Why Your Pension Is Failing You – SSAS/SIPP/Workplace Pensions

Unless you’ve taken a day to sit down and really review your pension situation, your pension is almost certainly failing you.

In the UK most of us just trust our financial futures to our employer, and just assume that our workplace pensions are being well managed – and that’s if we’re trying to be sensible.

The less sensible among us will be trusting their futures to the state pension – which is like putting your trust in a tiger not to eat you.

But this video is aimed at those who want their private pensions to shine, to outperform the mundane, and to set you apart in your retirement from the majority who are just barely able to get by.

We’ll show you how to get your pension working for you: how to withdraw money from it before you’re retired, how to break free of mediocre returns, how to add investment property into your pension, and how to dodge tax to the max while staying within the law. Let’s check it out!

Alternatively Watch The YouTube Video > > >

What Normal People Do

Most people in the UK of working age contribute to a Defined Contribution workplace pension. As well as this, they will hold several other workplace pensions from past jobs, probably one from each.

A UK worker will change employer every five years on average, which means your average 40-year-old will have 4 pensions on the go; 3 of which are no longer contributed to.

We were a bit more trigger-happy with the job-quittings when we were in the workforce, and between the two of us we’d racked up 11 workplace pensions by age 32 – none of which were doing a great job for us!

The problem with many workplace pensions in the UK is that they are UK biased. More than that, they are overly keen on low performing bonds.

One of MU co-founder Ben's old workplace pensions

Above is the breakdown of one of my old workplace pensions. Around 30% of it is bonds. For a 30-year-old, that is far too unambitious.

Bonds can be useful for people approaching pension drawdown age. But for someone with 3 decades to go until that happens, it’s frankly laughable.

Also, 38% is in UK equities – notorious for its low returns in recent decades. Why is this pension not investing larger amounts in the USA, the world’s economic powerhouse?

The answer? Workplace pension funds are stuck in the past, still conforming to home bias from the days before global investing became cheap and accessible.

Impact Of Home Bias And Too Many Bonds

The presence of too much UK equity and bonds is clear from the returns. This Aegon pension returned 5.5% annually over 5 years, which is 30% total growth:

Underwhelming performance of the old workplace pension

Over the same timeframe, a typical globally diversified equity fund – VWRL – returned 7.3% annually, which is 42% total growth. Lightyears ahead.

The problem with turning a blind eye to your pensions until you’re ready to retire is obvious – you’ve left it too late to make any necessary improvements.

The optimum time to get a grip on your pensions is the day you start your career – failing that, the next best time is today.

Finding out that your pension was invested in underperforming assets for the last 40 years at age 60 is not ideal. And yet this is what the majority will do.

Why Workplace Pensions Can Get Away With Poor Performance

They need to impress your employer – not you. And the wage-slave making the pensions decision for their company is unlikely to know much about investing.

A workplace pension provider could be chosen on the basis of sweet-talking the HR department better than the competition, rather than a proper long-term appraisal of their investment strategy.

What The Rich Do

Rich people don’t hold their futures in employee pension schemes. These schemes are too restrictive, with annoying rules that forbid you from accessing your own money until you’re at least 55.

Such rules don’t apply to the rich, nor to those aspiring to be rich who follow in their example.

They know better, and make use of a little-known type of pension called a Small Self-Administered Scheme pension, known as a SSAS.

SSAS Pensions – True Financial Freedom

A SSAS is a flexible pension usually for company directors of limited companies, managed by you (or by trustees that you appoint). Don’t let the ‘company directors’ part put you off – both Andy and I are company directors, as are many people who invest in property, as can be anyone who puts their mind to it.

We’ll come back to this point in a bit, but first let us tell you why you need to be aspiring towards having your future invested in this type of pension.

Once established, a SSAS pension can invest in all the normal assets such as stocks and shares, commodities, corporate bonds, and gilts – but it can also hold any investment property that you buy, and even shares in your own business.

It also gives you vast additional powers and opportunities, including getting your hands on your pension money whenever you need it, instead of in your late 50s like with other pensions.

Why You Should Have A SSAS Pension

#1 – Get Your Money When You Need It

You are allowed to make a loan of up to 50% of the value of your pension to your company for any use.

For example, you could use the funds in your pension to buy out part of your own company (i.e. giving you, the owner, a load of money). Alternatively, it could be structured as a loan to yourself.

Can you imagine dipping into your workplace pension at age 30? Well, you could, if your pension was a SSAS.

