The Full English Accompaniment – Weddings and wealth

What’s piqued my interest this week?

Hard to miss the Royal Wedding this week. I’m generally fairly equivocal about the royals. Whatever your views, I found the cheerful reporting a break from the general dour tone and sensationalism of violence employed by journalists looking for readers.

MrsFIREShrink and I recently married and spent far less than the reported £32million the new Duke and Duchess of Sussex (and associated Windsors) dropped on their nuptials (1,2). Far fewer than the 600 guests too. I wonder if Prince Harry enquired if the bride’s father would be covering the cost. Certainly the Royals don’t struggle with FI, but perhaps the RE given HRH The Queen’s daily work schedule. How do you retire from an inherited lifetime title with associated duties?

Elsewhere, YoungFIGuy has been blogging about UK Inheritance Tax (3). I recommend the read, as it summarises and follows up nicely from where the OECD and Resolution Foundation reports of a few weeks ago point (4,5). In my opinion Inheritance Tax holds a special level in the descent into hell, but more on that another time.

botticelli_hel_grt

Which brings me onto inherited wealth. The royals have it in spades. For those of us seeking FI, some will also be planning to or have children. This Reddit thread is an interesting insight into individuals experiences of growing up with FIRE parents:

Most of the posters discuss parents who lived within their means and taught them tight budgeting. That foundation appears to often be the case in people who live frugally and maintain the self-control required to accumulate savings to retire early. There’s various psychological drivers at play here, key perhaps the deep-seated and often unconscious drive to achieve what your parents aspired to. Itself based on how at an early age and in it’s most basic form you learn to derive satisfaction, pleasure and fulfilment in life.

Ultimately very few families ever achieve multi-generational wealth. Like the markets, most upwards social class movement will be balanced by a period of class loss. Lifestyles grow to meet budgets, and keeping up with the Jones’ becomes keeping up with the Rothschild’s. Another dimension to think about with procreation.

Have a great weekend,

The FIRE Shrink

Side Orders:

  • Monevator on the Royal “I do” (6)
  • Hourly pay improving for those earning the least, but no comment on the number of hours worked (7)
  • Continued fallout for TSB from their IT crisis (8)
  • Ermine chatting about the bleak economic future in the way only he can (9)
  • Student laments being unable to save money and buy nice things because they’re on a student budget in an irritatingly self-entitled manner (10)
  • But it’s not all bad for millenials (11)

What I’m reading:

When Breath Becomes Air by Paul Kalanithi – Useful for a sense of perspective

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. http://www.bbc.co.uk/news/business-44154438
  2. https://www.telegraph.co.uk/news/2018/05/19/royal-wedding-facts-figures-many-people-invited-cost-windsor/
  3. https://youngfiguy.com/time-to-reform-inheritance-tax
  4. https://www.theguardian.com/money/2018/apr/28/inheritance-tax-raise-inequality-wealth
  5. https://www.ft.com/content/48e3f960-4d51-11e8-97e4-13afc22d86d4
  6. http://monevator.com/weekend-reading-when-harry-met-an-30m-wedding-bill/
  7. https://www.theguardian.com/money/2018/may/18/number-of-low-paid-uk-workers-falls-to-lowest-level-in-decades
  8. https://www.telegraph.co.uk/personal-banking/current-accounts/tsb-meltdown-leads-eight-fold-increase-customers-switching-accounts/
  9. https://simplelivingsomerset.wordpress.com/2018/05/16/ben-broadbent-inserts-hoof-in-gob-message-gets-tossed-in-can/
  10. https://www.theguardian.com/commentisfree/2018/may/17/millennials-pensions-student-loan-debt
  11. http://awealthofcommonsense.com/2018/05/young-retirement-savers-scorned/
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Musing on… Mortgages, what’s your risk tolerance?

I’ve recently been thinking a lot about mortgages, because I’m getting a new one. At the same time I’ve been educating myself about investment risk tolerance (1,2). I’ve done lots of online questionnaire’s to evaluate mine, which broadly show I’m willing to tolerate a lot of risk; I’m youngish, can wait most storms out and have a background in a profession where I have to manage risk daily. I also have the capacity to tolerate that risk; I make a good, secure salary and I won’t be investing money I can’t afford to lose. That’s not the case for my mortgage though, the single last purchase/ cost I’ll probably ever make. A post last week on r/UKPersonalFinance got me thinking:

Stick or twist?

Are you mad Shrink? You need to fix, fix, fix, before the rates go up. Everyone says they will: the BBC (3,4), Newspapers (5,6,7,8), lots of blogs (9,10).

Is what everyone was saying when I was looking last week. Except the rates didn’t go up. We had crappier than anticipated economic results, and the BoE said no (11). It cut it’s growth forecast and interest rates remained on hold at 0.5%.

