September 2022 – A solution to the productivity crisis

WARNING: Musing on macro-trends ahead.

Hat-tip /u/Snkssmb on /r/CasualUK

Dry wit emerges and casts into light an uncomfortable truth.

The UK is economically bollocksed.

It would seem we’re currently at an awkward crossroads, 30 years in the making, and leaders in the next five years will decide decades of future. How and why? In the (rose-tinted) view of the Industrial Revolution the UK built it’s economy on empire (slaves, colonies, stealing stuff), technology and cheap labour (workhouses). The lead was so striking that it took the first world war to knock us off our perch, and the following 50 years were one of loss of a century of economic lead punctuated by the second world war. (There’s an argument we’re still winning at global Civ via culture victory). Come the ’80s, Thatcher yanks the handbrake and powerslides us out of industrial-focus to financial-focus. Vis-a-vis the rise of London finance as the engine room of the British economy. If you’re outside of a 50 mile radius of London then you’re irrelevant, and your contribution to a productive economy was essentially on attentional tick-over. Just enough funds and support to keep going and maintain an attempt at a standard of living.

I was reading an Atlantic article that was arguing that Britain’s current nadir is resultant from the 2008 financial crisis, fear amongst the banks, the subsequent austerity policies, and the xenophobia which added fuel to the Brexit fire (1). I half agree, but I don’t think you can blame it all on that. I think it’s more about the people left behind outside of the M25. Without a positive vision for their future, those people looked to a past where their wages bought more and their (childhood) quality of life was better. Here’s a great cost-of-living post from r/CasualUK (2):

So that household is supported by a single individual’s pay. There’s a reasonable standard of living, even if some things are a stretch. How much of current consumerism improvements to people’s existence is masked by decreased prices on items around the home?

We’re not the only ones facing this economic change. The rest of Europe has it too, but it never quite de-industrialised/ centralised to the extent of post-Thatcher Britain, and never became so reliant on their own equivalents of London financial cash, so they don’t have so far to fall (3). The pivot to the World Bank of London has left millions of people in the provinces with less incentive for productivity, creating a generational attitude. I think that’s what Truss, Kwarteng et al are tapping into in their “Britain Unchained” booklet (4). Unfortunately they lay the fault at the foot of the individual, not the collective culture:

“The British are among the worst idlers in the world,” they wrote. “We work among the lowest hours, we retire early and our productivity is poor. Whereas Indian children aspire to be doctors or businessmen, the British are more interested in football and pop music.” (4)

Alright, complain about laziness, idleness, sloth and lack of productivity, but God forbid they actually explore the reasons why.

The engine room

We come back to productivity. The UK is no more productive now than it was 10 years ago (5, 6). COVID hasn’t helped, but it’s not like we were on a parabolic trajectory. Output per hour is increasing by factions of a percent (6):

Prior to 2008 productivity rose about 2% a year, and since then it’s stalled (7):

Productivity since 2000, from October 2022 Productivity House of Commons Research Briefing (7)

We’re living in a political culture of finger-pointing blame. Truss, Kwarteng et al seem to reckon it’s lazy people, not working long enough hours or hard enough (at what job I wonder?!), whilst the movement that fuelled Brexit pointed at foreigners either taking jobs or making political decisions. They’re all keen to say the problem is x or y’s fault, and therefore the solution is to target x or y. Hence Brexit. Hence Truss-onomics. In my work with people in therapy often a solution is not to focus on why or who is to blame, but where we are now and how we get out of it.

Truss’ idea about growth wasn’t necessarily wrong, but the methods via unfunded tax breaks and what essentially amounted to trickle-down economics were those of an idealistic undergraduate’s. They lacked a knowledge of the world outside of insulated belief. We’re probably in a recession, and a “doom-loop” of low-growth, low productivity, low investment (8).

Hat-tip /u/what_am_i_not via r/dataisbeautiful

A solution

Part of the proposed ongoing solution is to get more skilled people into work. Rich, skilled workers are retiring early, leaving a skills gap in the economy (9). That means you, FIRE advocate and believer. The government wants your skills back in work. Business leaders want your skills back in work (10).

Underlying this lots of people over 50 have left work since 2020, reversing a trend that held since the 1970s of people working longer (11). Those people can afford to. Skilled workers are richer (9). They have Defined Contribution pensions that have sat in the market for long periods, and now due to pension freedoms (short-term gain) they can do with that money as they wish. What they wish is retiring early. FIRE are the early achievers. 40 years ago a Defined Benefit pension usually meant working to a set age (or taking a trade off to retire early). You had to work, you had no choice. Now the choice is yours.

I actually lay part of the blame for this productivity issue at the feet of passive investments. I tried to read up on links between passive investment strategies and decreased productivity, but could find nothing macro. It all focused on dilution of company management and loss of productivity in individual companies, e.g. Forbes and the Atlantic (12, 13). My opinion is that the rise of passive investing has meant self-management of investments is easier, so more people do it, so more people are aware of how much they have and how they could retire. As the markets go up, so do people’s passive investments, providing them with the financial resources to retire. I can’t find anything on what happens when your baby boomer population bulge all retires early thanks to passive investments dependent on these decreasingly productive companies. Maybe that’s a bit too Burry/ Cassandra.

Back to the UK and our relaxed, retired, educated workers. Living their best lives now they’ve FIRE’d. How do you get them back in work?

A large stick

You remove the thing that enables them not to work. You strip out the economic insulation protecting your older workers. A cynic would argue you could do this by:

  • Tanking the bond market that supports many retirement funds
  • Tanking the property market that supports buy-to-let property prices and the ‘capital return’ on investment properties
  • Pushing up interest rates such that mortgages on said buy-to-let or owned properties become difficult to pay without further gainful employment, whilst simultaneously removing tax and pro-BTL/property tax mechanisms.

I would argue that said cynic is attributing to strategy what could be attributed to stupidity and blind-luck. The result is the same. You force people back into work. That means you FIRE person.

A carrot

You don’t have to do the above, it’s just the alternative means doing quite a bit of tearing down of current institutions. If you’re buddied up with those institutions and people that’s not palatable. It’s massive reform, switching from finance and old industrial manufacturing to tech/ green industries. It’s what the EU are doing via their COVID Recovery Fund (3). But it means ignoring the existing big manufacturing companies, and not focusing on the Bank of London. It’s not what the Tories are currently doing. It would mean ignoring a lot of their historic voter base. They seem to be doing a halfway house by encouraging and promoting productivity via technology without diverting the economy away from it’s previous path. I wonder how much of that is down to being wedded to the idea of the City of London being the engine of growth, and how much is down to being friends with people in the City of London. Individual company improvement in productivity through technology is wonderful; you get huge net margins from your software profits without huge overheads of staff/ space (14). It doesn’t solve the wider issue at a population level. There’s a quote in that original Atlantic article about how the UK now has 50% more hand car washes and 50% fewer automatic machine car washes than it did in 2003 (1). Low skilled workers are cheaper than robots.

The strongest expert voices seem to suggest investment in human capital and infrastructure (5). Train people to do more skilled work, and invest (privately or publicly) in the facilities and environment to do that. Not just the workplace, but transport, internet services, healthcare, the lot. The people can be imported, or trained locally through university/ training centre expansion (5). We are well-placed to do this in some sectors; the UK is a world leader in biotech, and was in renewable energy infrastructure. It’s just not a quick fix. These are long-term policies, with few short-term gains, and lots of cost. If you’ve got two years until an election is it something you would want to do?

September 2022 Finances

Checking the assets and liabilities:

These are taken, as always, from my Beast Budget spreadsheet. I saved 39% of my salary in September. Its turns out that my pay had been miscalculated for the past 7 months, meaning juicy backpay. MrsShrink is back full-time in work now, and splitting house bills plus childcare between two full-time salaries is easier. My net worth is still stumbling around the £100k mark, and all saving this month was into boring monthly savers to recoup our emergency fund. That’s now sitting around the £5.5k mark and inching up.

Budgets:

As compared to my four year back-calculated mean monthly spend:

  • Groceries: August £317, September £234, budget £220 – Closer, and proving hard given current economic climates
  • Eating out & Takeaway: Aug £129, Sept £93, budget £50
  • Transport: Aug £170, Sept £220, budget £330
  • Holiday: Aug £0, Sept £330, budget £40 – We had a trip away, and blew the saved holiday pot on nice food and fun activities. I use a Starling pot to put aside £25-50/month and this seems to work well psychologically
  • Personal: Aug £62, Sept £75, budget £120
  • Health: Aug £52, Sept £52, budget £150
  • Misc: Aug £767, Sept £515, budget £215 – Nursery
  • Work fees: Aug £160, Sept £130, budget £265

In the garden:

Harvested tomatoes, squash, some salad crops, and started tidying ahead of autumn.

