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How Much People Saved & Invested In Lockdowns

Here’s another in our series of 2020 wrap-ups, this time looking at how saving and investing shot up for most people during the lockdowns of 2020.

Curiosity in investing has skyrocketed in the last year due to a combination of 3 factors:

it’s easier to do than ever before thanks to free trading apps;
the economy melting down made people stop and think about their own finances; and
people on the whole have been saving way more money during lockdowns than they would normally be able to.

Today we’re looking into this last point in detail. How much have people been able to save and invest during the lockdowns?

Of course… it isn’t the case that everyone is better off.

For those of you who have done well out of lockdown, we’re also going to look at where you might want to prioritise putting that money, to get yourself prepared, for if – or maybe when – the economy really starts to tank.

Stake are giving away a free US stock worth up to $100 to everyone who signs up via our link on the Offers Page – be sure to check that out!

Artificial Problem – Artificial Solution

While lockdowns are an artificial problem, put in place by government order, the financial solution to them is coming from another government order – the furlough scheme and related business loans. So far, the 2 policies are largely offsetting each other financially for many people.

Because of unprecedented financial support for the private sector from Boris and Rishi, the bulk of Brits have so far been able to keep calm and carry on despite lockdowns – in many cases improving their financial situation.

How Much Are People Saving?

The Centre for Economics and Business Research reports that households saved £7,100 on average in 2020, thanks to the lockdowns preventing them from spending, and most being able to maintain their jobs.

A study by AA Financial Services shows that 85% of UK adults spent less during the lockdowns.

Some of the largest savings areas were petrol (£49 a month), staying away from pubs and restaurants (£57 a month), and avoiding the shops (£53 a month).

In total people still on a full income were able to save £617 a month on average.

The Bank of England back this up, reporting that personal bank deposits have grown by 3x the recent average, with 31% of savers increasing their monthly deposits over the timeframe. Are people investing that money or just letting it rot in the bank?

Well, the US Bureau of Economic Analysis reckons that similar spending cuts to what’s been seen in the UK are also being seen across all the major economies, with most of the difference being diverted into savings accounts.

We know that investing is much more culturally embedded in America than in Britain, so we can expect a higher proportion of spare British money to be directed towards savings rather than investing.

We’re investors, so every last penny we’ve found ourselves up by during this pandemic has gone into the stock market and other assets. After all, saving for 0% interest is a chump’s game.

We want to know if investing activity has gone up, not just because it’s interesting to know, but also because more noobie investors entering into the market tends to push up asset prices, and can even lead to bubbles.

How Many People Are Investing

We know that the average saved was £7,100, but it’s safe to assume that most of that ended up in savings accounts rather than investment platforms.

However, 2020 did see a huge rise in individual investors taking to the markets for the first time.

eToro saw a 420% increase in investors’ trades between January and June 2020, compared to the same period a year earlier.

Interactive Investor reported a 119% increase between April and August 2020, and AJ Bell a 200% annual increase for March to April that year.

Across the board, hundreds of thousands of people have been turning to investing to store and grow their wealth.

But has this huge flow of money into the stock market had any effect on stock prices? Are new investors chasing rising prices or are rising prices partly due to new investors?

What Happened To Asset Prices

There’s a strong argument that the rush of new investors into the market in 2020 has caused asset price bubbles in the “trendy” stocks and industries: such as big tech, clean energy, and anything to do with electric vehicles.

It also may be partly behind why we now see a K-shaped recovery. That is, some industries like Tech recovering while others like Travel continue to slump:

Take Tesla for example. Since March 2020, Tesla went from an adjusted $72 a share to over $800, and saw a PE ratio of over 1000, riding a wave of media coverage and new investor enthusiasm.

The rise of free trading apps and innovations like fractional trading made it easy for anyone to buy shares, and the data shows that new investors overwhelmingly favoured the big name brands: Tesla, Apple, Microsoft and Amazon being the main beneficiaries of their cash.

It’s not just individual stocks – a rise in popularity of ETFs as an investment vehicle may mean that stock prices across the board in major indexes have been pushed upward by the flow of new investors, as ETF providers must now buy more of those companies to meet demand.

Let’s now look at what happened at the other end of the financial spectrum.

What Happened To Household Debt?

The Bank of England has revealed that consumer debt fell after the first lockdown by £7.5 billion – this reversed a trend of increases every month since 2013.

This is a combination of people having lower expenses and paying down their debts instead; and fewer opportunities to use a credit card, plus the fear of uncertainty stopping people from wanting to take out new loans.

Not Everyone Has Benefitted

One of the few positives of living under lockdown is being able to save more money. But that just isn’t the case for many low earners.

Right now there is a widening financial gulf opening up between middle and low earners.

The K-shaped recovery doesn’t only describe a split in industries – the analogy can be applied to the condition of the home finances of middle earners vs low earners.

While spending decreased for higher and middle earners; the lower your income, the more likely that your outgoings would have gone up during lockdown:

The problem was even predicted last Spring, with Universal Credit being increased by £20 a week in April 2020 in response to the lockdowns, but it hasn’t seemed to help much.

We can see that over a third of the lowest earners are having to cope with higher expenses than usual – and of course, this is both terrible and unsustainable.

There are several explanations for this, such as:

being forced to shop locally, at higher prices than the supermarket because you don’t own a car (and might want to avoid public transport right now);
higher heating costs because you and your kids are home all day during winter;
but no chance to offset this with the cost savings that middle class office workers saw from avoiding Pret a Manger lunches and dress-for-success work clothes, because they didn’t have these luxuries anyway;
home-schooling meant having to buy in extra equipment;
they are furloughed, on 80% of an already low wage.

The saying “the rich get richer” is true because rich people can take advantage of opportunities as they arise.

Conversely, it’s also true that the poor get poorer, as they get shafted harder when there’s a crisis.

We should reflect that while many have benefitted from lockdown, many have not, and Rishi and his magic money tree will have to make sure that these people don’t fall through the cracks.

For Those Lucky Enough To Have Financially Benefitted – Choose How Best To Use It

So if you’ve benefited from a lockdown savings windfall, how can you best direct that cash to protect yourself from a future crisis?

We may not even need to wait all that long.

There’s a fair chance that once the furlough scheme is removed, the shock to the wider economy from mass unemployment will be huge, even for those not directly impacted.

That, or any number of unforeseen issues with vaccine rollouts or new strains of the virus could set the economy back to square one.

Here’s 5 things you should consider doing with your cash while the going is good.

#1 – Clear The Slate

Pay down any short-term debts, especially any high interest ones, and set up an emergency cash fund of at least 3 months wages and ideally more.

You got lucky this time, possibly because your job was kept secure by government intervention.

If the company you work for fails during the next crisis, and government help isn’t possible, at least your personal finances can be working with you, rather than against you.

#2 – Take Out Insurance

It might be worthwhile to have Income Protection insurance in place to cover you for sickness.

That way, you and your family are more likely to be protected if you find yourself incapacitated by illness and unable to work. The next virus to come along might be far worse than Covid-19.

Unemployment Insurance exists too, which protects you from redundancy, but since the pandemic, you’ll struggle to get a quote.

#3 – Invest It

In our view, investing is almost always the superior choice over hoarding money in a bank account.

Given you may need access to this money, opening a General Investing Account or ISA is probably safer than locking it away in a pension – however, your emergency cash fund should have you covered for, well… emergencies.

Remember to grab your free stock in the intro above, and subscribe to our YouTube channel below or surf the articles on this site to learn everything you need to know about investing for the long term.

#4 – Important Upgrades

At time of filming, we’re on Lockdown #3. Who knows how long it will last and how many more there’ll be.

Lockdowns may even be forced upon us next Winter too, according to Chris Whitty. Now there’s a depressing thought!

If you’ve struggled through the last lockdowns with inferior home comforts, and still lack a proper home office, a decent TV, gaming console etc, now might be a good time to spend a bit on making home-life more bearable.

#5 – An Epic Holiday

If you have any money left after securing your finances, why not have a sweet holiday when this is over? After the last year, you certainly deserve one!

Recycled Taxes

At the end of the day, a lot of these savings are just recycled taxpayers’ money – £17.5 billion has been paid out to furloughed workers from the Treasury, and another £7.2 billion to the self-employed.

Much of this may even be given back to the Treasury in future massive tax hikes, as many economists and journalists theorise will happen to pay for the Covid splurge.

But get your finances in line now, and hopefully you’ll be in a good place for the years ahead.

How much did you save or invest during the lockdowns? Join the conversation in the comments below!

Check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

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What Age Do People Really Retire – Retirement Statistics

In the UK, the government recognises age 68 as the age that it’s reasonable to retire. That’s the age you can draw the state pension from.

But we want to know what age people really retire at – and we want to help you work out if you’re on track to retire earlier than this, and by how much.

Your private pensions will allow you to access them up to 10 years before the state pension age.

But how many make it to retirement by even age 58? On this site we’re about having the freedom to retire as soon as possible.

Early retirement doesn’t have to mean sitting in front of the TV. It can be doing charity work; travelling the world; writing a book; or whatever floats your boat!

We’ve gathered together statistics from the UK and around the world to show you what age people are really retiring at – and therefore, what you might expect for yourself. We also touch on how to move this date forwards.

If you still need to consolidate all your old workplace pensions into one place, we’ve arranged for you the first 6 months without management fees when you open a self-invested personal pension with Nutmeg through the link on the Offers Page. The same deal applies for their ISA accounts as well!

Retirement Ages Around The World

First off, let’s look at how the UK compares to the rest of the world when it comes to real retirement age.

Here’s a chart showing the average age that citizens leave the workforce in various countries, using data from the OECD:

This is not the state retirement age. This is the real age that people decide to pack it in and put their feet up.

The UK has an average showing, hardly showering itself in early-retirement glory.

But a point in our favour is that, at a real retirement age of 64, we’re at least beating the official state pension age, which was 65 at the time this data was gathered in 2018.

Our neighbours in France are free from the age of 60, putting us to shame, while our friends in America feel the whip until age 67.

If you’re feeling bored at work, be grateful you don’t live in Japan or South Korea. These guys are slogging away until age 70 and beyond!

But this data shows a fixed point in time, as of a couple of years ago. What was the situation 10, 20 years ago and more? Is the UK getting better or worse?

Real Retirement Age: The UK

The Department for Work and Pensions released this info in 2019 showing that the age of leaving the workforce has gotten worse for men by 2.1 years over the past 2 decades, and worse for women by 3.5 years:

This second chart shows that around 60% of over 50s were in the workforce 35 years ago – now, 84% of the over 50s are having to work.

This is obviously a bad directional trend for younger generations looking forward to their own retirement. Will the average exit date continue to creep upwards?

