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Someone reached out to me to try to solve the puzzle related to earning a high income as an employee (£237,000 to be exact) and using tax laws and perks to keep the most of the money to save and invest.
I scoured the tax rules to pull a quick report that broke down how that money can be allocated in tax friendly accounts or where tax relief can be obtained.
This exercise was a great reminder on why we should invest in a tax advisor to help us keep most of our money. A tax advisor is available to all income levels and although there could be costs associated with this service you can save up and use them at least once a year to get your monies in order. If you are on a low income, you can get free advice from the government. I have just opened a Money pot called Life Admin where I'll be saving to get a tax advise and formalise a Will.
Many wealth builders have great lawyers, accountants, doctors and financial advisors. What can a tax advisor do for you:
How to manage a £237,000 income and Tax. Click here or the image below to see the full report.
Need a Tax Adviser, click here to choose who is appropriate for you or use the all in one service from Taxscouts and get 10% off.
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What money lies have I stopped telling myself? What is my biggest financial asset? How do I spend and save today? A few years ago I had ZERO knowledge about money and in this post, I look back to see what key mistakes I've stopped making that have become a game changer in my life.
My 5 money mistakes
I remember always being so surprised that I had nothing left at the end of the month
Spending and spending with no real plan
Before I began to get an handle on my finances, my money would come into my current account and all of it would stay there. Slowly my rent, bills would get paid and if at all anything was left, I would still have a reason to spend it.
I remember always being so surprised that I had nothing left at the end of the month and when I thought about the effort it would take to go through my spending, in my mind, it was not worth the effort. The money was already gone.
Today, I have a budget which I optimise (find ways to reduce my expenses and increase my savings and investments) regularly. Nothing stays in my current account after all bills are paid (my current account doesn't pay interest) and monthly savings and investments have left. Every planned spending is accounted for and I no longer suffer the end-of-the-month-where-did-my pennies-go-syndrome. If you need a money goal to help you plan your spending start here.
To be honest, by the time I was 23 years old, no one or school had taught me how to save, no one sat me down to talk about debt or showed me savings accounts and it definitely did not come up as a topic amongst my friends. I simply had no positive money role models.
Not being deliberate about saving
Just as I spent with no real plan, it is no shocker that I had nothing to save and this happened every time. To be honest, by the time I was 23 years old, no one or school had taught me how to save; no one sat me down, showed me savings accounts, opened a piggy bank and it definitely did not come up as a topic amongst my friends.
I knew I wanted to have money but to me it was magic that makes this happen and this magic happens to special people. Little did I know that magic starts with a budget. A budget is the greatest energy source for your money - no lie, they are like batteries you charge to take you far. It shows you where all your money goes and how you are doing. Today, I know of many magic wands that are accessible to all of us where it is savings accounts, the stock market, pensions, private equity, real estate, peer to peer lending, Crypto.
This is how I am now deliberate about my savings are as follows:
Thinking I've got my pay-check. That's all I can make right now...
Once I got my first proper job, I breathed a sign of relief I now have money. I revised this thinking after my first pay-check (with National Insurance (NI) and taxes deducted, very little was left). Since this was my only source of income, there wasn't much else I could do except find ways to increase my income constantly - this was a hard task. I knew I had to find a way to fatten my income outside of my employment.
I went to a seminar once and they spoke about making money while you sleep and multiplying your hourly rate. Since then, this quote from Dave Ramsey has stuck with me-Your most powerful wealth building tool is your income. One of the ways I am applying this principle is by allowing other companies to work for me by buying into funds or shares. When these companies do well, their prices increase and/or they give a dividend. If they don't do great, I take the risk of having lower return but on average and over a long period of time, I should win.
Of course there are other things you can do like getting another job for your 5 to 9 but if want an 'simple' co-worker earning for you without any additional effort, you now know your options.
Before writing this post, I looked at my overall pension to see the current value and hands down - it is the largest financial asset I own today.
Not setting my pension to the max matching to get free employee match
When I started my first job, I think I opted out of the work pension plan initially or I may have begun with saving 1%. At this time, if I put in up to to 5% of my salary, the company would match that 5% and I would have 10% paid into my pension pot.
Now as a 23 year old, why would I give away 5% of my money for old age when I am young and in my view at that time, close to the London poverty line? I kept this view for about a year and half when I got serious about transforming my financial life.
I spoke to a friend at that time who advised that the easiest place to start getting money was by increasing my pension saving to the 5%. This not only allows me to get free money but it also reduces my taxes.
Before writing this post, I looked at my overall pension to see the current value and hands down - it is the largest financial asset I own today. This is not surprising given this UK research where pensions can make up to 60% of households net worth. This are some reasons for the growth:
I am now looking forward to being older; I've even calculated how much I'll need to live comfortably. I also have some peace of mind that the efforts I am putting in now will lead to a beautiful life and that is exciting. I like pensions because they force us to save for old age (otherwise, we will just stumble into it), once the money is gone it is out there working, growing to make the most for you.
Fast forward to age 24, I read a book by Tony Robbins which simplified the foreign language and and so I quickly open my brokerage account with £25. I have not looked back.
Believing the stock market is scary
As a young girl, I remember watching CNN evening news and at 9pm GMT, we would hear the NYSE Bell ringing to close the day of trading. I must have watched this happen hundreds of time but I never understood why the bell was there in the first place and what those green and red triangles next to names like LSE, NYSE, DAX etc. meant. I did not know that I was witnessing the opening and closing of money making opportunities. The commentary the pundit gave after each closure was like a foreign language to me, one I found very boring.