Well they can’t stay that way!

No, they probably won’t. But they could do, pollsters and pundits have been off before. They said Lehman Brothers, Northern Rock etc were too big to fail. They said Brexit wouldn’t happen. Predicting the future is Mystic Meg’s domain.

Carney  
Mark Carney – will the last one out please turn off the lights.

 

Opportunity cost

Four years ago MrsFIREShrink and I were looking at putting our hard-earned deposit down. As 20-something millenials we were pretty unusual to be in that position. We leveraged a 90% LTV on a do-er-upper in the area we both loved, worked and intended on staying in. In those pre-Brexit, pre-May/Corbyn, pre-economic flatline days everything pointed to fixing for as long as we could. 4.29% fixed for 5 years was the best we could manage. That was ok as when we bought we planned to renovate and stay there for 5-10 years.

Fast-forward four years and we’ve moved 150 miles for job opportunities we couldn’t pass up but never anticipated. Our old house is for sale, and we’re trying to port our mortgage to save paying our eye-watering (5%!) exit fee. We’ve learnt that long fixed rates have their downsides (12). We look at others fixing for 10 years, who have no plans to move, and think about their flexibility (13,14).  Going back to those trackers *affix hindsight glasses* had we selected a three year tracker rather than fixing we would have saved thousands in interest. This time we’ve taken information from a number of different sources, and used online calculators to think about our best financial options (15). Cardinal rule learnt: Always consult multiple sources, references and opinions before purchasing.

Where’s the risk?

Why didn’t we go for a tracker 4 years ago? We wanted to minimise our risk to a rising base rate. Despite being tolerant of risk in work and in cash/ stock investments in the past, I’m not for my housing. I started to think about why, and where the risk lay:

  1. LTV – How much you’re willing (or the bank is) to leverage your cash against future earnings.
  2. Monthly repayment figure – How much you’ll be paying back a month, and if you can afford it.

The two are obviously inextricably linked. Our LTV has improved to 80%, which looks to be optimal for interest rate offers. Risks/ costs worth considering:

  • Under-leverage – borrow less, with LTV 60-80%, and pay less on interest due to better rates and lower value. Buy a smaller property, but risk missing out on the extra equity caused by a potential increase in house prices.
  • Over-leverage – borrow more, with LTV 80-95%, and pay more interest due to higher rates. Buy a larger property, put more money in monthly, so more equity in the long run. Greater exposure if there is a house price falls resulting in more negative equity.

The tolerance for this definitely varies amongst my friends and acquaintances. The common theme amongst blogs I’ve read has been to leverage to your max, 90% at least, as long as you have a good duration (25 years+) of work-life human capital left. This seems to be driven by the view that property remains a good long-term investment option. Monevator does an excellent piece on this, although as it’s 2012 it’s a bit out of date (16). Just look at the long term trends below to get the picture:

house-prices

real-house-prices

Anecdotal evidence; I have a close friend who bought on a 85% LTV five years ago. He bought a property in an up-and-coming commuter belt, and the house value increased by about 25% (good on him). He took this and leveraged at 90% LTV on a thumping great Barratt executive home (le sigh), so in his early-30s is sat in a half-million pound house. He’s willing to tolerate the exposure because it’s their dream home and they intend to stay there 10+ years.

Historic Value

Digging a bit deeper into those trends to understand whether now is a good time to go max-LTV is difficult. The question; Have property prices always been a good investment? Could be a whole separate post in itself, but suffice to say it’s difficult to answer. Most property prior to the post-war housing boom was owned by landlords and rented out (are we heading back that way?). The British obsession with owning your own home is a new one. UK house price index data only reliably starts in the 1950s, but this LSE blog looks at land prices going back to 1892 (which helpfully are no longer published) (17).

Cheshire-fig-1

To unpick this data note that the value of the home is made up of the value of the structure and the value of the land combined. This blog by James Gleeson summarises dis-aggregating house price value (18). From it I take this graph:

test2

So, we see that the value of the structure increased slightly once inflation-adjusted, but residual values, i.e. that value of the land, is the source of most of the increase. This is also visible in the price of undeveloped land. Review the historic trends from the former LSE graph and we see that the increase in value is a modern phenomenon, and the long-term investment strategy of property is not so long term.