#2 – Invest In Property

As we touched on already, pensions don’t have to just invest in stocks and bonds – with a SSAS, you can use your pension cash to buy investment properties too.

One of our biggest annoyances with ISAs is that they can’t be used to buy properties (outright – we don’t mean REIT funds).

Well, a SSAS is an alternative tax-shielded product that you can do just that with, and still have some flexibility to access to your money at any age.

#3 – Very Tax Efficient

Contributions can be made by both you and your company – and because your company is probably you, this means tax loopholes!

SSAS pensions get the same basic tax benefits of other pension types, including:

  • Pension contributions are deductible against tax;
  • No income tax charge on investments;
  • No capital gains tax on investments;
  • A tax-free lump sum on retirement.

But SSAS pensions get extra tax benefits too:

  • Commercial property can be bought by the SSAS and leased back to your company, which may have tax advantages (also possible in some SIPPs);
  • Loans can be made to your business – the interest, which is effectively payable to yourself, could be tax deductible;
  • You have greater control over accessing lump sums, which might have tax advantages over normal pensions.

#4 – Fees Are Fixed

Fees are typically charged on a fixed basis rather than the traditional percentage charges for most normal pensions, and is shared amongst the members.

The ones we’ve seen cost between £300-£1,000 a year, no matter the size of your pot. This is great for wealthy people – probably not great for smaller pots.

How To Qualify

You usually need to become a company director, which can be of your own limited trading company.

Becoming a company director is not difficult – setting up a company online takes a few minutes and costs just £12 to do on the UK government website.

SIPPs – For Getting Your Finances In Order Now

Being a director with a SSAS pension is something cool to aim for maybe in the future when you have large funds to take full advantage.

But to help you get there, a SIPP is the perfect pension product for taking back control of your future, today, that anyone can open.

A SIPP acts like a workplace pension, but has the following advantages:

  • You can consolidate all previous workplace pensions into one SIPP which is under your control – what you invest in is completely your choice, not some pencil-pusher in HR;
  • The returns are therefore likely to be much better if you choose a more sensible mix of assets;
  • The fees are usually lower than what a workplace pension charges you.

The simplest SIPP we’ve come across is run by Nutmeg. It’s also one of the highest performing against their peers. You can see here how it smashes the competition:

Nutmeg SIPP performance

Over that same 5-year period as we discussed earlier, Nutmeg produced a 7.5% annualised return after fees, similar to the 7.3% we’d have expected from a global fund.

Nutmeg is a robo investing platform, offering ISAs and SIPPs. When you open one of these, you’ll be asked a series of questions, so that your portfolio is tailored to you.

Gone is the one-size-fits-all approach of the workplace pension, which tries to work for everyone, but ends up working for no-one.

You’ll also get 6 months without any fees if you find your way to Nutmeg via the link on the Money Unshackled Offers page. Check out the Nutmeg offer there if you want to open your own SIPP and get to grips with your pensions.

When A Workplace Pension SHOULD Be Used

There’s no doubt in our mind that a SIPP is preferable to an old workplace pension. But what about your current, active, workplace pension?

Your employer is probably matching your contributions to your current pension, in which case, that is a 100% return in year 1 and is free money which in most cases shouldn’t be turned down – regardless of how crappy the underlying investments may be.

For instance, I opened a SIPP for transferring my old workplace pensions into, which I’d accumulated from many previous jobs.

But I would always contribute into one current workplace pension, for the tax-free top-ups my employer would pay in alongside my own contributions.

ISAs

Finally, you should ask yourself, do I even need a pension?

If you are able to set aside less than £20,000 a year, have no employer contributions, and are a basic rate taxpayer, then a Stocks and Shares ISA might be preferable to a pension.

You get similar tax benefits – the tax break comes when you draw from it, rather than during accumulation as with a pension, but it works out roughly the same in the end.

And you can retire whenever you feel ready – instead of a predetermined minimum age of 58.

As for us, we currently use SIPPs for our pensions, but as company directors we will be looking into transferring those into a SSAS as our wealth gets bigger.

But at least with our SIPPs, our investment returns are strong, our fees low, and our futures are in our hands.

What will you be doing with your pensions? Join the conversation in the comments below!

 

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

How Much Money We Make On YouTube With 30k Subs

How much money do small youtubers really make? We’ve all heard the stories of how some kid makes millions every month reviewing toys and how gamers are making serious moolah just playing games. Is this the success that everyone can expect or are these the exceptions that break the rule?