Here’s the age of exit for men and women in more detail:

Although the real retirement age has gotten much worse in the modern era, the period from the ‘50s to the ‘80s showed the opposite story.

This reminds us of the trend in the wealth gap – shown here for the US, but the same story applies to the UK:

The same period from the 1950s to the 1980s showed the wealth of the bottom 90% (i.e. most people) increasing to a larger percent of the nation’s total. Since the 1980s, inequality has been on the rise, and the wealth gap versus the top 0.1% has been growing.

The story of this graph is that inequality has been reversed before, after a period of political shake up – and can happen again. We’d expect average people to be able to retire sooner if this happened.

Maybe People Are Waiting Too Long To Retire

On the flip side of the coin, pension wealth has nearly doubled in real terms since 2008, but we know it is being accessed later.

If people could retire sooner and with less money a decade ago, why not now?

We suspect a big part of the reason why people work longer is a lack of financial education about investing, combined with a tough time to be a saver. There is no interest to be earned anymore on your savings.

If you plan to retire before state pension age, you need a good private pension, or you need decent savings to bridge the gap.

In the years before the 2008 crash, interest rates were high, and it was a simple thing for savers to retire and enjoy the high interest, or get generous annuities offering good income for life.

Now, wealth languishes in 0.1% savings accounts, losing real value each year, making a mockery of their life-savings. Today’s would-be-pensioners are fighting an uphill battle.

Retirement Age By Region

Where do you live? If we look at the UK on a regional basis, Scotland is the best place to live for early retirement, with 33% of Scots set to retire before age 65:

Surprisingly, despite the highest incomes, London is the worst place to retire early, with only 21% of Londoners predicted to be able to quit before age 65.

Maybe if they’re serious about retiring early, Cockneys may want to swap their jellied eels for haggis and neeps.

When Do People Want To Retire

A study by pensions advice specialist Portafina says that the nation’s dream retirement age is 57.

Presumably those people aren’t investors like the many subscribed to this channel, whose target retirement age could be a couple of decades before that!

But even age 57 is a lofty dream for most, because as we’ve seen, the real average retirement age is 64.

And it gets worse. 21% of Brits have no pension at all. Even 17% of the over-55s have nothing in their pension pot, according to an Opinium survey of 2,000 working adults from June 2020.

Figures from the ONS show that just 7% of people expect to retire before the age of 60. Most will retire at or just before the state pension age, out of necessity.

Ability To Retire Before The State Pension

This next graphic shows, with data for men only, which countries in Europe are able to retire before their state pension age (those in yellow, orange and red). Those in shades of blue, like the UK, are retiring after the state pension date.

Women, not included in this graphic, actually help bring the totals down in the UK to just below the state pension age, as they retire earlier.

The Italians retire over 4 years before their state pension kicks in, and pretty much all of Europe bar a few pockets comfortably retire before the state tells them they can.

What we think we’ve shown so far is, you don’t want to be an average UK worker!

Years To Retirement By Savings-Per-Month (SPM)

What we really wanted to know, was at what age people are able to retire, based on the amounts they save each month from their income.

Try as we might, we couldn’t find any studies that have looked into this area, even though it’s got to be the one thing that everyone in the investing community really cares about!

What we’ve done instead is pull a chart together, based on these assumptions. In theory, it shows how many years you’d need to be investing into the stock market on average until you can retire on a basic income.

If you plan to retire earlier than age 58 – the age our generation can draw on their private workplace pensions and SIPPS from – you will need a big chunk of cash, or more likely, investment assets, to live on.

Here’s the chart, and it shows the estimated number of years to retirement based on the amount you are investing each month into the stock market, starting from scratch:

We’ve assumed zero tax because there are many ways to minimise it such as by using an ISA.

If you are investing £2,000 a month, it means you could retire 15 years from now.

Investing more than this each month has less and less effect on your retirement age if you’re aiming just for a £500,000 portfolio, as after a certain point the bulk of the work is being done by compounding returns, rather than new investments.

Investing £500 a month means you could retire about 33 years from now.

The main thing to do if you want to retire young is to increase the amount you can invest each month as much as possible.

The chart shows that the variance in years is massive at the smaller end of the monthly savings scale – an extra £100 a month could shave a decade off your career.

Our assumptions used the 4% rule to provide an income in retirement from the ISA of £20,000 tax-free.

We’ve shown here how the 4% safe withdrawal rate can be increased by trusting in the stock market, so maybe you could retire earlier than our cautious estimates.

People used to a £38,000 salary should be able to survive on a £20,000 after tax income in retirement, if we follow the 70% rule which says that people tend to need less money when they’re retired than during their working years.

This rule was made for old age retirement, but it could apply here too – but in reality, if you’re retiring young you may want to spend more on freedom activities.

But, consider that you won’t need to save for your retirement anymore, once you’re retired – and monthly savings would probably have been a big part of your budget if you’re retiring early.

Retirement Age And Career Choice

Finally, does your career affect the age you retire? Well, manual labourers tend to retire earlier than office staff, despite pay being typically lower.

This is more to do with being forced to retire early for health and productivity reasons than because they have saved more.

But maybe it shows that office staff could retire earlier than they do, if their blue-collar friends and neighbours are able to, and not be ruined by it.

Also, the pension age isn’t the same for all jobs.

The armed forces can draw a pension at age 60; police, firefighters and sports professionals from age 55.

So, maybe if you want to ensure your work boots are hung up for good by your mid-50s, and you’re good at rescuing cats from trees, maybe it’s time for a career change.

Don’t Be Average

The take-home lesson here is ‘Don’t Be Average’.

Average people retire in their mid-60s, at or close to the state pension age, and have little in the way of investments or private pension pots.

Make sure you subscribe to our YouTube channel below for regular videos aimed at UK investing and financial freedom, and check out the articles and features here on moneyunshackled.com, starting with this guide on matched betting for a way to increase your monthly income and savings rate by maybe £500 – maybe more!

What do you think is a good retirement age, and what’s your target? Join the conversation in the comments below!

Check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

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Investing In The 2020s: Roaring 20s, or a Lost Decade?

A century ago, the 1920s exploded into a decade of prosperity and excess called the Roaring Twenties. Could we be about to see something similar happen in the 2020s?

The world had just been hammered first by World War 1 from 1914-1918, and then by the 1918 Spanish Flu which killed somewhere between 17 and 100 million people.

It was a period marked by the loss of loved ones, economic hardship, and a stressed-out population in need of a release-valve.

As we head into the decade of the 2020s after coronavirus, many economists are looking at the parallels in the history books with excitement, that the Roaring Twenties might be set to repeat itself.

The 2020s have begun with around 2 million deaths so far attributed to coronavirus worldwide, and lockdowns have caused similar economic harm to what you might expect in war-time.

Here we look at all the reasons to be hopeful that the 2020s will indeed be a new Roaring Twenties.

And then, the alternative viewpoint – that the 2020s will end up being The Lost Decade…

Part 1 – Sunshine and Optimism: The Roaring Twenties

How The Years 2010-2020 Set The Stage

Western economies cocked up in the years running up to the 2008 recession, but the years of financial reforms and political shake-ups that followed it have put us in a good position today to move forwards.

We could hardly go much further backwards – in the UK, real GDP per head in Q3 2020 was no higher than it was in 2004. And remember, Q3 was the good times between lockdowns.

In 2016 Brexit was voted for, and then eventually resolved.

What really matters is what this government and future governments choose to do with their new powers.

Hopefully they make a good job of it and the UK takes a competitive lead in the world in the 2020s.

Whether you believe Brexit was a good or a bad thing doesn’t really matter. A good poker player will often win regardless of the hand they’ve been dealt.

2020

Then of course, Covid hit. The recession that followed is unique from other recessions, and we should take some relief from that.

In the name of public health, governments took the intentional decision to tank the economy, trusting or perhaps hoping it would come back again when the virus had passed.

Unlike in a normal recession, the locked-down population still want to spend, they have the cash to do so, but are just not allowed to.

Such a thing has never been tried before.

What’s really positive though is that some demand is still there, building up and longing for a spending spree, and will be able to do just that once all our shackles have been removed.

Will the world see a quick rebound, leading into a decade of prosperity?

We Were Due A Big Crisis

As we covered in this article on the upcoming debt crisis, we think the artificial recession caused by lockdowns has popped the bubble of the economic cycle at a time when it was due to be popped anyway.

Asset values, debt and the economy all move in cycles, and with a good run since the 2008 crash, economists were just waiting for the next global event to light the dynamite that had been naturally building up.

Government Policies

We’ve been critical of the furlough scheme, but if lockdowns were necessary, then this scheme was too. While many people lost their jobs, more kept theirs, and these people can now contribute to an economic boom rather than being pushed into the benefits system.

And government policies of endless money printing and dumping cash into the economy is likely to stay in place for some time.

In many ways, debt is now all that keeps the UK economy going.

This ultra-loose monetary policy could support a decade of strong growth, but is also just the kind of irresponsible short-termism that could lead to something similar to the 1929 Great Depression that ended the last Roaring ‘20s. But the going will be good for a while.

Savings And Debt

The national debt should hopefully be manageable if interest rates stay low for the next couple of decades. Let’s hope it does.

But while national and corporate debt has ballooned through the crisis, household debt has actually shrunk. In fact, the average household saved £7,100 in 2020.

If everyone splurges that cash once the economy opens up again, it could be the boost needed for a speedy recovery.

The National Feeling

The cash is there, the government policy and willingness for unfettered growth is there too. But there’s something more emotional going on too.

The impatience to escape from our cages is there, and it’s strong. So much depends on the quick roll out of vaccines though, to catch this wave of confidence before it descends into despair.

Imagine the effect on the culture if lockdowns lasted until summer 2022 for instance.

We’ve been denied the basic human rights of eating together, drinking together, and leaving the house, let alone the country. Even a hug has been made illegal.

Hopefully when this is over, people will want to get out and explore the world, live life to the max, and spend like there’s no tomorrow.

Part 2 – Doom and Gloom: The Lost Decade

Economic Mismanagement

In the UK, the 1920s may have been called Roaring, but they were still very much restrained by government policies.

During the Great war, the UK’s money supply had more than doubled through money printing, much like what we are familiar with today.

So in 1925, the government just cut the money supply in half, which caused a recession in 1926, three years ahead of the Great Depression in the US in 1929.

We’re no fans of the UK’s dependency on the magic money tree, but to cut it off abruptly would result in a Lost Decade.

The immediate risk is that policymakers panic and clamp down on the recovery before it has a chance to turn into a boom – possibly even kickstarting a new Depression.

The government has chosen the solution of printing money, and so must keep doing that until we’re fully past the corona-crisis.

Brexit (Again)

As we said earlier, Brexit can be either good or bad economically depending on what happens next. The government could easily mess it up, or it could set us on a growth trajectory much faster than the EU is able to achieve, bogged down as it is with 27 nations with different priorities.

