Post-FIRE day update: three months in

The post-FIRE1 day euphoria lasted two weeks. My spirit level of happiness flattened out after a fortnight.

At that point I realised the novelty of life without work had worn off.

So this was it. The place I’d spent seven years dreaming about.

Was it worth it?

Oh god, yes.

I go to bed happy. I wake up excited. Sometimes I catch myself smiling for no apparent reason.

Close friends ask me what I’m doing. There’s a faint sub-text of: “Well, tell me what life in seventh heaven is like. Tell me about the harps, the ambrosia, and bungee-jumping off the Burj Khalifa.”

“Well, GO ON THEN!”

It’s difficult to explain. Life post-FIRE is simultaneously very ordinary and extraordinary.

I haven’t boarded a log flume ride of perpetual hedonism. But I have found joy in the everyday.

The border fence between work and play has come down. Stuff I’d previously classify as a chore no longer seems like an obstacle between me and the good life.

That’s because I’m a sucker for flow. That serene mental state where you’re completely immersed in a task. You come to the surface after what feels like minutes, only to discover time has passed without friction, as if you were in hypersleep.

Now I slip into flow easily because I can do things at my own speed, in my own way, and to the standard I want.

It doesn’t matter what the task is. What matters is that I choose to do it. And that I’m not under some crushing deadline to get it done.

If I can strap the task to some notion that I’m making life slightly better for me, or someone I care about, then I’m happy.

Flights of fancy

In this way, I’ve inhabited a surprisingly small world so far. But my imagination has been free to wander via podcasts and books.

I can lodge my mind in space travel, politics, quantum physics, genetics, the evolutionary history of the octopus, or whatever else fires my curiosity neurons.

I’ve always had a broad range of interests, but there was never enough time in the day. Now there still isn’t enough time, but I don’t want the day to stop.

I’m both less focussed and less distracted. Less focussed because there isn’t a ton of BS (client, business, and asshat-related) to deal with every day. Less distracted because there isn’t a ton of BS to deal with every day.

Humans reputedly thrive when they have mastery, autonomy, and purpose.

I don’t know about the mastery part. But autonomy and purpose mean everything to me.

Other good things about FIRE

I sleep better.

That low-level, chronic stress that afflicts every contemporary workplace: it’s gone.

My physical health is better. There wasn’t much wrong with me that not sitting at a desk for 10 hours a day wouldn’t fix. Now I don’t do any single thing for 10 hours a day.

I’m not worrying about money. I’m not obsessively checking my portfolio or fretting about spending.

I feel carefree again. For the first time since leaving school.

I’m staying in touch with people. Jumping on my bike to see old friends, catching up for breakfast, or having a natter in the garden.

There’s no fixed routine. No longer do I just ‘work, eat, sleep’ repeat.

Mrs Accumulator is happier, she reports. (I didn’t make her fill in an extensive questionnaire, I swear!)

We get to spend proper time together every day, instead of only at weekends and holidays. The weekdays when our only exchange was a bleary, “My god, what time is it?” at stupid ‘o’ clock are but a memory.

So it’s all rainbows post-FIRE?

Like anyone, I’m subject to negative thoughts even when quite content. They turn up like trains at my mind’s central station.

These trains may be on their way to You Should Be Earning More City or You’ve Given Up Street. The doors open, I decide not to board, and the train of thought departs. It’s followed by another one – usually more positive – seconds later.

I think this is normal? It’s part of the human condition, at least as I experience it. As long as I don’t take these thoughts seriously then they disappear.

Maybe I’m fooling myself. I could still be on a Financial Independence high. The real test could be lying in wait. Perhaps in six months, as the seasons turn colder.

We’ll see. Right now I think FIRE is the right prescription for me.

Hopefully I don’t sound too giddy. I genuinely don’t feel that way. I’m just in a good place.

Take it steady,

The Accumulator

Financial Independence Retire Early.

The post Post-FIRE day update: three months in appeared first on Monevator.

How to future proof your kids’ financial future

This article on your kids’ financial future comes courtesy of Long Weekend from Team Monevator. Check back every Monday for more fresh perspectives from the Team.

Generation Alpha parents – those with kids born between 2010 and 2025 – need to get creative. Based on the traditional adult measures of success, our kids are screwed. They face monster student debt, job insecurity, and house prices to the moon.

Excelling in the school system may or may not pay off. Taking a job is being replaced by the entrepreneurial making of a job. Kids will need to cultivate a toolkit of strategic thinking and collaboration skills in order to solve new world problems in novel ways.

I don’t know about you but I was not familiar with this language – let alone the principles – until I entered the workplace.

In this brave new world, sitting down to plan your children’s accompanying money blueprint will never be time wasted.

Here are three ideas1 for building your kids’ financial future.

1: Open a Junior ISA

The Junior ISA limit is now a generous £9,000 a year. That is a punchy number to fill every year, especially if there are siblings.

However let’s say you were able to put in the maximum from birth until your child(ren) hit 18 years. They would then leave school with a pot of £350,000, based on a 7% growth rate.

These kind of sums are only achievable by investing in the stock market via a stocks and shares JISA. In contrast, with a cash JISA your child will probably end up with less money than you invest in real terms, due to inflation.

Once you have overcome the first hurdle of saving £9,000 per child, you hit the second JISA challenge.

In the words of Gandalf the Grey “with great (investing) power, comes great responsibility”.

Your kids’ financial future in your hands

As the parent or guardian, you have a limited time window to positively influence your children’s financial literacy and hence your kids’ financial future.

They can access their JISA money in their late teens. Before then you’ll need to impart your hard-won wisdom on delayed gratification, saving for something special, giving to worthy causes, the power of compound interest, and budgeting.

They are not going to learn this stuff at school. It’s on you.

Regular automatic investing into a stocks & shares JISA sets your children up for success on their next adventure. That could be university, starting a business, or a deposit for a house. They will have money to put to work.

If you are new to investing, a JISA is a great training ground for buying and holding for the long-term. Once invested, only the junior recipient can access the funds on turning 18. This removes your ability to withdraw and hopefully the temptation to sell or tinker.

How to set up a Junior ISA

Estimated admin time: 1 hour

Select a low-cost broker from Monevator’s broker table. I choose Charles Stanley Direct. Open the account online. This requires proof of ID and you’ll need to set yourself up as the nominated contributor to pay in funds.
Choose a low-cost fund, with global exposure. Do you own research but for ease take a look at Vanguard Lifestrategy 80% (accumulation). Invest a lump sum, or select monthly payments.
Save your the log-in details in LastPass. Then forget about the account, at least until the next tax year.

2: Open a Junior SIPP

My mum scoffed at me setting up a Junior pension for my daughter. The timeline of 60-plus years seemed meaningless. My mum argued that by the time my daughter could access the pension, she’d have her own money.

I see it differently. A Junior Self Invested Personal Pension (SIPP) is a wise investment.

Firstly, as with an adult pension, the government pays tax relief on a kid’s pension. This is the equivalent of 20% free money from the Government.

Parents or guardians can can pay in £2,880 and this is topped up to £3,600 per year. I will always take free money from the Government, thank you very much.

Secondly, the power of compounding works best on a long-time line. Sixty years is about as long as it gets!

Use the Monevator compound interest calculator to get a sense of what’s possible. An investment of £3,600 x 18 years, which is then left to compound2 (no further contributions) until they are 60-years-old would give your precious a pension pot of £2.2million, from an initial investment of £50,000.

That is not a typo.

Admittedly £2m will be worth a whole lot less in 60 years. But it’s still a very generous patronage.

I plan to only tell my daughter about her family-funded pension when she’s established herself both personally and professionally. Imagine being told, aged 35-40 year, that there is money put aside that will allow you to pursue your passions, pay off your mortgage, and invest in your children’s and grandchildren’s future!