It goes without saying that most creators will never get the sheer volume of views that these superstar YouTubers get. But does that mean you can’t make a good living from YouTube? Here at Money Unshackled we’ve laid the foundation for a very successful business that primarily built up an audience through YouTube.

In this post we thought it would be interesting to open up our business model with you guys, so you can see exactly how much a small YouTube channel makes every month with close to 30,000 subscribers.

A lot of people think that YouTubers get paid based on their subscriber count or number of video views, but this isn’t correct! We’re going to show you what this YouTube channel has made and what really drives that income! Let’s check it out…

Alternatively Watch The YouTube Video > > >

New visitor? Don’t forget to check out the Offers page for freebies and discounts, including free stocks worth up to £200, no fees for 6 months on a Nutmeg investment ISA or pension, and even cash back on your utilities!

A lot of YouTubers have done videos on the “how much we make” topic but many of the ones we’ve seen clearly don’t fully understand all the different metrics that YouTube provide to creators. To be fair there is a lot of ambiguous acronyms out there such as CPM, Playback-Based CPM, and RPM. If you ever google these trying to find an average, you will get a thousand different answers.

Also, in some videos we’ve seen some YouTubers have even tried to predict other YouTubers’ incomes using a website called Social Blade. Social Blade is a great website if you want to look at a specific channel’s views or subscriber numbers, but the estimated earnings are way out.

Taking our channel as an example, Social Blade is predicting that we make between £345-£5.5k a year in advertising income. They’re basing this on a default CPM of a measly $0.25-$4.00 USD. Thankfully, our actual CPM is much higher than this, which you’ll soon see.

What The Heck Is A CPM?

CPM stands for Cost-per-mille, which means cost per one thousand ad impressions. Mille is Latin for one thousand – not a million as you might expect.

An ad impression is whenever an ad is served to a viewer irrespective of whether they skip it or not. There could be multiple ads on a video or there could be none at all.

In other words, CPM is the amount of money that advertisers will pay for one thousand impressions.

From what we’ve been able to work out, our CPM is on the high end when compared with other channels with an average of £12.35 per one thousand ad impressions. But as you can see it does tend to fluctuate within a range.

More recently though YouTube have moved away from CPM and are instead using Playback-based CPM as the preferred metric.

Playback-based CPM is very similar but rather than counting multiple ad impressions on the same video it just counts them all as one. This chart looks identical to the CPM chart just seen but it does differ slightly, giving us an average Playback-based CPM of £14.94.

So, what does this mean in terms of a YouTuber’s income? Firstly, it is the gross revenue figure, which sadly is not what we get paid from YouTube. They take a slice of 45% – leaving the creator with just 55%.

What Is RPM?

A more meaningful metric for working out what a Youtuber got paid from ad revenue is RPM, which means revenue per mille.

This time instead of being based on some confusing count of impressions, it is based on simple video views, whether they are monetised or not. Also, the revenue is the actual revenue that the YouTuber receives after YouTube have taken their cut. Our average RPM is £8.30, which is pretty good.

On all these graphs you may have noticed a few things:

  1. They don’t start until April 2019; and
  2. Income per view seems to vary hugely from month-to-month.

Although we started making videos in February 2018, we didn’t qualify for the YouTube partnership program until over a year later. You need 4,000 hours of watch time in a rolling 12-month period and 1,000 subscribers before ads can be switched on.

The reason that both CPM metrics and our RPM fluctuate so much is because there are a million different factors that drive how much advertisers are willing to pay. Seasonality plays a factor, location of your audience is huge, and so is the topic of your videos.

We saw a massive surge around March to April 2020 because investing suddenly became the hot topic due to the market crashing, and we presume advertisers were willing to pay more.

CPM and Views on a popular video of ours

Also, we had one video in particular that had a very good CPM whose views suddenly skyrocketed as you can see here by the green line.

Does Your Audience’s Geography Matter?

Yes, the location of a YouTuber’s audience is a huge factor in determining how much they get paid.

Advertisers from wealthier countries such as Australia, Europe and the US are willing to pay more for that same advertising space. We actively target UK investing, which is handy because we get a good CPM for our UK based audience, averaging £12.48.

That definitely does not mean all UK channels will receive that high CPM, but you are far more likely to earn a good CPM from the UK than you would from India for instance. Our CPM from India is just £1.62 – 8 times lower than what we get from the UK.