The double hit of Covid-recovery mismanagement and bad post-Brexit policies could be a vicious cocktail that sets us back a decade.

But get both right, and we’ll have little to worry about!

Ramifications Of Furlough

The scale of the economic mess we saw in 2020 was an opportunity for all the bottled-up crap in the markets to be flushed out in one go.

Allowing inefficient companies and bad systems to die is a natural process that is meant to happen in recessions. Indeed, it’s a big part of why booms often follow them.

Like Australian bush fires that clear the old dead trees to leave fertile ground for a new generation, rubbish companies are swept aside allowing room for innovative upstarts to do the job better.

But Rishi’s furlough schemes and business support packages have had the side effect of keeping zombie companies alive right through this crisis, as well as the genuinely good ones of course.

Psychological Scarring

Another risk is that confidence in the recovery never shows up. Vaccination rollouts may take too long or be ineffective against new strains.

Or enough people may have been so terrified by the news in 2020 that they decide it’s just safer to stay indoors, away from other people and their germs – forever changing their social and economic lives.

This permanent culture shift could permanently leave the hospitality and travel industries at half-capacity.

And of course, the precedent has now been set so that if another virus or strain rears its ugly head in the next couple of years, the policy of first resort will be to shut down again, inadvertently nipping any economic recovery in the bud.

A Tale Of Two Lockdowns

The Lockdown Era has been very different for 2 different groups of people, with a dividing line drawn between the employees protected by furlough or able to work remotely, and the small business owners and the self-employed who have been largely left impoverished.

While most remote working office staff will have seen their savings increase throughout the pandemic – thanks to spending opportunities being limited – this has come at the expense of the entrepreneurs and job-creators in the economy, who enter the 2020s saddled with debts and the risk of bankruptcy.

Investing Through The 2020s

In a Roaring 20s scenario, all asset values would go up, particularly productive ones like stocks and property.

In a Lost Decade scenario, as confidence in business and the economy stagnates, it would be to precious metals and possibly bonds that people turn.

And if a new Great Depression comes along later in the ‘20s as a result of the Debt Mountain collapsing, deflation would reign supreme and cash would have the natural advantage as the main asset class to benefit.

The key is to have a balanced portfolio. We think the 2020s will be good times overall, and we’ll continue to hold a majority of our portfolio in equities like stocks and ETFs.

If you want a diversified portfolio without having to learn how to invest, you could look into robo-investing platform Nutmeg, who do all the work for you.

If you like the look of them, they’ll cancel the first 6 months of management fees if you use the link on the Offers page.

We love equities, but in the current economic climate we’ll continue to protect our downside with around 20% of our portfolios in cash and precious metals. If the decade ends up a write off, we’ll be glad we didn’t go all in.

What’s your outlook on the 2020s? Let us know in the comments below.

Check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

Stock Market

Should The Minimum Wage Be Doubled? Pros and Cons

Should the UK minimum wage be doubled, tripled or perhaps increased just a smidgen? Or maybe you think it’s too high, or even think it should be scrapped entirely, so the market can decide a fair rate.

Whether you’re on the national minimum wage or not, that minimum hourly rate affects your salary. This is because it acts like gravity preventing wages from being increased out-of-step with the minimum.

Speak to anyone who earns minimum wage or close to it and if they’re honest they will tell you that their finances are a constant struggle.

So here we’re asking the question: should the UK minimum wage be increased significantly?

Would an increase of say double have a negative impact on jobs and the economy? Let’s look at the arguments for and against…

If you’re looking for a bit of additional income, then one great way to make £500+ a month is through matched betting. If you’re interested in finding out more on this, then check out the Matched Betting Guide.

What Is The Minimum Wage?

Before we look at the arguments for and against a minimum wage overhaul, lets quicky remind ourselves what the UK minimum wage is.

The National Minimum Wage is the minimum pay per hour that almost all workers are entitled to.

As of April 2021 the National Living Wage, which is what the government have stupidly renamed the minimum wage for those over 23, will be £8.91.

If you are younger you will get paid a lower rate dependant on your age – which sounds like total age discrimination to us.

Their logic, but perhaps implemented poorly, is to incentivise businesses to hire young people to help get them on the career ladder, who would overwise be overlooked in favour of older people with more life experience for the same price.

However, there are fairer means to achieve this such as using government subsidies.

A 20 year-old doesn’t get a discount from his landlord because of his age and he doesn’t get his weekly food shop discounted either. If they do the same job to the same standard they should be paid the same.

Some people claim that young people live with their parents and so have lower expenses but we would argue that it should be their choice to live with parents if they wish – not forced to because of a discriminatory wage system.

Why Should The Minimum Wage Be Increased?

#1 – Not Enough To Live On

So we said that the government had stupidly renamed the minimum wage for those over age 23 to the “National Living Wage”.

The reason we suspect they have done this is for bragging rights and to exaggerate the minimum wage’s generosity. Although some would say it still falls short of being good enough.

Normally we wouldn’t care what something was called but the National Living Wage is a lie or misleading at best because it is not calculated based on what is needed to live on. As Martin Lewis said, “This is not a living wage.”

In fact, there is a completely unrelated organisation called the Living Wage Foundation that independently-calculates what people need to get by.

They refer to this as the Real Living Wage and it is currently £9.50 for the UK and £10.85 in London, which far exceeds the UK government’s statutory minimum of £8.91.

Interestingly, the Living Wage set by the Living Wage Foundation is the same for everyone over 18, so it seems like they are in agreement with us that age should not affect a person’s pay.

#2 – The Benefit System Has To Bridge The Gap

By paying people less than what is possible to live on, it forces the benefit system to bridge the gap.

This means the employer gets the benefit of cheap labour, but the British taxpayer has to pay for it due to higher social security costs.

You probably recall the free school meals debate recently that tore the country apart. Whether certain children got free meals or not was not the main issue that needed discussing in our opinion.

Free school meals may be a short-term solution to an immediate crisis, but it doesn’t deal with the long-term problem. The provision of free school meals is just a plaster for a wound that requires stitches.

There’s an argument that if those parents struggling to feed their children were paid a better wage, then perhaps there would be less of a need for the benefit system.

Though of course some parents still wouldn’t pass that money on to their kids, and there’d always be a case for some government intervention.

Higher wages might even encourage parents back to work where currently it is uneconomical to do so due to childcare costs, which often cost more than what they can earn in a job.

#3 – Businesses Are Not Economically Viable

This is really an extension to the previous point. When the benefit system has to plug the gap, then this implies that businesses are not paying high enough wages.

If a business cannot afford to pay someone the minimum that is required to live, then perhaps those businesses are not economically viable.

If raising the minimum wage would cause the collapse of a small number of businesses, then this would create a vacuum. Assuming there is still a demand for those products it would allow new and more innovative companies that can pay a fair wage to enter the market to meet that demand.

Theoretically this would replace uneconomical businesses with better ones and reduce the burden on the state.

#4 – Immigration

Most companies will pay the lowest possible wage that they think will maximise shareholder wealth. In some cases that may be slightly higher than statutory minimums if those companies believe doing so will bring added benefit that exceeds the cost.

But a low national minimum wage will always put downward pressure on salaries.

In theory, an unregulated market will set fair wages automatically, as the supply of labour will perfectly meet demand.

However, uncapped net immigration puts severe pressure on the labour supply, which in turn means people are prepared to work for less and less just to land a job.

We know that immigration is a contentious issue, so we’re only mentioning it in the context of labour supply and demand.

In 2015, the year before the Brexit vote, net immigration was 329k people. That’s a city the size of Birmingham every 3 years.

We’re not saying this is right or wrong, but we do think that high immigration comes hand in hand with the need for a higher minimum wage, to avoid a race to the bottom on wages.

Likewise, lower immigration and therefore a lower supply of labour would reduce the need for regulating labour markets with minimum wages.

We can’t have both high immigration and a low minimum wage.

Why The Minimum Wage Should Not Be Increased?

#1 – Market Economy

Employers are paying what they can get away with, which in a market economy is what that time is really worth.

Sadly, that time is probably worth less than the current minimum wage, because as we just mentioned there is severe pressure on the labour supply.

Intervening with a high minimum wage disrupts businesses from maximising wealth creation, which may impact a country negatively overall.

#2 – Loss of Jobs

Many businesses struggle to survive in the best of times. By forcing them to pay higher salaries, many businesses will take the easiest action to cut costs – reducing the work force. As former accountants we have witnessed this.

When times get tough, a business’s first reaction is always to slash the wage bill. Wages – even at the current pathetic rates – are usually the most expensive cost for a business.

It doesn’t take Sherlock Holmes to work out that this is where the axe will fall first.

#3 – Lower Investment

The increased costs to a business also means a tightening of budgets, which means lower investment and therefore fewer jobs created.

Increasing the minimum wage has ramifications that could make a bad situation worse.

#4 – Global Economy

We believe that we’re about to witness a paradigm shift in working practices, which is only beginning to dawn on businesses due to the necessity to work from home during the Corona pandemic.

Do you like working from home? Well, be careful what you wish for.

When companies realise that someone in the Cambodian jungle can do the same job as you remotely for a tiny fraction of the cost, then why bother employing you at all?

Advances in technology have changed the way we work, but recruitment hasn’t yet caught up with these changes. It will!

If you can do your same job from Hull or from Bristol, why can’t someone else do it from Bangladesh?

This possibility first occurred when businesses outsourced certain functions such as call centres abroad, but now almost any job can be outsourced. We no longer live in the UK economy, but a global one.

Sadly, our minimum wage has to reflect global pay rates, which unfortunately are much, much lower than current UK wages.

Any effort to artificially increase wages through a statutory minimum, would likely only increase the speed at which jobs are outsourced abroad. Watch this space!

#5 – Automation

What’s cheaper than outsourcing work abroad? That’s right… Automation! It’s only a matter of time before more and more jobs will be lost to automation.

One potential catalyst to automation is forcing increased labour costs on businesses.

We don’t know if they’re still moaning to this day, but London tube drivers were constantly striking over their measly pay, which is currently £55k – poor guys…

Surely this only speeds up the desire to get self-driving trains that will replace these out of touch drivers entirely – a case of cutting off your nose to spite your face.

#6 – Move Somewhere Else or Retrain

If somewhere is particularly expensive and you are struggling for income there is always the option of moving elsewhere where the living costs are cheaper.

The north is cheaper than the south, but even moving half a mile down the road can half your rent.

Likewise, many retirees move abroad to affordable countries like Thailand, where their money goes much further.

But don’t think that this is only an option for retirees. If you can take your laptop with you and do your work from anywhere, then you have a lot of options.