Cheers,

The Shrink

References:

  1. https://www.theatlantic.com/newsletters/archive/2022/10/uk-economy-disaster-degrowth-brexit/671847/
  2. https://www.reddit.com/r/CasualUK/comments/xhs119/i_found_my_greatgranddads_bills_from_the_1950s/
  3. https://hbr.org/2022/10/the-uk-economic-crisis-might-not-be-a-one-off
  4. https://www.npr.org/sections/money/2022/10/25/1130633196/britains-productivity-problem
  5. https://blogs.lse.ac.uk/businessreview/2020/03/07/if-the-uk-is-high-tech-why-is-productivity-growth-slow-economists-weigh-in/
  6. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/articles/ukproductivityintroduction/2022-10-07
  7. https://commonslibrary.parliament.uk/research-briefings/sn02791/
  8. https://edition.cnn.com/2022/10/25/economy/rishi-sunak-uk-economy-crisis-choices/index.html
  9. https://www.thetimes.co.uk/article/skilled-workers-ability-to-retire-early-is-creating-unhealthy-social-division-dhfh50263
  10. https://www.smeweb.com/2022/10/19/businesses-need-to-invest-in-older-workers-to-unlock-economic-growth/
  11. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/movementsoutofworkforthoseagedover50yearssincethestartofthecoronaviruspandemic/2022-03-14
  12. https://www.forbes.com/sites/greatspeculations/2020/06/01/the-hidden-dangers-of-passive-investing/?sh=36e4ce6a4d96
  13. https://www.theatlantic.com/ideas/archive/2021/04/the-autopilot-economy/618497/
  14. https://www.forbes.com/sites/adigaskell/2022/10/20/why-is-technology-not-producing-productivity-improvements/?sh=1cebe7a170e8
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The Financial Dashboard – March 2020

The goals for March were:

  • Review progress towards long term goals
  • Review emergency fund accounts
  • Plan for 2020s ISA
  • Get the project car back on the road
  • Gardening

Checking the assets and liabilities:

Assets March

Liabilities March

These are taken, as always, from my Beast Budget spreadsheet. Bit of a mammoth change to my net worth this month. As a result of exploring the NHS pension, I fired up my Total Reward Statement. It’s difficult to value an NHS pension ahead of when you actually take it, so I’ve therefore used the NHS estimate of a hypothetical equivalent annuity cost. Based on these new numbers my net worth increased by a lot, and I had a 38% savings rate.
Goals:
Goal achieved: Review progress towards long term goals

I set my first goals in November 2018, and some of them were pretty ambitious and unachievable. Considering my pension made me question my approach. 2038 for a goal retirement date seems a more achievable number, and setting things down on paper which are realistic targets has been more motivating than a pie-in-the-sky number. My asset allocations also need a look at as I’ve learnt and understand more, so that’s a job for next month.
Goal achieved: Review emergency fund accounts

My emergency funds are currently split across three accounts. I hold £2500 in my Starling account, £2500 in a 5% Nationwide FlexDirect account and a further £300/month goes into a Monmouthshire Building Society regular saver at 3%. The Starling account interest is a paltry 0.5%, and I’d prefer to keep a maximum £500 cash float there instead. My Nationwide FlexDirect deal is also coming to it’s end. I’ve exhausted most of the bank accounts with fixed rate deals or regular savers.

In light of this, and following up on my recent post about Premium Bonds, I’ve transferred spare savings from my Starling into a new Premium Bonds account. This will be topped up by the £2500 from Nationwide when it expires. I’ll also be setting up a Marcus account as it remains pretty much the market leader, to be topped up with any leftover cash lying around (1).
Goal achieved: Plan for 2020s ISA

It’s that time of year again! I only put £2700 into my ISA last year. I’m very happy with my Vanguard account as a basic platform, but I’m after access to stocks/ shares and a wider range of ETFs for future active and passive shenanigans. For that reason, and planning ahead for platform risk, I’ve been looking at opening an account with another provider.

Both Monevator and Money to the Masses suggested Cavendish Online was the next cheapest for me after Vanguard from the traditional providers, whilst also offering a wider range of funds, ETFs and shares (2, 3). Interesting to note that Cavendish’s website actually links to Monevator for the price comparison section – if that’s not proof of success I don’t know what is!

When I ran the numbers including trades it turned out FreeTrade’s annual flat £36 ISA fee was cheaper than Cavendish. I’m going to put my money where my mouth is and follow up my small investment into FreeTrade with a new ISA account. FreeTrade does have limits – it’s only ETFs and shares, no funds – but I can work around that.

If you want a free share for opening a new FreeTrade account, send me an email using the link on my About Me page.
Goal failed: Get the project car back on the road

It fought me, and with the help of the COVID-19 shutdown of most garages, won. Parts have been procured, fixes installed, and an MOT awaits.
Goal achieved: Gardening

Did loads of this, and very relaxing it was too. The enforced time at home meant the raised beds have been filled will seeds, shoots are emerging in the greenhouse for radishes, rocket, salad greens, sunflowers, tomatoes, spring onions… the list goes on.
Budgets

  • Groceries – Budget £200, spent £175.55, last month £169.83
  • Entertainment – Budget £100, spent £106.75, last month £143.33
  • Transport – Budget £460, spent £401.48, last month £862.40
  • Holiday – £150, spent £317.33, last month £60 – Squeezed a stag weekend in before lockdown
  • Personal – £100/ £25/ £15.88
  • Loans/ Credit – £0/ £0/ £0
  • Misc – £50/ £15.12/ £94.59
  • Fees – £70 /£267.50/ £648.50 – Further gristle, for now cancelled conferences – refunds pending.

In the garden:

See above.
Goals for next month:

  • Review target asset allocations
  • Get the project car back on the road
  • Tidy the garage, sell anything unnecessary
  • Tidy the loft and begin to clear

Happy April everyone, I hope you’re all keeping well,

The Shrink
References:

  1. https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/
  2. https://monevator.com/compare-uk-cheapest-online-brokers/
  3. https://moneytothemasses.com/saving-for-your-future/investing/compare-cheapest-best-investment-isa-platforms

The Full English Accompaniment – Premium Bonds: The time is now?

One of the cardinal rules of financial security is to have an emergency fund. If you need to ask why, you’re in the wrong place, and I suggest you read Monevator’s excellent explanation (1). A big credit line isn’t enough. You need 3-6 six months of expenses in a liquid, easily-accessed account. For the basic rules and steps Monevator again has your back (2)

So far, so basic.

Beyond that the arguments start. What classifies as an emergency? How much is too much? Where do you put it?

High yield current accounts and instant-access savings accounts have long been the go-to. Which was fine when returns were 3% plus in the early noughties, but over the past decade interest rates on savings accounts have drifted down (3, 4). The best easy access accounts, including the once-vaunted Marcus, are now returning 1.3% (5). Meanwhile inflation hovers around the 1.3-1.5% mark (6).


So we’re left with a dilemma: do we accept our emergency fund will (at best) tread water or (at worst) lose money relative to inflation, or do we chase returns?

The latter has led to some very creative accounting by some authors, including the suggestion that your emergency fund spending should be built into your household budget (7). Which sort of suggests it’s predictable, and not an unforseen emergency.

Or you could be like a number of other FIRE bloggers (Early Retirement Now, Physician on FIRE), and go without an emergency fund, relying instead on lines of credit and your investments to bail you out (8, 9). This reduces your opportunity cost and improves your returns (10). It also tackles the behavioural problem with an emergency fund; the temptation to dip into it for that emergency TV or holiday. It’s much harder to impulse spend an investment. But do you risk crystallising losses during the inevitable downturn?

Step forward premium bonds; long-derided though the UK’s biggest savings product (11). They’re a psychological leap from an instant access savings account, yet improvements in IT means you can check results on your phone and transfer into cash within a couple of days (ticking that liquidity box) (12, 13). The prize rate has been cut, but it’s still 1.3% – the same as instant access savings (14). And given you’re reading this and into FIRE, you’re probably a higher rate tax payer. Here premium bonds sweeten the deal further, with no tax to pay on winnings (15).

You’re still not likely to see a win, as that 1.3% is practically lower due to the skewing effects on the average of the top prizes. But maybe now, in the days of rubbish cash returns, premium bonds offer a credible emergency fund safe haven.