Short-term LTV Outlook

Again, another whole post in itself. In 2016 the UK Value Investor reckoned that UK house price forecasts weren’t looking good (19). Two years on and the market, as discussed in recent Full English Accompaniments, looks to be stodgy. Back then, UK Value Investor reckoned that house prices were in a bubble and due a crash. This was based on price to earning ratio data:

UK-house-price-chart-2016-11

From UK Value Investor (19)

Here’s a quick description of what that chart shows:

  • The black line – The average house price in each year
  • The red zone – Where the average house price would have been if houses were historically expensive, i.e. if the PE ratio had been between 5.5 and 6
  • The yellow zone – Where the average house price would have been if houses were at historically average valuations, i.e. if the PE ratio was between 3.8 and 4.5
  • The green zone – Where the average house price would have been if houses were cheap, i.e. if the PE ratio had been between 3 and 3.3″

The whole article is worth a read if you haven’t before. John predicts:

Expected capital gains from UK housing are zero over the next ten years

Which two years on looks pretty fair. His assumptions hold that house prices won’t crash, but will stay relatively flat while wages catch up. Worth considering if you’re buying now expecting a 10-20% increase in the value of your holding. Why waffle about this – it nullifies one of the arguments for a 95% LTV.

2. Monthly Repayment Figure

Back to our original list and the monthly repayment figure. A function of mortgage duration, principal sum and interest rate. I’m not going to go into duration so much, as this appears to be more a personal choice and dependent on how much human capital you have left. Opting to pay a short duration means more/ month, a long duration = less. People modulate their monthly repayment on big houses with high LTVs by going longer on their duration. The risk here is about what % of your earnings you’re going to be spending on your mortgage. Lenders set their affordability calculators on earnings, up to 4.5x, but this has got stricter. There have been concerns that borrowers who were previously approved will now struggle to remortgage due to the affordability rules (20, 21, 22).

The traditional model argues to aim for 35% of your pretax income to go on your mortgage, 45% at a push (23). Dave Ramsey advocates a conservative 25% of take-home (24). UK-wide this is on a downward trend, with Halifax reporting it’s dipped to around 29% in 2017/18, but with massive regional variability (25, 26). This has a complex interplay with affordability and price-earning ratio.

Mortgage Payment as %

4A420BC000000578-0-image-a-1_1521210565456

Bottom line – you don’t want to be paying so much on a mortgage you can’t afford other day to day activities. Money Advice Service and Money Saving Expert have good tools to work this out (15,27). The balance between fixing or tracking affects interest rate. Generally go for a tracker and it’ll be closer to the BoE base rate, go for a fixed rate and you’ll pay some percentage for the choice. Money Saving Expert also includes tools to compare trackers, or calculate if paying out of a fixed rate mortgage could be better value (28). People are fixing to avoid a base rate rise, and there’s various calculators available to help with this too, allowing you to calculate how much extra you would pay (27,29,30). The risk if you don’t fix – the BoE base rate skyrockets and repayments become un-affordable.

Anecdotal evidence; I have a colleague who’s a bit of a flash git. At 28-29, he owns 3 properties (from a standing start) and drives a new LR Discovery (on PCP/ lease). He achieved this by buying a small property straight out of university, sub-letting rooms, using the cash created for a second BTL property, and then leveraging that for a flat. All on about 80% LTVs. He works full time 48 hours a week in the medical profession, then does another 20 hours on top overtime to pay his mortgages. Just thinking about it gives me the collywobbles.

What have I learnt?

My risk tolerance for my mortgage is substantially lower than for investments. Our LTV is now 80%, we’ve opted for a shorter (2 year) fixed rate on our extension while our other fixed rate runs out, and combined these make up 39% of our take-home income. Once burnt, twice shy. We’re hoping to fix next year on the other larger principal, and that rates remain low. This seems likely looking at conditioning paths (31). Even if it rises to the long run UK average of 5-6% we’re comfortable. In face we’ve calculated that we can tolerate up to a 10% BoE base rate and still be ok. Those would be days of property price collapse, repossessions, defaulting and as Ermine over at Simply Living in Somerset teaches us the hooded figure of negative equity (32,33). We’re not at the 15% of the the mid-’80s, and it seems unlikely we will be any time soon, but my tolerance for the chance of losing my home is minimal (34,35). But if you have the stomach and the wallet for it, then maybe a tracker is a decent current option. Ultimately I’ve learnt I’m not willing to gamble my home or my family, and I’m not so gung ho after all.

The Fire Shrink

References:

