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With COVID-19 restrictions easing up in the UK and around the world, many of us are left asking - what's next for me, my career, my health and my finances. Some of us are unsure, confused and looking for clear answers.
In my previous post, I wrote candidly about how this pandemic has made me re-think and replan for the future. Since then, I have spent the last weeks trying to define the milestones of financial success. Specifically, what could it feel like or look like?
I tapped into research and my personal experience and I have designed an interactive financial success map lets me assess how I am doing with my money goals.
I asked 5 readers to share their financial success Map...
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Over the past weeks, two things continue to dominate the news: health and the economy. This pandemic has highlighted how important and fragile these two aspects of our lives are.
Because we feel good, we can easily neglect to check on our health
Apart from the regular advice to eat better and exercise, one thing we can do moving forward is to get an annual health check. In my view this is particularly important if you have a pre-existing condition, a family history of an illness or are past the age of say 35+. Many of us may think that we need private healthcare to get this but this is not the case. Last year, I used Wowcher to get a £120 health check for a family member with a pre-existing condition to make sure everything was fine. The report was detailed and highlighted some known and unknown problems in a clear PDF. This provided some peace of mind for the whole family. The NHS also provides health checks, although you have to be 40+ to qualify. Also factor in health checks for specific areas (breast checks, kidney checks etc), depending on your medical history.
Apart from our financial investment, we should have a health saving pot that is allocated to getting needed health care. We are not only responsible for ourselves but also our friends and family and it is important that we remind and help others to invest in their health as well.
In the UK, we are lucky that we can get free health services. On a couple of occasions I forgot, or dismissed the need to complete my General Practitioner (GP) checks or vaccines - not a good idea. I got a chance to get a health check via work and the GP told me that we all should contact our GP if something does not feel right. The earlier the better.
The NHS does not cover everything however, special services like dentistry, dermatology, physical therapy can all incur supplemental charges. Again a money pot can really save you here. This is especially true if you have children who may specifically require services like braces, paediatric assessments etc. If you want services beyond the NHS, you can shop around to get the best health insurance for yourself where you can pay a monthly fee to get covered. Look at what health services are covered before you make a decision. Many people think they need a job that offers private insurance, but self pay can be as low as £15, and may actually turn out cheaper than paying out of pocket per visit.
One more thing, if you have a family and a serious pre-existing conditions/family history of health problems, consider getting life insurance to protect your loved ones.
5 ways you can invest in your health:
As part of our financial investment, we should have a health saving pot that is allocated to getting a health check.
6 ways to create financial safety nets to weather unprecedented storms
Last year I explored the definition and steps that lead to financial vulnerability - last week, I read an article that sums up how this happens ' first gradually and then suddenly'. In the news today, we see many stories of people who have been forced to lose their jobs particularly those in the gig economy and retail industries. This has been particularly difficult for women, many of who are employed in these sectors. For the lucky ones who qualify for the government support, they can still earn up to 80% of their income. But even still, a 20% pay cut can leave people in very tough conditions.
Nonetheless, without this government support, I shudder to think of how life can be. Here are a few things I think we can do:
1. It is very important to Build and Sustain an emergency fund.
A emergency fund is a saving account where you save enough to cover your expenses for a period of time if you are unable to work. Everyone should have an emergency fund. Start with saving 1 month worth of expenses then aim for at least 3 months, then 6 months. An emergency fund allows you to build the foundation to have something to tap into when things get really tough. If you are able to take this one step further, build a curve ball account to cover the day-to-day expenses that WILL arise.
2. Consider insurance to cover income loss in the event you get ill or lose your job.
This way, if your income stops, you can get covered for up to 24 months until you are able to get back on your feet. Like other forms of insurance, you pay a monthly amount and if anything goes wrong, you get an income paid to you no matter what.
3. Consider getting mortgage insurance to reduce the risk of losing your home
If you own a home, your mortgage is likely to be your largest monthly expense. In the event that your are unable to keep up with your payments, a mortgage insurance makes sure that you are covered.
4. Have a pension pot
I cannot imagine how retirees with low or no pension are supporting themselves in this pandemic. We can be short sighted in these times and forget that we will live a long life. When we retire, our pension pot will become the core income source to weather storms like these. Making sure you are building a sizeable pension pot for when you are older is a constant goal for us all.