Fast forward to age 24, I read a book by Tony Robbins which simplified the foreign language and and so I quickly open my brokerage account with £25. I have not looked back. Today, I know the stock market is a huge source of wealth for the top 1% in the UK and is designed to be confusing (with the graphs and financial terms). It is actually not confusing and I am very supportive of the low fee robo-advisors that make it easy for you and me to take part this huge wealth engine.
Last week, a family member was discussing a real estate scheme that guaranteed 8% return if she put in £5000. I immediately opened by brokerage app and told her that one of my fund is posting 22% gain. Five years ago, there is no way I wold have been able to suggest this as an option to explore but now I know more and can suggest ideas that could generate a 14% pay bump. This is the true power of knowledge.
Now, your turn, do you have any mistakes you've made?
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Is your country making you rich?
I've written extensively about what we can do on our own to build wealth over time; have a savings goal, build an emergency fund, stock market investments, a pension and more. Let's change the focus for a moment and imagine you don't have to do 80% of this because your government has programmes to easily help you build wealth. How would that feel?
In this post, I explore the United Arab Emirates (UAE) and the perks given to it 1.4 million Emirati citizens who have an average net worth of $99,000.
Infographic: What do you get an a citizen of UAE? Plenty!
Healthcare (free). Roof over my head (check). Job (guaranteed), Large pension (check) & more
UAE is a country known for Dubai, its oil wealth, architectural landmarks, home to millions of expats and more. Its government has created a financial cushion for its citizens with the focus on giving them a high standard of living. It seems Emirati citizens might have the dream quite a lot of people are after, much akin to lottery winners; you don't have to worry about a job, your old age, your health even your marriage costs!
Some lessons and next steps
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Here's a 60 plus list of money goals you can achieve anytime. We've covered the research behind the power of writing down your goals. So choose yours or add to the list.
Do right with my cash savings
Travel & Fun
Protecting my Family
Save better and more
Take care of my future
Financial Health Check
Experiment with my ideas
Big overall Goals
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When you get a credit card, the one thing of concern is the interest rate. Unmanageable and very high interest rates can be a problem when managing our money. While credit card companies make money off of high interest rates, we can sometimes struggle to keep up and are left with high repayments and bad credit scores. If you have credit card debt or want to make a big purchase, keep reading to learn how to pay off your debt and no interest using Balance Transfer and Purchase credit cards.
Let's change the game
In this post, we learn how to pay zero interest rate using credit cards. This applies if you 1) already have a high credit card balance or 2) you want to make a large purchase. There are rules to play by but learning this technique can put money back into your pocket as opposed to putting the money in the lenders account.
Balance Credit Card
Move debt from your existing credit card to another and pay ZERO interest during the interest free period
Purchase Credit Card
Buy goods or services and pay ZERO interest during the interest free period
Your Credit card should be doing this for you
A credit card is a type of unsecured debt that is to pay for goods or services. If you are able pay in full, you credit card helps you build a good credit score and puts you in good financial health. If you do not pay in full, lenders charge high interest rates and the debt can grow if it is not managed.
Make sure your credit card is giving you one of the following. You can contact your lender to discuss options available to upgrade your card.
The Good and Bad of the Credit Card
How to build a Credit Score
Use a Balance Credit Card to pay ZERO interest if you already have credit card debt
A balance credit card is a product that allows you to move your leftover credit balance onto a balance credit card. Doing this allows you:
An Example: The good and less good way of using Balance Transfer Credit Card
Jess has £5,000 in credit card debt to pay. So far, Jess pays the minimum per month and also pays interest. Jess wants to pay this debt off in 18 months and has been working on improving her credit score. Jess looks online and see companies like Virgin money, Halifax, HSBC, M&S and more who have balance transfer offers. Jess applies and moves her balance to the new balance card. She makes sure she pays the minimum each month to retain the interest free off. By month 16, Jess has paid off all her debt. She closes the account with no penalty and moves on with the rest of her glorious life.
THE OUTCOME: Jess pays off ALL of her debt and ZERO interest.
If Jess only paid £3,000 during the 18 months, the left over debt of £2,000 will incur an interest rate of e.g. 20%.
THE OUTCOME: Jess pays down SOME of her debt and pays HIGH interest on the remaining debt
Use balance credit cards if:
Download Clearscore or Experian. Depending on your credit score, they can pre-approve you for balance transfer credit cards. This means based on the information they hold on you, you can find out which card and terms you are eligible for. I checked with some friends and found that the better your credit score, to larger the interest free period you can get. So a friend with a relatively lower credit score, could get balance transfer cards with a maximum of 6 months interest period and another with the highest credit score was eligible for 29 months. Mind you, the credit limit you get will depend on your credit history.
When searching for a balance transfer card, keep an eye of on the following so you pay less:
Use a Purchase Credit Card if you want to make big purchases and pay it off in a given time
A purchase credit card gives similar benefits to a balance transfer card.
What's the difference?
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Tax is part of our lives whether we want it or not. It touches our income, contributes to our society, our healthcare, education, roads and more.
In this post, I spend some time looking at the UK tax rules to find out which benefits we could use to grow and protect our money. I put my basic findings in an infographic to make it simple [Scroll down to view].
So let's learn about tax so we no longer label it as highly-confusing and downgrade it to somewhat confusing (a much better space to be in).
The Tax Web
Throughout this research, I found that Tax is actually not hard to understand on its own. The confusion comes when you have to consider all parts. Take this example:
You have an income over the personal allowance threshold whilst saving for a pension and a home which your family will support you with a deposit.
I call this the web because to understand your tax position, you need to understand the Tax rules for income, pension, stamp duty tax and gifts. No wonder you and I shun this topic...but to our own wealth demise.