  1. https://www.forbes.com/sites/mitchelltuchman/2014/03/14/understanding-your-own-investment-risk-tolerance/#7f0edac140f5
  2. https://www.thebalance.com/what-is-risk-tolerance-2466649
  3. http://www.bbc.co.uk/news/business-44055400
  4. http://www.bbc.co.uk/news/business-41831777
  5. https://www.theguardian.com/money/2018/mar/05/mortgages-fixed-rate-loans
  6. https://www.theguardian.com/money/2018/apr/21/mortgage-rate-highest-two-years
  7. https://www.standard.co.uk/news/uk/rush-for-fixed-mortgages-as-bank-of-england-rate-rise-looms-a3816071.html
  8. https://www.thesun.co.uk/money/6120079/interest-rates-could-go-up-twice-this-year-but-how-will-it-affect-you/
  9. https://moneytothemasses.com/owning-a-home/interest-rate-forecasts/latest-interest-rate-predictions-when-will-rates-rise
  10. https://mortgageadvisers.which.co.uk/about/blogs/
  11. http://www.bbc.co.uk/news/business-44065472
  12. https://www.ftadviser.com/mortgages/2018/01/18/downsides-to-long-term-mortgage-fixes/
  13. https://www.independent.co.uk/money/mortgages/is-a-10-year-mortgage-deal-a-fix-too-far-10237879.html
  14. https://www.moneyadviceservice.org.uk/blog/how-long-should-you-fix-your-mortgage-for
  15. https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator
  16. http://monevator.com/historical-uk-house-prices/
  17. http://blogs.lse.ac.uk/politicsandpolicy/land-prices-the-dog-thats-lost-its-bark/
  18. https://jamesjgleeson.wordpress.com/2017/04/03/historical-housing-and-land-values-in-the-uk/comment-page-1/
  19. https://www.ukvalueinvestor.com/2016/11/uk-house-price-forecast.html/
  20. https://www.theguardian.com/money/2014/apr/12/need-mortgage-new-rules-lenders-check
  21. https://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/10787446/How-to-pass-the-new-mortgage-affordability-tests.html
  22. https://www.mortgagestrategy.co.uk/borrowers-lose-tightened-mortgage-affordability/
  23. https://www.moneyunder30.com/percentage-income-mortgage-payments
  24. https://www.moneyunder30.com/dave-ramsey-financial-peace-university-review
  25. http://www.thisismoney.co.uk/money/mortgageshome/article-5510061/Mortgage-payments-compared-disposable-income-region.html
  26. http://www.thisismoney.co.uk/money/mortgageshome/article-5510061/Mortgage-payments-compared-disposable-income-region.html
  27. https://www.moneyadviceservice.org.uk/en/tools/house-buying/mortgage-affordability-calculator
  28. https://www.moneysavingexpert.com/mortgages/fixed-mortgage-calculator
  29. https://www.which.co.uk/money/mortgages-and-property/mortgages/getting-a-mortgage/bank-of-england-base-rate-and-your-mortgage-albl35s6phq0
  30. https://www.uswitch.com/mortgages/interest-rate-rise/
  31. http://www.thisismoney.co.uk/money/news/article-1607881/When-UK-rates-rise.html
  32. https://simplelivingsomerset.wordpress.com/2014/04/06/when-not-to-buy-a-house-a-cautonary-tale-from-a-quarter-of-a-century-ago/
  33. https://www.financialsamurai.com/what-if-you-buy-a-home-at-the-top-of-the-market-and-a-recession-hits/
  34. https://www.theguardian.com/business/economics-blog/2014/mar/03/uk-interest-rates-a-brief-history
  35. https://www.theguardian.com/commentisfree/2018/may/10/celebrate-house-prices-falling-britain-property-values

The Full English Accompaniment – How now BoE cow?

What’s piqued my interest this week?

Due to life events there was no Full English Accompaniment last week, so a double length post this weekend to make up it.

As a millennial (oh how I hate that term) I sit squarely in a morass of people struggling with affording housing. Last weeks latest proposition of giving millenials £10k sits squarely in the ‘baby-boomer guilt complex’ zone that seems to occupy a lot of print inches currently. The economic logic behind it also seems to expect that all millenials want to save for the future, set up companies or buy property, and not, as the BBC voxpop (hack-spit) found, spend it all in Selfridge’s. Just who the hell are the BBC asking?

Either way, as millenials we’re not supposed to have any money, and we can’t afford to buy property. MrsFIREShrink and I are an exception to the rule. The Guardian this week reported that the proportion of home owners has halved for the millennial generation (1). Again I’m not really sure blaming millenials inability to save or avoid smashed avocado is fair. We’re certainly lucky to earn good wages, but a decade of sluggish economic growth, poor employment figures (if you discount the gig economy) combined with sky high house prices seems more at fault. People seem to be earning less, paying more rent and can’t afford to buy (2).

The economic factors don’t look like changing anytime soon. Business investment is poor, growth is weak, and investors nervous (3). Surely a great time to be buying up underpriced or underperforming investments. Especially since the UK output data first hinted, then led to, the Bank of England base rate sticking at 0.5% (4,5,6).

Great news for those with tracker/ SVR mortgages! Not so much for cash investments. There’s the obvious inflation effects of keeping the BoE base rate the same, but what about on house prices? Is the BoE surreptitiously stimulating a faltering flatlining housing market? Various sources have published this week that in areas house prices are falling (7). While it doesn’t feel like a full-on crash, could it be a herald of a new recession? A family friend who works in the city was a year ago suggesting just such a situation could be on the cards. He said “the market follows trends”, mysteriously and without any further guidance, before flopping in his cups.