I’ll need to wait a long time to be proved right. That said, I’m feeling pretty bullish.

How to set up a Junior Pension

Estimated admin time: 1 hour

As per the ISA, select a low-cost broker. For the purposes of diversification and protection from Internet hacking, choose a different provider. For example Best Invest. Its pension performs well in terms of low fees
Again, choose a low-cost fund, with global exposure. Given the long investment timeline, you might help your kids’ future by choosing an ESG fund, too. Vanguard’s own ESG fund saw returns of 34% over the last 12 months. This growth isn’t sustainable (excuse the pun) but it proves that ESG investments needn’t inevitably compromise returns.
It will take roughly a month from investing to receive the extra Government 20% (max £720) into the account. Set a reminder to invest that, and then forget it until next year

3: School of Life investing

We’re witnessing explosive growth in DeFi (decentralised finance). If my child were in their late teen and obsessed with Roblox, Fortnite, and Axie, I would be tempted to set them up with a little money in an account, subscriptions to newsletters such as Real Vision and The Defiant, and suggest they put their metaverse skills to work.

With supervision, it’d be a fun, gamified, way to learn about returns, lending, and yields. It also flexes their research skills. It will help them find authentic and knowledgeable voices for advice. Most significantly, Defi is your kids’ financial future. It will impact their work, money and investing, communications, and ownership. Starting this learning journey early is only going to help.

In her coming secondary school years years, I also intend to gift my daughter roughly £1,000 to set up a business during the summer holidays.

Again, the learning curve is huge, from selecting a product or service, learning how to sell, problem solving, managing a budget, branding and IP.

I’ll be rooting for what she creates and hope her business succeeds.

But in this instance the journey will be more important than the destination.

In time you will be able to see all Long Weekend’s articles in her dedicated archive.

I’m not an accountant or financial advisor. I’m a mum who’s educated herself on personal finance. Please do your own research and make your own investment decisions.
This is based on the assumption that the annual investment of £2,880 remains the same for 18 years with an annualised return of 7% per year.

The post How to future proof your kids’ financial future appeared first on Monevator.

Weekend reading: More FIRE fighting

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Like Lennon and McCartney, sweet and sour pork, and Matt Hancock and his job, there’s multiple tensions at the heart of Monevator.

The biggie probably isn’t active versus passive these days.

Following the lead of Macca in his prime, The Accumulator has produced hit after hit on why and how to use index funds.

Whereas I’ve – metaphorically – taken my naughty stock picking and left the band. At least for now.

Imagine!

No, I’d say our biggest on-site difference of opinion is the RE part of FIRE.

We’ve debated that in the past, too.

In short I nowadays believe that early retirement is a rubbish goal, ill-suited to most who can reach it.

The Accumulator, on the other hand, is living it.

And loving it, apparently.

FIRE in the hold

Of course, both of us are full-square behind achieving financial independence – the FI component of FIRE.

That goes without saying!

Being so ill-versed in the FIRE community and lingo I only just discovered that the kids call my version of reaching it ‘Slow FIRE’.

Monevator reader Ian pointed me towards an article from Business Insider, which explains:

Slow FIRE practitioners focus on designing and achieving their FIRE lifestyle now.

This may include working remotely in order to create more flexibility in their lives.

It’s also a nod to the fact they will work longer in order to hit their FIRE number.

There’s no work-shaming because work factors heavily into Slow FIRE.

Yes! This is what I was trying to get at in You Don’t Have To Go Nuclear On Working For a Living. (In retrospect not such a catchy name for a movement, compared to Slow FIRE.)

Back then I wrote:

I often read retirement bloggers saying they quit work because they couldn’t take kowtowing to The Man anymore.

Yes – The Man sucks – but it’s not a good reason to quit working.

Especially if you’re impoverishing yourself for the rest of your life to do so.

I believed that mostly working from home, mostly on projects I enjoyed, and on my own schedule was a more sustainable way to spend my life than:

killing myself in the rat race, or

jumping off a cliff like an exhausted lemming as soon as I believed I could meet my minimum spending requirements from some vast pool of cash I’d accumulated, just out of sight of my bedsit or RV.

I’ve got nothing against people retiring in their 40s after 20 years of frugality if they choose.

I don’t think it’s morally wrong, or anything silly like that.

You do you.

I’m just saying be sure you’ve thought about all the options first.

Not so shy and retiring

Someday I’ll make my case for this Slow FIRE business more coherently.

In the meantime, Party at the Moontower this week explained why he too is against the ‘retire early’ part of the mantra.

Despite his apparently just now retiring early!

Like me he’s sceptical that sustainable withdrawal rates (SWRs) are a golden bullet to ‘the hardest problem in finance’:

Solving for how much you need to save and for how long, solving for how much you can withdraw annually and for how long, all so you don’t outlive your money.

If you have walked through the Moontower Retirement Model you learned the levers — savings rates, longevity, and post-tax inflation-adjusted returns.

Every one of those terms is impossible to forecast. The problem suffers from intractable amounts of garbage inputs.

The value of the exercise is not the outputs, it’s for articulating the problem in the first place and gaining a low-res appreciation for the sensitivities.

Thinking about your likely SWR is indeed super-valuable. It makes you consider all the variables.

Also, if you’ve never encountered the idea of living off your investments before, then applying 4% to a pot of ‘some number’ can be mindblowing.

Fighting FIRE with fire

However beyond their thoughtprovoking, SWRs only do a perfect job of telling you how you would have done in the past.

Worse, they crumple the edges.

Their fans declare “of course you wouldn’t actually spend your money if you saw it was running out”

Um, okay.

I’m practically a dinosaur in that I believe investing for income is a more intellectually credible way to prep your finances for a long period of living off them. I also hate the idea of spending my capital.

This means more money is needed, and perhaps some active management. Again, more on that some other day.

But none of this is to discredit The Accumulator’s wonderful work on SWRs.

I think his is probably the most readable deep take on the Internet.

The Accumulator has read widely – proper academic research papers and all . In contrast, as ever I’m a bundle of notions and hunches.

So you should certainly read through everything he says on the subject – it’s a goldmine – even if you reach a different conclusion.

Fee FI fo fum

The other solution to getting an income in your later years is to keep doing some work for money.

RE goes out the window, but FI remains front and centre in giving you options and buffers.

To again quote Moontower:

The idea that you can work until you are 75 or 80 is freeing IF you can do it on your terms. If you can take a break for a year sometimes. If you can work 4 days a week, or from wherever you want. If you actually enjoy bringing your uniqueness to the job to be done.

The definition of a sustainable life is one you actually want to sustain.

Nobody wants to sprint forever, and sprinting for a short while doesn’t make the scarcity mindset go away even if you “win”.

This is partly why rich people fear inflation. They thought they were “done”. What is “done” anyway?

Past experience tells me that plenty of you will disagree (which is fine!)

Smart and articulate people tell me they couldn’t do work they half-like on their own terms, although I’ve done just that for 20 years. Their only option is to cane it at a job they hate for the best years of their life, and to smell the roses at the weekends. And then to hope their SWR doesn’t blow up.

Again, okay…

Just be aware what you’re saying: can’t, won’t, will.

You’re just saying it in a different order to me.

Maybe it’s all a question of where we choose to put our limits and our faith and to see the uncertainties.

Happiness is a warm run in the stock market

I’m no zealot. The truth is after quitting my ‘big gig’ last year I’ve not put a lot of effort into ramping up my hours and income to replace it.

So maybe I’m leaning a bit more towards RE than I care to admit?

To his credit The Accumulator has also shifted over the years. He is at least trying out doing some work post-retirement.