Did you know that if you make a loss when you sell your home, shares in an ISA, or a personal possession worth £6,000 you can get a tax relief? Imagine that getting paid when you lose. These are the kinds of helpful money tips I want to know about (I've added much more below).
If you work for an employer, your income tax is typically handled by your company. If you are self employed, you'll file paperwork on your own or via an accountant/certified tax advisor to pay the appropriate tax and claim relief. Anyone can reach out to an accountant or tax advisor on tax matters.
Before we move on, one question. What tax rate payer are you? If you don't know the answer, keep reading to find out.
What Tax Rate Payer are you?
Your income determines how much tax you pay. The UK uses a progressive tax system, where the more you earn the more you pay in tax. So, if you earn up to £12,500 per year, you'll pay £0 tax.
On the other hand, the highest income earners pay up to 45% of their income in tax. This can be very difficult to accept which is why many people look at ways to legally reduce their tax bill by using some of the options outlined in the infographic such as increasing payments to their pension, using ISAs to prevent being taxed again or not taking out dividend income for a given tax year (deferring it). Some others flee the UK to low tax rate countries. Just know that your tax solution or option is unique to your personal circumstance.
Find out what tax rate payer your are here.
More tips & resources
Get Tax Advice
Videos on Taxes
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NS&I have cut Interest rates meaning you get less back for your money. There is speculation that other bank/lenders will follow NS&I's lead. This means that holding a lot of your money in cash will not make you rich anytime soon. What else can you do with your cash?
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Leaving university can be an overwhelming and stressful time for students and I firmly believe that Personal finance does not have to be one of these issues. The truth is, all you need are a few basics to set you up for life and luckily, these are not complicated. Looking back I wish I had someone to teach me personal finance whilst at university and so in this post, I share my experience, key tips and hacks related to budgeting, saving, investing and borrowing.
University is a fantastic starting point to begin building a brilliant fiancial future because students have the benefit of time to apply their skills to do meaningful work
I know from my experience, even with a degree in economics and a job in banking, I could use someone discussing money with me. It has been one of my goals to bring this valuable knowledge back to schools. I launched wealthsquats.com to start this journey.
My vision is for all students to make clever financial choices whether it is how much to save, how to manage debt, how to use the stock market, how to be rich or how to have peace of mind about money. This post is my view of how students can get started on their financial journey. The first step is to set up some money goals that you want to acheive. When I began this journey, my goal was to track and increase my net worth. As I progressed, I increase the amount of money I paid into my company pension from 3% to 5% to benefit from company matching and I opened a Stocks & Shares ISA to get involved in the stock market.
Will you be self employed or work for an employer?
Many students will choose to work for themselves as the freelance and consulting industries continues to form a significant part of the UK economy. Others and the likely majority will find jobs with employers for instance through graduate schemes. As a student, what does it mean to be self-employed or employed?
The first financial decision you make as a Graduate is what Salary to choose
Let's use the example of a student who will be employed in London. The salary this student can expect to get in London is around £29,000 - the average annual salary for graduates in London. Of course depending on the role, sector and negotiation, this figure can vary. It is important to know that the salary you choose will form the basis of how much you can save or invest. If you are able to have other sources of income, your savings and investments can expand accordingly.
The salary you choose upon graduation will form the basis of how much you can save or invest
What could be your salary?
Using the salary calculator, If you make, £29,000 a year your actual take home pay is around £1,800. As a working member of the population, you will start to contribute to the wider economy via taxes and national insurance.
In addition, your company will likely have a pension plan which is deducted before you receive your take home pay. Also, if you have student loans, these will be deducted as well. For 2019/2020, the personal allowance - which is the amount of money on which you do not pay taxes on is £12,500.
So what is likely to be your take home pay?
Your TAKE HOME PAY (salary after tax) is £1804.50
Next, we deduct your expenses?
Your TOTAL EXPENSES: £1435
What is LEFTOVER: (£1804.50 - £1435) = £369.5
Most people do not get rich by winning the lottery or via inheritance. For many, they just saved in assets that grow over a long period of time.
What steps can I take to build a brilliant future
As a student, it is from the £369.5 that you can start to save and invest. The expenses example above is just an example of what you can have to build a great financial future. This amount is much higher than what I began with and I focused on investing in things that grow.
Step 1: Choose how much to save and where
Here is how you could save or invest £369.5.
£60 Emergency Fund (Cash Savings)
£30 Oops account (Cash Savings)
£75 Travel & Fun account
£150 Stocks & Shares
£25 Bond Account (5 years)
TOTAL SAVINGS & INVESTMENTS: £365
To maximise your savings, continue to invest each month (automate this process) and keep tracking your performance.
Most people do not get rich by winning the lottery or via inheritance. For many, they just saved in assets that grow over a long period of time. In my experience, I have found my pension to be one of the fastest way to grow my overall net worth this is because if I put in 5% of my salary, my company matches it by 5% so I get 100% increase each month on my pension savings.
Step 2: Step up a budget
Entering your savings and expenses into the WealthSquats tracker, you can see that your expenses make up around 80% of your income and you are only able to save around 20%. Now you can take steps to creatively think about how to increase your savings. In my case, I moved to a cheaper room to reduce my rent after reading that rent should take no more than 30% of my income. Thereafter, I significantly reduced my eating out and put every extra savings into cash savings or the stock market. Today, I still continue to find ways to optimise.
There is a rule of thumb that says, wealth creators save 30% of their income and spend 70% on expenses. This rule is a rough guide but can help wealth builders like yourself to control your outgoings.