Personally, following many years of turmult and the unexpected baby bundle of Brexit joy, I wonder if the current status may be a new norm. A norm of a flat housing market, flat base rates, sluggish growth and nervous confidence. A quiet while the world catches up after 20 years of financial storm and rebalances the employment market. Who bloody knows!?

Have a great weekend,

FireShrink

Side orders:

  • Baidu raises billions for an AI powered investment arm (8)
  • TSB does a good lame duck impression with it’s IT failures, but offers strong interest rates as apologies (9)
  • House of Fraser is the next head on the block, circling the drain by slumping to a loss and closing stores (10,11)

What I’m reading:

N.B. I’ve written a post this week about mortgages, but WordPress deleted it somehow, so that’ll follow next week.

Referenced:

  1. https://www.theguardian.com/society/2018/apr/28/proportion-home-owners-halves-millennials
  2. http://www.bbc.co.uk/news/uk-england-43881389
  3. http://www.bbc.co.uk/news/business-43919426
  4. http://www.bbc.co.uk/news/business-43987478
  5. https://www.ft.com/content/c955aa70-5441-11e8-b24e-cad6aa67e23e
  6. https://www.theguardian.com/business/2018/may/10/bank-of-england-holds-uk-interest-rates-at-05
  7. https://www.theguardian.com/commentisfree/2018/may/10/celebrate-house-prices-falling-britain-property-values
  8. http://m.scmp.com/tech/article/2143875/baidu-raises-more-us19-billion-artificial-intelligence-powered-finance-arm
  9. http://www.bbc.co.uk/news/business-43948889
  10. http://www.bbc.co.uk/news/business-43973149
  11. http://www.bbc.co.uk/news/business-44068513

Frugal Motoring – Should I buy a diesel?

Well, no, obv… Except yes?

What started as a rant post, I shall turn into a mini-series.

In Frugal Motoring I will discuss how to cheaply purchase cars, the pros and cons for various purchasing methods (straight up cash, loan, PCP, lease), ongoing political/ government motoring related machinations and how to keep your car running.
This week I will discuss why and when you should purchase a diesel instead of a petrol.

Diesel’s bad rep

As discussed in the last Frugal Motoring post, diesels have a bad rep. Audi continues to push the slide into mediocrity with the recent news that even new build A6/A7 cars are affected.

http://www.bbc.co.uk/news/business-44037673

But this does not extend to all manufacturers. Many (Mazda/ Merc/ Ford/ Kia) continue to produce diesel vehicles with low emissions and good MPG. The diesel brush tars them unfairly, suggesting all manufacturers have ignored the NOx as particulate emissions problems. If we take a look at AutoExpresses list of best ‘green’ cars for 2018, there slap bang in the middle is a diesel Astra.

http://www.autoexpress.co.uk/vauxhall/astra/86341/vauxhall-astra-16-cdti-ecoflex-best-low-emissions-green-cars

While if we look at the website Next Green Car, there’s a huge raft of diesels with low emissions. It’s important to note as well that most of these are general family cars, not flash executive motors sporting the latest tech. The technology for low emissions has trickled down to the mainstream. http://www.nextgreencar.com/emissions/low-emission-cars/diesel/

Changes, changes

Taxation is being increased on new cars, and some of the new rules will only affect future vehicles. Additionally, depending on emissions the extra taxation could be as little as £20/year, but are more likely to be around an extra £100-200/year for new low emissions models. Residuals for diesels remain strong but are expected to drop in the future with increased taxation. Governments decreasing taxation on diesels seems unlikely.

http://www.autoexpress.co.uk/car-news/102928/new-diesel-car-tax-rules-april-2018-changes-explained

Recent technology advances by Bosch also claim to mean lower emissions in the future, with a new tech targeting the pesky problem particulates and NOx:

http://www.autoexpress.co.uk/car-news/103331/new-bosch-tech-drastically-cuts-diesel-nox-emissions

https://www.driving.co.uk/news/new-nox-emissions-tech-bosch-save-diesel-engine/

When is diesel a good thing?

Diesel engines continue to offer generally better MPG when running at moderate RPM for long periods. So if you’re doing lots of long distance journeys diesel is probably best.

Diesel also offers better torque at low RPM. This means if you are regularly making long journeys or towing then diesel is a better fuel choice.

Which? offers an excellent calculator to work out how much you could save with efficiencies of a diesel engine:

https://www.which.co.uk/reviews/new-and-used-cars/article/driver-calculators-and-tools/petrol-vs-diesel-calculator

But it’s worth remembering most of these efficiencies rely upon turbos being spooled up, engines being warm and DPFs operating properly. Short journeys will kill Diesel Particulate Filters, and by nature most diesel engines will struggle to get up operating temperatures doing stop-start work in traffic. Around town this will also mean more invisible pollution for local pedestrians and residents.