How Do Views Compare To Ad Revenue?

On our channel we can clearly see that more views tend to lead to more advertising revenue. Our channel has steadily grown to 180,000 views a month and ad revenue has more or less followed suit. However, there has been a drop in the last couple of months, which was due to a lower CPM – perhaps due to seasonality after Christmas.

For the first several months we barely got any views. In fact, that little bit at the start was almost all due to paid-for promotions. We were god damn awful – no wonder advertising our videos didn’t help us grow.

How Does Total Subscribers Compare To Monthly Views?

So, we’ve seen that views are highly correlated with ad revenue on our channel but what about subscribers?

We have had amazing success in keeping our audience watching, so a special thank you to you guys who keep coming back. From what we’ve seen online, lots of small YouTube channels don’t have this consistency. For us there is clearly an overwhelming correlation between Total Subscribers and Monthly Views.

Although we’re just short of 30,000 subs, we can safely say that we can expect to get around 200,000 views per month from a subscriber base of that size.

The subscriber count is often referred to as a vanity metric, but we can say with certainty that more subscribers do lead to more views, which in turn leads to more ads, which brings home the bacon.

How Much Revenue Have We Made?

In 2020 this channel brought in £14,000 in ad revenue alone, which isn’t bad considering for half of the year we were working on it just in the evenings and weekends. Of course, this isn’t the full story, and if it was it certainly wouldn’t be worth starting a YouTube channel from a financial perspective.

When we started YouTube, we set out to create a proper business in its own right. We were never going to be satisfied with £14,000 in an entire year. Based on the hours put in that would be less than the hourly minimum wage!

Most successful YouTubers, especially the smaller channels like ours, set up multiple income streams. A popular income stream for many is by asking for donations such as via Patreon. We never did this!

The bulk of the Money Unshackled income comes from affiliate marketing and sponsorship deals, and these combined typically make up around 70-90% of this YouTube channel’s income, making ad revenue a sweetener and not the reason to start a channel. Total revenue in January alone was over £8,000.

In fact, this is the same business model Money Saving Expert use. That site started with an email newsletter and funded itself with affiliate links. Likewise, we have built a community of people on YouTube who are interested in investing. We have also laid the foundations for a successful website and more recently an email newsletter.

A lot of YouTube channels – or businesses as they should be called – fail because they are too generic. We talk exclusively about money and investing, which means investment platforms and the like want to work with us and give our viewers special offers. If you talk about anything and everything, what advertisers will pay top dollar to reach your audience? – probably not many.

Another great income stream for many YouTubers is through selling merch – Hoodies, T-shirts, mugs and so on. We assume cool, trendy YouTubers will have the most success here. Other than creating this epic Money Unshackled branded Wage Slave mug we’ve not yet gone down this avenue.

When Can You Start Making Money?

We just released a video and post about 3 side hustles that you can start today – Two of which the money will start flowing in immediately, but the 3rd, affiliate marketing, which can be done via YouTube, is a very slow burner. It starts at zero and can potentially grow to make you a millionaire.

As we already said, you can’t enable ads until you meet the eligibility requirements, which will take some time to achieve – for us it was just over a year. Also, if you’re so small that adverts can’t be activated, few companies offering affiliate schemes will want to work with you either, nor will anybody throw money at your Patreon account.

From personal experience we found that nobody wanted to work with us until around 1,000 subscribers. The more subs we had the more credibility this gave us, and more companies were willing to work with us.

Looking back, it took us an entire year to make our first £50. With hindsight this was clearly worth it but so many wanna-be YouTubers never make it this far. That’s a lot of time and effort to yield nothing in return. If we didn’t have other income streams, it would have been very difficult indeed.

What do you think of YouTube as a way to make money? Has this behind-the-scenes post inspired you or put you off? Join the conversation in the comments below.

 

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The 3 Big-Money Side Hustles To Start In 2021 | £££

How can you make decent money outside of your job?

The long-term solution that we tout on this channel is investing. But investing a few grand is unlikely to bring much of a change to your income today. 

No. What you need is a side hustle – something you can do that brings you in a second income, alongside your job.

Some side hustles can add hundreds, even thousands of pounds to your monthly income, which we can confirm from experience.

This can be achieved all while working around your schedule, and without a boss breathing down your neck. 

Here we’re looking at what we think are the 3 best ways to make serious money outside of your job, that anyone can do!