Have a great week,

The Shrink

P.S. Couldn’t really get away without mentioning the Coronavirus outbreak could I? I’ve briefly mentioned my thoughts in the Reasons to be cheerful/fearful post, and for how I think it’s going to go see Scenario 5 of the Thought Experiment. Ultimately it’s going to be a difficult time for the markets. Due to the number of unknowns we’re dealing with, trying to price in predictions is near impossible. The efficient market is going to struggle with the level of uncertainty. We’ve been near a market top for a long time. No-one knows the future. Stick with your plan and be confident in your preparation.

Other News:

Covid-19 mini-special:

And elsewhere:

Opinion/ blogs:

References:

  1. https://monevator.com/its-an-emergency-fund/
  2. https://monevator.com/emergency-funds-the-ten-essential-steps/
  3. https://thistimeitisdifferent.com/uk-savings-interest-rates-feb-2018
  4. https://www.bbc.co.uk/news/business-49752883
  5. https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/
  6. https://www.bbc.co.uk/news/business-51117888
  7. https://awealthofcommonsense.com/2019/09/what-do-i-want-my-money-to-do-for-me/
  8. https://earlyretirementnow.com/2016/05/05/emergency-fund/
  9. https://www.physicianonfire.com/dont-bother-with-emergency-fund/
  10. https://www.fool.com/investing/2018/04/15/people-are-thinking-about-emergency-funds-wrong.aspx
  11. https://www.moneysavingexpert.com/savings/premium-bonds/
  12. https://moneyfacts.co.uk/news/savings/nsi-enhances-its-premium-bonds/
  13. https://www.yourmoney.com/saving-banking/premium-bonds-winners-can-now-be-notified-by-text/
  14. https://www.moneysavingexpert.com/news/2020/02/premium-bond-prize-rate-to-be-cut-to-1-3-/
  15. https://monevator.com/are-premium-bonds-a-good-investment/
  16. https://twitter.com/i/status/1230554753182003203
  17. https://twitter.com/andrewgregory/status/1233076394084720640?s=19
  18. https://www.bbc.co.uk/news/business-51681620
  19. https://www.nejm.org/doi/full/10.1056/NEJMp2003762
  20. https://www.theguardian.com/world/ng-interactive/2020/feb/26/coronavirus-map-how-covid-19-is-spreading-across-the-world
  21. https://www.theguardian.com/business/2020/feb/15/coronavirus-black-swan-shadow-global-economy
  22. https://www.theguardian.com/world/2020/feb/26/coronavirus-spreads-further-as-who-expert-warns-world-not-ready-for-pandemic
  23. https://www.ft.com/content/e0ca01ee-57cb-11ea-abe5-8e03987b7b20
  24. https://www.theguardian.com/money/2020/feb/17/uk-housing-boom-leads-to-2500-jump-in-asking-prices
  25. https://www.thisismoney.co.uk/money/buytolet/article-8019811/Hundreds-thousands-landlords-sold-tax-relief-began-phased-out.html
  26. https://www.cnbc.com/2020/02/21/elon-musk-recommends-science-fiction-book-series-that-inspired-spacex.html
  27. https://www.theguardian.com/environment/2020/feb/17/west-midlands-canals-help-heat-hospitals-homes-plans
  28. https://www.theguardian.com/us-news/2020/feb/25/anti-greta-teen-activist-cpac-conference-climate-sceptic
  29. https://www.bbc.co.uk/news/uk-wales-51633458
  30. https://www.thisismoney.co.uk/money/investing/article-7978521/Is-worth-investing-space-stocks-Virgin-Galactic.html
  31. https://www.cityam.com/fintech-unicorn-klarna-posts-first-ever-annual-loss/
  32. https://www.vice.com/en_uk/article/qjd3p7/how-to-get-out-of-debt
  33. https://www.morningstar.co.uk/uk/news/199513/fire-means-i-can-retire-at-41.aspx
  34. https://www.bbc.co.uk/bbcthree/article/2b3f3f67-2338-4253-b7f5-a36192885492
  35. https://monevator.com/weekend-reading-bring-me-sunshine/
  36. http://www.retirementinvestingtoday.com/2020/02/perspective.html
  37. http://eaglesfeartoperch.blogspot.com/2020/02/the-end-of-world-as-we-know-it.html
  38. http://quietlysaving.co.uk/2020/02/28/february-2020-plus-other-updates/
  39. http://diyinvestoruk.blogspot.com/2020/02/sse-portfolio-addition.html
  40. https://www.ukvalueinvestor.com/2020/02/diageo-share-price.html/
  41. https://gentlemansfamilyfinances.wordpress.com/2020/02/28/bye-bye-aegon/
  42. http://thefirestarter.co.uk/resigned-to-my-fate/
  43. https://cashflowcop.com/so-near-and-yet-so-fi/
  44. https://theescapeartist.me/2020/02/28/sweat-those-assets/
  45. https://awaytoless.com/delaying-fire-to-enjoy-today/
  46. https://www.thefrugalcottage.com/february-2020-a-month-in-review/
  47. http://fiukmoney.co.uk/february-20-net-worth-and-monthly-update-18-525898-15143/
  48. https://thesavingninja.com/ficalc-ninja-mobile-application/
  49. http://bankeronfire.com/the-real-path-to-wealth?the-real-path-to-wealth
  50. https://www.foxymonkey.com/ir35-contract-market/
  51. https://firevlondon.com/2020/02/23/how-much-is-enough/
  52. https://indeedably.com/shedding-skin/
  53. https://indeedably.com/held-to-account/

The Financial Dashboard – December 2019

The goals for December were:

  • Continue to exercise 4x a week
  • Keep a record of all dietary intake (what gets measured gets managed)
  • Sell 5 items (need to get back on my de-clutter)
  • Save 30% of my salary

Checking the assets and liabilities:

Dec 2019 AssetsDec 2019 Liabilities

These are taken, as always, from my Beast Budget spreadsheet. This month my net worth grew by 14.42%, though not due to any stonking savings rate. Instead it was down to a house revaluation, which brought our equity up in our home up by £20k. My savings rate missed my goal at a measly 23.85%, leaving my average for the 12 months at 23.52%.

Goals:

Goal failed: Continue to exercise 4x a week

Work, Christmas parties and a break away to stay with family meant that I only managed three times a week. There’s a recurring theme this month…

Goal failed: Keep a record of all dietary intake

Failed at this too. I’ve downloaded an app to try for January.

Goal failed: Sell 5 items

Nope. Next…

Goal failed: Save 30% of my salary

Not even close. Should and could have been, however we had a plumbing emergency the week before Christmas, requiring a dip into the emergency fund. A couple of years ago this would have gone on a credit card, and hung around my head like a noose for the following year. Now the £2k could be paid immediately, without breaking a sweat, and the emergency fund topped straight back up at the end of the month.

Budgets

  • Groceries – Budget £200, spent £195.46, last month £157.76 – This probably should have been more, but we ate out a lot and didn’t host for Christmas
  • Entertainment – Budget £100, spent £242.95, last month £119 – Christmas parties, breaks away, beers, beers and prosecco!
  • Transport – Budget £460, spent £406.16, last month £394.05 – More work to the daily, and it needs further if I’m not to replace it soon
  • Holiday – £150, spent £0, last month £0
  • Personal – £100/ £56.99/ £102.90
  • Loans/ Credit – £0/ £0/ £0
  • Misc – £50/ £25.50/ £109.16
  • Fees – £70 /£109.49/ £135.40

In the garden:

Harvesting root veg, and now tidying up in preparation for planting next year.

Goals for next month… take 2:

  • Continue to exercise 4x a week
  • Keep a record of all dietary intake
  • Sell 5 items 
  • Fix my car

Happy New Year everyone,

The Shrink

The Full English – Tech bubble or Tech revolution?

What am I buggering on about this week?

This week we’ve seen Slack join ranks of tech startups on the stock market (1). It’s price surged immediately after listing and remained up, a distinct difference to the Uber IPO in May and the Lyft IPO in March (2). Perhaps due to the state of Uber and Lyft’s respective balance sheets (3, 4). Perhaps due to the methodology of the listing, with Slack following in Spotify’s footsteps in utilising a direct stock listing rather than an IPO. This model means that current investors are allowed to list their stock for sale, but no new stock is offered, and the positive uptake of Slack and Spotify is spurring other companies to consider this model (5, 6).

