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.