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.

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.”

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.

Save 1%

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

— Jim Rohn

The first time I “really” realised I needed to save money was in my thirties. Far too late, but not too late. I often set myself a New Year’s resolution of saving £1,000. I normally got close to achieving it, then some small “emergency” popped up, or what I thought was an emergency at the time, but really was more like a “want” and I had to spend what I’d saved. The £1,000 felt like the other end of the galaxy. No matter what I did, I couldn’t achieve it. The problem was, the things I was doing to save, were not correct. Some of the things I did were:

  1. Not saving automatically – the money I should have contributed every month, £83.33, was not coming directly out of my bank account (standing order) as soon as I got paid. I needed to move the money manually, and if there was money to move, I didn’t do it, as I often found something else to spend it on.
  2. Not paying myself first – As I was not saving automatically, I didn’t pay myself first. Paying yourself first means as soon as you get paid, before you pay the mortgage/rent, electricity, gas, etc, you pay money into your savings. I never wanted to be without money during the month, so I held off until the end of the month, and told myself I’d move the money then. But or course, at the end of the month there was no money left to move. If I had paid myself first, I would have simply readjusted my spending through the month to compensate.
  3. Not having an emergency fund – By not having money saved in an emergency fund, when an emergency hit, I had to use what I’d saved of the £1,000, meaning I never got to save that £1,000 by the end of the year.

By not utilising the three above best practices, I set myself up to fail. The problem was I simply didn’t know about the three things above. I was financially naive. I realised I’d had this New Year’s resolution for the last four years and had never achieved it. Somehow, without realising it fully, I began searching YouTube and started finding ways to become better at saving money.

The first video I discovered was from Brian Tracy called The Absolute Best Ways To Save Money. In this video he suggested saving 10% of your net salary (salary you get in your bank account after tax, pensions, healthcare, etc). 10%! Jesus, I couldn’t believe it. Where was I going to be able to save 10%? The man must be a raving lunatic.

Note: 10% really is the industry standard. It’s the minimum the financial industry says you need to save. Most people say more than 10%. In the FIRE (Financially Independent Retire Early) community they say save 50%+.

Anyway, back to Brian Tracy. He’s saying save 10%. That just couldn’t be done. Then he said, if you can’t save 10%, then start with 1%. Now that is a number I could… probably, make. Brian Tracy said, if you can only save 1% then just save 1%. It’s not the amount that you’ll be saving that changes your life, it’s the habit that you form.

Immediately after watching the video I watched it again, to make sure I didn’t misunderstand. Then, straight after that, I put a reminder in my iPhone calendar to save 1% of my net salary as soon as I got paid. I was going to pay myself first!

So profound was this knowledge, I told several people, quickly, of my plan. Note: often a bad thing to spread the word about your financial goals. One person actually laughed and asked what I’d do with the 1% of money saved. I ignored the cretin. I had this 1% rule so fixed in my mind that as pay day approached, I watched the video again several times. Brian Tracy turned into Micky and I was Rocky. Every time he mentioned in the video I should save 1% I got more charged up. I was going to do it.

Then, on the morning of the 26th of that month, my standard pay day date, I woke before 5 o’clock, opened my mobile banking app and moved 1% of my net salary into my ISA. It felt amazing. The money was gone, tucked into an ISA: safe, secure, tax-free, and all mine.

I must have looked at that ISA balance 200 times that month. And when the end of the month came, and I realised I’d not spent it, and the following day I was going to do it again, I knew I’d somehow, through sheer YouTube serving content luck, stumbled onto the domino video, the spark plug video, the starter pistol video. There was no turning back. The next day, when I got paid, I once again moved 1% into my ISA. Same happened the following month. And the one after that. I did this for 6 months. There was little showing in that ISA, but that didn’t matter. The habit was formed.

In the video, Brian Tracy said once the habit is formed, we should increase our percentage contributions and raise them, even by a percentage. Still completely financially naive, I thought that going to 2% was impossible. I continued Googling, looking at videos on YouTube and stumbling across podcasts. Once I found some podcasts and heard that all the experts I was listening to: Warren Shute, Pete Matthew, Andy Hart, were saying the same as Brian, that 10% is the minimum, then I knew I had to take the leap and increase my percentage contributions, and that’s what I did.

I’m happy to say I’ve completely passed the 10% mark a long time ago and continuing to increase my contributions’ percentages on a regular basis. My goal is to be like the FIRE blogger The Escape Artist and save 50%+. Let’s see.

Note: The Escape Artist’s blog is amazing. Treat yourself and read every post he’s done. He’ll open your eyes and make you laugh.