Again, financial independence lets us both look for our middle ground.

I suppose I’m saying that 40-50 years is a long time to plan to drop out. I doubt even Lennon would have managed that, though sadly he never got the chance.

Too much leisure time is probably counterproductive, anyway. Studies suggest there’s a sweet spot:

Employed people’s ratings of their satisfaction with life peaked when they had in the neighborhood of two and a half hours of free time a day.

For people who didn’t work, the optimal amount was four hours and 45 minutes.

Working for just a couple of hours a day – or a couple of full days a week – leaves you abundant time to learn Swahili or to see your grandkids.

And a small amount of income is worth a lot. Many years ago I pointed out that £5 a day was worth around £90,000. Today it’d be even more.

Earning to keep FIRE burning

Consider planning to earn a couple of hundred quid a week indefinitely. I suspect you’ll be happier.

It doesn’t have to be working from home or side hustling, either.

A sociable friend of mine wants to retire in her 50s to do a couple of days a week in an independent coffee shop. Some of her fondest memories are of part-time work at Starbucks as a student.

There was seeing the regulars, the free coffees, the short walk to the ‘office’, the lack of responsibility, and being usefully whacked at the end of the day.

It’s not my bag. But then, writing this post on a sunny Saturday morning in bed wouldn’t be hers.

Let’s all find our own way.

Have a great weekend (and Cymru am byth!)

From Monevator

What goes into an ESG index? – Monevator

It’s too late to get into buy-to-let – Monevator

From the archive-ator: How you can enjoy the profits of 2,267 companies around the world for free – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Government mooting less generous pension lifetime allowance and tax relief – ThisIsMoney

UK facing summer food shortages on lorry driver shortage due to Covid and Brexit – Guardian

Millions of pensioners could receive a record rise in their state pension next year – Which

Bitcoin fell below $30,000 this week; first time since January… – Coindesk

…with a China crypto mining crackdown blamed – CNBC

Brexit blast from the past mini-special

Five years on from the Brexit vote, the UK is more divided than ever – CNN

The key Leave and Remain campaign claims that never happened – Politics Home

The real ‘Brexit dividend’? Minus £800m a week, and counting – Independent

Rejoining the EU is now unthinkable, except for a diehard minority – New Statesman

Why the EU is not missing Britain that much – Guardian

Views from Boston, Britain’s most Eurosceptic town – BBC

Fifth anniversary of Brexit vote marked by inane North Korean-style children’s song – Business Insider

“The most embarrassing anniversary since a sexual health clinic told me to come back in 12 months to check if anything had regrown”The Investor

Non-EU immigrants have replaced EU immigrants since Brexit referendum, almost one-for-one – ONS

Products and services

Post-Brexit, EE reintroduces roaming charges for UK customers in Europe – Guardian

New flexible train tickets will save this commuter just £7 a year – BBC

Secta lets parents take second mortgage to pay for school fees – ThisIsMoney

A quick review of digital piggy bank apps for kids – ThisIsMoney

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

New £50 note featuring Alan Turing goes into circulation – Guardian

We both get £50 to invest at Seedrs if you sign-up via my link and invest £500 in 30 days – Seedrs

Homes for sale in former churches, in pictures – Guardian

Comment and opinion

Lessons learned after decluttering 300-plus items – A Lawyer and Her Money

What to watch for in onerous employment contracts – Indeedably

How much do you need to be financially independent? – Of Dollars and Data

The ups and downs of stocks, and stock markets – Humble Dollar

How wealthy Americans are taught to protect their wealth – MSN

Americans are quitting their jobs en masse: great – Slate

The fastest way to £100,000 – Banker on FIRE

Some quantitative portfolios that go beyond stocks and bonds – Validea

Naughty corner: Active antics

How to listen to Dr Copper – Verdad

Venture capital firms target retail investors for funds [Search result]FT

Luck – Enso Finance

WallStreetBets lingo decoded [Oh to be 23!]Business of Business

Building Berkshire 2.0 with Chamath Palihapitiyah [Podcast]T.I.P.

Is QinetiQ a good dividend growth stock? – UK Value Investor

Bubble expert Jeremy Grantham on ‘epic’ equities euphoria – FA Mag

Covid corner

‘Delta plus’ Covid variant found dozens of times in UK – Evening Standard

Dr Fauci on the thread of the Delta variant – NPR

Balearics and Malta added to UK’s green list – BBC

China is vaccinating 20m people a day – Nature

Nearly all US Covid deaths are now among the unvaccinated – AP

The less than welcome return of social obligations – Axios

Kindle book bargains

The Joy of Work: 30 Ways To Fall In Love With Your job Again by Bruce Daisley – £0.99 on Kindle

Legacy by James Kerr – £0.99 on Kindle

Think and Grow Rich by Napoleon Hill – £0.99 on Kindle

Liars Poker by Michael Lewis – £0.99 on Kindle

Environmental factors

A slimy calamity is creeping across the sea – The Atlantic

Majority of UK homes now served by green energy suppliers, but is it all just rebranding? – ThisIsMoney

Off our beat

US government reveals it can’t explain 143 UFO-like flying objects – NBC News

Blood test that finds 50 types of cancer is accurate enough to be rolled out by NHS – Guardian

Jeff Bezos and Elon Musk want to burn their cash in space – Vanity Fair

Mystery of the wheelie suitcase – Guardian

An interview with the tech pioneer and VC Marc Andreessen – Noahpinion

Ricky Gervais on Twitter [Video] – on Twitter

And finally…

“Never mind that Britain has a German royal family, a Norman ruling elite, a Greek patron saint, a Roman/Middle Eastern religion, Indian food as its national cuisine, an Arabic/Indian numeral system, a Latin alphabet and an identity predicated on a multi-ethnic, globe-spanning empire – ‘fuck the bloody foreigners’.”
– Akala, Natives: Race and Class in the Ruins of Empire

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It’s too late to get into buy-to-let

You’re too late to get into buy-to-let. It had a good run, but the party’s over.

I graduated from university in the early 1990s. I got a job in The City, moved down to London, and shared a rented house with a few friends.

After a year of renting – and spurred on by a combination of parental pressure, MIRAS1, and (ludicrously) a mortgage interest subsidy from my employer – I bought a house.

Did I have a big inheritance? No. I saved up for the deposit in my first year of work.

Okay, that’s not actually quite true. I also had some profits from punting my student loan on the stock market, the proceeds of a systematic building society carpet-bagging operation, and a well-timed cash withdrawal on my credit card.

Combined this took me over the line into buying my own house.

And yes, I do mean a house – as opposed to a flat, let alone a bedsit.

My deposit plus salary secured a three-bedroom, freehold house with a garden and garage, in Zone 1, 30 minutes walk from my job in the City.

Even I cringe a bit as I write this. Sorry, millennials.

I paid £130,000 for this house and spent the autumn weekends decorating it to the incessant radio play of Whigfield’s Saturday Night.

Then, for a while, I just couldn’t get enough of the things.

My property portfolio balloons

I got my first ‘proper’ bonus (two figures!) soon after I bought that first property.

While my colleagues were spending their windfalls in Clerkenwell dives doing shots from lap-dancers’ bellybuttons, I was at home eating toast, reading about newly-launched buy-to-let mortgages, and perusing the property section of the Evening Standard.

And so, barely two years after buying my first house, I bought a second.

This one was an ex-local authority three-to-four bedroom property. I picked it up for £75,000. After a lick-of-paint I let it out for £600 a month.

That’s a starting gross yield of nearly 10%. 

Soon afterwards, newly married, I left London for a pointless dormitory town in the commuter belt. I moved into a house I bought with my wife, for which I paid – cough – less than I earned that year.