We get that some people don’t want to do this, but should the government have to manipulate the job market, which could do more damage than good to the economy, just to help these people out?

Alternatively, if you’re not happy with your pay you can easily retrain and do something that pays better!

Final Thoughts

What concerns us most about minimum wages is that it often becomes a target or a benchmark for businesses.

We have worked for companies where they have little desire to pay decent wages to the lower skilled staff or to those who do less marketable jobs.

Many companies will seek to just match the minimum or close to it, rather than beat it. The higher the minimum is the more likely that most wages will hover around that figure.

It doesn’t seem right to have pharmacists or other highly skilled jobs all circling around the minimum, which is what we believe would happen if it was raised too highly.

So what’s Money Unshackled’s take on it?

Andy would like to see the minimum wage raised to at least the real living wage set by the Living Wage Foundation but appreciates this make take a few years to achieve.

Ben would not like to see the wage burden raised on businesses, as they create the jobs and the opportunities. But, if a minimum wage increase coincided with cost reductions for businesses such as a cut to corporation tax, he’d be for it.

What do you think should happen to the minimum wage? Join the debate in the comments below.

Check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

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State Pension UK – How Much Do You Get? Will It Still Be There For You?

When planning for retirement most people will be eligible to receive the state pension, but unfortunately understanding what and how much you are entitled to can be ridiculously complicated. But we’re going to make it easy here.

The new State Pension changed in 2016, and although it is meant to be simpler than the old system, there are some very complicated changeover arrangements.

This article will demystify state pensions and tell you everything you need to know so that you can plan your retirement with hopefully a little more certainty – although we’re expecting a future government to throw a spanner in the works sooner or later!

Alternatively Watch The YouTube Video > > >

Who’s Eligible & When Will You Get It?

You’ll be able to claim the new State Pension if you’re:

a man born on or after 6 April 1951; or
a woman born on or after 6 April 1953

If you were born before that then you’d be eligible for the old basic State Pension.

The age that you can claim the new state pension is gradually being raised in an attempt to lower the cost to the government.

It has increased to age 66 for both men and women since April 2020, then it will rise to 67 by 2029, with a further rise to 68 due between 2037 and 2039.

The slow phasing in of the increases over many years adds complexities when trying to determine your retirement date, so the best way to determine your specific date is to check the government website.

They have a dead straightforward form where you bang in your date of birth and up will pop the date you can start taking your state pension.

The State Pension age is under review, so it’s a good idea to keep tabs on this over the years.

You will also need to have met the National Insurance record requirement, which says that you need at least 10 qualifying years of NI contributions, but if you want the full State Pension you will need many more years of NI contributions.

How Much State Pension Will You Get?

The bit that we’re all interested in. The full new State Pension is £175.20 per week as of 2020/21, which works out as about £9,100 per year.

Not bad but likely to be a struggle if you have made no other retirement preparations.

This amount paid out will also increase each year by the highest of the following:

the average percentage growth in wages across Great Britain;
Inflation, measured by the Consumer Price Index (CPI); or
2.5%

This is what is known as the triple-lock and it’s a “guarantee” that the state pension would not lose value in real terms. Note, that is a government guarantee, so expect a U-turn to come along shortly.

But to be fair the 2.5% minimum is an arbitrary figure, and this is expected to be dropped to form a double-lock instead, under pressure from Covid.

Back to the £175.20 per week: you won’t automatically get the full amount as it depends on your National Insurance record. The calculation is quite simple. If you have over 35 years of NI contributions you’ll get the full amount. We’ll explain what a qualifying NI year is in a sec.

If you have less but at least 10 years, then you’ll get a proportion of the new State Pension. If you have less than 10 you get nothing.

For example, if you have 25 years of NI qualifying years, you divide £175.20 by 35 and then multiply by 25. This gives you £125.14 per week.

If you have 15 qualifying years, you divide £175.20 by 35 and then multiply by 15. This gives you £75.09 per week.

It may get a little more confusing if you made NI contributions before 6 April 2016. In this case you will get the higher amount of the old pension rules and the new State Pension.

Unfortunately, if you were contracted out, which meant you paid lower National Insurance contributions because you paid into a work or private pension, it gets far more complicated.

This probably won’t apply to most of our audience, so rather than go into unnecessary detail, we’ll put a link to the gov.uk guide here.

Is the new State Pension better than the old system? Well, the old system was so complicated that it’s difficult to give a blanket answer, but analysis shows that more people are likely to be worse off under the new system than those who get a better deal.

So that sucks. But on the plus side, the new system will make things fairer for everybody.

Rather than calculate what State Pension amount you’re entitled to yourself it’s best to check on gov.uk here to avoid any doubt.

There they will tell you the estimated weekly amount that you’ll receive based on the current £175.20 figure, and you can also view your National Insurance record to see where you have qualifying years and where you have gaps.

So, What Are NI Qualifying Years?

A qualifying year is generally any year where you earned a minimum amount of money and pay the required NI contributions.

For 2020/21 these minimum earnings are:

For employees: £120/week, £520/month, £6,240/year

For the self-employed: £125/week, £540/month, £6,475/year

You don’t have to work every week of the year to gain a qualifying year as long as you earn over those yearly minimums. For example, a few years back Andy (MU co-founder) took a career break and went travelling for 6 months, so only worked about 6 months in that year – but he still earned a qualifying year. Awesome!

In fact, you’ll be likely to gain these NI qualifying years whether you’re working full time (even if you’re on minimum wage), or if you’re working part time for just a few days a week throughout the year.

Also, the qualifying years don’t need to be earned consecutively. You have several decades to build them up, and you can even make voluntary NI contributions to fill any gaps.

If you’re not working, then don’t worry – you may still accumulate National Insurance credits.

You can get these if you’re a carer, you’re unemployed, or for a variety of other reasons. Here’s the full details of what you can earn NI credits for.

How To Claim?

Perhaps surprisingly you won’t get the new State Pension automatically when you hit State Pension age – you’ll have to claim it.

You should get a letter at least 2 months before you reach State Pension age, telling you what to do. Obviously if you don’t receive this letter give the claim line a call and they’ll be able to help.

The quickest way to claim is to apply online but you can also do it by phone and by downloading a form – instructions here.

How To Increase Your Retirement Income?

There are ways you can boost your state pension, but you need to carefully consider if you should.

Defer Your State Pension

You can actually defer taking your state pension if you choose. For every 9 weeks deferred, the weekly payment increases by 1% . This works out at just under 5.8% for every 52 weeks.

For example, if you defer by 104 weeks (2 years) you’ll get an extra £20.25 per week on top of the £175.20.

If you do choose to defer, it will take about 17 years to come out financially on top – so is a risky strategy. But it could pay off handsomely if you live for many more years.

Buy ‘Extra’ Pension Years

If you have any gaps in your National Insurance record and are retiring after 6 April 2016 you can buy up to 10 years’ of contributions.

You can usually pay voluntary contributions for the past 6 years but there are some exceptions, which you can check on the NI record we mentioned earlier for your specific circumstances.

Before you rush out to potentially waste money paying for unnecessary voluntary contributions, you should first consider the likelihood of whether you will gain the 35 qualifying years over the course of your lifetime.

For example, Andy is 32 and has gained 14 qualifying years – he missed 2. He is probably not going to buy these because he only needs to get a further 21 qualifying years to get the full pension and has several decades to earn them, so would be likely wasting money by buying them. Remember, you can’t get more than 35 years.

On the flip side, buying a full extra year will currently cost in tax year 2020/21 £795 (or £15.30 per missing week) and will boost your pension by £4.80 a week, equivalent to about £250 a year. This means that whatever number of extra years you buy, you’ll earn back what you paid in just over three years.

So, if you’re unlikely to hit the 35 qualifying years through natural means, then it’s probably worth buying these extra years.

Will The State Pension Even Exist In The Future?

There’s a good chance that the state pension will not exist in the future and certainly not in its current state. There have been a ton of rumours floating around about what might happen in the short-term.

The triple-lock is under threat, the age you can claim is expected to continue rising, and many people including us think it will eventually be means-tested.

The country is in debt up to its eyeballs and recent Covid costs have certainly not helped with this. People are living longer, and people are having less children, meaning there are fewer working adults paying for those claiming the state pension. The state pension is a pyramid scheme on an epic scale, which will eventually topple.

Also, we think the introduction of auto-enrolment into private workplace pensions is the government’s way of saying that a reckoning for the state pension is inevitable. They’ve essentially forced people to be more self-reliant, so they can cut back the state pension later.

How Else Should You Boost Your Retirement Income?

So, with that despair put to one side, we think it is absolutely essential to take control of your own future, by investing.

You have several ways to do it such as buying funds in a Self-Invested Personal Pension (SIPP) or ISA, or even buying BTL property.

We cover these topics endlessly on MoneyUnshackled.com, so if you’re new here do check out our other stuff.

We suggest you check out our Ultimate ETF Portfolio next, for ideas on how to build a sweet portfolio.

Also, if you want to invest in a Stocks and Shares ISA and need help choosing the best platform, head here to find a full breakdown of all the major investing platforms in the UK to help you choose the one that’s right for you.

Some platforms like Freetrade are even giving away free stocks there, and others like Nutmeg are giving you 6 months without management fees.

What do you think will happen to the State Pension? Join the conversation in the comments below.

Check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

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Why The Debt Bubble Is Due To Burst – Inspired By Ray Dalio

It’s worth understanding how debt cycles work – the periods of time between financial collapses – so that we can predict when the next one will come.

Governments and central banks need to know how to foresee debt crises and plot a successful course through them. For us investors, we just need to know how to take advantage.

The tell-tale signs are all there that we’re heading into the next in a long line of debt crises, with similar events in the run-up mirrored across history.

Whether the Great Depression of 1929, the Japanese bubble bursting in 1988, the dot-com crash of 2000, or the Great Recession of 2008 – all were showing symptoms of a debt crisis long before asset prices plummeted.

So, building on the theories of Ray Dalio, why are we heading into the next debt disaster, and what can we do as investors to prepare?

FYI: Stake are giving away a free US stock worth up to $100 to UK investors who sign up via the link on the Money Unshackled Offers Page. Don’t miss out!

Debt Cycles

An economy’s relationship with debt moves in predictable long-term and short-term cycles. Short-term debt cycles typically run around 12 years in length on average, with a boom-and-bust pattern of affluence and overspending, followed by austerity and bruised consumers sitting on their cash.

Long-term debt cycles run far longer, typically around 75 years, or could run the full length of a country’s rise to greatness through to its inevitable decline.

A country like China would sit somewhere there on the rise, with a large but reducing inequality in its population’s wealth gap, and gobbling up credit to build infrastructure and fuel growth.

Ray Dalio puts America and the UK as over the hill, America still near the top with their still booming stock market but relying more and more on money printing to get by.