I do not believe in budgeting and suffering, we should still live a good life no matter what income we have so it is crucial that you add 'enjoyment' into your budget so you do not restrict your self from doing what you like. Every month, I make sure that I save or invest my target amounts and once I've done that, I am free to spend whatever is left as I please!
Step 3: Control your Debts
Debt is another expense that can significantly reduce your ability to create wealth. I suggest you read this post on how to spot good and bad debt behaviours.
To summarise, save and invest in things that grow
Wealth building is fundamentally about saving and investing in things that grow. With this in mind, use the tips below to build that brilliant future.
Once you've got the hang of this, your money goals will evolve and you'll already have the wealth building basics.
What to consider when deciding on your first salary
So what choice will you make?
Remember to share these tips with your friends and start taking active steps to build a wonderful financial future.
Get in touch if you have more questions.
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Why do the rich pay less for housing month on month? How do they make their money grow? How many of them can survive one month without a pay-check? I read the 2020 report from Resolution Foundation on wealth in the UK to see what research says about how to be rich in the UK. Keep reading to see the surprising answers.
First, a quick recap: What is Wealth?
Wealth is your assets (An asset: is a thing of value that grows e.g. savings, pension, real estate, art, gold etc.) minus your debt. We also call this your net-worth. In this study, 4 types of wealth were measured:
So, how do the rich manage their money?
The top 10% have about 50% of UK's wealth
The average net worth of the 10% is £800,000. But, where do they grow their money? Keep reading to find out.
Do it like the Rich:
When it comes to financial assets, the Rich hold less cash and more of their money in growth assets like savings bonds, ISAs, and Stocks and Shares.
Poor households hold most of their money in cash or current accounts where there is very little growth.
When the rich hold money in savings bonds, ISAs, and Stocks and Shares, they benefit from:
Do it like the Rich:
The Rich have about 45% of their money in pension pots, 35% in property and 20% in financial assets (savings bonds, ISAs, and Stocks and Shares)
Financial wealth (in high growth assets) increased substantially in the last 10 years and this contributed significantly (80%) to the overall wealth of the rich.
As mentioned above, the financial assets of the rich are held in growing assets like bonds and the stock market. The Stock Market grew substantially in the past 10 years and it made the rich richer.
The poor held most of their money in zero growth assets e.g. cash or current accounts and even when they added more money in these places, it grew at a much lower rate.
Do it like the rich:
Richer families tend to be homeowners
Their housing costs are around 5% of their income if they own their home outright or 11% of their income if they have a mortgage
Do it like the Rich:
The Rich have emergency funds
7% of the rich would have a hard time if their main source of income is impacted as opposed to 44% of the poor.
An emergency fund allows the rich to stay afloat if a shock like a pandemic or job loss takes place. Young females who are not degree educated were the most at risk if their income ran out.
Do it like the Rich:
There you have it. Some insights into the habits of the rich. Of course there are other ways to get rich, such as owning a successful business, investing in start ups, inheriting money or owning art for example. The options above are the accessible ways to start to build wealth which is also the reality for many people. See this infographic on how to spend £2000 which highlights the step by step guide to implementing the lessons above.
Which Rich habit will you start to use?
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What do you want to be when you grow up? What is your 5 year plan? What are your career goals? What are your relationship goals? We've all heard this at one point in time and I wonder, why do we not also ask: WHAT ARE YOUR MONEY GOALS?
if you are the kind of person that writes your life goals, does it include money goals? Research has shown that writing your goals down can make you reach them faster. Keep reading to find out how you can incorporate this money habit for success.
What you need to know
I asked 5 readers to share their money goals:
I asked 2 questions:
1. What makes you want to save and invest
2. What DOES NOT make you want to save and invest
Click on the images below to see their responses.
The research and experience of writing money goals
Every year, I write my money goals down. So far, I have found that I met them before or after the deadline I had initially set. I believe that there is some magic to writing things down. Once you write it down, it is autosaved in your brain and then somehow, you start to focus consciously or unconsciously to make it happen.
My experience aside, research has shown that setting goals makes you more confident, motivate and in control - no wonder employers use performance reviews to set and monitor targets- they know that if done well, it motivates employees and can also help their business grow. If you want to actually make it happen, start by writing them down. 'A study by Gail Mathews, found that you are 33% more likely to meet your goals if you write them down, share it with a friend and review it frequently'.
Want to meet a money goal? write it down.
How to Write a Goal that you stick to (4 ways)
1. Choose an exciting goal
According to Business Insider, 'Instead of being afraid of your finances, focus on the goals that excite you'. Why? when you choose an exciting goal, you stay motivated to make it happen. Here are the types of goals you can write down:
Types of Goals
2. Break it down into small bits
Big goals can feel overwhelming and when it comes to money goals it is important to break it down. A Harvard study explains, 'When we’re judging the difficulty of a goal, the first thing our brains see is the size of the gap that separates the goal from the baseline. The bigger the gap, the more difficult the goal'
For example, if you are planning that trip to tour the East Africa and it would cost 2000. Saving 2000 might today can feel challenging. To make progress, you can break it down to save 100 a month and add more in months where you can. After 5 months, you'll have 500 saved and have covered 25% of the cost. With an exciting goal ahead of of you, you can celebrate the small progressive wins and that is key,
3. Make it Challenging
If the goals is too simple, you won't be satisfied. Research has shown that you achieve 'greater satisfaction from achieving goals that help you improve as opposed to maintaining the status quo'. So, If you are dedicated to clearing your 3 credit card debts of 2000, 1000 and 300, you'll likely be more satisfied clearing the 300 than paying off the minimum for each month which would make you feel like you are not improving.