Alternatively Watch The YouTube Video > > >

Side Hustle #1 – Matched Betting

Big Payouts Up Front

Perhaps the easiest way to make money from home right now is with Matched Betting – which despite the name, is not gambling.

When I (MU co-founder Ben) did it, I made the equivalent of around £500 a month using the OddsMonkey package, for just half an hour a day, but I wasn’t really even trying.

There are countless examples in the Matched Betting community of people making way more than this.

Your profits will depend on how much time you are willing to dedicate to it. A novice can start doing this side hustle and be making many hundreds a month for less than an hour a day. 

But… What Is Matched Betting?

Basically, it involves placing 2 bets – 1 on both possible outcomes of a sporting event – which, when done properly, means one of your 2 bets is going to win!

In doing this, you temporarily lose a small amount of money, being the bookies’ profit margins. But this is not a problem because the beauty is, you are then awarded a free bet – which might be £10, £20, even £100! And you make your money by turning these free bets into withdrawable cash.

With this, you repeat the same process as before, but this time using the free bet!

Whatever the outcome, you are in profit!

That is as complicated as it needs to be – logging into your betting accounts once a day, placing 2 bets, once of which is sure to win, and then going about your daily routine.

You can choose to do several pairs of bets each day, if you want to make more money.

Hustling On The Job

It might be a bit cheeky, but a friend of ours who recently got into Matched Betting has been doing it casually during office hours – now that working from home is a thing – after 3 months he’s made close to £1,500 from it. 

He’s effectively getting paid twice for his time! And again, he’s not exactly busting a gut – he could be putting in more hours for more money if he felt like it.

On our recommendation he’s done it using OddsMonkey too.

Simple Example

The simplest offer will give you something like £20 in free bets when you sign up and place a small qualifying bet of, say, £5.

Following the simple guides on OddsMonkey, you’d get most of that initial £5 back too. And then the £20 is yours!

Beginner Guides on OddsMonkey

Usually, you’ll have to make a bet with it before you can withdraw it, but OddsMonkey hold your hand through the entire process with step-by-step guides – if you follow the steps, it’s a guaranteed win!

If you’re interested in giving this side hustle a go, check out the unique offers we’ve got for you in affiliation with OddsMonkey here, which currently include 60% off the first month, or 12 days of access for just £1.

At the link, you’ll also find great resources including a detailed video guide and “How-To” article explaining the Matched Betting process in full.

Side Hustle #2 – Crypto Mining 

What Is It

You can again make hundreds of pounds a month from this, but it requires an upfront investment in hardware, and the upfront investment scales with how much income you want to make. We’ll get to exactly how much you can make soon.

This side hustle is about creating bitcoins and other cryptocurrencies out of thin air, which can then be sold for cash.

When bitcoin was first invented, the creator decided to control the supply of the currency through a process called mining, meant to mirror the real-world slowly increasing supply of gold. 

Mining means that bitcoins were gradually created from nothing on normal computers around the world, by normal geeks running programs on their home PCs that solved equations. It’s worth pointing out that these mining programs run automatically – the person doesn’t actually do anything.

Whenever their program hit on the right answer, the nerd would receive a bitcoin. 

Bitcoin’s pioneers probably never realised that it would one day become a money-spinning side hustle for over 1 million people!

How Does Mining Work

You need 3 things:

  1. An account on NiceHash.com, which is where the mining is done;
  2. An account on a crypto trading platform – we use Coinbase;
  3. Graphics card(s)

Mining crypto needs a tonne of hardware, namely graphics cards (known for their high processing power) which you attach to your PC.

Example Mining Rig (Credit: Strukt/Shutterstock.com)

A rig like this using more modern graphics cards is capable of at least £250 passive income a month at current crypto values.

It works like this – you open an account on NiceHash.com, hook up one or more graphics cards, and the website starts running equations through them, which will create cryptocurrency over time.

The simplest way to make money is to mine in Sell mode, which means any crypto you mine becomes the property of someone else on the internet, but you receive a flat daily fee in Bitcoins in return.

Doing this, you would typically mine Etherium, Conflux,   or some other minor cryptocurrency, but be paid daily in Bitcoin. 

Although it is possible to mine Bitcoin directly, it takes too much time and is expensive.

You transfer your earned Bitcoins out to your wallet on Coinbase. NiceHash have their own wallets, but they got hacked a while back, so we’d stay clear!