Deflationary Debt Cycles

In the West, our debt cycles tend to be deflationary, which we’re covering in this article – the crisis causes investment assets to lose value and cash to become a safe haven.

On the flip side, there are inflationary debt crisis, like what happened to Germany after World War 1, where a wheelbarrow of cash was needed to buy a loaf of bread.

Credit

What we think of as money is often not money at all, but credit. You can go into a shop and buy a nice hat with a credit-card.

The shop keeper thinks you have the money, but all you’ve really given is a promise to pay the bank that money later.

When a debt crisis hits and you can’t afford to pay off that card, the truth becomes clear for all to see. That money never existed – and has now disappeared from the economy.

Short-Term Debt Cycles

Credit used correctly is a good thing, and an essential economic tool for growth.

During the good times, people use more and more credit because it makes sense to, since growth opportunities are abundant.

It doesn’t matter that they are racking up debts too, as they can be easily managed. And the banks are all-too-happy to lend money to anyone, as there is good profit to be made from doing so.

Above is what a typical short-term debt cycle looks like, taken from Ray Dalio’s book Big Debt Crises.

The bottom axis is in months and runs for 12 years, from the recovery through the bubble phase, to the inevitable decline and debt deleveraging. The red line is interest payments, but the blue line is the main one to focus on; being the total debt as a percentage of GDP.

2020 and 2021 sit in the depression phase after a good second half of the 2010s, leading up to the peak of Debt-to-GDP.

This tallies with the government’s massive printing of money during the corona-crisis.

According to debt cycle theory, we’ll soon enter the phase of the cycle when debt has to be reduced, no matter how painful, as it is unsustainable.

Note that debt typically ends a cycle higher than when it began. Several short-term cycles will balloon into a long-term cycle, starting and ending with economic catastrophes.

Why Debt Moves In Cycles: Self-Reinforcing Movements

During the good times, lending gathers momentum like a runaway train that becomes unstoppable – except for a head-on collision into something solid that knocks it off the tracks.

Lending supports spending and investment, propping up asset prices and fuelling incomes.

Bigger asset prices and incomes give banks more confidence to lend even more money, as borrowers have better collateral.

But all the while, debt is building and eventually outpaces incomes. At some point, some event will happen that triggers banks to panic, who reign in their credit lines.

Projects pause; incomes stagnate; outlooks for asset price growth look bleak; bad debts mount; and banks stop lending.

This makes the problem worse, and the debt cycle spirals downward into the end-phase.

How Debt Crises Can Be Managed

There are 5 ways to manage a debt crisis:

#1 – Austerity

Cameron and Osborne tried this in 2010 after the Recession, with limited effect.

The problem with austerity is that it is deflationary and discourages growth at the same time as the debt crisis is already doing both of those things.

It does help reduce debt, but it lowers incomes too, so can be counterproductive.

#2 – Debt Cancellations

Just cancelling the debt is not great, as the lenders lose out and this reinforces a downward spiral of deflation, but the crisis can be so severe that it might be sometimes necessary.

It’s widely believed that this needs to happen to solve the Greek debt crisis in the Eurozone, ongoing since 2009.

#3 – Slash Interest Rates

Slashing rates makes it easier for people to pay the interest on their debts, at the same time discouraging people from hoarding their money in a bank savings account.

In this way it encourages investment into the economy again.

#4 – The Magic Money Tree

The central bank just prints more money.

This only works if the country’s debts are in their own currency, but it does encourage growth and spending in the economy which really does help get things moving again.

But is this storing up a currency problem for a later day?

#5 – Raise Taxes

Raising taxes may be necessary eventually to pay for the country’s debts. But raising taxes whilst in a crisis is a big mistake.

This makes everyone poorer at a time when you need money to flow freely again.

The tax hike doesn’t even help the less-well-off, as the money is not being invested to help people, but wasted on debt payments.

However, this is the inevitable final destination for a country in ever rising net debt.

Long-Term Debt Cycles

Remember that each short-term debt cycle leaves the country a little more indebted than it was before, and after many short-term cycles the problem adds up to result in a mega crash like the Great Depression in 1929.

Many of the levers that were pulled by central banks to resolve the last several short-term crises become less effective each time.

After the 2008 recession, we lowered interest rates to almost zero. Even a decade later, rates have not recovered, so that lever cannot now be pulled again.

And the UK is now in over £2trn of debt – over 3 times higher than in 2008!

Where We Are Now In The Debt Cycle

It has been over 12 years since the start of the 2008 Credit Crunch, also now called the Great Recession.

The UK recovered: unemployment went to historic lows, the banking sector was reformed, and city centres underwent massive renovation projects.

But debt built up, and the kindling of the next debt crisis was waiting to be lit by something, and the coronavirus was more of a flamethrower than a match.

Now, we’ve seen banks pulling low LTV mortgages at the height of Covid.

We’ve seen the Bank of England base-rate slashed to 0.1%, businesses forced to shut down, and people forced to stop spending, taking credit out of the economy.

We believe we’re in the end-phase of the short-term debt cycle.

But as for the long-term cycle, 2008 might not have been the end-phase that some people assumed it was. It was a body blow, but is the knock-out punch still to come?

The levers that were pulled at the time to resolve it have been exhausted and haven’t recovered since.

Austerity has already cut back public spending as much as is politically tolerable; taxes have been raised by stealth to what we feel is the upper limit of what can be tolerated by most families; and interest rates have been slashed to the max.

Perhaps worst of all, the money printing was not rolled back at all over the last decade, and was then increased dramatically in 2020.

There is little room for manoeuvre when the next debt crisis hits. We may be just years away from a full blown 1929 style disaster.

Can Investors Take Advantage Of A Debt Crisis?

During good times of growth and demand, productive investment assets like stocks and property are favoured.

During debt crises, these assets stop being as productive, and money runs into cash and precious metals like gold and silver.

It may be too early to say, but crypto currencies like Bitcoin should logically do well during a debt crisis as well, as they act in many ways like a digital version of gold.

We’ve said before how cash itself should be given respect as an asset class in your portfolio, with perhaps a 10% allocation, and perhaps a further 10% to precious metals, and some of you may even want a small portion in crypto currencies.

During times of deflation, cash is naturally well placed to outperform, as many other assets lose value relative to it.

We’ll still hold the vast majority of our portfolios in well-diversified equities and other productive assets, but to ignore cash and precious metals entirely is to ignore the real risk of a major debt crisis coming down the road.

As long as the government keeps on printing magic money, that day keeps getting closer.

Are Debt Crises Unavoidable?

Almost. As Ray said, lending is never done perfectly and tends to be done badly.

The short-term rewards of funding faster growth with credit helps governments to justify the rising debt, and it is politically more popular to let people have easy credit than to take it away.

What politician would impose austerity and tighter restrictions on the voters during good times, before a crash had even happened?

Are you worried about the debt bubble? Tell us your take in the comments below.

Check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

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Budget Like A Pro – The Complete Guide To Budgeting The Lazy Way

The thought of budgeting is enough to make the eyes of most people glaze over in boredom. We hear you – it’s not the most exciting of subjects, which is why we’ve never covered it until now; and will be a big reason why so few people can commit to it.

But we think our approach is better than the usual penny-pinching approach touted elsewhere.

We suspect that the inability to stick to a budget is partly due to how you’ve been taught to do it. We’re guessing that previously you’ve been told that budgeting involves tracking everything you spend down to the penny.

You’ve also probably been incorrectly told that you must go over your last 3 months bank statements and also heard that you need to deprive yourself from everything you enjoy in life. It doesn’t have to be this way.

We’re not going to lie and say budgeting can be fun – it can’t! But hopefully in this article we can show you the techniques we use to keep it as simple as possible – and hopefully they’re ones that you can stick to as well.

If you head over to the Money Unshackled Offers page, you’ll find tons of great offers, such as free stocks worth up to £200 when you sign up to Freetrade or 6 months with zero management fees with Nutmeg. It’s definitely worth checking that page out.

Why You Need To Budget

It’s no coincidence that those that don’t budget never have any money left at the end of the month. They live paycheck to paycheck. We’d go further and say there’s a clear rich/poor divide between those who budget and those who don’t.

Many people might find this surprising, but it makes little difference how much money you make. We know many people who earn what most people would consider to be awesome salaries and yet they struggle financially.

Even in fields like accounting you would expect these people to have some financial sense, but you’ll be amazed just how many struggle – many of whom are counting down the days to payday just like someone who is on minimum wage.

Even premier league footballers and other celebrities who have earned millions end up broke!

Despite earning a massive £20m from his football career, famous England goalie David James declared bankruptcy in 2014, and ended up selling signed shirts to pay the bills.

Why do people have this problem? In many cases it’s because they fail to budget properly. You need to control your money, or it will control you.

When people earn more money what generally happens is their expenses quickly follow suit – bigger houses, faster cars, better holidays, fancier restaurants, private schools, horse riding lessons… you know.

Some lifestyle creep or lifestyle inflation is perfectly fine. It’s okay to reward yourself and enjoy the fruits of your labour.

But without a proper budget you are likely to let this get out of control and don’t really know what you can and can’t afford. This is where a budget comes in handy.

Pay Yourself First

A phrase you have probably heard us and every other financial commentator utter. It’s one of the most important things a person can do when it comes to managing finances and taking care of your future.

When we started paying ourselves first it really did change our lives. If you take away anything from this read, let it be this.

Paying yourself first means buying assets such as shares, gold, property and so on as soon as you get paid. Bestselling author Robert Kiyosaki calls these investments your asset column.

Paying yourself first allows you to spend the rest guilt free knowing that your financial future is taken care of.

How much should you pay yourself and what can you afford? This is what a budget will tell you.

By paying yourself first and then living on the remainder, you’ll know whether you can afford something or not. It will force you to tighten up in that month if you’re over-spending.

It’s amazing how simple this is and how effective it can be. It’s very important that you never dip into your investments – if you do it means your budget is failing and you’re stealing from your future.

Avoid Bad Debt

Sadly, a lot of people are not in the position yet to pay themselves first because in many cases they chose to use debt to plug any gaps between their income and expenditure. This means they have to pay their creditors first.

While this is not ideal it just means you have to clear this first before working on your own asset column.

Whether you’re paying yourself first or paying down your debts our budgeting techniques will help you take control of your finances.

Why Budgets Fail

We’ll get to the specifics of how to budget very soon, but first let’s look at why people usually fail with their budgets.

#1 – Tracking All Expenses

A lot of budgeting advice says that you need to track all expenses. This is time consuming and, in most cases, unnecessary. In theory this is the best way to budget and companies themselves do this; but they have entire accounting departments doing the work – you don’t!

For most people, this complex and time-consuming work is the cause of them jacking in the budget entirely. It’s better to focus on the important bits if it means you will stick with it and we’ll show you exactly how to do this.