Going back to the readers response on What DOES NOT make you want to save and invest? I noticed most of the response was about making sacrifices today so they can enjoy tomorrow. I think this is another crucial element of satisfaction, delaying gratification, allows the reward at the end to be more enjoyable.
4. Track It
Truth session. Years ago I began tracking one specific money goal. Since then, that number has increased by a whopping 4024% to be exact. How come? What you cannot track, you cannot measure. Remember the research I mentioned earlier, it said, if you share your goal with a friend on a monthly basis, to keep you accountable, it happens. My friends are my spreadsheet, MUTAZ, and you readers of this post. I review my spreadsheet monthly to check how I am doing. Tracking helps me to stay focused and also allows me to think of new ways to reach my goals faster. Grab a copy of the WealthSquats smart budgeter to write and track yours.
Need help on where how to start tracking? Use Financial Success Map to make a plan.
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The sweet spot for many stock market investors is knowing where to put their money to make it grow consistently over time. When you are new to investing it can be difficult to know how put your hard earned cash to good use. This post explores 4 methods everyday investors can use to know how much stocks, bonds and commodities to hold.
Where you choose to put your money within the stock market can make a BIG difference to how your much and fast your money grows. Inspite of the risk, the stock market remains a viable option to increase your wealth, beat inflation and get better interest rates than what your bank. So, the question is how should you spend your money in the stock market?
Keep reading to find out:
First, some quick definitions.
Methods/strategies: can be a rule or way of doing things to achieve a goal. For example, a high risk strategy will be focused on growing money very fast and could choose to put investments in riskly companies. A low risk strategy is focused on protecting money from loss and an investor can choose bonds
Portfolio: think of it as a folder that holds, a certain amount of stocks, bonds and commodities (gold, oil, coffee, silver)
An asset: is a thing of value that grows e.g. pension, real estate, art, gold etc.
Inflation: the price of things you buy go up. So you'll need more money to get the same amount of the thing you buy or you get less of the thing you want with the same amount of money
How much Stocks should you own forever?
1. 100 Age rule
Your Age minus 100 is how much you should put into stocks. The premise of this approach is that is the younger you are, the more risk you can take. So, if you are 25 years old, you should have 75% in stocks and 25% in bonds. As you get older, you will want to take less risk with your money so you will move towards having more bonds (which are seen as less risky and provide lower returns) and less stocks (relatively seen as more risky because share prices can go up and down frequently).
Some investors are taking this rule one step further and making it 110 or 120 minus age to take more risk. For women, who live longer on average, this could be an approach to make sure their investments last throughout their lifetime.
As with every rule of thumb, this rule does not factor your individual circumstance or preferences.
2. The Traditional 60/40 rule
This is the traditional method of investing. The idea is to have 60% in stocks and 40% in government or corporate bonds. This method allows you to take some risk but also allows you to get regular income when the economy goes down. As your stocks and bonds rise or fall in value, experts suggests to maintain this ratio at least once a year by selling and buying the respective bonds or stocks.
This rule has performed well over the past decades but following the 2008 financial crisis experts are asking - how will it perform over the coming decades?
3. The All Weather
I came across this rule when reading Tony Robbins' Book Master the Money Game. Tony reached out to Ray Dalio of Bridgewater Associates to answer this question: how should investors spend their money in the stock market?
One thing that stood out to me in the book is the notion risk. Ray explained that an investor with the 60/40 portfolio above is exposed to 3 times more risk (the potential for significant loss of money) which comes from owning stocks as they are more risky. Bonds which have a 40% allocation, contribute about 5% risk to the overall portfolio.
In response to the reality of the size of these risks, Ray created the All Weather portfolio. He also identified 4 financial seasons that impact prices. These prices change depending on the growth or decline of the economy and inflation (when the prices of things you buy go up). The All weather portfolio allocates an equal amount of risk (25%) to these four seasons. Investors can create the All Weather Portfolio using the strategy shown below.
4. The Dragon Portfolio
I learnt of this rule while watching this video on how to build a portfolio that is strong enough to withstand a recession. Artemis Capital Management carried out research over the past 90+ years to find out which strategy made the most money for investors. They concluded that investors should "Find assets that can perform when stocks and bonds collapse, and boldly own them regardless of short term performance". How can we do that?
Author Chris Cole, gives the following example:
Take assets (a thing of value that grows) X, Y and Z
According to the author Chris Cole, the optimal mix for an investor is roughly 20% of X + Z or Y + Z. You can buy more of each asset when it becomes cheaper during an economic decline and grow your money long term. This strategy is summarised in The Dragon Portfolio. The author found that over 90 years, the Dragon Portfolio generated a 14.4% return with lower risk.
1. What should I invest in?
Low cost stock and bond index funds that capture the entire market.
2. How much stocks and bonds should I have?
A range and mix of 25% - 75% that you modify according to your age. If you have more time to invest, you can afford to take more risks.
3. How can I improve my returns?
It is the year 2056, I am age 62 and have just retired. I have paid off my mortgage, I have healthcare coverage and I need £3000 per month (net tax) to be happily retired. Research has shown that UK retirees need around this amount to maintain a certain comfortable lifestyle that allows for some luxuries likes holidays, fine dining and more.
So if I want to be a disco dancing queen at 62 , living it up on £3000 a month, where would that amount come from? The answers I found are well… huge and I must start now. See it all here.
At 62, I envision a life where I can spend on luxuries, management my expenses and retain or increase the lifestyle that I had when working. An undesirable scenario for me is a position where I am used to a certain lifestyle and then in retirement, I find that I have to downsize significantly.