It’s been a big year for new tech listings, with Pinterest, Zoom, Beyond Meat and Fiverr also coming to the market, and AirBnb, WeWork, Palantir Tech and Peloton all touted to be in the pipeline (7, 8). This is inevitably raising the spectre of the last time we had lots of tech companies listing… the late 90s (9). So what’s to set the current market apart from the dot-com bubble, and what comparisons can we draw (10).

The Similarities

These are fairly obvious:

  • Loss-making tech companies making well over valuation at initial IPO. Promising dot-com companies that make millions going public but never turn a penny profit was a hallmark of the dot-com bubble, and we’ve yet to see Uber or Lyft make money…
  • Linked to the above, 84% of companies going public last year were not turning profits, the highest % since 2000 (11)
  • A market that is (depending on your measure) over-valued (12)
  • Economists are predicting a recession, as they did in fear of the millenium bug
  • Investors are chasing returns through new startups as the traditional markets slow

The Differences

A defining trait of humanity is it’s ability to learn, so you would hope we’ve learnt from the dot-com bubble and won’t repeat the mistakes. Let’s not do a Nathan Barley (a Charlie Brooker masterpiece) (13).

Looking at the recent tech listings there are some differences:

  • The internet is more mature

The internet in the nineties was still a thing of wonder. It’s potential seemed limitless, so valuations naturally followed. It wasn’t yet clear how this could be translated into a money-making machine, and that was a partial cause of the downfall. The internet has matured in the intervening 20 years, and the FAANG stocks in particular have demonstrated how to capitalise on it. They now dominate the market with eye-watering profits. Their growth may be slowing but they’re unlikely to collapse given their hoarded cash reserves (14).

  • Companies funding streams are more complex, but also more transparent and under greater scrutiny

Many of the companies being listed are not the fully VC-backed start-ups of old, selling a fairly unspecific dream. Companies are staying private for longer, with pressure for their finances to be under public scrutiny. Others are utilising P2P/ crowdfunding streams like CrowdCube and Seedrs. You can’t just pitch any old crap with a domain name!

  • Companies are disrupting traditional models (IMO)

Arguable this one, but I think many of the companies that went bust in the dotcom years were basically trying to take a traditional economic model and translate it to an online format with minimal idea on how to gain market presence or be profitable; see Pets.com and eToys.com. Compare this to the current round of stock offerings.

The global tech revolution

Here’s where I see the real difference. Amazon, Netflix, Google etc are massive global players, making profits around the world. They developed their own markets. AirBnB, Spotify, Slack, Uber etc are all doing or have done the same. Their founders have identified a niche or a gap, and placed a product which is a natural fit. Why else would they become so ubiquitous if they were not so obvious. Improvements in the infrastructure of technology has made this possible, and will continue. Starling and Monzo, which I talked about last week, are also disruptive, but banking still has further to go.

We’ve seen wholesale changes in almost all aspects of our lives. There are apps for pretty much everything you do; shopping, leisure activities, work, investments and loans, sleep, music, etc. What hasn’t changed? Banking and central economics. Governments and central banks still set interest rates, still co-ordinate and oversee financial structures and currencies. Which is where Libra, the new cryptocurrency backed by Visa, Mastercard, PayPal, Uber and Facebook comes in (15).

There’s plenty of arguments against Libra (I’m looking at you Ermine), not least security and the prospect of having Facebook digging through your earnings (16). But it’s backed by lots of major players, and could be truly disruptive. Like all blockchain cryptocurrencies it’s decentralised, beholden to no central bank (17). This has got the regulators in a right tizz; if it’s globally decentralised who can/ would regulate it (18). How will government lobbyists get their greasy mitts on it?!?

The clever move that puts Libra over and above Bitcoin and other blockchain cryptocurrencies (beyond it’s big industry support) is asset-backing (19). Backing with physical assets (probably cash/ bonds, but interestingly also could be equities) removes the wild price swings seen with Bitcoin. If it’s globally backed then you suddenly have a currency which tracks global inflation automatically, can be accepted in any country, and allows you to purchase across borders without incurring currency conversion costs. No wonder Mark Carney reckons it could be ‘systematically important’.

We live in the age of a global economy. Corporations are multinational, straddle borders and look to leverage international differences to increase earnings (moving jobs offshore for lower wages for instance). I don’t think central governments/ banks are about to relinquish their stranglehold on economic policy, but Libra offers a window into a future where this might be the case. Where your earnings are paid in a global currency by a global company, wherever you are. Where geoarbitrage becomes the norm, forcing international parity. Where interest rates on your loan are not set based on a baseline from central government, but by global market inflation, or a combination of your credit score and what a credit union of your Facebook contacts are willing to lend. Governments and global banks (Rothschilds etc) have long held a hegemony on money. Now there’s a chink in their armour.

Have a great week,

The Shrink

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading (affiliate links):

Food Of The Gods: The Search for the Original Tree of Knowledge: A Radical History of Plants, Drugs and Human Evolution – Terence McKenna – An ethnobotanist explores humanitys’ fascination with hallucinogenics, and the role of altered states of consciousness on the development of human society.

References:

  1. https://www.bbc.co.uk/news/business-48707622
  2. https://www.bbc.co.uk/news/business-47741990
  3. https://www.bbc.co.uk/news/business-48451339
  4. https://marketrealist.com/2019/05/why-lyft-stock-has-declined-21-since-its-ipo/
  5. https://www.bloomberg.com/news/articles/2019-06-21/with-slack-sitting-pretty-its-bankers-eye-more-direct-listings
  6. https://markets.businessinsider.com/news/stocks/slacks-direct-listing-bill-gurley-says-startups-call-morgan-stanley-2019-6-1028298641
  7. https://www.marketwatch.com/story/slack-listing-comes-during-banner-year-for-tech-ipos-despite-uber-and-lyfts-troubled-debuts-2019-06-20
  8. https://www.vox.com/recode/2019/6/20/18650993/tech-ipo-tracker-uber-lyft-slack-zoom
  9. https://www.barrons.com/articles/chewy-fiverr-and-crowdstrike-ipos-recall-the-dot-com-bubble-51560553067
  10. https://en.wikipedia.org/wiki/Dot-com_bubble
  11. https://www.vox.com/recode/2019/6/20/18650993/tech-ipo-tracker-uber-lyft-slack-zoom
  12. https://eu.usatoday.com/story/tech/2019/06/17/goldman-sachs-says-technology-stocks-overvalued/1483689001/
  13. https://www.digitalspy.com/tv/tube-talk-gold/a399600/nathan-barley-is-10-looking-back-at-charlie-brookers-debut-tv-series/
  14. https://marketrealist.com/2019/01/the-tech-sector-is-finally-slowing-down/
  15. https://www.forbes.com/sites/panosmourdoukoutas/2019/06/22/libra-could-make-or-break-bitcoin/
  16. https://simplelivingsomerset.wordpress.com/2019/06/18/all-you-cash-belong-to-zuck/
  17. https://www.wired.co.uk/article/facebook-libra-startup-privacy-analysis
  18. https://www.bbc.co.uk/news/technology-48688359
  19. https://www.theguardian.com/business/2019/mar/20/lorraine-kelly-theatrical-artist-tax-tribunal-judge-rules
  20. https://www.theguardian.com/business/2019/jun/19/consumers-being-badly-advised-on-pensions-says-regulator-fca
  21. https://www.cam.ac.uk/employmentdosage
  22. https://www.independent.co.uk/money/spend-save/help-to-buy-house-prices-loans-first-time-buyers-savings-a8958056.html
  23. https://indeedably.com/marriage-of-ultimate-doom/
  24. https://indeedably.com/ownership/
  25. https://simplelivingsomerset.wordpress.com/2019/06/20/playing-with-fire/
  26. https://monevator.com/visualizing-investors-emotions/
  27. https://www.ukvalueinvestor.com/2019/06/royal-mail-dividend-yield-is-13pc-but-i-still-wouldnt-invest.html/
  28. https://cashflowcop.com/best-guide-to-selling-on-ebay/
  29. https://cashflowcop.com/maternity-leave-for-men-tips-for-dads/
  30. http://diyinvestoruk.blogspot.com/2019/06/sipp-drawdown-year-7-update.html
  31. https://firevlondon.com/2019/06/17/ive-paid-for-my-dream-home-in-less-than-4-years/
  32. http://quietlysaving.co.uk/2019/06/20/crowdfunding-road-trip/
  33. https://ditchthecave.com/may-2019-update/
  34. https://thesavingninja.com/what-is-fire/
  35. https://www.msziyou.com/net-worth-updates-april-2019/
  36. https://www.msziyou.com/bros-scared-me/
  37. https://awaytoless.com/a-way-to-less-what/
  38. http://www.thefrugalcottage.com/my-updated-porfolio-june-2019/
  39. https://gentlemansfamilyfinances.wordpress.com/2019/06/19/green-money-greencoat-uk-wind-share-offer-success/
  40. https://gentlemansfamilyfinances.wordpress.com/2019/06/18/hard-lucks-and-let-down/
  41. https://gentlemansfamilyfinances.wordpress.com/2019/06/21/booze-and-babies/
  42. https://www.earlyretirementguy.com/summer-2019-networth-update/
  43. https://www.iretiredyoung.net/single-post/2019/06/21/My-early-retirement-or-midlife-crisis
  44. https://twothirstygardeners.co.uk/2019/06/interview-urban-foraging-whiskey-cocktail-making-john-rensten-bushmills/