The less affluent you are, and the tighter your budget, you will have to go into more granular detail than those who have a higher income. That’s because the cost of a coffee is more significant to them than for those with higher incomes.

You’ll work out for yourself the amount of granularity that you need to track to, but you don’t need to track everything.

#2 – Irregular Expenses

Another major reason why budgets fall down is because you’re often told to look at your last few months bank statements to work out what you spend.

This won’t work on its own because it does not include irregular expenses. A lot of what we spend is not monthly but is often yearly or even once every several years. At this point their budget fails and they quit. Our budgeting technique which we’re about to cover handles this.

Moreover, this often leads people to spend what they call their savings on these irregular expenses. Therefore, these people’s saving are not savings at all – they’re delayed spendings.

How To Budget Like A Pro

These are the steps that you want to take as soon as you get paid your salary:

1) Pay yourself first i.e. Invest

2) Transfer money for bills into a separate account (using a standing order)

3) Transfer money into a provision account for delayed spending (using a standing order)

4) Live on the rest

This means you will have a bank account that you get paid into, an investment account (probably a Stocks & Shares ISA), a separate current account for monthly bills, and a separate savings account (or accounts) for building up a delayed spending provision.

Budgeting is about looking forward. It’s about knowing what you will spend, so that you can avoid bad debt, live comfortably, and build a freedom fund or retirement pot – whatever you want to call it.

The best way to assess your current spending is to look at bank statements and also make reasonable assumptions about irregular expenses such as an annual holiday. Don’t forget that irregular expenses occur very infrequently, like a new car.

What we suggest you do is come up with a list of categories for your spending. This will probably include: Mortgage or rent, council tax, energy bills, phone and tv bills, food, clothes, entertainment and so on.

This list needs to be comprehensive. You should absolutely include things like Christmas spending, car maintenance, a provision for buying your next car, and new furniture such as a new mattress. It needs to include everything.

Don’t worry too much if you miss the odd thing. It’s not likely you will get it perfect first time, but do your best and always continue perfecting your budget.

How Much To Pay Yourself First/ Invest

This is the last part you can work out from your budget. Calculate what you can invest but make sure the action to invest on a monthly basis is done first. We use standing orders on pay day to automate this and we suggest you do the same. As long as you are disciplined you will make sure you never exceed what you put aside for living on.

You should aim to invest as much as you can here, but not to the point that you deprive yourself from having any fun.

If you calculate you can invest £100, try £150 and squeeze other areas tighter. It all helps Future-You.

Transfer Money For The Bills Account

Bills are usually consistent every month and are normally taken by direct debit or standing order. This usually includes the mortgage, utility bills, council tax, tv subscriptions, gym membership or sports clubs, and so on.

This means you should be able to budget for these with a great level of accuracy. Transfer the total spend into a separate bank account on the day you receive your salary and then you don’t need to worry about them not being paid.

If you could individually arrange for all of these to be paid at or near the day you receive your salary, then you can forgo the separate account. But you will probably have so many – with little control on the payment dates – that it’s best to have a separate current account for monthly bills.

Delayed Spending

Irregular expenses are not as straight forward. They need to be broken down into monthly equivalents. For example, an annual holiday costing £1,000 let’s say, should be split into 12 months, so that £83.33 is put into a separate delayed spending account. It’s what an accountant would call a provision.

The same should be done with Christmas. If you normally spend £600 on Christmas, then it makes sense to put aside £50 a month (£600 /12 months) to prepare.

You should do this with every irregular expense. These might be saving for a new car, new house furniture, a boiler replacement, redecorating the house, etc.

This exercise might highlight that what you thought you were saving before was actually just all delayed spending. It might be demoralising to have to set so much aside for expenses which won’t happen for another year or so, but you should feel proud to be finally getting a grip on your finances.

Over time you will build up sizable pots and you will also run them down as you spend.

For example, over the course of a few years you may have built up a large pot for a new car, and then you deduct from this pot whenever you buy one.

It’s the best way to remove any guilt from spending as you know it’s all been planned for.

We tend to record each category on a spreadsheet and record each time money is added or withdrawn from the category. You probably want to aim for just several different categories, so you don’t overcomplicate things:

These might be Car, Holiday, Clothes, House, Presents, Big Items, and Other to mop up the rest. What we’re showing is just a simplified version of what it might look like.

Earlier we said that budgets often fail because they tell you to track all expenses. The method we are proposing only tracks irregular expenses, so is far less of a burden.

In the past we’ve tried to track all expenses and quit almost immediately and yet we’ve been able to track irregular expenses without fail using this method for years.

Some people with spreadsheet phobias might prefer to set up multiple savings accounts instead – one for each delayed spending category. Or there’s always the old-fashioned notepad and pen method! Do whatever works for you.

Live On The Rest

The remaining money in your main bank account is for you to live on. It means you can spend it as you please, as long as you don’t run it down to below zero before next payday.

Your expenditure here might include supermarket food, meals out, petrol or train fares, coffees, small purchases, nights out and whatever else you buy frequently.

What To Do If Your Budget Is Failing

Over time you will perfect this budget – and we expect it will take a few months of tweaking – but at first it might go wrong. In the first instance it would be okay to access your emergency fund or even your investments if it got to that stage.

If your boiler breaks and you had forgotten to put money aside for this in your delayed spending account, you do have a genuine emergency. Just make sure you replenish the emergency fund asap – and adjust your budget to add in future boiler breakdowns.

As this should be a planned for event, typically this would not be an emergency and so don’t get comfortable doing this. This is where your self-control comes into play.

We don’t normally advocate using debt for everyday spending, but if you have not yet built up an emergency fund, then using a 0% credit card might be a short term solution until you can plug the hole in your budget. Avoid payday loans and overdrafts like the plague!

How do you budget, and will you be adopting any of the techniques discussed today? Let us know in the comments below.

Alternatively Watch The YouTube Video > > >

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Should Debt Be Cancelled? Debt Jubilee

Across the pond, there’s been talk that the new US president Joe Biden could cancel or forgive up to $10,000 of student debt per borrower, and some Americans are even pushing for far more.

This might sound crazy but is it? Does the cancellation of debt have benefits that outweigh the cost?

Here in the UK, our student loan debt already has a ticking expiration date.

This date varies but if you took out a loan between 2006-2011 then it’s only 25 years before it gets written off.

But the topic of debt cancellation, also known as a debt jubilee, goes far beyond just student debt.

Since Covid decided to rear its ugly head there has been renewed attention for debt cancellations for crippling household debt, as well as the national debts of countries both rich and poor, including the UK.

The UK’s public debt is way over £2trillion now and growing fast and this will be a burden that our generation and our kids and grandkids will have to carry!

In this article we’re going to look at the possibility of debt cancellations for both UK household debt and the UK national debt, why it should and why it shouldn’t be cancelled, and how it might be done.

Does Britain Have A Debt Problem?

Before we even look at the need or feasibility of a debt cancellation, we should first look at whether the UK has a debt problem in the first place. This debt problem can be split into 2 broad categories: national debt, and household debt.

National Debt

It’s widely believed that high national debt is bad for growth and most countries seem to be doing their utmost to keep a lid on the potential ticking time bomb, at least they were before Covid.

However, there are many interesting theories out there that say the UK national debt doesn’t really matter.

Jubileedebt.org point out that one-third is owed to the UK government itself – the Bank of England – and another 45% is owed to other people and companies in the UK, such as pension funds and savers.

Only 20% is owed to those outside of the UK, and the UK government’s foreign debt payments are just 3% of its revenue, one of the lowest levels of any ‘rich’ country.

So, based on this, it does seem that the debt problem has been slightly misreported on, but still we don’t understand the argument that debt is less important when it’s owed to people and companies in the UK.

If you lend money to the government in the form of a gilt, then you want your money back just as much as a foreign lender would.

Another argument that says the national debt doesn’t matter is the ability of governments to print more money.

The fact that a country like the UK can seemingly print money at will means it can always just pay off debts by turning on the printing presses.

We’ve seen this with the amount of Quantitative Easing that has occurred since 2009 and more recently in 2020. They’ve magicked £895bn into existence and this is likely to increase further.

Before Covid we had been told that Britain’s finances were at breaking point but clearly the magic money tree has been found – even if it was then stripped down to the roots in 2020.

National debt cannot be allowed to spiral out of control because debt enslaves countries as much as it enslaves individuals.

It places limitations on how a country can react to opportunities and threats. Would the UK be less willing to spend on infrastructure or education knowing it will struggle to pay for it? We think it would and therefore damages growth.

And then there’s the argument that it doesn’t matter how big the national debt is, as long as the interest payments can be met.

In this age of rock bottom interest rates, the government feels it can spend at will, because debt costs almost nothing.

Of course, governments that take this view are being short sighted – but this is a recurring problem in democracies. The Opposition, whoever it is at the time, can always clean up the mess when they are next in office.

Household Debt

The general public definitely do not have magic money trees, so arguably this is far more worrying.

According to the latest data from finder.com, total household debt in the UK was £1.7 trillion or almost £32,000 per adult. This debt could include a mortgage, credit cards or short-term loans.

These figures don’t tell the whole story because not all debt is created equal. There is good debt, which is when the debt is matched to a productive asset such as property or stocks.

Then there is wicked consumer debt, which is most commonly from credit cards, overdrafts, store cards and payday loans. According to finder.com this now stands at £206bn, of which £61bn is credit card debt alone. Per household this is round £2,200 of credit card debt.

Why Debt Should Be Cancelled?

National Debt

Quite simply, if the country wasn’t in debt, there would be more money available to pay for public services like the NHS, education, transport, police and everything in between.

A debt free nation would help to raise the living standards of everyone, as the money that was spent on interest could be directed instead towards the stuff that matters.

Household Debt

Debt acts as a vice, preventing the indebted from acting in a way that benefits them and society to the fullest. Large swathes of the British public struggle month in, month out to service their debt obligations and feed themselves and their family.

For each and every person struggling to look after themselves there is an opportunity wasted. They are little use to society if they can’t properly contribute.

A country benefits most when the most number of brains have access to the most number of opportunities. Opportunities – no matter how small – arise everyday, but have to be declined or ignored as the indebted cannot take risks.

A free man or woman who isn’t living pay-check to pay-check may take the opportunity to retrain and could end up inventing or doing something that changes the world – the next Jeff Bezos, Tim Berners-Lee, Elon Musk or Martin Luther King.

This may sound unlikely but when millions of people are liberated from debt, all it takes is one.

A cancellation of debt would close the opportunity gap. As it stands now, the poorest of people are likely to stay poor, and in many cases it can be a seemingly small sum of debt that entraps them.

To us, credit card debt of £2,200 might seem inconsequential, but to someone in poverty it can be the chains that enslave them.