So if I was living on £2500 while I working, In retirement, I don't want to have only £1,500 as income. Studies show that most retirees want there income to be around 70% of their working income in retirement.
My £3000 will cover, healthcare, bills, food, clothing, travel, donations and a few luxuries.
It is very crucial that my mortgage is paid off or at least close enough to being paid off (2 years away). This way, I will not have to work to discharge the loan or feel the stress of using my savings to cover meet my debt obligations.
My ideal situation would be to have my primary home paid off and to have a rental property where I can continue to hold assets. We are likely to live longer and with a retirement age at 62, I can expect to live till I am 85 or longer. This means that my income must last for at least 23 years.
Today, I work for a company and each month on a specific date, I get a salary. That salary is provided once and it funnelled into my expense, savings and investment. Fast forward to age 62, my retirement age. My income will no longer come at a specific date but it will come from different sources to make up £3000. It could look something like this:
£750 from Company Pension received in on 8th of each month
£450 from State Pension received in on 8th of each month
£450 from Personal Savings account received in on 8th of each month
£450 from rental income received in on 15th of each month
£300 from SIPP received in on 17th of each month
£300 from LISA received in on 17th of each month
£300 from part-time job received in on 23rd of each month
This reconfiguration of my potential income at age 62, changes the way I think of a pay-check. It will mean that for instance, I'll have to organise my spending not around one date but multiple dates. This is a mindset shift that I have to be aware of and start getting use to as the retirement age comes closer.
The above is an example. The £3000 I estimate is for an individual. If that amount covers a couple, adjust your income sources to reflect your cirumstance.
Now that I know how much I want to live on at 62, I now had to figure out how much I needed to save in order to get £3000 monthly. See the table below for full details.
To estimate how much I need to save, I learn of the concept of '4% drawdown rate'. This the rate at which I can take out of my savings in order to maintain my pension pot and not run out of money.
Let's take my LISA, each month, I need £300 from that account to live on. In 1 year, I need £3600 = £300 x 12. If I want to withdraw 4% of my LISA account at 62, I need (£3600/4% = £90,000 saved in my account upon retirement.
So the Ideal scenario is that my LISA will grow annually at 4% and if I withdraw 4% annually, I actually NEVER run out of that £90,000 saved. This is called the natural yield.
So if my annual income i £36,000 net, I need (£36,000 / 4%) = £900,000 saved at the age of 62 to maintain the lifestyle I desire. This calculation is based on a number of assumption related interests rates and inflation. However, it gives me a view of the size of the pension pot I'll eventually need.
Seeing this figure, I can spend all the £900,000 in 25 years (£900000/£36000). However if I anticipate that I will live longer than 25 years, I need that £900,000 to last much longer.
Want to simulate your pension pot?
Have a go at the Wealthsquats calculator shown in the table above. Alternatively you can do a quick search and find other like the People Pension calculator
At what age can you access your pension?
For each of the pension sources I have mentioend above, you'll need to keep in mind when you can actually start to withdraw from them. For instance, the age when you can access State Pension will differ depending on your birth year, so if that age is 68 years, and you wish to retire at 55, you'll need to find ways to cover the income you would have received from our state pension.
So part of my pension plan is looking at the age and time when I can access these income sources.
Some Interesting things I found out:
- £1 million is the maximum size the UK allow for your pension pot excluding state pension. This is called the Lifetime Allowance. If you go beyond this, you will be taxed.
- £40,000 is the maximum an individual can pay into pension each year. This is called Annual Allowance. If your income exceeds £150,00, your AA will reduce up to a maximum of £10,000 at £210,000. The more you pay in your pension, the lower your taxes.
- £4000 is the maximum Amount I can save in a Lifetime ISA per year if I allocate the savings for retirement. If I save the full £4000 the government will give me a bonus of £1000 (25%).
- 25% is typically the amount you can withdraw TAX FREE from company pension or SIPP upon retirement. The remaining 75% is taxed as income but you can vary your withdrawal rate to pay lower taxes.
Know the Pension Carry forward rule.
I learnt this from a friend.
Every year I put in £40,000 into my pension this is the maximum annual allowance permitted by the government. I also manage my wife’s finances and she currently has around £160,000 in her pension pot. For the years where we do not put the full pension allowance, I use the pension carry forward rule where in a given year, I can pay the difference from the annual allowance for the past 3 years. This looks like this;
Year 2016 I contribute £30,000 into my pension (I have £10,000 left for my annual allowance)
Year 2017 I contribute £20,000 into my pension (I have £20,000 left for my annual allowance)
Year 2018 I contribute £20,000 into my pension (I have £20,000 left for my annual allowance)
Year 2019 I contribute £40,000 into my pension (I have maxed out my allowance, nothing is left)
In 2019, I can contribute a total of £90,000 into my pension because I am able to carry forward £10k+20k+20k= £50,000.
There are many variables that impact your growth and longevity of your pension pot. Keep these in mind when reviewing your circumstance.
- When you start saving
- How long you save for
- How much you want to live on
- Interest rates
- When’re you hold your investments
- How you manage your taxes and tax free pension
What you can do now?
- Calculate the value of your current pension
- Simulate your expected income
- Agree on your savings plan
- Track your progress monthly
Options avaliable for you
- Save more
- Reduce your expenses
- Work longer
- HOPE for a better interest rate
Read our full guide on pensions here to get started. I also found this website from The People Pension to be useful.
This can be an attractive option if:
- You want regular income in the form of interests
- You want to access to your money at certain intervals
- You are happy not to touch some of your money for a while
- You are retired
I am actually going to rename these bond trees as they money bloom all year round. Who doesn't like that
How a bond ladder works
With a bond ladder, you split your £1000 into different amounts across different bonds that mature at different times which also offer varying interest rates as return.