Diesels also generally continue to cost more to purchase. This means that unless you’re doing starship mileage you may not save on fuel cost what you initially paid out extra in engine choice. Most buyers will only see a diesel recouping it’s cost after 6-7 years. The new taxation system is set to worsen this.

https://www.which.co.uk/reviews/new-and-used-cars/article/petrol-vs-diesel-cars-which-is-better

Summary

Broadly, diesels are better for:

  • Towing
  • Long distance commutes or frequent long distance journeys
  • Heavier vehicles
  • Multi-stop journeys

If you think this fits you, consider that new diesels will be cheaper to tax and more efficient, but will have a payback time calculation to make. Second hand with have less of this payback due to depreciation, but will be taxed more. Both may see a future drop in residuals. As with all big purchases think carefully about your requirements before buying.

Have a great week,

The FIRE Shrink

Further reading:

https://www.rac.co.uk/drive/advice/buying-and-selling-guides/should-i-buy-a-diesel-car/

https://www.moneyadviceservice.org.uk/en/articles/choosing-between-petrol-and-diesel-power

http://www.autoexpress.co.uk/car-news/103111/should-i-buy-a-new-diesel-car?amp

The Financial Dashboard – April 2018

So where did that month go?

April 2018 Dash

My first monthly review is not pretty reading, but I expected that. My net worth has actually decreased. This is due to a few expensive payments for professional courses and subscriptions I have coming up. Some of these will be reimbursed by expenses. I’ve also been shelling out for wedding items and legal expenses for property conveyancing. This has swallowed up some money I had in my main bank account put ready after working some extra shifts last month.

Assets April 2018

My assets have decreased. I have been back through old bank accounts and working out a more accurate picture of the lay of the land. I’ve now factored in a bit of overdraft I paid off earlier in the month, and the cash float has been swallowed by legal fees. Next month I should be clear of my (interest free) overdraft for the first time in several years. I’ve managed to raise a bit of cash by starting to sell some spare car parts, but I continue to be a serial hoarder of bits which I picked up cheap and ‘may come in handy one day’. I’ve also managed a mini-goal in drastically reducing my £4/day canteen lunch habit to a £10/week shopping trip… Chipping away.

Liabilities April 2018

My liabilities have decreased a bit. Student loan is being paid off as per amortisation, as is the mortgage. My credit card has increased a bit with wedding expenses. Over the month I’ve set a clearer plan for my credit card, and I now plan to pay off a specific amount (~£250) monthly rather than ad hoc amounts.

I have also set a plan to decrease monthly spending. We currently pay mortgage on a house on the other side of the country, and rent on a house where we work. This is an eye watering £1950/ month, plus bills and council tax. We’re downsizing our rental on a short lease, and waiting on the sale of our property and purchase of a new place.

Plans for next month:

  • Set up a regular savings account to build an emergency fund. This may either be a regular saver or a high interest bank account.
  • Set up a Starling/ Monzo/ Atom/ Revolut account for day to day transactions.
  • Reduce mortgage and rent outgoings
  • Sell five items from my hoard
  • Set a monthly budget for hobbies

I also plan to continue reading about savings and investment strategies, and look into overpaying my mortgage once conveyancing and purchases are complete.

There’s a load way to go.

Yours,

The FIRE Shrink

The Full English Accompaniment – High Street Horrorshow

What’s piqued my interest this week?

What is happening to the British High St? Does a FIRE advocate really care?
For years now I’ve been buying things through the internet. It’s significantly cheaper, and totting up my purchases I reckon at least 50% is via Amazon/ eBay or other online retailers. I only go into town to shop if I need SOMETHING NOW, which points to piss poor planning, or if I’m after inspiration. Massive distribution centres like the one below and same day delivery means that the failure of planning is less of an issue too:

https://www.theguardian.com/artanddesign/2018/apr/15/shed-the-size-of-town-what-britains-giant-distribution-centres-tell-us-about-modern-life

So what the hell is the High St for?

That seems to be a question plaguing retailers, with lots on the wane. Just in the last month we’ve had Poundworld shrinking (debate as to this being a bad thing), House of Fraser calling in KPMG, Debenhams and Mothercare issuing profit warnings, to add to the folding of Maplins and Toys ‘R’ Us:

Poundworld adds to retail gloom – http://www.bbc.co.uk/news/business-43908423

House of Fraser calls in KPMG to draw up turnaround plan -http://www.bbc.co.uk/news/business-43828629

https://www.thetimes.co.uk/article/retail-profit-warnings-on-high-street-reach-seven-year-high-fjhpnsdg2

The ONS is blaming this on the snow:

UK economy in weakest growth since 2012 – http://www.bbc.co.uk/news/business-43919094

Which I think makes about as much sense as blaming Stalin for the current Tory government. Tenuous.