And of course I kept my original home in London to let out.

Because why would I not? 

Buy-to-let boom

In those open and liberal Blair years London was booming. As the de facto financial capital of the European Union, it sucked in talent and money from all over the world.

From American investment bankers and French derivatives traders to Polish plumbers and Italian waiters, everyone wanted to be in London.

Which meant London property prices were going through the roof:  

Shortly after leaving London, I bought three more properties in a single year. My wife still reminds me of the time I went out for a newspaper one Saturday morning and came back with a two-bedroom flat.

By this time I’d worked it out. I raised equity against my steadily appreciating London properties for a deposit on the local ones. This way I put no money down.

It was like I’d discovered a perpetual money machine!

Only… the machine started to sputter a bit. The problem was that while house prices kept going up, rents did not. Starting yields were decreasing.

This was largely a story of falling interest rates. Property was like a very long duration lightly-inflation-linked bond. Prices moved accordingly.

The landlord game was also getting more competitive because more people were doing it.

Buy-to-let had become… a thing.

Too late to get into buy-to-let for big bucks

You know the old adage that an optimist is someone without much experience?

Well, that was me.

I started out on my property ‘journey’ as YouTube pundits call it by guessing that my costs would be about 10% of the rent. That wasn’t far off, to begin with.

But as rents increased more slowly than my expenses, the economics got steadily worse.

Then there’s the ‘exceptional’ costs that nobody warns you about. Or, if they do, you don’t think they’ll happen to you.

What sort of expenses? This sort of thing:

Double-crossing agent

The agent for a London property reports the tenants aren’t paying the rent. Letters and threats of  legal action are (supposedly) sent to the tenants. Rent is received sporadically over the next couple of years. It turned out the tenants were paying the rent all along. The agent kept it himself. Agent declares bankruptcy, directors leave the country. Loss to me? About £18,000.

Shit happens

Tenant moves in, pays deposit and the first month’s rent. Never pays a penny more. Takes 14 months to get them out of my property through the courts. On taking possession I find their dog has eaten all of the internal woodwork. And when I say all, I mean all: doors, skirting, architrave, even the window sills. The back garden had been destroyed. It was like some combination of a First World War trench and 14 months worth of dog shit. I still wake up in a cold sweat, thinking about that day I spent in a HazMat suit digging out two-foot of shit to replace it with topsoil. Loss to me? About £15,000 (not including sleepless nights). 

Size matters

That first rental I bought in London, which I’d always let to three sharers, is suddenly designated a ‘HMO’ by the local authority. (It’s not). So obviously I have to pay them £500 and spend several hours filling in pointless forms. Oh, and I can only let it to two people now – because of some arcane bedroom size restrictions. (Ironically it was the local authority that built this property…) Perpetual rental income reduced by a third. It’s hard to quantify the loss here – what discount rate to use? It’s a lot, anyway. 

Party walls

My personal favorite – not because of the cost, but because of the timing. A builder is completely refurbishing a London property for me. It’s a big job, including moving walls and bathrooms and so on. Randomly I get a bill, in the post, from the police, for something like £300. They’ve attended an ‘incident’ at the property. Turns out that unbeknownst to me the builder’s laborers had been sleeping on-site. They’d got drunk one night, had a fight, and the police were called. When did this bill arrive? I think you can guess – the day after I’d paid the builder his final payment. 

Once you factor this sort of thing in, along with the more regular stuff – the boilers, the double-glazing, the roof replacement, the damp that just WILL NOT go away – my 10% expense estimate was hopelessly naive.

Too late to get into buy-to-let – and too much hassle

I can now look back at more than 25 years of accounts from my modest buy-to-let empire. Starting with one property, with seven at the peak and with three remaining today.

Which means I can tell you, exactly, how much the non-interest costs were as a fraction of the rent:

31.4%!

Call it a third. Wow.

I do use agents to fully manage the properties, and they are expensive. But I will not be being phoned in the middle because of a blocked toilet. Not when I’m working 16 hours a day at an investment bank. (Okay, I don’t do that anymore, but I’m still not going to field those calls).

And this is why it is too late to get into buy-to-let. Along with falling rental yields, the trend in costs is only rising.

There have been lots rule changes over the years that have made things worse:

Higher CGT rates
Abolition of the Indexation allowance
The pointless requirement to pay CGT outside of the tax-year cycle
Annual Tax on Enveloped Dwellings (ATED)
Extra stamp duty
Elimination of the wear-and-tear allowance 
Deposit protection schemes
Tenant fee ban

Section 24 (tax on rental turnover not profits)
The PRA’s CP11/16 (which means you can’t borrow as easily)
Arbitrary and retrospective ‘HMO’ rules
All-sorts of safety and environmental regulations 
So called ‘right-to-rent’ law that compels landlords to be a tool for the government’s cruel and damaging immigration policies

That was all off the top of my head – I didn’t even need to consult a list.

Now, don’t get me wrong. In isolation there’s nothing inherently wrong with most these rules (the exception being the last one) and the health and safety aspects are especially reasonable.

But the mood music is pretty clear. The government believes it can impose these costs on landlords because we are all loaded.

It’s not 1994 anymore

How loaded?

The average gross yield on my property portfolio is now – checks notes – 3.4%. Which implies that the long-run post-cost (excluding financing) yield is about 2.3%.

That is… not enough. Especially as there’s no tax shelter. 

My property portfolio has been an enormous accelerator of my wealth over the years. But the easy times are over. My success came about almost completely as a result of falling interest rates.

I simply got leveraged lucky. 

Some newcomers may try to make the maths work by getting into buy-to-let via a limited company or whatnot. I’d question whether it’s worth the hassle. In my view it’s too late to get into buy-to-let to make a killing. It’s not 1994 anymore.

Whigfield is more likely to have another global hit than you are to get rich investing in property at today’s starting yields. “Da ba da dan dee dee dee da nee na na na” indeed.

If you enjoyed this, follow Finumus on Twitter or read his other articles for Monevator.

Mortgage Interest Relief At Source, a defunct tax relief scheme to encourage home ownership in the UK.

The post It’s too late to get into buy-to-let appeared first on Monevator.

What goes into an ESG index?

This dissection of an ESG index is by The Scientist from Team Monevator. Check back every Monday for more new perspectives from the Team.

People like to throw the ‘ivory tower’ label at scientists like me. And it’s true, we can be guilty of making what we do inaccessible to everyone else.

But for inaccessibility of language made into a true art form, nobody beats the financial industry.

Environmental, Social and Governance investing (or ESG for short, because acronyms always help…) is not a new fad. Nor is the concept very complex.

Yet I had no end of difficulty digging into the background of ESG indexes.

Introducing the ESG index

The core idea of ESG investing is to grow your wealth whilst trying to do some good.

Back in 1990 a group called KLD Research & Analytics started the first Socially Responsible Investment index (or SRI, because one acronym is never enough).

MSCI took over KLD’s index at a later date. MSCI now offers some 1,500 ESG indexes. There’s an ESG index for everything from human rights and climate change to the fallout from the COVID-19 pandemic.

The purpose of investing is to build wealth. And as it happens, since 1990 that first US-focused MSCI KLD 400 Social Index has bested the US market.

But the motivation behind ESG/SRI investment is not to outperform.

ESG investors choose to invest in such a way as to encourage business practices that have a positive impact on the world.

An ESG index dissected

I decided to look under the hood of an ESG index to see how it worked. I chose one closer to home: the FTSE4Good Developed Index.

The FTSE4Good index series is “designed to measure the performance of companies demonstrating strong ESG practices.”

The index I’ve chosen is an ESG take on the FTSE Global Developed World index.