5. Invest in the stock market
You are not going out, eating out or going on vacation. With the world on lockdown, the stock market is feeling the effects making some stocks/share and funds are cheaper. If you’ve got spare change, this is a great time to get stocks cheap. With interest rates getting lower (I saw one lender providing a 0.05% on savings), the stock market is one place where you can get a good return in the long run.
6. Negotiate the interest payments on your debts
We know that there are good and bad ways to handle debts. If you are paying high interest on your debts, this might be a good opportunity to negotiate low rates with your provider. I have seen many articles of companies announcing support to their customers in this unprecedented time. Reach out and see what they can do to make you life easier for the long term.
All in all, I hope we can do our very best to give ourselves and our loved ones the strongest chance of living a healthy life. Remember health is wealth!
What other things are you doing to invest in your health and finances?
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Companies like Revolut and Monzo have these two neat features that have made it easy for me to set up my curve ball savings account. Using one account, I am now able to split my expected expenses (such as travel, phone replacement, transport, beauty service) into different pots. PLUS I get interest payments.
Curveball accounts help you manage the WHEN and IF it comes!
The problems I was having
Up till now, I used one savings account to save for curveball expenses. This account did not let me split my expenses and so I set up my automatic savings to hold it all in one go. if I wanted to split expenses into a savings account, I would need multiple savings accounts to track each of my curveballs.
For me this was too much overhead. I don’t want too many savings account to track and maintain.
Saving pots with Monzo and Vaults with Revolut
My new curveball best friends are these saving pots and vault features from monzo and revolut.
Why I like them
6 benefits! I am abuzz. At this time, I decided to go with Monzo saving pots because Revoluts saving vaults is only available to members with a Metal card which is available at £12.99 a month. At the time of wring this article, the Revolut interest rate is higher than Monzo'.
If you have a Revolut Metal Card, watch the video below to see how to set up your Vault
How I have set mine up
Now I can track all my curveballs in one place and this has significantly made it easy for me to be on top of things. If I want to save for another thing maybe a trip next year, I can set up the a new travel pot and start saving so it does have to be a worry.
Watch the vido below to Learn more about Monzo
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We all know what we think of ourselves. But how does the financial world view you? Knowing my credit score was and remains a crucial part of my financial education. I recently downloaded two super easy Apps - ClearScore by Equifax and Experian. These Apps have made it much simpler for me to track my credit score and to see how lenders view me.
A bank sees you as a number. This number can change EVERYTHING
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.
- Pay only the minimum amount- this means you'll pay more than you borrowed e.g. If you borrowed 50, you can pack 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.
You woke up this morning and decided, every month I want to save £100 each month in a savings account that pays 5% annual interest rate.
5 years later, You wake up and look at your account and your balance is £6,828.94
10 years later, as you continue to deposit your £100 and you check your account as it says, you have £15,592.93
30 years later, you check the account again and it says, you have £83,572.64 saved
What is happening here?
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”
The 8th Wonder of the World
Albert Einstein called Compounding the 8th wonder of the world. Compounding is one of those mathematical concepts teachers taught me in school but it did not fully resonate until I began my financial education. Compounding allows you to keep growing your investments by continuously adding interests.
In the example above, we assume an interest rate of 5% and that you invested the £100 in a savings account. In fact, you can choose to invest your £100 in the Stock market via a mutual fund and get double digit returns depending on market conditions which can exceed your overall returns.
Where can I apply compounding?
Compounding applies to asset classes where interests or dividends are paid. These can include:
- Savings & bond accounts
- Stocks & Funds
- Peer to Peer platforms
How to get the most of Compounding
In order to reap the full rewards of compound interest, you have to do three key things:
1. Start NOW
2. Continue to save or invest frequently
3. Do not take anything out
The key secret of compounding is time. If I save or invest £100 for 20 years vs. 30 years at a rate of 5%, I will get £41,274.63 and £83,572.64 respectively. The difference of 10 years allows me to double my investments.
The more time you allow for your investments to grow, the higher your returns. I always encourage my friends to start today even with a little bit in order to take advantage of this opportunity.
Continue to save or invest frequently
At what frequency should you save? Daily, Weekly, Monthly, Quarterly? The frequency of saving is something that you should consider in line with your financial goals. Personally, I like to save/invest the same amount or more monthly to benefit from interests and to keep promoting this financial habit.
Do not take anything out
The mindset that I have employed is to have a long term view (25+ years) on my investments. I suggest you have a short, medium and long term view for your investments. This allows you to create contingencies in case anything arises. The goal here is to try and leave your medium to long term investments untouched. When I say untouched, I mean, not spending your principal and interest returns. You can always move your savings/investments from one bank account to another to gain the benefits of higher returns.