The Financial Dashboard – May 2019

The goals for May were:

  • Sell £100 worth of stuff
  • Finish my portfolio spreadsheet
  • Get two extra blog posts out
  • Re-mortgage
  • Set up new bank accounts

Checking the assets and liabilities:

May AssetsMay Liabilities

These are taken, as always, from my Beast Budget spreadsheet. This month my net worth fell by 1.41%. A number of reasons for this: we re-mortgaged which included a fee, I moved the date I pay into our joint account resulting in less actually in my accounts, the markets dipped a bit, and I had a number of work courses which all required payment at once.  We finally paid off our loan to our family member for the wedding, and I’ve started setting up new accounts to squirrel emergency savings into.

Goals:

Goal achieved: Sell £100 worth of stuff

Finally got rid of a big ticket item that’s been taking up garage space, along with some smaller stuff. Actually smashed this goal, making £250 into the joint account. For now this goal will be on hold while I send more stuff to charity shops.

Goal failed: Finish my portfolio spreadsheet

So I tried the Rebo app developed by Andy at Liberate Life, but found it too simplistic for what I wanted (1, 2). I’m working on another hybrid google sheet which I’ll probably start debuting for next months end of Quarter review.

Goal achieved: Get two extra blog posts out

This was to get me back into the swing of posting regularly. There’s some fairly long posts which have been taking me a while to draft, hopefully these will be out soon.

Goal achieved: Re-mortgage

We’re in a slightly difficult situation, in that we have a split pot mortgage as a result of our various house moves. The larger of the two mortgages came to the end of it’s 5-year 4.29% fix last month; a reminder of days when we only had a 10% deposit and where the economy and house prices were looking strong with all the talk of rising interest rates. Hindsight is 20-20. We umm-ed and ahh-ed about what to do. Given our intention is to sync up the two pots within the next five years here’s our thinking:

  1. A tracker rate appealed for similar reasons as set out by 3652days last year (3). Namely:
    • If we assume a no deal brexit there will likely be a recession. BoE unlikely to raise rates. Tracker wins.
    • If we continue to have delays to Article 50 then the knock on economic uncertainty is likely to keep a dampener on inflation/ economy. BoE unlikely to raise rates. Tracker wins.
    • If parliament passes Mrs Mays deal (unlikely) then whilst the pound and economy may rise from their current torpor, it’s unlikely this will be within the two year tracker period. It will take time for things to gear up again. Tracker – not much difference.
    • Depending on the new leader of the conservatives and de facto PM, we can theorise potential outcomes – either they’re a hardline no-deal leader, in which case they’d probably try to push a no-deal brexit by waiting the damn timer out (and therefore see bullet point one)… Or they try to unify the party with the promise of a new deal in compromise with labour. Such a deal will likely struggle to get through parliament, because it’s unlikely to resolve the Irish border or pacify the wings of either party. Both strategies will push towards a general election, which the bookies now reckon is more likely in 2019 than not (4).
    • If we assume no brexit, either through a further referendum or a complete “betrayal” by the conservatives or a new government, then the economy may bounce back.  Routes to this would be either a general election and coalition Lib/Lab/Green Gov, or (due to our first past the post system) a Conservative majority led by a moderate trying to appease the centre. This will again take time. The economy’s not going to be able to come straight out of the blocks flat out whilst still wading through the political fallout of such a decision. Tracker – not much difference to fix.
  2. The tracker rates available to us were ~4-5% within the same bank we currently use. Rates available at other banks were ~1.55%.
  3. Fixed rates available to us were ~1.6% for 2 years, up to around 2% for a five year. Fixed rate pros and cons:
    • If we go for a longer rate fix we might as well change bank for the lowest rate possible. A long fix nullifies the tracker arguments to an extent due to timescale. Pros – financial stability and predictability. Cons – lack of flexibility and difficulty consolidating mortgage pots resulting in logistical and cost  implications.
    • If we fix for a shorter rate we can stay with the current bank. Pros – consolidating mortgage pots next year, cheaper rate vs long fix, flexibility. Cons – risk of interest rate rises in the next two years.
  4. Inflation is currently 2.1%, close to the BoE target of 2.0%. Whilst this remains that way they’re unlikely to change the base rate. The current outlook is mixed and largely Brexit dependent, but the BoE is predicting a base rate of 1.25% by 2022, with the next move late this year or early in 2020 (5, 6).

Our decision was somewhat reactionary and behavioural. We were burnt by our lack of flexibility in the past. Our current home is not our dream home, and we intend to move in the next five years. We favoured the flexibility of a short fix or tracker. The tracker rates at our current bank were not competitive. If we moved banks we could split the pot across banks, but this would likely make consolidating the mortgage next year (when the smaller pot’s fixed rate ends) more challenging. The short fixed rate at our current bank was close enough to tracker rates as to make no odds. We’ve therefore fixed for two years, gambling that rates will only rise by ~1% in the interim, dependent on Brexit outcomes. Both pots average ~1.65%, meaning our mortgage rate is less than RPI inflation.

The kicker here is that the drop in our interest rate actually meant that we could reduce our term whilst keeping repayments the same. It now sits at a nice 20 years, with the continued option of a 10% overpayment. We calculated either of us can pay the mortgage on our own independently, and we could tolerate up to a 15% interest rate (which would be seriously dire days) (7). It’ll be interesting looking back on this in the future, did we make the right gamble?

Goal achieved: Set up new bank accounts

Our 5% Santander regular saver matured this month, and Santander have reduced the interest rate to 3%. Santander have also changed the terms on their 1-2-3 account, which we’ve been using for our joint account. I’m therefore in the process of moving us over to First Direct for their £100 switching bonus and linked 5% regular saver (8). I’ve also opened a Nationwide Flex account to benefit from their 5% interest rate on balances up to £2500 for the first year (9). In the next few months I’ll add a Marcus account to this mix for my emergency fund over £2.5k.

Budgets

  • Groceries – Budget £300, spent £264.72, last month £184.25. We hosted a lot this month, so spent more than usual but well within budget. I’ll likely decrease my self-imposed budget limit soon.
  • Entertainment – Budget £150, spent £139.47, last month £99.38
  • Transport – Budget £460, spent £119.25, last month £851.53. Back on track.
  • Holiday – £150, spent £0, last month £0
  • Personal – £100/ £15/ £41.88
  • Loans/ Credit – £350/ £407.40/ £88.97
  • Misc – £50/ £59/ £121.92. Misc payments this month:
    • £25 on a sewing machine
    • £25 on a carpet cleaner
    • £9 on gardening gear

In the garden:

Things are getting wild, overgrown and many an evening is spent weeding. Our salad crops are providing plenty of dinners, and the first of the spring onions and early potatoes are nearly ready.

Goals for next month:

  • Finish my portfolio spreadsheet
  • Compare current insurance rates
  • Look into further financial planning: wills and income protection
  • Plan healthy weekly dinners
  • Exercise at least 3x a week

What’s in the pipeline: (Life continues to get in the way of blogging)

  • Stoicism and the finance world
  • Should I buy an electric car?
  • Q2 2019 – Green Credentials
  • Property Renovation Lessons Part III
  • Plus the usual Full English Accompaniments and other drivel…

Happy June everyone,

The Shrink

References:

  1. https://reboapp.co.uk/
  2. http://liberate.life/index.php/2019/05/01/track-portfolio-rebo/
  3. https://3652daysblog.wordpress.com/2019/01/11/its-a-tracker/
  4. https://www.theweek.co.uk/93763/will-there-be-a-general-election-in-2019
  5. https://www.which.co.uk/news/2019/05/what-will-brexit-mean-for-interest-rates/
  6. https://moneytothemasses.com/owning-a-home/interest-rate-forecasts/latest-interest-rate-predictions-when-will-rates-rise
  7. https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/
  8. https://www.bankaccountsavings.co.uk/
  9. https://www.moneysavingexpert.com/banking/compare-best-bank-accounts/#bonus

The Full English Accompaniment – Playing fair when maximising your ISA allowance

What’s piqued my interest this week?