Companies are screened for inclusion in this ESG index. The screen employs a convoluted algorithm containing about three layers. I say ‘about’ three layers, because the algorithm gets pretty complex, pretty quickly.

First, the relevance of the three ESG ‘pillars’ are considered with respect to a given company. These are: Environmental, Social, and Governance.

Then, within each pillar there are further ‘themes’.

Environmental:

Supply Chain: Environmental
Biodiversity
Climate Change
Pollutions and Resources
Water Security

Social:

Supply Chain: Social
Labour Standards
Human Rights and Community
Health and Safety
Customer Responsibility

Governance:

Anti-Corruption
Corporate Governance
Risk Management
Tax Transparency

Finally, within each theme are ‘indicators’.

Over 300 indicators are considered, with each theme containing 10-35 quality and data-driven indicators. For any given company, on average 125 indicators combine to calculate its ESG score.

Source: FTSE Group

Points mean prizes

Based on the indicators, a company gets a score out of five. Zero is totally rubbish, from an ESG perspective. Five is industry-leading best practice. Each theme and pillar is scored.

Theme and pillar scores are then weighted based on their relevance to a given company. Enter another scoring system – this time out of three. Zero is irrelevant and three is high.1

The relevance weighting reflects how responsible a company ought to be with respect to a certain theme. It’s determined by industry.

For example, you wouldn’t expect an insurance company to undertake many activities directly related to water security.

Super, smashing, great

Confusingly, the calculation of a company’s ESG score works backwards from how it is presented in the FTSE4Good documentation. It runs from indicator to a final ESG score.

But there is yet another step. A company’s ESG score is also weighted relative to the performance of other companies within its ‘supersector’.

What’s a supersector? Well, there is a supersector ‘taxonomy’, according to FTSE Russell’s Industry Classification Benchmark:

Technology
Telecommunications
Health Care
Banks
Financial Services
Insurance
Real Estate
Automobiles and Parts
Consumer Products and Services
Media
Retailers
Travel and Leisure
Food Beverage and Tobacco
Personal Care, Drug and Grocery Stores
Construction and Materials
Industrial Goods and Services
Basic Resources
Chemicals
Energy
Utilities

Their index, their rules, but scoring a company’s ESG rating relative to a supersector seems counterintuitive to me.

Why? Well let’s say everyone in the Energy supersector burns coal. Just because you burn less coal than others in your supersector, for me that doesn’t diminish the fact you burn coal. Or use slave labour. Or manufacture cluster bombs.

Worse, some of the indicators used to calculate the ESG scores are “tailored for different industrial sectors”. So sector-relative scoring is already at the heart of the ESG calculation. It is potentially accounted for twice.

No score draw

After all this accounting alchemy, a company has a score out of five.

The company needs to score 3.3 or higher to get in a FTSE4Good index, in a Developed market. (2.9 or higher in an emerging market).

But wait, no, actually there is one more consideration!

Some kinds of companies are actively excluded. This includes those that manufacture or produce tobacco, chemical and biological weapons, cluster munitions, nuclear weapons, conventional military weapons, firearms, coal, or are investment trusts.

Personally, I find this the most concerning. It suggests the long, complicated ESG calculation we described above doesn’t already work to exclude companies that partake in these naughty list activities.

So what was the point of it all?

Indeed, what is the point of ESG?

Again, the point of ESG is not to outperform the market.

Just as well. As recently reported in the Financial Times [search result]:

“There is no ESG alpha,” said Felix Goltz, research director at Scientific Beta and co-author of the as yet unpublished paper, Honey, I Shrunk the ESG Alpha.

“The claims of positive alpha in popular industry publications are not valid because the analysis underlying these claims is flawed,” with analytical errors “enabling the documenting of outperformance where in reality there is none”, he added.

Financial Times, 3 May 2021

Deciding to invest by considering ESG scoring should instead be a decision to allocate capital towards companies that do ‘good’.

For me, ESG indexes are not a perfect means to that end. Perhaps more convoluted than effective. But they’re better than nothing.

What’s the alternative? You could instead investigate every single company you invest in. But then you’re an active stock picker. That does not go well for most people.

Passively investing via index funds is the best way to go for nearly everyone.

And if you want to include ESG considerations in your passive investment strategy, then choosing funds that follow ESG indexes is a simple way to do this.

Two cheers for ESG index funds

Choosing to invest in ESG funds is a bit like shopping for Fair Trade coffee, carbon offsetting your gas bill, or buying an electric car. You’re making a choice with your spending power to try to make some small difference.

Investing in the status quo means you will only ever get the status quo. We have to start somewhere.

It may be hard to understand the rationale behind any given ESG index, but alternative ways to invest in an ESG-friendly way don’t work most of us.

By buying ESG funds, you at least indicate to the market that there is a demand for ESG products. Hopefully they’ll get better and clearer in time.

FTSE calls relevance ‘exposure’.

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Weekend reading: Email SNAFU, and the FCA wants you

What caught my eye this week.

First off, apologies if you got a rogue email from us yesterday pointing to a popular US investing website – and nothing else!

This was a screw-up, and the person responsible has been roundly ballsed-out – which was the longest talking to I’ve given myself in a bathroom mirror since I worked up the courage to ask out Joanna Jones when I was 13.

It was also a reminder that I really must sort out our creaking email system.

If you subscribe to Monevator by email (and how could you not, it’s free?)  then please watch for an opt-in reconfirmation in the next few weeks. That will ensure you keep getting posted our articles.

(The real ones, I mean. Not the SNAFUs!)

Watching the watchmen

Second, a quick pointer that the FCA is after comments on its discussion paper concerning the rules around high-risk investments and regulated investment firms.

I appreciate that Monevator is the spiritual home of ‘two cheap diversified tracker funds in a tax-wrapper and your done’ investing. Many of the products being looked at – such as P2P investing, crypto, and crowdfunding – are frowned upon by true passivistas.

But personally I enjoy the opportunity to lose money experiment with all sorts of weird and wacky things – with my eyes open to the risks – and I know I’m not alone.

Of course there should be proper regulation, disclosure, and oversight. But active and esoteric investing shouldn’t just be for the rich.

Maybe you feel differently? Fair enough. The point is the FCA is asking for your thoughts by 1 July. If you want to have your say, you best get opining.

Otherwise there are truly tons of links below, just in time for the end of summer floods… Enjoy!

From Monevator

How an offset mortgage can help you achieve financial freedom – Monevator

Defensive asset allocation and model portfolios – Monevator

From the archive-ator: Enter The Accumulator’s confession booth – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

UK inflation hits 2.1%, ahead of BOE target – Reuters

About 2.3m Britons hold cryptocurrencies, despite warnings – Guardian

JP Morgan swallows Nutmeg ahead of UK launch of digital bank – Sky News

Cashless society nears, with only one in six payments in cash – Guardian

UK food and drink exports to the EU have plummeted – ThisIsMoney

FCA urges thousands to seek compensation over pension transfers [Search result]FT

‘Big Short’ investor Michael Burry warns of biggest bubble in history – Business Insider

Hong Kong’s Apple Daily newsroom raided by 500 officers over national security law… – Reuters

…and the paper subsequently sells five times as many copies – BBC

The distributions of equity returns are not that different whether inflation was rising (blue) or falling (red) [PDF]JP Morgan

Products and services

Equifax has revamped its credit score scale: does it matter? – Which

Lifetime ISA deposits hit £1bn for the first time – ThisIsMoney

Offer: Open a SIPP at Interactive Investor and you pay no SIPP admin fee for six months, saving you £60 – Interactive Investor

Savers pull £24.5 billion from NS&I after rates are slashed – ThisIsMoney

Fidelity now has nearly $18bn in its game-changing zero-fee index funds – Investment News

