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.

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!