If you invest in the stock market, your investments can increase via an appreciation of the stock value and/or via dividends. The same principles apply, reinvest your dividends to build momentum with compounding.
Keep in mind
In summary, let your principal grow and your interests returns will increase. This applies to all types of asset building engines that you choose to use. It is very important that you maintain a long term view on your savings/investment. Only save what you can make you sleep well at night. Maintaining a long term view on your investments allows you weather economic changes, recession, booms, bust, over time research has found that these correct themselves. So try not to panic when for instance you find your stock investment has gone down from what you saw yesterday. This is part of the cycle of our economy.
Want to play around with your figures to see the effects of compounding? Visit the calculator site
How do I use an automated Standing order?
Every month when I receive my salary, I have set up instructions to my bank to automatically allocate a given amount to multiple asset classes. For example, If i receive £100 on the 30th of each calendar month, the minute the £100 reaches my account, my bank automatically sends:
£8 to my emergency fund
£10 to my P2P account
£20 to my H2B ISA
£17 to my Mutual fund account
£10 to my LISA
£5 to my travel account
£30 remains in my bank account to cover my expenses
Out of Sight, Out of Spending Mind
Allocating my funds in this manner allows me to effectively meet my monthly or annual financial goals. In this scenario, I am applying out of sight, out of spending mind. It is very easy to be tempted to spend when you do not have a plan for your funds and I have chosen to be structured and disciplined with my own goals.
You may say, but I can do this every monthly manually and that is ok if it is helping you reach your own goals. Using this easy tip, has allowed me to be very careful about unplanned spending. If you find that new reasons arise where you want to spend the money you want to allocate to your asset class, it become very easy to derail your goals.
After doing this for a while, you'll find yourself checking one of your accounts surprised at the amount you have accumulated without having to do too much. This is exactly the experience one of my friends described- 'every month, I send £50 to my savings account and at the end of the year, I go and look at it and £600+ is just sitting there and I do a little dance'.
How can you set-up your automated standing order
The great thing about an automated standing order is that the hard work takes places only at the beginning when your set up your instructions. There are many ways to set up your own automated instructions and it takes only a few minutes.
1. Identify how much you want to allocate to your asset classes
2. Contact your bank and set up your instructions. You will need the receiving bank account details. Alternatively, you can set up your instructions via online banking or your banks' phone App.
3. The typical details you'll need to complete your automated instructions:
Bank details of your receiving account
The date when you want the instruction executed (make this the day you receive your salary)
Amount to be allocated
Automated standing orders is a great and easy tool that allows me to build wealth over time with the right discipline. Remember, you can always amend your instructions to match your plans.
Knowing that I did not need to be a millionaire before I could start investing and saving, I began to learn about ways to keep more of my current income by saving and investing wisely, controlling debt and understanding taxes. This blog will focus on taxes.
Why we pay taxes
Taxes are payments citizens/residents of a country make to their government who will typically use such funds to secure social goods like maintain public parks, provide state pensions, provide national healthcare and many more. There are different types of taxes but the one that significantly impacts your wealth goals are income taxes.
What is your tax bracket?
Income taxes are typically deducted from your monthly or annual pay check. Depending on where you are in the world and your occupation type, you can pay up to 70%+ taxes. If your income tax is 50% it means that 50% of your income is going to government and that amount will not be available for you to build your wealth. The 50% that you get to keep can also be subjected to taxes on the interest earned via savings so it is very important to ensure that you are not taxed twice when planning for your financial future.
Many individuals, use banks and tax planners to help them identify ways to legally reduce the amount of tax they pay so that they can hold more of their wealth.
So what can you do today to protect your wealth?
1. Look through your assets classes and identify if you do pay taxes. For instance, if you are using a retail savings account that is not a cash ISA, you will be paying taxes on your savings.
2. If you get a monthly pay check, look through your pay slip and understand how much tax you pay monthly. If you want a holistic view, visit HRMC to see how much income tax you pay annually.
3. My favourite: Start using tax friendly products to safeguard your wealth
The UK government allows wealth builders to save up to £20,000 tax free in any of the three ISA wrappers available. You can save your cash, invest or use Innovative finance products.
In addition, if you invest in Private Equity companies that are covered under the EIS scheme, you can get up to 30% back from the government. You can also get similar refund using a VCT.