It’s that time of the year, and for the first time in a long time I’m looking at dipping my toe in the ISA waters, that generous government tax-sweetener (1). Sensible investors of course maximise their ISA allowance at the start of the tax year (for time in the market), but I’m only just reaching a point where I can start thinking about it.

So I have my £20,000 allowance ahead of me. How do I use it? Well according to some denizens of the internet I should max out all of my lines of credit and fill up my ISA pots. This would potentially maximise my allowance, and ensure I don’t regret losing it in the future. I could do this by stoozing, taking out a new 0% interest credit card and bunging it all in an ISA (2). I’m loath to do this for three reasons. The best cash ISAs are currently providing 1.77% interest (or 1.95% if two year fixed), which on £10k borrowed is a measly £177 (3). I lack the kahunas to leverage £10k on credit cards into a S&S ISA in the current market. We’re also due to remortgage soon and I’m trying to minimise my credit utilisation.

If not stoozing then perhaps using a flexible ISA to at least fill my allowance before paying it all back next month (4). This would be a pretty weird use of the flexibility, and I’m not sure how well it sits with me. The main premise of a flexible ISA is that you can take money out and as long as you replace it within the tax year it doesn’t effect your allowance; i.e. Put in £5k, leaving £15k allowance, withdraw £2.5k and you go down to £17.5k allowance (5, 6). So far so simple, but it gets a bit more complicated when you start adding in previous tax year allowances. Money withdrawn comes first from the current years allowance, and then previous years. Money replaced first replenishes previous years and then the current year’s allowance (7). Also worth noting Innovative Finance ISAs and cash within a S&S ISA can be flexible, but not any element in a S&S ISA that is not cash. MSE’s guidance on this is pretty excellent (7).

In my situation I could therefore use £20k of credit to fill up this years allowance on the 5th of April, before paying back my creditors on the 6th of April and leaving myself with £40k to fill for the next tax year. I’m not going to do it because I don’t think I’ll fill my £20k allowance next year, never mind £40k. It also feels a bit morally like bed and breakfasting, the act of selling and repurchasing shares on the same-day to play CGT, which is a naughty tax no-no (8). My suspicion is that the actual number of people in this position is so low that nobody at HMRC really cares. Bed & ISA-ing is a separate proper thing which is recommended, because the repurchase into the ISA counts as being in a different capacity and therefore it’s not B&Bing (9, 10, 11).

Other sources point to portfolio cash ISAs, with a bit in S&S and a bit in cash in separate pots under once umbrella, just to make the waters more muddy (12). There’s also recommendations to use a flexible ISA as a sort of tax store, where you take it out of your 1% instant access ISA account at the start of the tax year, bung it somewhere it can earn more interest, and then put it back in at the end of the tax year to keep the allowance (13). This makes it ‘work harder’, but seems absolutely bonkers to me as surely any interest is taxable and therefore negates the point of having a bloody ISA. It’s all a bit of a minefield of suggestions, and you’ll have to wait until the end of the month to find out what I actually did. Hint: it’s very boring.

Have a great week,

The Shrink

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading (affiliate links):

Tombland – C.J. Sansom – I love the Shardlake series, detective novels set in the Tudor period with a crippled lead character. Beautifully written.

Food Of The Gods: The Search for the Original Tree of Knowledge: A Radical History of Plants, Drugs and Human Evolution – Terence McKenna – An ethnobotanist explores humanitys’ fascination with hallucinogenics, and the role of altered states of consciousness on the development of human society.

References

  1. https://www.gov.uk/individual-savings-accounts/
  2. https://www.moneysavingexpert.com/credit-cards/stooze-cash-credit-cards/
  3. https://www.moneysavingexpert.com/savings/best-cash-isa/
  4. https://www.gov.uk/individual-savings-accounts/withdrawing-your-money
  5. https://www.thisismoney.co.uk/money/saving/article-5572897/What-flexible-Isa-advantage-it.html
  6. https://www.gov.uk/individual-savings-accounts/withdrawing-your-money
  7. https://www.moneysavingexpert.com/savings/flexible-ISAs/
  8. https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg13370
  9. https://forums.moneysavingexpert.com/showthread.php?t=5850109
  10. https://www.moneyobserver.com/how-to-invest/isa-rules-everything-you-need-to-k
  11. https://www.which.co.uk/news/2019/03/revealed-how-to-play-the-tax-free-isa-rules-to-your-advantage/
  12. https://www.which.co.uk/news/2019/03/revealed-how-to-play-the-tax-free-isa-rules-to-your-advantage/
  13. https://www.thisismoney.co.uk/money/saving/article-5572897/What-flexible-Isa-advantage-it.html
  14. https://www.bbc.co.uk/news/business-47636056
  15. https://www.theguardian.com/business/2019/mar/21/bank-of-england-holds-interest-rates-amid-brexit-chaos
  16. https://www.bbc.co.uk/news/business-47554026
  17. https://www.bbc.co.uk/news/business-47617206
  18. https://www.bbc.co.uk/news/business-47666249
  19. https://www.telegraph.co.uk/news/2019/03/21/three-drunk-russian-sailors-rescued-island-welsh-coast-getting/
  20. https://www.bbc.co.uk/news/uk-47652870
  21. http://eaglesfeartoperch.blogspot.com/2019/03/cost-of-car-ownership-over-9-years.html
  22. https://theescapeartist.me/2019/03/19/get-rich-with-recycling/
  23. https://ofdollarsanddata.com/we-all-make-mistakes/
  24. http://quietlysaving.co.uk/2019/03/22/5-years/
  25. https://monevator.com/weekend-reading-oops-bonds-did-it-again/
  26. https://monevator.com/why-the-4-rule-doesnt-work/
  27. http://diyinvestoruk.blogspot.com/2019/03/ishares-global-clean-energy-new-addition.html
  28. https://simplelivingsomerset.wordpress.com/2019/03/20/red-and-white-dragons-fight-under-the-edifice-of-brexit-as-the-end-of-the-isa-year-approaches/
  29. https://gentlemansfamilyfinances.wordpress.com/2019/03/21/fire-proofing-the-portfolio/
  30. https://theenglishinvestor.com/a-life-update-from-the-english-investor-q1-2019-edition/
  31. https://ditchthecave.com/child-millionaire-saving-kids/
  32. https://thesavingninja.com/how-to-be-successful/
  33. https://indeedably.com/uncharitable/
  34. https://indeedably.com/a-professional-not-an-expert/
  35. https://firevlondon.com/2019/03/17/february-2019-skinny-update/
  36. https://lifeatno27.com/2019/03/23/sweet-cherry-tomatoes-plot-to-plate/

 

 

Investment Strategy Statement – Part 4 – Accounts, Funds, Taxes & Rebalancing

Wrapping up my ISS with the mechanical stuff.
Taxes

Exploit tax-free allowances where possible

MrsShrink and I are both UK resident fully compliant UK taxpayers. 2018/19 I have been on the cusp of higher rate tax, and will need to review once I get my year end P60 for the three (actually sort of four) jobs I’ve been on PAYE (1). From 2019/20 onward it looks like I’ll be in the higher rate 40% bracket.

I plan to exploit four tax-sheltering methods:

1. Interest from cash savings and emergency funds will stay within my Personal Savings Allowance

This latest weapon in the public’s tax armory allows for £1,000 tax-free savings for basic rate tax payers and £500 for higher rate (2, 3). Interest from our high interest current accounts holding our cash emergency fund will aim to be held within this limit.

2. Filling up ISA allowances

Once our emergency fund is topped off we will contribute to ISAs (4, 5). In the short term all my stock market purchases will fit within the £20k/year wrapper (6). MrsShrink is likely to use Cash ISAs (7). We will utilise the Marriage Allowance if such circumstances arise (8).