Coinbase is far safer, the market leader, and rated top crypto platform by Investopedia.

The Upfront Cost

This side hustle requires a small upfront investment in graphics cards. The type our mining nerd friend uses is an NVIDIA RTX 2070. These cost around £500 (but graphics card prices change all the time due to availability) and are at the top end of the value range. 

You might want to buy several of these because the income you can make scales with the number of graphics cards you have, for the same limited amount of effort on your part.

Buy right, and you can even expect to get most of your upfront investment back. We’ve been told that NVIDIA graphics cards hold their value better than AMD alternatives. 

How Much Money Do You Make?

As you are mining various cryptos and being paid in Bitcoin, how much you make depends in part on when you sell the bitcoin (as it’s always fluctuating in value), and on the value of the cryptos you’re mining.

When prices are high, you make more money!

At time of writing, 1 card could make you £60 a month. You could buy 5 cards for £2.5k and make around £300 a month in perpetuity.

This calculator tells you the profit you’d make for each make of graphics card, after factoring in the electricity costs of keeping your computer on all the time.

Once it’s set up, this side hustle is almost 100% passive. Just check every-so-often that your internet is still connected!

Side Hustle #3 – Affiliate Marketing

It’s All About Scale

The ultimate goal of affiliate marketing is scalable income, or at the very least, breaking the link between your time and your income.

The idea is that you promote other company’s products and receive a share of the revenue.

The way to do affiliate marketing properly is by using the internet to build your reach. Your time is better served speaking to a million people than to ten.

Build Something

You might start a website or blog about a subject you feel passionate about, and then share products and services you believe in with your followers.

The most successful affiliate marketers achieved success not by pursuing money, but by wanting to share something with the world.

You should first set out to build some useful content that people will find value in – and only then you can monetize it.

You Have To Build Something (Credit: Aa Amie/Shutterstock.com)

Long Term Pay-Off

Affiliate marketing is rarely quick to get off the ground. First, you need to build a marketing platform, where you can host your affiliate links.

Look at MoneySavingExpert. Martin Lewis has built the mother of all marketing platforms, aimed at savers. We’re talking about the entire MoneySavingExpert.com website, email newsletter, and social channels.

Littered through that site are affiliate marketing links , that are constantly bringing in money. But that’s nothing to do with the reason people visit the site in the first place.

They visit because they know there will be useful information there about savings accounts and credit cards, etc.

Building a site like this that people wish to visit can’t be done overnight.

While a side hustle like Matched Betting results in immediate payoffs, affiliate marketing takes a while to get off the ground.

But it is in theory limitless in its profitability. It’s all about how big your audience is.

The Golden Rule For A Good Affiliate Marketing Side Hustle

Only promote products you truly believe in. Companies throw themselves at us to be affiliate partners,   but we have to ignore most of them.

To make a long-term success of an affiliate marketing side hustle, you need to put reputation before short term greed.

We only bring you offers for products and services that we think our audience want to use  and that we think can make you money, which we believe it is our job to do.

Why You Need A Side Hustle

If you want the confidence to escape a job you hate, the extra income from a side hustle can give you that confidence.

Or if you just want to make extra money without having to change careers or get promoted a bunch of times, having multiple incomes that work around your schedule can be life changing.

For us, every spare bit of cash we get our hands on we put into the stock market. Remember that with Matched Betting you can bag £500+ a month straight away, with no upfront costs.

Imagine investing an extra £500 a month over 20 years – factoring in compounding from dividends and capital growth at 8%, that could add around £300,000  to your net worth!

What side hustle are you currently involved in, or thinking of starting this year? Join the conversation in the comments below!

 

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

Should You Buy Premium Bonds

Should you buy Premium Bonds? Well, if you listen to your gran the answer will probably be yes, but if you listen to a mathematician who understands odds and median averages, then the answer is likely to be no.

We’ve been contemplating whether to do a post on Premium Bonds for a while now, and the reason we haven’t until now is because we always thought – who is silly enough to buy them?

But it turns out that Premium Bonds are owned by around 23 million people in the UK – that’s right, a third of the country! So, either there a lot of silly people in the UK, or we’re missing something.

In this post we’re going to look at Premium Bonds – what they are, the interest rate, who they’re for and who they’re not for, and everything else you need to know.

If by the end of this post you want to invest in the stock market instead, then check out the best Stocks and Shares ISAs here. Or alternatively, if you want experts to manage your investments, then Nutmeg is giving you the first 6 months without management fees when you use the link on the Money Unshackled offers page here.