If you donate to charity, you can also claim a tax relief on your donations. Furthermore, if you are saving for your children, you can use the Junior SIPP or Junior ISA to protect your savings.
As you can see there are numerous opportunities for you to keep more of your income by understanding how to manage your tax situation. Most importantly, the size of your income is not a blocker. Remember, it is not how much you make but how much you KEEP.
The following are excerpts from WealthSquats.com
Get 20% Returns
Junior SIPP: is a personal pension plan that parents can use to set up a pension for their children. The money invested in the Junior SIPP can only be accessed at around age 55. For each amount invested into a Junior SIPP, the UK government provides a tax relief of 20%
Self-Investment Personal Pension or SIPP SIPP is a pension scheme that allows you to contribute and invest your pension contributions as you like. In the UK, the government provides a tax relief on the contributions made and you can access the funds when you reach retirement age. Keep in mind that there are annual limits to the amount you can contribute to a SIPP (Learn more here).
Get 25% back on your savings!
The LISA can be held in cash ISA which is a saving account or as a Stock and Shares ISA where you invest in the stock market. Each month, the UK government provides a 25% bonus on your cash or investments. You can use the LISA for only one of two things. Either you can use it to purchase a home valued up to £450,000 or you can use it as a substitute pension in which case you are not allowed to make any withdrawals until the age of 55. If you put in £4,000 a year, the government will give you £1,000 free and we like that.
The H2B ISA can also be used to save up for a home. In that case, the government will give you £50 for every £200 you have in the account. Keep in mind that this is only valid for buying a house in the UK.
Receive up to 30% back on your Private Equity
Private Equity: In the UK, the government wants to support early stage companies as they see them as an investment into the overall economy. The government has several schemes including the EIS, SEIS, VCT to support these companies.
Because you are investing in businesses that are at an early stage and are therefore high risk, the UK government can provide a tax relief of up to 30% on your investment. So if you invested £50 you can get back £15 from the government. This means that your actual investment costs you £35.
Receive 100% from Employers
Employer Pension Matching: If someone told you that if you put in £100 in your account today and they will also put in £100, will you say no? probably not. This is the same mindset you should apply when reviewing your Employers pension matching option. Matching pension allows you to build your pension networth at an accelerated pace. In addition, as your salary increase, so does your matching contribution and your overall pension pot.
How do I apply this practice?
On the 12th of each month (I have this set-up as a recurring calendar appointment), I spend at least 1 hour where I pull up my networth tracker (download your copy here) and answer 2 questions:
- How did I do this month?
- Do I need to make any changes?
How did I do this month?
To answer this question, I open all my savings and investments accounts, look at the current values and add them into my networth tracker. Where the investments have grown, I mark them in green and where there a losses, I mark them in red. This allows to me visually see how each asset is performing month to month.
If you have any liabilities like a student loan which you are slowly paying off, you can also use the tracker to make a record of your financial performance.
To finish up, I sum up (automated via the tracker) the values of my assets and liabilities to re-calculate my overall networth. This singular figure allows me to know how I am progressing towards my own financial goals.
Do I need to make any changes?
Once I have updated my networth tracker, I look at each assets/liability and decide if I want to make any adjustment.
Example of adjustments:
- Moving some savings to a new high interest account
- Increasing the monthly amount I put towards reducing a debt
- Adding new funds to my brokerage account
- Reducing the amount of money I save
- Increasing the amount of money I invest in bonds
This month (October 2018), I chose to add new funds to my brokerage account that focus on investing in small sized businesses around the world. I also chose to add bonds to my LISA account which I have chosen to be my personal pension savings account.
I began record keeping in November 2015.
This practice has provided me with better control of my finances. It has also enabled me to plan and to be flexible with making changes which contributes to making me a more confident investor.
I truly believe that if you do not know where you are, you cannot decide where you are going. I encourage you to develop your own record keeping practice set a date, use a spreadsheet or an App and GO!
Do you keep a record? Which Apps do you use? Let me know.
One of my friends asked her dad about how to save and he told her to google it
To unravel this question, we must first understand where individuals learn habits in the first instance? As a child, you learn your speech, behaviors and values from your surroundings which is made up of family and friends. In just the same way you also learn your money habits from your surroundings. Your money habits include how you spend, save and think about money.
“Your money habits include how you spend, save and think about money.”
