have contributed £600 into your pension pot.

So you’d have your £1,200, plus their £600, resulting in £1,800 contributed.

That’s contributions.

The magic of workplace pensions

When you join a company as an employee, you are automatically enrolled into your workplace pension plan. This means that you must contribute a minimum of 5% of your salary and your employer must contribute 3%. I’m hesitant to write this, but you can then decide to opt out and not be in the pension. Only a raving lunatic would do that, which I did at a previous company as I thought I’d only be there for three months. Eight and a half years later I left… with no pension. Idiot! The company was contributing 6%! That’s a lot of free money I missed. Idiot! Move along now.

Let my foolish mistake be a lesson you can learn from and avoid.

Below are as many benefits of workplace pensions that I can think of:

  1. Automatic enrolment – As above, this is all set up for you when you join a company. You don’t have to think about pension providers, setting up direct debits, how much to pay in, etc.
  2. Regular contributions – If you’re reading this blog because you’re struggling to save, then workplace pensions are a great thing for you, as the money comes out of your salary before it goes into your bank account, every month. So you can’t get your hands on it and blow it on more junk like a backup plasma screen TV in case your other one breaks.
  3. Free money – Your company contributes at least 3%, every month, so that’s like getting a 3% pay rise. A lot of companies do more. Mine does 7%! I heard if you work for The Bank of England it contributes 55%. That can’t be true, but I wish it was.
  4. More free money – The government are pushing workplace pensions hard. They understand how difficult life will be when we’re pensioners and a Mars bar costs the equivalent of a VW Tiguan nowadays. The government gives you tax relief on all your contributions, so you don’t pay tax. Let me say that again in case you read it fast. You. Don’t. Pay. Tax. Yes, you don’t pay take on your contributions. And that tax you saved goes back into your pension pot as well!
  5. Percentage increase – One of the keys to building wealth is percentage increases. If you are contributing 5% of your salary, let’s say that’s £100 a month. Next year, if and when you get a pay rise, the 5% will no longer be £100, but say £120, so you’re saving £20 more a month. The same goes for your employer’s contributions, their 3% which was £50 is now £55! You didn’t need to do anything, it’s automatically done for you. And the great thing is, as it changes when you get a pay rise, you don’t even feel the loss in your pay packet, as you’ll still get a bit more from the pay rise. I should also note here that your 5% contribution is the minimum. You can contribute much more that 5%. The annual allowance limit, as of 2019, for the current tax year is £40,000. I believe you can use allowances from the previous three years, but best to do some research first.
  6. Investing – Pensions are invested into “funds” by your pension provider. They put your money in a fund that holds things like shares, bonds, property, cash, all that stock market jazz that the majority of us are not aware of. They do it all for you. So if people ask if you invest in the stock market, you can say, “Yes”. Look at you, you’re a regular Gordon Gekko!
  7. Locked away – People get a little concerned when they realise they can’t get to their money until they’re old. This was a big blocker for me. But as Hunter S Thompson said, ” Buy the ticket, take the ride“, now I’m pleased that the money’s locked away. Currently, the earliest you can get to it is 55 without incurring crippling fees. But experts recommend you take it much later than that to enjoy adding more contributions and compound interest. But, actually, not being able to pull the money out and blow it on a holiday to dusty, boiling Spain is a good thing. The money keeps increasing and the interest keeps compounding and the more money you save, the better it is for you when you want to retire. If you’re reading this and trying to learn how to save, this is a full-proof way to save. That money is automatically taken and locked up.
  8. Take it with you – One reason why I never got into pensions in my early years was because I loved to have the freedom to move jobs. I was worried I’d have 15 little pensions scattered all around and wouldn’t be able to keep hold of them. Now, this is no longer a problem, it probably never was, I was just financially naive. You can easily move your pension value from your old company to your new company and accumulate all the pensions into one, so it’s easy to manage. I did this with a customer and it took two minutes to move an old pensions to his new company. Note: always read your pension document before moving it, as there might be great benefits that you’ll lose by moving your pension from one provider to another, or there might be charges. So have a check and if you need help consult the government’s website The Money Advice Service or the government’s Pension Advisory Service website, or a Financial Adviser.
  9. Lump sum – When you’re retired and ready to start taking your pension, the government allows you to take a lump sum of 25% of your entire pension tax free. Let’s say you have £800,000 in your pension when you retire. That means you can withdraw a cool £200,000 tax free. Imagine that hitting your bank account and the good you can do with it.
  10. Pass it on – Not planning on living to 75? Great! You can pass the pension onto your spouse and they receive it, wait for it… tax free! Plus, wait for it… it doesn’t come out of your inheritance tax. See government website about inheritance tax, it’s the only tax I hate. Die after 75 and you can still pass it on, but your spouse gets taxed on it like a salary. Still, better than it disappearing.
  11. Tax relief – I hinted on this above, but it’s just wonderful to get tax relief. If you are a basic tax rate payer and you contribute £100, it only costs you £80, as the government return the other £20% to your pension pot. So you’re getting an immediate 20% return on your investment. That’s Warren Buffett type of investment returns. Also, speak to your employer as you can also add bonuses, again tax free, into your pension. If you get a £1,000 bonus it all goes into the pension. If you were to tax the bonus and put it into an ISA rather than your pension, then you’ve lost £200 big ones in tax. If you’re a higher rate tax payer, you’d lose 40% of that bonus, £400! Plus don’t forget good old National Insurance Contributions on top of that as well. But, if you invest it in your pension, you get to keep all £1,000.
  12. Compound interest – And, and, and, the best thing is, that £400 that you didn’t get taxed on goes into your pension, and what does it do? It grows. It builds and builds, generating more and more money over the years. £400 investing in a fund that provides 8% returns equals £4,025 over 30 years, over 40 year it’s £8,690. And remember, that’s only £400. You’re pension will be vastly bigger. So imagine how much a decent sized pension can grow. As they say, “Get rich slowly“.

There must be dozen more benefits to workplace pensions that I’ve not mentioned, but the things I’ve said should indicate they are essential. If the above still doesn’t convince you, then ask yourself this, if at the end of each month you have a little amount of money, or no money, or worse, go into debt to pay for your lifestyle, what’s going to happen when you stop working and no longer get a salary? As they say in John Grisham novels, “I rest my case.”

Here’s the government’s website about workplace pensions. Their website is great. Clear to read, easy to understand, and remember, they run the shop, so that’s always the best place to begin when doing your own research into anything regarding finance.

Congratulations, you’re broke!

There is a difference between being poor and being broke. Broke is temporary, and poor is eternal.

— Robert Kiyosaki

Broke, skint, penniless, pot-less, boracic, however you want to phrase it, you have no money. Sounds awful, but for now, let’s put a positive spin on this. Broke, is one step up from in debt, which is one step up from drowning in debt.

So if you are broke, you’ve either not accumulated debt, well done, billions of people cannot say the same, or you were in debt and you’ve paid it off. Even better, as again, billions of people cannot say the same. Being in debt and repaying it all is of course, not a teddy bears’ picnic, but it does teach you lessons about sacrifice and learning from your mistakes. Plus it installs good habits of putting money away each month to pay off you debt. This habit can then be transferred to putting the money into savings such as an emergency fund, deposit for a house in a Lifetime ISA, or adding it to a stocks and shares ISA via Vanguard and investing in one of their low cost index funds.

So if you’re looking at your bank balance and you’re completely broke, but have no debt, don’t feel down about your financial situation, feel joyous. You’re in the best position to now start saving and investing your money so later in life you will be rich. Billions of people in debt would give their left nut to be in your position.

Put a smile on your face, your financial future starts today by creating your financial goals.