As normal with bonds, you'll get the highest interest rate with a longer maturity period. Essentially the issuer or bond provider rewards you more the longer they hold your funds as a loan.
If you are retired or you know someone who is about to retire
A bond ladder is a good way to manage your savings or lump sum pension while you retain your capital. With a bond ladder, you are guaranteed a monthly (if you bond provides this) income via interest payments across multiple years.
Do keep an eye out of the interests you get to ensure that you are getting the types of returns you want. You can also create bond ladders using:
Click here to learn more about bonds.
Imagine this, two individuals Niya and Hurley receive an email that says you owe £450 from phone contract which you did not formally close if you do now address the cost, it will continue to increase.
Niya and Hurley's response to this curve ball event
Niya's response: damn I should have done this, I kept putting it off. I can resolve it in 24 hours using my own savings
Hurley's response: oh no, I'll have to borrow from Shane again and I have not paid him back and I can't ask Leo again as I still owe her as well.
Niya is less vulnerable, More capably and more resilient as she has the funds to attack the issue immediately. Hurley is highly vulnerable, less capable and less resilient as she was in an already difficult position and this new phone bill has added to her worries.
This is how people become suddenly poor
I read this article that mentioned that the number of people who are at risk to becoming poor is actually higher than the number of poor people. I thought eh!?
The scenario above is the simple view of how poverty happens. You are less likely to be poor because you have ONE bad event. You need combination of multiple events for it to happen- like a domino effect that makes your situation more and more precarious.
If we understand this cycle, then we know that if we can manage these multiple series on unfortunate events by having a sufficient financial cushion, we are more likely to survive it or at least come out of being poor in no time.
A key goal of WealthSquats to encourage ourselves to build financial resilience, the ability to progress with our financial goals in the face of the unexpected. It is about building a strong finical muscle.
What are examples of curve balls
I found the table below from UK's MSE report where they list out all the most frequent unexpected events and it associated costs. From their report, the average amount for unexpected cost is £1545, the highest category is lending to family/friends which amounts to £2,482.
How am I building my resilience?
After reading this report, I promptly reviewed my finances to see how I can start to prepare myself for just in case situations. I converted one of my saving accounts into an oops account where I make a monthly deposit.
This account is for managing any expenses and I am perfectly fine knowing that it will go to zero at some point and I will continue to top it up. I want to be part of the survey that has funds to solve problems that can be prolonged if I am unable to take action.
It is important to note that the oops account is part of building our overall financial resilience imagine a future where you have a robust emergency fund, a diverse asset class that includes bonds, funds, pensions and an oops account. That to me is holistic financial resilience- you are taking care of yourself today, you are prepared for tomorrow and you have a starting point to handle the unexpected.
I encourage you to open your curve ball account today and start with something however small and give yourself additional peace of mind.
About life insurance
Life insurance is a financial product that provides your dependents with income in the event that you pass on. This is particularly important for parents with children and individuals with partners/spouses. As part of my exploration into wealth protection, I have found that life insurance allows you to continue to provide for your dependants so that they do not have a lower quality of life. Using the insurance payout, your dependents can pay mortgage payments, pay for education, manage other expenses as well as continuing to save and invest.
How to get life insurance...
With your employer
Typically, employers provide life insurance as part of employee benefits package. In this scenario your employer will ask you to identify your dependents and sometimes you can allocate the percentage that should be allocated to them. Having an employer provided life insurance package provides coverage if you pass on while you are an employee of the firm. If you move to another job, you will lose the coverage. So check the terms and conditions carefully.
On your own
If you wish to have life insurance coverage that is not dependent on your job, you can shop online from providers such as Vitality, AIG, Scottish Widows, Virgin Money and more. My research has shown that you should seek life insurance policies that is at least 12 times your annual income so if you annual income is £30,000, you should seek coverage of £360,000.
How much does life insurance cost?
The monthly cost of Life insurance varies substantially and can range from £2,50, £6, £12, £30. This is variation can be due to a number of factors:
1. Your age: typically, the older you get life insurance, the more expensive it will be
2. The term of the policy: What length of coverage are you seeking, is it 25 years or unlimited?
3. What will the policy cover: do you want mortgage cover and/or financial payments to your dependents? The more you cover, the higher the monthly costs.
4. The payment plan you choose: Level or decreasing term
Level Term The payout will remain the same over your chosen term. So if you elected a payout of £360,000 over 25 years, your dependents will get that amount if something happens to you over the selected term.
Decreasing term: The payout decreases over the term of the policy and is typically used to cover specific debt like a mortgage. If you obtained a decreasing policy of £360,000 over 25 years, your dependents will get a higher payout at the beginning and as the 25th year approaches, the payout will approach £0.
Your own monthly payments will be advised by your insurance provider and there is also no limit to the number of life insurance policies you can purchase.
Is life insurance for you?
I like the idea of allowing my investments and savings to continue to grow and have my dependents benefit separately from life insurance payments. The combination of your savings, investment and life insurance payments, can provide a very stable financial foundation for those you care about.
Should you get life insurance if... (my view)
Yes if, you have dependents- children, a spouse or parents, it is beneficial to get life insurance.
It Should at least be 12 times your annual income
And is separate from your job so it follows you and does not end if you leave a job
Spread the word!
After reading this, do check if your parents have life insurance and discuss why it matters. If you know of parents or individuals with dependents, inform them as well so that they are armed with the right options and information.