What Are Premium Bonds?

The first thing that springs to mind when we think of bonds is a type of investment that pays interest. Usually at the end of a specified period you will get the face value of the bond back. In other words, they are essentially loans. The market value of a bond changes over time as it becomes more or less attractive to potential buyers, so if you decide to sell early you may get more or less than the face value.

However, Premium Bonds are different. The market value of a Premium Bond does not fluctuate, and you can cash it in at any time for the original value. Also, they don’t technically pay interest. Instead, each Premium Bond that you hold is entered into a monthly prize draw. And there you were, thinking this was a serious investment!

Premium Bonds are often referred to as a cross between a savings account and the lottery. It’s entirely possible to win a life-changing amount of money with them but we’ll soon look how likely (or should we say unlikely) this is. The difference with Premium Bonds is that unlike a traditional lottery, you never lose your stake, which is why Premium Bonds are often used as a savings account.

Where To Buy Premium Bonds?

Premium Bonds are issued by NS&I or the National Savings and Investments agency to call them by their full name. This is a government agency and can probably be best described as a ‘government savings bank’.

When you save with NS&I or buy their Premium Bonds, you are actually lending your money to the government.

The easiest way to buy Premium Bonds is directly on the NS&I website, and if you’ve found this article, we’ll assume you can search google and find it yourself. You can also buy over the phone and by post, but come on guys, who’s doing this in the 21st century?

What’s The Interest Rate (Prize Fund Rate)?

As of December 2020, the annual prize pool is 1.00%. If we consider a Premium Bond to be a type of Savings account, then this compares quite favourably. At time of writing, the best easy access online cash ISA on the market only pays just 0.4%.

1% might sound quite reasonable in today’s low interest environment but remember – this is an average pay out and you are likely to receive nothing.

When we consider that the odds of 1 Bond unit winning anything at all in any given month is 34,500 to 1, then Premium Bonds might not be as generous as first appear.

Historical Rates

What we’re looking at here is the annual prizes over the last 12 years. Today, the average prize is more than other available cash savings on the market, but from our memory you could have often beaten those historical average prize amounts. So, perhaps Premium Bonds are more competitive now than they’ve ever been.

How Are The Prizes Distributed?

Okay, so the mean average is 1%, but because there are some very large prizes this means there is less money for the other prize winners. Arguably, the median average is a better indication of what return you will get.

The mean average is what you’re probably used to by the word “average”. In this case you would take the total prize pool and divide by the number of Premium Bonds in circulation. So, with a current annual prize pool of around £1bn and roughly 100bn Premium Bonds, this is where the 1% mean average comes from.

The median average, however, is calculated by ranking the 100bn bonds in order of the biggest win to the lowest and taking the middle one, to establish what pay out the average person would get. This results in an exactly zero return.

In other words, the average pay-out is 1% if you include the overnight millionaires, but probability wise you will end up with precisely nothing for each individual bond held – much like a lottery ticket.

The top prize is £1m and there are 2 winners every month. Sounds awesome and this seems to be the main selling point used to entice potential savers. We’re not saying that NS&I are deliberately trying to mislead people, but we couldn’t find any easily presented information on the odds of winning each prize pool.

Prize Pool

Instead, they present this, which makes it appear that the prize pool is huge and that there are lots of winners.

With almost 3 million individual Premium Bonds each winning £25 or more it looks very generous. However, without context this doesn’t really say much at all – given there are over 100,000 million bonds in circulation.

We decided to crunch the numbers to work out what the chances are of winning each prize.

Odds of 1 Bond Winning in 1 Draw

The distribution of prizes changes slightly each month but for January 2021 the odds were as seen here.

What the table shows is the prize amounts and the number of pay-outs, with the lower prizes paid more frequently and the higher prizes increasingly rare. The next column shows the odds of winning this exact prize and the following column shows the odds of winning at least that amount.

The odds of winning the top £1m prize in a given month is 1 in over 50 Billion with a capital B. We both enjoy the occasional flutter, but to call this an outsider would be an understatement.

The next prize of £100k is paid out 4 times a month, and the odds of winning at least this amount still has astronomical odds of almost 17bn to 1. Even the odds of winning at least the lowest prize of £25 is unlikely with odds of 34,500 to 1.

What Are Your Odds Based On X Number Of Premium Bonds?