It feels to be part of a wider consumerism shift towards online and digital usage and away from browsing shops in town. Banks are moving this way too, with Lloyds shutting a string of branches:

http://www.bbc.co.uk/news/business-43802021

Incidentally, I recommend going back and listening to a recent Radio 4 Moneybox where they interview an RBS executive about the closure of rural RBS banks. His summary is no matter how much people complain about wanting local banks, small branches being important etc, RBS are following people’s actions not words. People aren’t going into branch anymore. https://www.bbc.co.uk/programmes/b09x8qq5

This weeks news that Asda and Sainsbury are considering merging is also interesting.

http://www.bbc.co.uk/news/business-43933517

They talk of a shake up from what they call ‘the discounters’ Aldi and Lidl. I predominantly shop at the Aldidl, but this is made possible because of online purchasing of things not held in stock. Shopping there is going in, knowing what you want, getting it, paying as little as possible and leaving.

Is the business model for the High St changing? The following article from the BBC makes a lots of sense:

Why shopping needs to be more fun – http://www.bbc.co.uk/news/business-43813154

And the turnaround at Waterstone’s seems to mirror the picture that in order to survive, businesses on the High St have to change to provide something not available online. A personal touch to sales, or something more? Toys ‘R’ Us and Maplins were late to that party. Mothercare, House of Fraser and Debenhams seem to be waiting in invitations.

https://www.theguardian.com/books/2017/feb/03/balancing-the-books-how-waterstones-returned-to-profit

Big changes in the nature of the retail market matter to FIRE advocates, as like any market, diversification means you probably have a toe dipped in these investments. If you’re lucky it’s one of the clued up retailers. Either way, this is just the musing of one bored professional.

Happy weekend!

The FIRE Shrink

Side orders:

This week I’ve mainly been reading new blogs.

I’ve been learning about basic investing with the diy investor (uk) – http://diyinvestoruk.blogspot.co.uk/p/basics.html

And of course Monevator’s passive investing – http://monevator.com/category/investing/passive-investing-investing/

YoungFIGuy’s guide to Safe Withdrawal Rates – https://youngfiguy.com/safe-withdrawal-rate

And more domestically, cheap eats from Frugal Feeding – http://frugalfeeding.com/

Frugal Motoring – Diesel Curse

The adage goes that you should write about what you know. While I continue to learn about investing I’ll blog about frugal motoring.

In the last few months there’s been lots in the news about diesel cars. Since ‘diesel-gate’ (what will it take for lazy journalists to stop adding -gate to things? Door-gate? Gates-gate?) their social popularity stock has been in free fall. Suddenly they’re very out of fashion, and the Daily Mail warns us that many nuns and kittens will die if you buy a diesel. Should you be concerned?

Motoring fashion

The rise of diesel cars as a proportion of total sold really took off in the ’90s and early ’00s. Prior to this diesel engines were the preserve of commercial vehicles; loud, clattery, generally large displacement and utilised for their torque curve. In the late 1980s and early 90s manufacturers began to make smaller displacement, less tractor-ish, engines. This was largely possible due to a spread of direct injection and common rail technology, bringing more refined efficient running. These found their way into a wider variety of cars including corporate, higher end models. Engines like the Peugeot XUD, VAG 1z/ AHU/ AAZ/ PD and Mercedes OM60x series spread the word. Reps doing mega-mileage sang the praises of the fuel efficiencies and reliability of these donks.

Diesel had it’s golden age. Emissions concerns in the 00s pushed manufacturers to reduce harmful large particulate output (the old diesel smokers) while at the same time increasing efficiencies. Turbos, diesel particulate filters (DPF) and exhaust gas recirculation (EGR) were born. Diesel engines spread across consumer car ranges and people were seduced by their quoted MPG figures (leading to low tax brackets).

Emissions controls

The combination of emission controls and the spread across consumer car ranges lead to people using diesel cars who previously wouldn’t. Cars got heavier due to increased safety features all while tax incentives towards high efficiency vehicles continued this push. It was now people doing 5,000 miles/year as well as those doing 50,000, and so issues began. Engines were built for higher combustion pressure using tighter tolerances. Diesel engines are more efficient when up to temperature, and EGR/ DPF function best with long duration moderate RPM runs. The short distance, short duration journeys of those moving from little petrol cars to little diesel cars couldn’t produce the sustained RPMs required. Oil barely had time to warm up and lubricate the tight tolerances. People began to complain that their cars were not as efficient as expected, or not as reliable, or were doing DPF regen too frequently. Clouds gathered on the horizon.