Another argument for the forgiveness of debt is that some debt is, in a way, forced upon you without being properly educated about it, such as student loans.

There does need to be a level of personal accountability but student debt is practically given to kids without proper direction. Nowadays we consider ourselves well versed on money but at 18 we didn’t have a clue. Is that fair?

Another example of when debt is practically forced upon you is through mortgage debt.

We all need to have a roof over our heads and yet UK governments have allowed housing costs to spiral out of control.

Successive governments of both parties have not done enough to increase the housing supply, which would have kept the cost of a house down to more affordable levels.

As a result, people are enslaved to mortgage debt though most of their adult lives.

When everyone is indebted, they are unable to spend, forcing trade and the economy to grind to a halt.

How Can Debt Be Cancelled?

There are many ways that debt could be cancelled, both directly and indirectly.

The direct way would be that you no longer have to pay the debt and it is simply written off. It’s probably safe to assume that the lender would not be too impressed with this as they would lose out. We think this is a non-starter.

The immediate damage it would cause would likely destroy our economic system, which we’ll get to soon.

A more plausible solution would be to cancel the debt but at the same time have the government reimburse the lender.

In effect this would be a hidden tax, as personal debt would be lowered but public debt increased. Public debt is owned by everyone and the middle classes would bear the biggest burden through likely higher taxes.

On the other hand, if the magic money tree of Quantitative Easing can be sustained a little more this could be one way to do it – at least to pay off some of the debt. Let us know in the comments what you think about this.

An indirect way would be for the government to gift money to everyone to spend on what that want as they have done over in the US with their stimulus cheques.

Large numbers of people would choose to spend this on paying down household debt but like the previous idea, this has the problem of increasing public debt, which as discussed some people consider not to be a problem at all. We certainly consider public debt to be the lesser of the two evils.

Why Debt Shouldn’t Be Cancelled?

Someone will lose out. The borrower owes money to the lender. That lender expects to be paid. If the lender loses out, then they will never lend again, or expect excruciating interest rates when issuing loans, to factor in the additional risk of debt cancellation.

This would cause a collapse in our economic system, which is why it’s a non-starter. Without the option to borrow it would cause a momentous slowdown in the economy.

It’s the lenders who finance business and entrepreneurs. These businesses and entrepreneurs create the jobs and opportunities but if they lose out, the jobs go, the wealth goes and the opportunities go.

Even if the government reimburses the lender, the British taxpayer has to pick up the bill.

Why should someone who hasn’t incurred the debt and has not had the benefit of it be forced to pay the cost? In the case of student loans, why should someone who didn’t go to university pay for those who did?

Perhaps the most important reason not to cancel debt is because it would set a dangerous precedent.

Currently, we all know that if we dig ourselves into a hole we have to dig ourselves out. We all must take accountability for our actions. This might be a painful lesson but it’s worth it.

If there was one debt bailout, then people would expect it again. It would encourage wasteful and frivolous spending, and the forgiveness of debt would teach people all the wrong lessons.

Has There Ever Been A Debt Jubilee?

When doing the research for this article, most of the articles we came across were rambling on about debt jubilees that took place in biblical times, as if it had some sort of relevance.

What we want to know is have there been debt jubilees in the times since we lived in straw huts and traded 2 cows for 1 camel.

Well, there have been modern-day debt jubilees. According to moneyweek.com, one took place in 1948, when the Allied Powers replaced the Reichsmark with the Deutsche mark.

They wiped out 90% of government and private debt and paved the way for West Germany’s economic miracle.

Should debt be written off and if so, how? Let us know in the comments below.

Check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

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How and To Invest In China Stocks From The UK

One in six people on earth live in China, with populations of each of China’s mega regions by themselves the equivalents of other major countries. But their stock market is overlooked by western investors.

In 2020, Chinese companies’ market capitalisations hit $10trn USD, in second place behind America’s $38trn. Despite this, China typically only gets allocated around a measly 5% in world tracking ETFs.

A lot of this is to do with the shadowy way in which the Chinese government controls the stock market, keeping the volumes of shares that are available to foreign investors artificially suppressed.

But with China expected to be the world’s biggest contributor to economic growth through to 2030, it is not a region to be side-lined. But how should you invest in China and ride this wave? Let’s check it out!

Don’t forget to scoop up free stocks, cash and other discounts when you open an investing account through any one of our many partners on the Offers Page. These include Freetrade and Stake, who are giving away free stocks!

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Why You Should Invest In China

China has exploded in the last couple of decades, mostly thanks to the government’s creation of city hubs and massive investment in infrastructure, including skyscrapers, road networks, air and rail transport and massive expansion of factories and fossil fuel harnessing.

And even staunch communists have found a way to embrace capitalism, with American consumer products, internet access and smart devices helping millions to join the middle classes.

China went from a nation of cyclists to the world’s biggest car market in a matter of years, and are now also the world’s largest smartphone market, and set to surpass the US as the world’s biggest retail market by 2021.

Endless Growth

China’s growth is seemingly unstoppable. While the rest of the world embraced recessions in 2020, China went ahead and found the V-Shaped Recovery that had eluded everyone else.

China is expected to be the only G20 economy to grow in 2020.

The global economy is expected to contract by around 4-5% in 2020 according to the IMF – the worst downturn since the Great Depression. China, meanwhile, has bounced back strong.

But despite sweet growth and a strong economy, its stock market remains underdeveloped.

How You Can Invest In China

Investing in China poses a logistical problem. Their government wants to control foreign ownership of Chinese companies, and makes it tough for outsiders to plough money into their stocks.

Of course, this damages China and holds it back, but you can’t expect communists to fully embrace capitalism overnight. They’re slowly getting better at running a stock market, but they have a long way still to go before they reach Western standards.

In their efforts to smush together 2 opposing ideologies, they’ve come up with a complicated class system of shares, with some tightly controlled, and others open to everyone.

The main types, A-shares and B-shares, are the shares of China-based companies that trade on the two mainland Chinese stock exchanges, in Shanghai, and Shenzhen.

A-Shares and B-Shares

Historically, China A-shares were only available to mainland citizens, due to China’s restrictions on foreign investors.

This is still mostly the case, with exceptions now for big institutional foreign investors like banks and fund providers, including our favourite ETFs providers – iShares, Vanguard and Invesco.

These big institutions have something called an RQFII qualification, which allows them to buy A-shares.

The other share classes in theory are open to everyone these days, and can be bought by foreigners, though you may struggle on UK platforms.

These include China mainland B-Shares, as well as H, Red Chip and P Chip share classes which trade on the Hong Kong stock exchange.

ADRs

A modern development is that many of those elusive A-shares can now be bought indirectly through American exchanges, using American Depositary Receipts, or ADRs.

Note however that this is a certificate from a bank that represents the stock you’re buying, not the physical stock itself.

A qualified U.S. bank will purchase the real A-shares from the Chinese exchanges, and hold onto them, but list ADRs for that stock on the NYSE or the Nasdaq – which you can then trade.

One other convenient option you have to get exposure to China is to buy an ETF – more on this shortly.

Some Of China’s Biggest Stocks

The Great Firewall of China has long kept out Western technology companies from getting established within its borders. You won’t find Amazon there, but you will find Alibaba and JD.com.

You won’t find Google, but you will find Baidu. Instead of Facebook and Whatsapp, they use Tencent’s QQ and WeChat.

The point is, these companies are as important for China’s 1.4bn people as the FAANG stocks are for us in the West, and at least the following 3 should make their way into your portfolio in one way or another.

#1 – Tencent [SEHK:700] (Market Cap $416bn USD)

If you’re investing in Facebook for the potential that social technology has to shape the future, then you should want to own Tencent as well.

Facebook serves 2.7 billion people – Tencent similarly serves another 1.2 billion people, with almost zero overlap between the two. A portfolio including both of these giants covers most of the world’s adult population.

Tencent Holdings does not have an ADR listing in America, so look to the bigger platforms like Interactive Investor to buy Tencent shares on the Hong Kong Stock Exchange.

#2 – Alibaba [NYSE:BABA] (Market Cap $495bn USD)

Alibaba is the e-commerce company in China, their equivalent of Amazon as a one-stop-shop for everything.

And similar to Amazon, they are also leading the way with their cloud computing service, Alibaba Cloud.

They also own a large stake in Alipay, a major payment processing service used by 700 million people in China.

If one company personified the Chinese march towards the middle class, it would be Alibaba. You can find it listed on the NYSE as an ADR.

#3 – JD.com [NASDAQ:JD] (Market Cap $73bn USD)

A fierce rival to Alibaba is JD.com, far smaller in market cap but poised to grow, with a logistics and delivery service the equal of Amazon’s.

They offer a same or next day delivery across China, and have similar warehouse robotics and drone technology.

JD and Tencent operate as close partners, allowing JD to use Tencent’s social media apps as part of its shopping network. JD is listed on the NASDAQ as an ADR.

The Risks Of Investing In China

There are risks when investing in foreign countries: currency risk, regulatory issues, transparency, volatility, corruption, and possibility of war, to name a few. China has 3 key risks.

#1 – Political

The shady communist government could nick your money. It’s not likely, but it’s not inconceivable either.

Another way it could upset your portfolio is through its ability to crackdown on companies at will if they step out of line.

This happened to software company Momo in 2019 who had its Tantan dating app forcibly removed from app stores.

#2 – China Has An Underdeveloped Stock Market

But… it is improving, and there has been real progress in the last several years. China itself doesn’t have much of an institutional investing sector, and it’s A-shares market used to be 99% owned by normal people – retail investors – which led to the Chinese stock market behaving like a casino.

Now it is around 18% owned by institutional investors since throwing open the doors to approved foreigners, and is gradually becoming more stable.

This still stands in stark contrast to truly open markets like Hong Kong, the US and the UK, which are dominated by big investment banks.

Institutional investors are less reactive to short-term news, have better analysis tools and move in and out of positions slowly to manage profits, by keeping prices from moving too fast – in this way bringing order to a stock market.

While retail investors often trade on rumours, causing stocks to be significantly under or overvalued.

A study by Bloomberg in 2015 found that more than two-thirds of new Chinese investors failed to graduate high school – many investing with borrowed money based on faith in the government.

#3 – Problems Analysing Chinese Stocks

China has very different reporting standards to the UK and US, so understanding a stock’s balance sheet is trickier.

There is also believed to be a higher potential for fraud in their financial system, so less trust can be placed in a set of accounts.

The Best Way To Invest In China

We believe the best way to invest in China is through an ETF, and to forget individual stocks.

To get proper exposure to the China market, the right ETF can buy you ownership of all major stocks, including A-shares.

The MSCI China Index

There are a great number of ETFs and indexes that focus on parts of China, but this index gives us the full coverage we need.