You won’t just own 1 Premium Bond. So, those probabilities are just the odds of 1 winning. You may own a few hundred or thousands. And there is a prize draw every month, so you will have multiple attempts to win.

Odds of Winning in 12 Months

This table shows what the odds are of you winning each prize if you hold the Premium Bonds for 12 months and therefore enter 12 draws. We’ve done this for a range of different Savings amounts.

If you had £100 you would only have a 1 in 42 million chance of taking the top prize. Even if you own £20,000 worth of Premium Bonds your chances of winning any of the top prizes are still minute, but you do stand a very good chance of winning multiple small prizes.

Before buying this quantity of Premium Bonds you should first consider the likely better returns available from the stock market.

What You’ll Win With Average Luck

Up until now we’ve talked about the probability of a bond winning a prize, but what is the probable return for a person based on the number of bonds they own.  The maths gets really complicated but fortunately money saving expert have hired some nerd to do it all for us.

Median Winnings

Using the calculator on that site we can see that someone with £100 with average luck will earn nothing. Someone with £1,000 would also likely earn nothing. Someone with £10,000 would likely earn just £75, and someone with £20,000 would likely earn £175 (still less than 1%).

Basically, the more bonds you own, the more likely it is that your returns are closer to the reported “interest” rate – though most people will win less.

Other Need-To-Knows

The minimum you can buy is £25 and the maximum is £50,000. All prizes are tax-free, and your money is 100% guaranteed by the Treasury.

Back in the day its tax-free status used to be a major benefit, but with the introduction of ISAs and personal savings allowances, it is quite easy to avoid paying tax on savings anyway.

Just like cash savings, the rate of return on a Premium Bond is unlikely to beat inflation over the long term. Inflation may be below 1% right now due to the Corona pandemic but on average you can expect it to be around 2-3%, so you will lose money in real terms – unless you hit the jackpot of course.

The Lottery vs Premium Bonds

According to the National Lottery, the odds of winning the Lotto jackpot are 1 in over 45m. Compare this to the odds of 1 bond winning the top prize, which is over 50 billion to 1.

To be fair though, this isn’t a like-for-like comparison because you don’t lose your stake with Premium Bonds, and there is a prize draw every month. But you do lose the chance to invest that money for better returns elsewhere, which you could have then used to buy Lotto tickets with!

Who Are Premium Bonds Good For?

If you don’t mind playing the odds and are happy to maybe get nothing, then Premium Bonds are an alternative to a bank savings account, with the very slim outside chance of making you rich.

So Premium Bonds are good if you want a bit of fun and are getting next to nothing on your savings in interest anyway. It must be a nice feeling if you get one of the big prizes.

Premium Bond prizes are tax-free, so if you pay tax on your savings because you earn more than your personal savings allowance, then it makes sense to own Premium Bonds if you want the safety of cash savings.

And finally, Premium Bonds are really best suited to those with more savings, say £5,000 or more. The more you can save, the closer you will get to the advertised prize fund rate.

Who Shouldn’t Buy Premium Bonds?

Other than a bit of cash set aside for current spending and an emergency fund, most people should be investing their money in assets like stocks, property, precious metals, and so on.

Only through investing can you achieve a good rate of return that will not only beat inflation long-term but could make you very wealthy.

Check out this video next, which covers the basics of how best to invest at all levels of knowledge, from noob to expert.

Do you own Premium Bonds and if so why? Join the conversation in the comments below.

 

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

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:

  1. it’s easier to do than ever before thanks to free trading apps;
  2. the economy melting down made people stop and think about their own finances; and
  3. 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:

K-Shaped Recovery

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:

Low Income Families Impacted The Hardest

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:

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:

Average Age Leaving Workforce (By Country)

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:

UK Real Retirement Age Trends

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:

UK Real Retirement Age Trends (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:

Wealth Gap History (Source: Ray Dalio)

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?

Pension Wealth Going Up (ONS Data)

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:

UK Regions - Predicted Retirement Age

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.

European Countries Retiring After/Before State Pension Age

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:

Years To Retirement by Savings-Per-Month

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 £500.

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:

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:

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!

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 Monday, Thursday and Saturday:

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.

Long Term Debt Cycle - Source: Ray Dalio

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.

Short Term Debt Cycle - Source: Ray Dalio

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.

Ending Higher Than It Began - Source: Ray Dalio

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:

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:covered

Budget categories example

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.

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