We are considering using LISAs as well, but their benefit appears limited to the government bonus (9). We’re not first time buyers, so such an account would be for the long-haul and intended to supplement our income post-60. They’re a complex product and I’m not sure I’m happy with the lack of flexibility, so this will be another area to think about in the future (10).

tax efficiency

3. Pensions Contributions

I will maximise my tax relief on my pension contributions. I’m in the enviable position of having pensions held in two of the most generous funds left in the country; the NHS Pension Scheme and the Universities Superannuation Scheme. Both are sort of defined benefit schemes. The NHS Pension Scheme functions as a career average revalued earnings (CARE) scheme (11). The USS is a hybrid defined benefit and contribution scheme, where DB is paid on salaries up to £57,216.50 and DC over that figure (12, 13). I will detail both schemes in separate future posts. I shouldn’t really have both (this has happened due to some HR oddness) and so I need to sit down and unpick. The complexities of my professional life mean that I am likely to be bouncing between services for the foreseeable future, so this will remain a headache.

The secondary headache in this is that both pensions may be hard up against the lifetime allowance cap (14, 15). As a defined benefit scheme my NHS pension is multiplied by 20 and added to any lump sum to give a capital value (16). Many of my senior colleagues have been hit with substantial (five-figure) unexpected tax bills since the reduction in the lifetime allowance. It’s therefore not clear to me yet if making further contributions will be tax effective, or which pension scheme will be the most advantageous for a potential early retirement (17, 18, 19, 20). A matter for future reading.

4. Other investment structures

Longer term areas of interest:

  • Venture Capital Trusts
  • Enterprise Investment Schemes
  • Seed Enterprise Investment Schemes (21, 22)
  • Premium Bonds (I dared to speak thy name!) (23, 24)
  • Property (25, 26, 27, 28)

Accounts and Funds

Split holdings across multiple providers and platforms to reduce risk

We will use the bank account savings website (or similar if superseded) to maximise returns on liquid cash holdings (29). This will be split across multiple accounts to remain within the FCSC £85,000 limit (30). Tax-free accounts will be the preferred method for holding passive equities, bonds and stock.

Assets will be allocated across investment accounts to reduce costs, provide further security and reduce platform risk (31, 32). Initially I will aim to keep investments within the £50,000 FCSC protection limit (33). As stated in my ISS part 3, I intend to allocate ETFs across fund holders to meet allocation targets. No provider will hold more than 25% of my holdings after year five (to give me time to actually build the damn thing up!).
Rebalancing

Rebalance quarterly using Swedroe’s 5/25 through purchases

A basic tenant of my investment plan is to sell rarely, if ever. My stock purchases are for the long haul. Therefore I aim to check and buy back to allocation each quarter through purchases (34, 35). Boundaries for this are set using Larry Swedroe’s 5/25 rule; 5% absolute or 25% relative percentage variance (36). If this implicates selling I will wait until year end to optimise Capital Gains Tax. Allocations will be balanced annually against global markets plus my own weighting. On the active naughty step portfolio investments are free to do their own thing but will be re-evaluated against the overall portfolio yearly at the 10% stocks, 10% active target.

I’ll revisit this and update periodically, but for now that about wraps it up.

Take care,

The Shrink

References:

  1. https://www.gov.uk/income-tax-rates
  2. https://www.gov.uk/apply-tax-free-interest-on-savings
  3. https://www.moneysavingexpert.com/savings/personal-savings-allowance/
  4. https://www.gov.uk/individual-savings-accounts
  5. https://www.moneyadviceservice.org.uk/en/articles/isas-and-other-tax-efficient-ways-to-save-or-invest
  6. https://www.fool.co.uk/investing-basics/isas-and-investment-funds/stocks-and-shares-isas/
  7. https://www.fool.co.uk/investing-basics/isas-and-investment-funds/isa-basics/
  8. https://www.gov.uk/marriage-allowance
  9. https://www.fool.co.uk/investing-basics/isas-and-investment-funds/lifetime-isas/
  10. https://youngfiguy.com/why-the-lifetime-isa-is-not-a-simple-to-understand-product/
  11. https://www.moneywise.co.uk/managing-your-pension/pensions/the-lowdown-nhs-pensions
  12. https://www.imperial.ac.uk/human-resources/working-at-imperial/pension-schemes/uss—universities-superannuation-scheme/changes/pension-schemes-explained/
  13. https://www.uss.co.uk/members/members-home/the-uss-scheme
  14. https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance
  15. https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/the-lifetime-allowance
  16. https://www.bma.org.uk/advice/employment/pensions/lifetime-allowance
  17. http://www.legalandmedical.co.uk/3-reasons-to-have-a-pension-pot-that-is-over-the-allowed-limit/
  18. https://chasedeveremedical.co.uk/2018/02/22/beware-the-lifetime-allowance-charge/
  19. https://www.telegraph.co.uk/money/special-reports/should-i-retire-at-55-because-of-my-125m-nhs-pension/
  20. https://www.uss.co.uk/members/members-home/retirement-articles/2018/the-easy-way-to-keep-track-of-your-annual-and-lifetime-allowances
  21. https://www.moneyobserver.com/how-to-invest/how-to-invest-tax-efficiently-beginners-guide
  22. https://www.fool.co.uk/investing-basics/how-shares-are-taxed-2/tax-efficient-investing/
  23. https://www.moneysavingexpert.com/savings/premium-bonds/
  24. https://www.nsandi.com/premium-bonds
  25. https://www.moneyadviceservice.org.uk/en/articles/tax-and-property-investment
  26. https://www.out-law.com/topics/tax/property-tax-/tax-treatment-of-reits/
  27. https://www.investorschronicle.co.uk/tax/2017/08/31/how-farmland-is-taxed/
  28. https://www.whatinvestment.co.uk/how-to-invest-in-forestry-2134293/
  29. https://www.bankaccountsavings.co.uk/calculator
  30. https://www.fscs.org.uk/what-we-cover/
  31. https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts
  32. https://www.thisismoney.co.uk/money/experts/article-2553851/How-I-know-DIY-investing-platform-safe.html
  33. https://www.fscs.org.uk/what-we-cover/investments/
  34. https://www.investopedia.com/articles/stocks/11/rebalancing-strategies.asp
  35. https://www.bogleheads.org/wiki/Rebalancing
  36. https://awealthofcommonsense.com/2014/03/larry-swedroe-525-rebalancing-rule/

The Full English Accompaniment – Wealth whispers

What’s piqued my interest this week?

This picture, from meta-aggregation site Reddit, triggered me.

The Shrink comes from an old family. We have an extensive family tree taking up many interconnected A1 sheets, and several books have been written about both maternal and paternal ancestors. These families are not rich. They fell from grace long before my parents came around, and many of the extended family survive at the mercy of universal credit. This is one of the reasons for my peculiar attitude to wealth. I have learnt from my family that all that is won can be lost by your children. Attitude is more important than cash. The Shrink’s great x 5 grandfather may have been a Victorian Buffett, but he didn’t teach his grandson not to splash it all on fine wine and pheasants.

This created an underlying distrust of overt displays of wealth. Encounters with people classically defined as aristocrats reinforced this. No lord gives a damn about your 68-plate Landrover. Wealth whispers.

I feel this attitude sits well with financial independence. You don’t maintain great wealth by spending it frivolously. To an extent, I think the financial independence movement needs to credit the millionaire next door concept as part of it’s roots. The original 1996 Millionaire Next Door book found that millionaires were disproportionately clustered in blue-collar neighbourhoods due to white-collar professions spending on luxury goods and status items (1). The follow-up focused on how financial attitudes (and advertising/ cultural shifts) pushed people to live a pseudo-affluent lifestyle of “freedom to consume” (2). Credit and loans means you can consume whatever you want, when you want, and deal with the consequences later. Consumerism and debt props up a stagnating economy by borrowing from future prosperity. Lifestyle magazines and the media focus on self-made stars (footballers, rockstars etc) encourages people to believe that anyone can rise to the top and have everything. And even if you don’t get that million-pound AC Milan contract you can emulate your favourite footballer by buying a Merc C-class. You just have to get finance at 18.9% APR to do it, paid for by your job managing a Vodafone call centre. Other brands are available.

Across the ages debts don’t make a person rich. Greeks and Romans knew the value of saving. Samuel Pepys turned £25 to £10,000 by working hard and saving (3). The core concepts of saving, spending only what you can afford, keeping debts and credit lines small cross-cut history and movements. Modern articles on how to be the millionaire next door could be copy-pasted to FI (4). The lesson is that you can’t get rich by ‘flashing the cash’.