It covers large and mid-cap China A-shares, B-shares, H-shares, Red chips, P chips and foreign listings such as ADRs. With 714 constituents, the index covers about 85% of the China equity universe.

ETFs that cover this index are few and far between. The cheapest one for UK investors is the Lyxor MSCI China UCITS ETF (LSE:LCCN), with an OCF of 0.29%.

Look at that growth. China is classed as an emerging market, but has been significantly outperforming the rest of the emerging markets.

This chart shows that China in blue has much higher momentum behind it than emerging markets as a whole, the yellow dot. A higher momentum means investors are backing China.

The MSCI Emerging Markets IMI Index

Another, cheaper way to get this same coverage is by investing in an ETF which tracks the MSCI Emerging Markets IMI Index.

China makes up 37% of the index, and the China part is an exact copy of the MSCI China Index which we just covered.

The ETF we use is the iShares MSCI Emerging Markets IMI ETF (EMIM), with an OCF of just 0.18%, and a typical spread of just 0.11%.

You may want to hold the Emerging Markets ETF, and top it up a little with the China ETF if you felt like you needed more China in your life!

ETFs and China

Although institutions can buy A-shares, many index providers choose not to include 100% of their value, as A-shares still pose a trust and volatility problem.

It was as recently as 2018 that MSCI started adding China Large and Mid-Cap A-shares to its Emerging Markets and China indices, increasing the holdings by many hundreds.

It is adding them in on a gradual basis, starting at 5% of their market cap in 2018 (being 1% of Emerging markets as a whole), and quadrupling to 20% in 2019, where it sits now (being 4% of the Emerging Markets).

If China becomes a free and open market and A-shares increase to full inclusion in the index, China would make up almost half the value of the Emerging Markets.

What We Do

For now, we feel the risk is too high to excessively ramp up China in our portfolio, and will stick to the MSCI Emerging Market IMI Index allocation, which incorporates the MSCI China index.

Mindful of growth potential, but also of Chinese government shadiness, we like to overweight the emerging markets slightly in our portfolios, which puts China at around 6-7% of the total equity for now.

This will be naturally increased as MSCI adds more A-shares into the index, and as China continues to grow.

How are you investing in China? Let us know in the comments below.

Check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

Stock Market

Triple Your Pension Income – Optimal Safe Withdrawal Rate

How big does your pension pot need to be? The answer comes down to how big your income needs to be.

A basic retirement income doesn’t actually need to be that big – remember you’ve likely nearly paid off your house and sent the kids off packing by the time you can legally draw your pension.

Which.co.uk says the average pensioner spends just £12,500 a year.

Using an inflation linked lifetime annuity with Aviva, shockingly you’d need a pension pot of £700,000 to achieve this.

However, the average private pension pot for 55-65 year olds only stands at £105,000, which translates into a meagre £1,900 a year income using an inflation linked annuity.

The pathetic returns on annuities means that if you’re still young, you need to either start ramping up your monthly pension contributions big-time, or know how to squeeze every last penny out of your pension pot by using the stock market.

In this article we’ll show you how you can triple your pension income by trusting in the stock market, and for all you under-55s out there, hopefully get you thinking about whether you’re putting enough aside for retirement in the first place.

The New Approach To Pensions

It used to be that on retirement day you would legally have to buy an annuity with your pension pot. No longer. You still can, but the returns are a joke.

The Annuity approach pays you an income by swapping your pension pot for an insurance product – it’s the low-risk, terrible-return approach that guarantees you a basic income.

How basic? Well, to confirm what we suspected about annuities, we ran a quote through Aviva for the average UK pension pot size of £105,000 and were quoted a £1,900 annual income, inflation linked.

That’s equivalent to a 1.8% rate of return, but with all your capital surrendered to the insurance company – don’t let them have it!

The new approach to pensions is the Drawdown method – continuing to hold investments with your pension money, and drawing an income from them – rather than seeking certainty from insurance products.

The drawdown method weighs likely market returns against your likely lifespan, and trusts in capitalism to see you through. The rest of this article assumes we follow the Drawdown approach.

Risks Of The Drawdown Approach

If you get the Accumulation stage a bit wrong for a while, you can always course correct.

But in the Withdrawal stage, being old and possibly infirm, you probably can’t just go back and get a job if your pension income is insufficient to live on. You’re stuck with the cards you’ve dealt yourself!

You’ll also need a plan for managing longevity risk – the risk that your cash will run out before you pop your clogs. And finally, there’s sequence risk.

Sequence Risk – The Risk Of A Bad First Decade

Getting a good rate of return is more important in the early years of retirement.

We know the stock markets average around 5% returns after inflation – that’s 8% nominal returns minus 3% inflation. But that’s just an average.

Here’s 2 scenarios. In both, we retire at the earliest possible pension age for our generation, age 58, and have a good innings until age 88.

Scenario 1: In the first 10 years your investments perform terribly, returning around 2% after inflation. We get to enjoy some good times in the decade before we croak, at 8% over inflation.

Scenario 2: Here it’s the opposite, with the good times happening early on and our final years spent grumbling at the news and chuntering that the young-uns are messing everything up: “those damn kids!”

So what’s the difference? In Scenario 1, we run out of money at age 76. In Scenario 2 we outlive our money.

Safe Withdrawal Rates

To make sure we don’t run out of money, some clever boffin (who we’ll get to soon) came up with the concept of a safe withdrawal rate – the amount you can cream off the top without damaging your pot.

You might have heard about the 4% rule. This is the amount you can withdraw safely from an American portfolio. It’s the amount you take out in year 1, and then you adjust it for inflation thereafter.

UK researchers might quote you closer to 3%.

This is because the UK stock market has underperformed the US on average by around 1% over the last 100 years, and bonds by around half a percent.

But these academics are living in the past – there’s no barrier now stopping UK citizens owning a majority of US market funds instead of UK ones!

Here’s the UK funds version – there are 86 blocks of 30-years between 1900 and 2015. 1900-1929, 1901-1930, 1902-1931, and so on.

We can see that the worst-case real-world scenario was 3.1%.

Pensioners using this rate would have survived financially through 2 world wars, the Great Depression, several recessions and the risk of nuclear war, without denting their portfolios at all!

A similar history applies for US funds, at a safe withdrawal rate of 4%.

Layering The Cake

The clever fellow who came up with the Safe Withdrawal Rate, Bill Bengen, suggested that it can be increased by adding layers like you would to a cake.

You can take that 4% and ramp it up quite significantly by making your retirement plan smarter.

Layer 1 – Adjust For Spending Patterns

Older people spend less. It’s a fact. New retirees in their 50s and 60s will spend about 50% more than they spend by age 80. We should recognise this in our retirement plan.

Here’s a tried and tested way to do this gradually: if you skip your inflationary income rise on every market down-year – that’s on average once every 4 years – history shows you could have added 0.6% to your initial withdrawal rate.

Layer 2 – Asset Allocation

The 4% rule is based on a 50/50 portfolio split of equities to bonds, but according to the research, you could sack off bonds, and have 100% allocation to equities instead. “Blasphemy”, we hear you say. “Pensioners need bonds to stabilise their pension!”

Except, interestingly, the history of the last 115 years tells us that a 100% stocks portfolio would have survived with a higher safe withdrawal rate than one split 50/50 stocks to bonds according to Bengen’s models – 0.5% higher.

But we do hear you. We ourselves probably wouldn’t want 100% in equities in old age, even if it does have the best history. We’d sleep better at night with some diversification.

Layer 3 – Small Caps

Further studies show that having 25% of your portfolio in small-cap stock funds over the last hundred years allowed for a higher withdrawal rate even in the worst years.

Doing this would have in fact added 0.4% to the safe withdrawal rate.

Layer 4 – Probability

This is the final layer, and up until now the cake could be baked so as to remain whole for your lifetime. But this final layer accepts that you won’t live forever – the longevity risk.

By running 10,000 simulations of different periods of stock market history, it’s been calculated that adding an extra 1% to your initial withdrawal rate gives an 83% chance that you won’t run out of money.

And that’s increased to an 87% chance of success when we factor in the high chance of dying before age 88 – i.e. 30 years after retiring at 58.

That means 13% of the time, this strategy will fail – in almost all cases, it will be due to sequence risk – the risk of having a bad first decade.

So, failure doesn’t mean you just keep ploughing ahead – you’ll get an early warning from the markets and course-correct in the early years, maybe by downsizing your home or living less lavishly to make up the difference.

Whether a much better lifestyle in retirement is worth the 13% risk of having to course-correct is of course your call to make.

So… How Big Does Your Pension Pot Need To Be?

Let’s add all that up. Starting with 4% invested largely in US funds, we add 0.6% to recognise we spend less when we’re over 80, we add 0.5% because we’ve sacked off bonds, we add 0.4% for having a quarter allocation to small-cap funds, and we add 1% in exchange for a 13% chance of course-correction.

That’s 6.5% total; or £6,800 from the average £105,000 pension pot. Still not enough! But triple what you’d get with an annuity (£1,900); or double the 3.1% UK unadjusted withdrawal rate (£3,300).

Here’s how big your pension pot needs to be under each approach to give you just £12,500 per year:

Annuity @1.8% = £694,000 Pot
UK Standard SWR @3.1% = £403,000 Pot
US Adjusted SWR @6.5% = £192,000 Pot

The average 55-65 year old therefore has about half as much saved up as they actually need for a basic retirement using the highest risk approach – and nowhere near the amount needed to use a low risk annuity.

Should You Use Such A High Withdrawal Rate?

History tells us that this works, and the rates are designed to protect you from the worst-case scenario.

But you also have to be able to sleep easy at night. So maybe somewhere between 4% and 6.5% then, depending on your attitude to risk.

Ideally though, and what we plan to do, is build up such a large pot that you don’t need to withdraw anywhere near 4% and still live very comfortably. This only happens by hustling now.

Building The Pot

Hopefully this study highlights the dangers of neglecting to build a sufficiently big pension portfolio.

And it’s important to have visibility over it so you can make sure your future is being managed properly.

We’ve both consolidated our old work pensions into SIPPs for just this reason. Left unchecked, they could otherwise be poorly managed by workplace pension providers as we proved in this video:

YouTube Video > > >

By using a single SIPP to consolidate your old pensions, you can tailor your growing retirement fund to your risk profile, reduce your ongoing fees, and have oversight of the total balance – so you can easily check if you’re on track.

We looked at the Nutmeg SIPP in that video, and we think it’s one of the best for a set-and-forget strategy. You set the direction, and they do the rest.

We’ve arranged for you the first 6 months without fees when you open your SIPP through the link on the Offers page. Check it out and see if it’s the right SIPP for you!

How big is your pension pot? Is it going to be enough? Let us know in the comments below!

Check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

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