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

Seraphim investment trust to give UK investors access to space – ThisIsMoney

How the Maker crypto token reinvents the financial system – Net Interest

Homes for celebrating the summer solstice, in pictures – Guardian

Comment and opinion

Three solutions for index fund voting dominance – Morningstar

Portfolio acid test – Humble Dollar

Want to stick to your budget? Open six bank accounts – Guardian

A mindful way to pay your bills – Rock Wealth

Avoiding early retirement invisibility madness – Leisure Freak

Predicting inflation is hard – A Wealth of Common Sense

Factory reset – Indeedably

Mid caps are not hidden champions versus small or large – Factor Research

The evidence against private equity and venture capital – Advisor Perspectives

Naughty corner: Active antics

When does the stock market go up? – The Blindfolded Chimpanzee

Two stock pickers look back at their Covid trading journals [Podcast]Telescope Investing

Mega marketplaces – Drinking from the Firehose

Ideas – Enso Finance

The Schiehallion Fund: early and patient – IT Investor

The post-Covid economy mini-special

Office, hybrid, or home? – Guardian

Winners and losers of the Work From Home revolution – The Atlantic

Kill the five-day workweek – The Atlantic via MSN

A ‘Great Resignation’ wave is coming for companies – Axios

Half of US pandemic unemployment money may have been stolen [Really?!]Axios

Covid corner

English Covid R number remains unchanged at 1.2-1.4 – Reuters

What will delaying the 21 June full unlock achieve? – BBC

All over-18s in England can now book a vaccine appointment – The Sun

Brazil’s main Covid strategy is a cocktail of unproven drugs – NPR

In hunt for pandemic’s origin, new studies point away from lab leak – Guardian

Kindle book bargains

The Joy of Work: 30 Ways To Fall In Love With Your job Again by Bruce Daisley – £0.99 on Kindle

Legacy by James Kerr – £0.99 on Kindle

Think and Grow Rich by Napoleon Hill – £0.99 on Kindle

Liars Poker by Michael Lewis – £0.99 on Kindle

Environmental factors

How low can birth rates go before it’s a problem? – Five Thirty Eight

Standard or ESG benchmark? – Klement on Investing

Off our beat

Man swallowed then spat out by a whale – Cape Cod Times

Harder than it looks, not as fun as it seems – Morgan Housel

Some scientists believe the universe is conscious – Popular Mechanics

Three couples in their 60s who share a house in their retirement – Guardian

And finally…

“Indeed, the very idea of ‘normality’ is now little more than a fiction, and in no sense a guide to the future in a world continuously reshaped by radical uncertainty.”
– Gordon Brown, Seven Ways To Change The World

Like these links? Subscribe to get them every Friday! Like these links? Note this article includes affiliate links, such as from Amazon, Interactive Investor, and Freetrade. We may be  compensated if you pursue these offers – that will not affect the price you pay.

Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

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Defensive asset allocation and model portfolios

What should your defensive asset allocation look like? How do the fixed income asset classes and bond sub-asset classes fit together?

We often hear from readers who’d like help with this aspect of portfolio construction. So let’s talk through the best defensives and table some asset allocation suggestions.

Let’s also acknowledge that many people are nervous about holding bonds right now and wonder whether they still have a role to play. If that’s you, then first read up on why we think bonds are a good investment.

What’s on the defensive asset allocation menu?

Defensives are asset and sub-asset classes that can fortify your portfolio. Here are the ones you need to know about.

Index-linked bonds

Best for: Keeping pace with very high inflation – one of the most frightening risks investors face.

Downside: High demand for index-linked bonds means they currently pay negative yields.

They also typically underperform conventional bonds in a standard, deflationary recession. 

Look for: Investment grade, developed world, government index-linked bond funds/ETFs. Index-linked gilt funds are theoretically ideal. However that market is potentially distorted

The alternative is global index-linked bond funds hedged to the pound. These may include some (less desirable) corporate bonds. But if the majority of the fund’s holdings are index-linked government bonds (issued by advanced nations) then put them on your shortlist.

Index-linked bond funds often use the term ‘inflation-linked’ in their name.

Short-dated government bonds

Best for: Short bonds mature quickly. They are less vulnerable to rising interest rates than longer maturity bonds.

Their lack of volatility makes short bonds useful for decumulators who want to pay their bills without worrying about sudden changes in capital values.

Downside: Short bonds offer flimsy refuge in a stock market crash, compared to longer dated bonds.

Look for: Bond funds holding investment grade government bonds with maturities of 0 to 5 years. Gilt funds and global government bond funds hedged to the pound fit the bill.

Intermediate government bonds

Best for: A reasonable compromise between short and long bond vehicles. Intermediates offer better crash protection than short bond funds without the egregious interest rate risk of 100% long bonds.

Downside: Intermediates suffer more in a rising rate environment than short bonds, and can’t compete with long bonds in a recession. Like a superhero, their very strength is their weakness. Ultimately, you must decide where you want to be on the risk / reward curve.

Look for: Investment grade government bond funds that offer a spectrum of maturities from 1 year to 15 years or more. Check the duration metric on your bond fund’s webpage. An intermediate fund will sit somewhere between 7 and 14.

Gilt funds are good, and global government bonds hedged to the pound are fine, too.

Global government bonds hedged to the pound

Best for: An alternative to gilts for British investors. Choose if you’re wary of 100% exposure to the credit risk of the UK Government.

Hedging offsets the risk of adverse currency movements swamping your bond returns, which would add unwelcome volatility to the defensive side of your portfolio.

Intermediate global bond funds generally have shorter durations than their gilt cousins. 

Downside: Global government bond funds tend to offer less crash protection than UK counterparts. That’s due to their lower durations. You’ll also pay more in management fees versus gilt funds.

Look for: Funds that explicitly say they’re hedged to the pound. The right funds for defensive purposes hold investment grade, developed world, government bonds. They don’t hold emerging market bonds.

Most global bond funds hedged to the pound own some corporate bonds and are called aggregate bond funds. Holding riskier corporate bonds means you can expect a bit more yield overall. However they offer less shock absorption in a downturn.

Cash

Best for: Convenience, liquidity, and reducing interest rate risk.

Downside: Cash doesn’t have the capacity to spike in value like intermediate and long-dated bonds.

Look for: Accounts paying interest rates that beat the yield-to-maturity (YTM) of bond alternatives.

Gold

Best for: Rocketing when other assets crater.

Downside: Gold has performed incredibly during a handful of recessions. But it’s been about as useful as a deckchair on a submarine at other times. The case is marginally positive overall.

Look for: A low-cost Gold ETC (Exchange Traded Commodity fund).

Off the menu: these are not defensive

From the perspective of your defensive allocation, you should avoid:

Sub-investment grade bonds (also known as junk bonds) sport tempting yields. Here you’re exposed to the default risk of dodgy debtors.

Such risk typically materialises at the worst possible time, sending junk bonds diving just when you want your defensives to stabilise your portfolio. The weak go under, and defaults batter those yields that lured you in like an anglerfish’s light. (Or at least the market fears as much, and so marks down their value.)

Long bonds, which could deliver equity-scale gains or losses, depending on the interest rate dice.

Unhedged global bonds. These require you to bet on the wild horses of the world’s currency markets. Great sport when it pays off but advocates go quiet when they back the wrong nag.

Investment grade corporate bonds aren’t needed. They’re unlikely to perform as well as government bonds in a recession (companies go bust, governments less so) yet are outpaced by equities over the long-term. 

Broad commodities wrap up low returns with high volatility in a Scotch egg of grimness.