Your surroundings can have a profound effect on how you manage your money. It also defines your path to wealth. It is therefore critical to assess how much your money habits is attributed to what you have learnt from your surrounding in line with evaluating your current circumstance. This insight will allow you to understand how a family can have wealth for generations, because the rich teach their children rich habits and the less well off teach less well off habits. Teach can also be observation.
Take for example, if you lived in a household where there was always a scramble to pay rent and meet monthly expenses, you could accept this a normal and find yourself with very little to spend at the end of each month as a working adult. But you can make another choice, you can take the time to assess why the scramble took place and plan how you can make money work for you and not fear it.
“Your surroundings can have a profound effect on how you manage your money. It also defines your path to wealth.”
My middle class parents did not teach me about money and financial management. This was in part due to the fact that they did not get an education from their parents. To be frank, money is not a subject that most families or friends discuss in open. To some any topic about money is best held in private or not at all. But if you want to manage money successfully, you need to understand it and you need to talk about it in order to develop successful money habits.
WealthSquats is intended to help others understand that they can start their own path towards financial with the right information, patience and discipline. There is no complex jargon about finance-it is basic, it is simple and it works.
It all starts with knowing that with what you have today, you can make the most of it by starting small.
If you want to manage money successfully, you need to understand it and you need to talk about it in order to develop successful money habits
Take Pleasure in saving money
Shaking up the plan work hard in school, get a decent job, stay at the job and somehow I would get rich
The plan was to work hard in school, get a decent job, stay at the job and somehow I would get rich. The ‘how’ is something that I struggled with for a long time. Questions I wrestled with include:
- How can I multiply my income
- How can I sustainably save?
- What are other successful people doing that precludes me?
The trigger for Change
The answer to these questions are becoming clearer over time through continuous research and a thirst to get a solid education on managing money. Now, your own quest for wanting to manage your money better can be for several reasons:
- You want to retire early
- You want the capability to afford nice things
- You have goals that you have set for yourself e.g. travel the world, buy a house, buy a car, open a foundation
- You are in debt
- You always have a limited amount of money to survive on at the end of the month
After much soul searching which included a solo evaluation of my own life's current circumstance and my future goals, I came to understand that getting or being rich was not my goal, my goal was to understand and implement the mechanisms of how to be financially savvy.
Your money management goal may vary from mine and that is a great thing. For you, the exact figure that you need to meet your financial goal is up to you to define.
Let me explain, Financial Independence to me, means that I get to a point in my life where I have enough funds to manage my expenses and address my financial issues without worry. I have always believed that if I do not want to worry, I must have all the necessary information and a solid plan.
In order to plan I needed to know:
- What is my monthly income pre and post taxes?
- What are my monthly and yearly expenses?
- What percentage of my income is saved?
- What percentage of my income is saved?
- How can I budget to have fun?
- What are my goals?
- Why does being financially literate matter to me?
- And more.
With these questions addressed, I was ready to kickstart my journey towards building a more informed life.
Everything in Ottolenghi
What is an expense?
An expense is something that takes money away from your pocket. This is my favourite definition provided by Robert Kiyosaki. An expense is in contrast an asset or investments which put money into your pocket (read Rich Dad, Poor Dad).
Taking note of your expenses is about making you aware of what things, actvities, or people that are taking money away from your pocket. The table below provides a sample list of expenses. You can also use this simple spreadsheet to quickly calculate yours.
Types of Expenses
Amount I spent per month is..
Money spent on housing. This should be circa 30% of your monthly income
Money spent on owning a home. This should be circa 30% of your monthly income
Money spent to buy food
Money spent on fitness
Money spent on socialization including theatre, concerts, dining out, going to the movies etc.
Money spent on your home utilities
Money spent on phone credit, phone payment plans and phone upgrades.
Money spent on television packages
Money spent on clothing,bags, shoes,sneakers etc.
An example of expenses
As part of my research to gain a PHD in understanding money management, I always remember one rule that I carry around. It is called the Millionaire rule which states that Millionaires save or invest 30% of their income after tax and spend 70% on their expenses. This is called the 70:30 rule.
If you are able to save 30% of what you make on a monthly basis in line with the compounding effect you are truly on your path to managing your money.
The 70:30 rule is a guideline for managing your finances. Depending on your situation, you can define what ratio works for you and that can be 80:20 or 75:25. You can even start with 90:10 and then work up to a ratio that you feel comfortable with. The goal here is to ensure that you do not feel strapped or have to struggle to save. If you start to struggle, you will dip into your savings frequently and that is not likely to help you achieve your financial goals.