Diesel-gate

It became difficult to develop engines that could meet the power/ weight/ efficiency/ emissions demands of the population and government with current technology. Some manufacturers built engines with tight tolerances that met standards at the expense of reliability (see Renault/ Nissan’s DCI). Others reduced displacement, upped boost pressure or used AdBlue (urea injected into the exhaust system, made from pig urine). VAG clocked that international emissions testing systems were always run a certain way, and therefore developed a programme in the cars ECU to detect when the car was being tested and tune for emissions at the detriment of performance. They were found out, and how the hysterical tabloids shrieked with indignation. Imagine that, a large corporation finding a way round government law and not telling the public!

At the same time scientists began to measure and report the elevated toxic levels of NOx and very fine particles that the new diesel engines chucked out. Those new diesels weren’t so clean after all, they had just changed from visible smoke to tiny invisible particles. A tipping point was reached.

Double standards

That brings us to now. The government, ever the one to follow the will of the people (shriek of The Sun/ Mail), has started to roll out new rules. Among these include that any Engine Management Light on, removal of Diesel Particulate Filter or Exhaust Gas Recirculation will be a fail come MOT time. This affects all car owners, but particularly diesel owners, where second hand owners replace or remove DPFs/ EGRs in pursuit of better reliability/ fuel economy.

https://www.theguardian.com/money/2018/apr/14/mot-changes-strict-tests-diesel-cars-fail

At the same time, the recognition of the other harmful exhaust gases has caused taxs and ultra low emissions zones to target diesel drivers.

https://www.bbc.co.uk/news/amp/business-43655703

I applaud the manufacturers who have managed to meet required standards. The technology (in it’s infancy 10 years ago) has matured and it is possible to have highly efficient diesels that haven’t bent the rules. Diesel is an excellent fuel for efficiency and torque.

Why does this matter to us?

Three points here. First the obvious. It will cost more to own a diesel car as tax classes change in the future. You may get stung with a hefty bill when you go for an MOT and find out that secondhand BMW 116d is missing it’s DPF. Manufacturers are also changing engines to make them meet new emissions standards, but in some cases this is worsening performance or MPG. Many new diesels aren’t meeting advertised MPGs in real world environments as the listed MPG figure is from a rosy scenario.

Additionally, you may have received a letter from the manufacturer asking you to bring your car in for a ‘fix’. VAG are the big name for this. I would think very carefully before getting the ‘fix’. Pistonheads (the car forum for powerfully built company directors driving shiny cars in shiny suits) is full of very interesting threads about documenting experiences with their ‘fixed’ cars.

https://www.pistonheads.com/gassing/topic.asp?h=0&f=86&t=1589780

Second, broader, point is about the knock on effect on the UK economy. We may no longer be the British Leyland industrial powerhouse nation, but many thousands of jobs across the UK rely upon the motor industry. The UK retains a reputation for high-tech manufacturing. Many of the manufacturers who have done well out of the rise of diesels produce the cars and engines in the UK.

https://amp.theguardian.com/business/2018/mar/05/diesel-uk-car-sales-fall-petrol-electric

The fall in demand has resulted in a fall in production volume, and jobs are being lost.

End doubts over diesel’s future, says Ford boss – http://www.bbc.co.uk/news/business-43885516

Nissan to cut hundreds of UK jobs – http://www.bbc.co.uk/news/business-43841922

Jaguar Land Rover to shed 1,000 contract staff – http://www.bbc.co.uk/news/business-43756202

It remains to be seen what will happen, but it’s unsettling to note the government not supporting manufacturers producing alternatives.

Third and final point and the one I see less writing about; diesel residuals. For the past 5-10 years people have been buying diesels, lots on PCP or finance deals, expecting when they come to sell or hand back the car will be worth a certain amount. That amount may no longer be what was expected. For the owner it’s a painful lump to swallow. For finance companies with hundreds of diesel cars on file, it’s a much bigger financial black hole. More on this another day.

I have a diesel, what should I do?

You’ve just bought your Vauxhall Insignia CDTI using a bank loan. You do 20k a year chugging around motorways, and find the car comfortable.

Probably nothing.

Check where you stand for MOT changes then drive your nice car.

Diesels remain an excellent engine choice if you’re doing high mileage where the torque and MPG show. Soporific sensationalist journalism doesn’t change it’s utility.

I continue to drive a 25 year old diesel. It’s loud, smelly, noisy and chucks out clouds of clag. It costs very little to service, very little to tax and can theoretically run on vegetable oils for maximum environmental offset.

Car purchases will be the biggest lump sum spend after a property, so always analyse engine choices pre-purchase. Don’t be swayed by government incentives which may change with the government’s mood.

Next time on Frugal Motoring: The PCP Black Hole

Yours,

The FIRE Shrink