Equity sub-asset classes touted as defensives prove to be anything but when they domino in line with the broad market. So take a bow tumble:

Infrastructure
Energy
REITs
Timber and farmland
Low volatility
Dividend aristocrats

There’s nothing wrong with investing in any of the above. But they belong in the growth side of your asset allocation, not in your defensive bastion.

Model defensive asset allocations

The following asset allocations are starting points keyed to different investing milestones. No size fits everyone. Always adapt model portfolio ideas to your personal situation and risk tolerance.

Because we’re in defensive mode today, I’ll leave the growth side as a global equities percentage without drilling any deeper.

Young accumulators

Asset class
Allocation (%)

Global equities
80

Intermediate government bonds (Gilts)
20

You’re young, you’re starting out, and you have at least a decade of investing ahead of you. Your main risk is a market crash that exceeds your risk tolerance and puts you off equities for life.

Your best defence is high-quality (developed world/investment grade) conventional government bonds.

Older accumulators / lower risk tolerance

Asset class
Allocation (%)

Global equities
60

Intermediate government bonds (Gilts)
20

Global index-linked bonds
20

As the sands drain from the top chamber of your personal hourglass into a peak of wealth below, you will increasingly think about protecting what you have.

That means increasing your allocation to bonds generally, and increasing your defence against inflation specifically. Use a wedge of index-linked bonds to hold the money munching monster at bay.

Check out our piece on managing your portfolio through accumulation. 

Decumulators – simple

Asset class
Allocation (%)

Global equities
60

Intermediate government bonds (Gilts)
15

Global index-linked bonds
15

Cash and/or short government bonds (Gilts)
10

Spending down your wealth is trickier than accumulating it because your portfolio must meet a variety of needs:

The need to be certain you can pay the bills for the next few years – hence you’ll hold cash and/or short dated bonds
The ever-present risk of a crash – which is why you own intermediate bonds
The long-term risk of high inflation impairing your spending power – prompting the 15% slug in index-linked bonds

Decumulators – max diversification

Asset class
Allocation (%)

Global equities
60

Intermediate government bonds (Gilts)
10

Global index-linked bonds
10

Cash and/or short government bonds (Gilts)
10

Gold
10

This portfolio adds gold to an armoury of strategic diversifiers that have proven useful against threats from depression to stagflation.

This suggested split should also allay the fears of people who believe that bonds are tapped out by low interest rates and looming inflation.

There’s no need to bet all for or against one possible future. Instead you can diversify against a spectrum of risks, using a modest proportion of your wealth to defang each danger.

On the defensive

Okay readers, have-at-ye! Asset allocation is as much art as science so I’m looking forward to a hearty debate in the comments.

For anyone who’d like some more background:

Investigate the best bond funds that can man the ramparts of your defensive allocations. We’ve also covered important bond metrics like duration and yield-to-maturity in this one. 
Discover how to build your own asset allocation from first principles.
See more model portfolios.

Take it steady,

The Accumulator

P.S. Shout out to Monevator reader John who tipped us off about a new shorter-dated global linker fund that neatly fills a gap in the market. It’s very new, but if you’re interested: Lyxor Core Global Inflation-Linked 1-10Y Bond ETF – Monthly Hedged to GBP (GISG).

The post Defensive asset allocation and model portfolios appeared first on Monevator.

How an offset mortgage can help you achieve financial freedom

This article on using an offset mortgage comes courtesy of Planalyst from Team Monevator. Check back every Monday for more fresh perspectives on personal finance and investing from the Team.

Paying for a home versus investing is a hot topic for the FIRE1 masses.

However I was late to this party.

I had already plunged in with the societal expectation that everyone starting a family should buy a ‘proper’ house. So that’s what I’d done.

And with that came a mortgage.

Laying the foundations

When I bought my first home in 2008, I hadn’t heard of the FIRE movement. I’d not even considered I might not keep working until State Pension age.

But I still wanted my mortgage debt paid off as soon as humanly possible.

Like most people who go down the home ownership route, my mortgage is the biggest liability I intend to incur in my lifetime.

(I’m aware that the Student Loan is a hefty debt for many graduates these days – including me. But I have less control or choice over its enforced repayment from my salary.)

My ideal was that once the mortgage was repaid I could focus on saving what had previously been mortgage payments into retirement savings.

A few years ago me and Mr Planalyst had created a whopping great budget spreadsheet. We now used this to plan how to pay off the mortgage faster.

Everyone should planalyse as often as possible in my (Excel work)book!

Discovering the offset mortgage

We chose a classic fixed interest-rate mortgage product, rather than a variable rate mortgage.

The fixed rate ensured efficient monthly budgeting. It also protected us against interest rates increasing again. They haven’t actually done so since the financial crash – but, as with most things, we only know that now with hindsight.

Anyway, when it came to the end of our fixed term five years ago, I looked around on comparison websites, intending to remortgage to another fixed interest-rate deal.

It was at this point the offset mortgage option piqued my interest.

And I’m glad I did my research, because it has proved its worth.

Offset mortgage, you say?

I’m going to assume you’re familiar with the concept of a mortgage, be it a fixed or variable interest-rate. However you may not be as well-acquainted with the offset options out there.

An offset mortgage enables you to ‘offset’ the balance of your outstanding mortgage with a cash balance held in a linked savings account.

Your monthly interest calculation is then based on the overall debt across these two accounts, rather than just your mortgage borrowings. The monthly payment to your mortgage company will therefore be lower than if you just had a normal mortgage product. That’s so long as you hold cash in the linked account, of course.

There are also a few options at the policy anniversary when the interest and mortgage capital balance are recalculated. You can reduce the term length or reduce the monthly payment or it’s possible to keep the same monthly amount and term as with a usual mortgage, in order to pay your debt off faster. This was what we did.

Sadly, you don’t earn any interest on the linked cash account (so it suffers from inflation risk).

However you’ll pay less loan interest instead. This saving should make up for what you could otherwise have earned on your cash.

Offset mortgage mathematics

The maths in favour of an offset mortgage works because your mortgage will usually have a higher interest rate than any cash savings account you’ll see in the wild.

The rates touted by offset mortgages are as low as 1.39% right now. That’s cheap, but it’s still higher than you’ll earn on a cash savings account.

Getting a return on your cash by reducing your debt repayments rather than earning interest also means taxpayers can store higher cash amounts without the risk of HMRC wanting its piece. This makes an offset mortgage very tax-efficient.

Even taking into account the small bit of interest I’d earn if the cash were held in a deposit account elsewhere, I’m paying less interest owed on the mortgage versus capital repayments each month. This means I’m eating away at the outstanding capital debt much faster than with my previous conventional mortgages.

It’s all clearly visible on my mortgage calculation spreadsheet, with its nicely downward sloping lines:

The joy of an offset mortgage: click to enlarge the advantages.

Note that the slope gets steeper the more that is added to the offset savings. That is very satisfying.

Offset with benefits

Committing surplus cash to the mortgage was all well and good in the early days of our indebtedness. Our goal of financial independence only materialised years later, and with it the need to accumulate wealth.

Nowadays I have a family, too. So I had to balance those responsibilities and my new FIRE ambitions with my desire to repay the mortgage quickly.

I therefore mentally earmarked my offset mortgage’s linked cash account as an all-important accessible emergency buffer.

The linked cash account can also offer quick access to cash for less devastating events. Maybe you’re a stockpicking type who has been waiting for the right moment to invest in a company you’ve followed for years? A dip in a firm’s fortunes can be your opportunity when you’ve cash to hand via an offset mortgage.

In the meantime and whatever it’s earmarked for, your cash is working to reduce your debts rather than earning diddly squat in a deposit account.

Paying off your debt

Emergencies and opportunities aside, the cash in your offset account can be committed – in part or in full – to the mortgage capital at any time.

Alternatively you could just wait until the end of your existing fixed-rate term and then reassess.