Have a great week,

The Shrink

Side Orders

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading:

Fools and Mortals – Bernard Cornwell

Smarter Investing 3rd edn – Tim Hale – hu-bloody-rah

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. https://en.wikipedia.org/wiki/The_Millionaire_Next_Door
  2. https://thinksaveretire.com/the-next-millionaire-next-door/
  3. https://www.independent.co.uk/arts-entertainment/books/features/samuel-pepys-diary-a-decade-worth-recording-5515913.html
  4. https://www.marketwatch.com/story/heres-how-you-can-be-the-millionaire-next-door-2015-07-14
  5. https://www.bbc.co.uk/news/business-46505692
  6. https://www.bbc.co.uk/news/business-46502650
  7. https://www.bbc.co.uk/news/business-46505688
  8. https://www.independent.co.uk/life-style/gadgets-and-tech/news/bitcoin-price-collapse-cryptocurrency-latest-value-prediction-analysis-a8675766.html
  9. https://www.independent.co.uk/travel/news-and-advice/crossrail-delay-opening-latest-update-london-underground-elizabeth-line-tfl-sadiq-khan-a8676076.html
  10. https://www.reuters.com/article/us-usa-stocks-bears/almost-half-of-sp-500-stocks-in-a-bear-market-idUSKBN1O928G
  11. https://www.bbc.co.uk/news/business-46530860
  12. https://www.reuters.com/article/us-imf-economy-lipton/imf-warns-storm-clouds-gathering-for-global-economy-idUSKBN1OA0SG
  13. https://www.telegraph.co.uk/news/2018/12/11/commuter-victory-rail-firm-ditches-ironing-board-seats-new-trains/
  14. https://www.theguardian.com/us-news/2018/dec/12/as-climate-change-bites-in-americas-midwest-farmers-are-desperate-to-ring-the-alarm
  15. https://www.dailymail.co.uk/money/investing/article-6484131/The-best-worst-performing-funds-investment-trusts-2018-far-revealed.html
  16. https://www.telegraph.co.uk/business/2018/12/09/ratesetter-falls-deeper-red-acquiring-carcass-motor-finance/
  17. https://www.cnbc.com/2018/12/13/richard-branson-the-9-to-5-workday-and-5-day-work-week-will-die-off.html
  18. https://simplelivingsomerset.wordpress.com/2018/12/12/odd-christmas-sales-and-consumerism/
  19. https://monevator.com/weekend-reading-can-we-take-back-control-from-brexit/
  20. https://monevator.com/money-is-power/
  21. https://youngfiguy.com/mrs-yfg-how-my-poor-self-worth-costs-me-10000-a-year/
  22. http://www.msziyou.com/overlooked-slovenia-bulgaria/
  23. https://www.pragcap.com/3-reasons-hold-long-bonds-short-rates-rise/
  24. https://humbledollar.com/2018/12/first-impressions/
  25. https://www.financialsamurai.com/patient-capital-is-the-key-to-long-term-wealth/
  26. http://www.retirementinvestingtoday.com/2018/12/is-visible-fire-movement-changing-for.html
  27. http://quietlysaving.co.uk/2018/12/09/restarting/
  28. https://littlemissfireblog.wordpress.com/2018/12/11/november-side-hustle-report/
  29. https://littlemissfireblog.wordpress.com/2018/12/13/monthly-catch-november-to-december-18/
  30. https://littlemissfireblog.wordpress.com/2018/12/08/diversification-isnt-only-for-your-portfolio/
  31. https://gentlemansfamilyfinances.wordpress.com/2018/12/04/how-i-learned-to-stop-worrying-and-love-the-calm/
  32. https://gentlemansfamilyfinances.wordpress.com/2018/12/07/stocks-and-shares-more-like-shocks-and-scares/
  33. https://gentlemansfamilyfinances.wordpress.com/2018/12/11/graphs-i-like-income-vs-outgoings/
  34. http://www.thefinancezombie.com/2018/11/still-ere.html
  35. https://inspiringlifedesign.com/posts/2018-goals-review.html
  36. https://indeedably.com/financial-planning/
  37. https://indeedably.com/opportunity-cost/
  38. https://sharpenyourspades.com/2018/12/06/10-highlights-from-the-grow-your-own-blogs-november-2018/

The Financial Dashboard – November 2018

With the long holiday I’ve missed out October, so here’s a chance the catch up.

The goals for October and November:

  • Clear out and sell/ dump items from the storage unit – Success
  • Sell five more items – Success
  • Service the red car – Failure
  • Establish weekly and monthly joint grocery account expenses – Success
  • Finish reading Tim Hale’s Smarter Investing – Failure

Checking the assets and liabilities:

Nov AssetsNov Liab

These are taken from my Beast Budget spreadsheet. Over the two months my net worth has grown by £4427 (19%). This is down to my quarterly revaluing of our property, which sees my portion go up by £5k, hiding two months of heavy spending. My actual savings rates have bounced either side of 0, despite putting money into my mortgage, savings accounts, credit cards and pensions. We spent several thousand on our honeymoon. We’re not looking at the figures properly, as it’s a once in a lifetime thing, but it was probably £4-5k all in, travelling around the far east for three weeks.

During that time I saved £400 in my 5% interest Santander saver and for the first time since February this year my credit card debt is under £3000.

Goals:

Goal achieved:  Clear out and sell/ dump items from the storage unit

Goal achieved: Sell five more items

I’ve cleared my storage lock-up garage. In the process we sold several pieces of spare furniture, with a couple more to sell along with a whole host of stored car parts. I’m trying to get better with this, as I have a tendency to snaffle rare or good quality parts when I see them, ‘just in case’. I took a full estate-car load to the dump too. By giving up the storage unit I’ve reduced £120 of monthly motoring outgoings. So we continue – Sell five more childhood toys. Sell five more car parts.

Goal achieved:  Establish weekly and monthly joint grocery account expenses

I’m going to cover this in the next quarterly update, as more data is better. I think I’ll take an average across the whole year and look at how I can restructure our diet and shopping to get a better budget.

Goal failed:  Service the red car

I harpooned myself here. I bought the parts to do the work (£50-odd quid), and then promptly filled my garage up with crap decanted from my storage. Bah.

Problem is this continues a theme. I love working on my cars, but rarely get the time any more, especially with continued house renovations and now the garden. My garage is full of sofas, lawnmowers and boxes of books, so it looks unlikely I’ll be able to wheel either car in there for tinkering any time soon. I’ve not actually been able to work on a car for at least a year, and this not only makes me sad but it also isn’t good for the cars. Nothing knackers a motor like a long period of inactivity.

Last month I spent a long weekend away with old friends for a stag do. Two of them are doing quite well for themselves and run brand new high-end German sports cars. They both spend a lot on these cars, but as they use them daily it’s an expense they’re happy to pay for the ‘smiles per miles’. Another bloody phrase I hate. It made me question my habits. I’m not about to abandon my bangernomics tendencies, but my current cars aren’t exactly costing pennies. I think I’ve spent £1150 on work on the red car this year alone, to only turn 250 miles in that time. I’m tempted to cut my losses and buy something either a bit worse to hack over the winter, or save up and buy an appreciating classic. Watch this space. In the interim I’m going to spend this month looking over my previous motoring spending and setting a realistic monthly budget/ savings target for my cars, to gradually build up their own replacement/ repair/ improve/ invest fund.

Goal failed: Finish reading Tim Hale’s Smarter Investing

Read fiction whilst away. Will finish it this month.

Budgets:

  • Daily living and entertainment – £0 from my account, but technically a lot more from the joint.
  • Transport – budget £300, spent £233.69, last month £217.23. Keep reducing this.
  • Holiday – a lot.
  • Personal – £50/ £20.64/ £90
  • Loans/ Credit – £200/ £571.77/ £425. Paying any new additions plus £250 off my credit card every month now.
  • Misc – £50/ £16.40/ £47.97. Took some cash out for the pub.

In the garden:

The early frost while we were away last month killed off much of our late crop. We managed to save some late potatoes which are now in the greenhouse, along with a host of salad crops. I’ve dug over the ground and I’m making plans for new beds.

Goals for next month:

  • Sell five more childhood toys. Sell five more car parts.
  • Set a realistic monthly savings target for motoring
  • Establish weekly and monthly joint grocery account expenses
  • Finish reading Tim Hale’s Smarter Investing

What’s in the pipeline:

  • Property Renovation Lessons Part II
  • Investment Strategy Statement – Part 3 – Asset Allocation
  • Investment Strategy Statement – Part 4 – Funds, Accounts & Rebalancing
  • FIRE for your Mental Health
  • Plus the usual Full English Accompaniments and other drivel…

Happy December everyone,

The Shrink