You are now age 73 and frail. The 119s now own your land, where your modest home sits (you are now a tenant) and they are also aware that you can no longer continue your services. You instruct your children to inherit your debt repayment services to the 119s. What will they do?
Luckily, Debt Bondage, as described above is illegal according to the International Labour Organisation but it provides some historical insight into how debts have been managed in the past.
Today, the 119s seem to be replaced with banks and other lending organisations. Additionally in some parts of the world, your debts can still be passed onto your dependents.
In the UK, research by FairMoney found that typically, women own 25% more debt that men. This reality is taking place in a world where a woman wage is statistically lower than men due to wage gaps and the increased number of women in part time jobs. One positive news is that women are more likely to speak about their debts than men showing that we have less guilt or shame about this subject.
With an open approach to discussing debt, this blog post looks at, what we can do to reshape a women's debt reality. I seek to understand the nature of debt, what it is and how to manage it to yield positive outcomes. And if you are already in a difficult debt situation, I share some views based on research on how to get address it.
There are two types of debts - Secured Debt and Unsecured Debt.
Secured Debts are backed by an asset. This means that when you take on a secured debt, the lender (who is providing you with the loan) has the right to asset e.g. a car or house upon as collateral. The typical types of secured debts are mortgages and car loans. If you are unable to pay the loan taken to obtain these assets, the lender can get the asset also called a collateral. As a borrower, you are able to own the asset only when you pay off the loan in full.
Unsecured Debt are not backed by an asset and the lender does not have rights to any collateral. These debts typically have a higher interest rate and examples of this type of debts are credit card loans, student loans, medical bills, pay day loans, overdrafts etc. If you obtain one of these types of debts, the lender can get repaid if your default in a number of ways- garnish your wages, send a debt collector to retrieve the funds or find a way to get access to your asset.
Across the Britain, Unsecured debts have increased by 50% since 2008 and make up around 30% of a typical household income. Why? these increases are attributed to public spending cuts and wage stagnation. In light of this, individuals are using debts a resource to manage their expenses. Unsecured debts are easier to access (online) and loan providers are able to typically charge higher rates and thus reap significant rewards particularly when borrowers are unable to repay them.
From my research, I have found that people hold debt for a variety of reasons, to purchase phyiscal assets, knowlegde assets such as education via a student loan, to deal with sudden changes, build their credit score and more. Some others choose to have ZERO debts and manage their lifestyle with their own savings.
However, most wealth builders handle debt with extreme care. This is because:
- If it is too high incomparision to their income, it does not free up funds to make additional investments
- It impacts their wellbeing. A debt free life is a stress free life
- It can impact their credit score- a representation of their ability to pay back a loan. If you have a low credit score, lenders including banks will likely charge you high interest rates to lend to you or will choose not to provide you a loan. You can check your credit score for free or for a fee using services like Experian, Equifax, Noodle or the Information Commissioner office.
For each debt type, I share my finding what what a good behaviour looks like and also list out which bad ones to avoid.
We hold debts for a variety of reasons
Bad Debt Habit:
- Spend beyond what you can afford.
- Take cash out of your credit card
- Pay only the minimum amount- this means you'll pay more than you borrowed e.g. If you borrowed 50, you can pay back 150 depending on the interest rate per lender.
Wealth building habit:
- For each amount you spend on your credit card, clear it (pay it back in full) every month.
- Get a credit card with low or zero interest rate payments
- Have only 1 credit card that rewards you for spending (if possible)
Bad Debt Habit:
- Buy a brand new car beyond your means and pay a large proportion of your income to pay back the loan
Wealth building habit:
- Buy a second hand car and pay in full using cash which you have saved this way you also avoid making monthly payment.
- Use public transport, Walk, get a bike (if possible)
Bad Debt Habit:
- You purchased your home and you cannot meet the monthly payments.
Wealth building habit:
- Have an emergency fund that covers around 3-8 months of expenses before purchasing a home
- Make sure the monthly payment is equal to or less than 30% of your monthly income.
- Make monthly or annual overpayments to reduce the amount of interest you pay and your mortgage term.
- Rent out spare room(s) to supplement your mortgage payment
On average, It takes women 16 years to pay off student debts. By contrast, it takes men 11 years.
Bad Debt Habit:
- Get a high student loan that will take more than X number of years to pay.
Wealth building habit:
- Go to a significantly cheaper university
- Take out low cost loans so you can start your career with very low debts.
(Discuss this in DETAIL with your loan provider )
- Seek low interest rate debts
- Ask for ability to pay it off early with minimal penalties
- Make debt repayment less than 20% of your monthly income
- Use comparison sites to consider all suppliers - family, friends, government, banks
- AVOID pay day loans (see more below)
- Do not take on debts for things that do not grow in value (e.g. a TV)
- Find out what happens if you default
Not to worry, you have multiple resources avaliable to you to acheive a postive outcome. Speak to your bank or financial advisers to get more information. You can consult resources and charities that include:
Here are a few steps that may help:
- Create a debt payment plan
- Speak to the lender to reduce the interest rates and repayment amount(s)
- Use the snowball method (pay off the smallest debt first)
- Reach out to debt management charities (see above)
- Overpay when possible
- Stay positive
Whatever you choose, DO NOT Use Pay day Loans
Payday loans refer to loans provided by pay day lenders who lend an amount of money which borrowers typically pay back on the day they receive their monthly salary-hence the word pay day. These loans are typically sought after as a last resort. Due to this, they typically carry very very high interest rates. These loans are unsecured and can negatively impact your credit score because they signify to the lender that you are not financially stable. This can make it more difficult for you to get other loans e.g. a mortgage in the future.