On my mortgage, there is no early repayment charge on up to 99.99% of the outstanding balance. That has made a big difference. We’ve been able to pay the capital down more quickly and ended up paying less in interest over the life of the mortgage.

Of course, different lenders will have different rules on the amount that can be thrown into actually repaying the outstanding debt. You can typically repay 10% without any early repayment penalties. The financially-savvy Monevator audience should certainly read the small print before signing.

If committing all your savings is too much to bear thinking about without a cash safety net squirreled away elsewhere, you could hold the same balance in the linked cash account as you owe on the mortgage.

Like this, you would pay no interest on the debt, but you’d maintain your emergency cash. Monthly payments would be 100% capital repayment. It would almost be like having a mortgage with no mortgage.

Of course, this method means that ultimately you would start to build up a surplus amount in your savings account – earning zero interest.

But you could periodically remove the excess cash to invest elsewhere.

Planalyst’s journey

I didn’t have a big mortgage to begin with. For one thing I had a chunky deposit. I was also lucky with the housing slump in the recession in 2008.

As a first-time buyer I could afford to be choosy and I chose a probate property with a ‘motivated’ beneficiary. That pushed the agreed price down even further.

Doing the sums, I was shocked the monthly mortgage repayments on my new three-bedroom semi-detached were about half the rent I was paying on a tiny two-bedroom flat overlooking Basingstoke train station.

And I wouldn’t be funding a buy-to-letter’s house in Cyprus. Instead I would be my own landlord.

So I would say I’m an advocate for buying your home if you can. We moved again for work and better schools five years ago. The mortgage repayments are still lower than the equivalent rent on my now four-bedroom semi.

I’m also happy to say that – with a few more months of additional savings into the linked cash account – I’m on track to pay off my mortgage this September. That in turn means I’ll avoid paying the bank – well, building society in my case – another 12 years of interest payments, too.

Once the mortgage is paid off, its associated monthly outgoings will instead be redirected into ISAs and the investments discussed on Monevator by The Investor et al. (Fingers crossed for another long-term bull market.)

Paying off my offset mortgage will be my first major milestone on the track to financial independence and the ability to retire early in my mid-forties.

Hopefully I will feel the anticipated exhilaration of being mortgage-free a bit more than The Accumulator did!

Over time you’ll be able to see all Planalyst’s articles in her dedicated archive.

Financial Independence Retire Early

The post How an offset mortgage can help you achieve financial freedom appeared first on Monevator.

Weekend reading: Heads you win

What caught my eye this week.

Finally my co-blogger The Accumulator has won the acclaim he so richly deserves.

No, not a plaudit for achieving the most active puns in a passive post.

Not the Leo Tolstoy Award for Services to Word Counts Beyond The Call of Anything Reasonable But Rather Really Excessive Haven’t You Even Heard of Twitter 2021 Edition.

Not even a retrospective of his black and white cartoons at the V&A.

But rather, a notification from The Motley Fool’s All-Star Money to tell us The Accumulator had won their article of the week spot with his Fighting The FIRE Demons post.

And the prize?

This artist’s impression of The Accumulator in bobblehead form:

Now, given how The Accumulator has cultivated an air of anonymous mystery around these parts, you might wonder why we’re so ready to share this homunculus with you all?

And the answer is you’re more likely to see The Accumulator doubling down on a triple-levered ETF than rocking a tie.

Meanwhile that wodge of cash would be out of his hands and invested into a long-term tracker fund before you could say, “I’ve worked out the terminal value of my round compounded in VRWL for 25 years and on reflection I’m sure I can hear my bus pulling up outside.”

And while TA is just as devilishly handsome as Bobblehead TA, our man is also older, more careworn, and about as likely to grin as Boris Johnson announcing a third wave.

In short, anonymity is preserved!

Nevertheless, it’s a wonderful treat from the All-Star Money team – thank you guys – and the least TA deserves after a decade of peerless posts for Monevator.

Just so long as he doesn’t expect a pay rise.

Have a great weekend everyone!

From Monevator

Can dogs and financial independence go together? – Monevator

How to manage multiple portfolios – Monevator

Beating inflation versus hedging inflation – Monevator

From the archive-ator: Are you lost in Neverland? – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

UK economy grew faster in April as shops reopened – BBC

Ministers aim to spur domestic tourism with cut-price UK rail pass – Guardian

House prices hit another record high with the average home up a mammoth £22,000 in just a year – ThisIsMoney

Smashed prices: Australians enjoy avocados that cost a mere $1 – Guardian

UK air taxi firm Vertical Aerospace to float in New York – Guardian

There are no bad assets… just bad prices [With PDF download]GMO

Products and services

There were 80 new 5% deposit mortgages launched last month – ThisIsMoney

Offer: Open a SIPP at Interactive Investor and you pay no SIPP admin fee for six months, saving you £60 – Interactive Investor

What to do if you were scammed by a Marcus clone site – Which

Index providers: the whales behind the scenes of ETFs [Research]SSRN

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

Fintech 3.0: an overview [Nerdy!]John Street Capital

Homes for sale fit for a Queen’s birthday, in pictures – Guardian

Comment and opinion

Fear – Enso Finance

Build the addition – About Your Benjamins

The top nine (bad) arguments against Bitcoin – The Simple Path to Wealth

A guide to moving from cash to investments – Compound Advisers

What to expect from the stock market – Humble Dollar

The million pound pension problem [Search result]FT

Index funds have too much voting power – Morningstar

Are rich people better investors? – Klement on Investing

Beware of anti-money hiccups when joining a new platform [Plus a rant]Simple Living in Somerset

Complementing a core strategy with managed futures [Geeky!]Wisdom Tree

Inflation for nerds mini-special

Why wage inflation can’t be transitory – The Reformed Broker

Booth and Fama on rising inflation – The Evidence-based Investor

Economists discuss: is inflation really dead? [Video] – via YouTube

Naughty corner: Active antics

Is there a better way to invest in meme stocks? – Of Dollars and Data

Inflation versus speculation – Feld Thoughts

The 10 biggest mistakes made by fund investors – Behavioural Investment

A deep dive into Fundsmith’s emerging markets trust – IT Investor

UK Value Investor updates on his model million pound portfolio – UK Value Investor

The dean of valuation looks at SPACs – Musings on Markets

A profile of the bullish US value investor John Rogers – Institutional Investor

Why one firm’s portfolio managers code in Python – Institutional Investor

Covid corner

Unvaccinated are most at risk from Delta variant – BBC

Did any of the anti-Covid mandates really make a difference? – Vox

Rapid Covid tests used in mass UK programme get scathing US report – Guardian

Kindle book bargains

Liars Poker by Michael Lewis – £0.99 on Kindle

Business Adventures: Twelve Classic Tales from the World of Wall Street by John Brooks – £0.99 on Kindle

Legacy by James Kerr – £0.99 on Kindle

Think and Grow Rich by Napoleon Hill – £0.99 on Kindle

Environmental factors

The decade of new veganism – GQ

Off our beat

Gareth Southgate: Dear England – The Players’ Tribune

In space, nobody can hear Jeff Bezos. So can Richard Branson go, too? – Guardian

The 20-5-3 rule on how much time to spend outside –  Men’s Health

Microsoft Excel is now an e-sport. Yes, really – MSN

“You don’t have enough work because you’re walking too much – and other weird things I don’t miss about office life”Elizabeth Tai

Feeling sorry for people who won’t buy an Apple WatchAnthony Lawrence

And finally…

“One of the reasons that millionaires are economically successful is that they think differently.”
– Thomas J. Stanley, The Millionaire Next Door

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The post Weekend reading: Heads you win appeared first on Monevator.