Does Being Fat Make You Poorer?

Every study into the connection between wealth and health looks at it from the angle of how wealth impacts health – how being rich or poor affects your fitness and longevity. We want to know if it works the other way around too – does being physically fit and healthy improve your ability to make money? Do the statistics support this?

And if there is an element of cause and effect between getting fit and getting rich, is it due to you gaining increased money making abilities… or is it due to other people such as potential employers giving you more opportunities if you’re in good shape physically?

In this video we’re finding out if a good diet and regular exercise leads to financial rewards. Let’s check it out!

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Written by Ben

 

Featured image credit: Ollyy/Shutterstock.com

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

Is Gen Z Being Cheated? Do THIS Or Be Left Behind

Much has been made of the financial gap between the young and the old. From house prices, to rents, to taxes, to university fees, to the changing demographics of the country, and even the response to the pandemic – all seem uniquely designed to screw with young people.

In this post we’ll be laying out all the perceived ways in which Generation Z are being cheated by the system. Then we’re going to fact-check that narrative and see if there are any ways in which Gen Z is actually better off.

Finally, we’re going to look at the actions that you need to take NOW to avoid being one of those left-behind. Let’s check it out!

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Issue #1 – Housing

The biggest planned shake-up of planning laws for 70 years has just been abandoned after a backlash from government backbenchers and their older home-owning voters. Reforms designed to help hit a target of 300,000 new homes annually by the middle of the decade will be watered down.

Planning reform is just one solution to the housing crisis that’s causing misery to so many young people who are unable to afford their own home. When reforms like this are cancelled it just compounds the problem.

Where 19% of 25-to-34-year-olds were private renters in 1997, that figure was 44% in 2017. And those aged 35-to-44 are three times more likely to be renters than they were 20 years ago.

Another problem with housing is that there isn’t enough stock of good, 4-bed-plus family houses.

The blame for this is often laid at the feet of the old, who continue to live in castles too big for their needs after their kids leave home, while young families are forced to live in new-build cardboard boxes.

But the true fault lies with the government. Their stamp duty tax on house purchases actively punishes people who choose to downsize.

An older couple choosing to help out the younger generations by moving out of their £500,000 4-bed house into a £350,000 2-bed face an immediate stamp duty tax payment of £7,500. It’s not surprising that they choose not to do this. The tax system is therefore structured to limit the availability of family houses for young people.

Regarding rising house prices and rent prices, are they ever going to stop? A decent-ish 2-bed flat in Birmingham rents for around £1,000 a month. How can a small cube in an apartment block cost so much?

The situation is echoed across the country, with people forced to pay ridiculous prices for substandard living conditions.

At our age, our parents’ generation were all about 10 years into paying off their mortgages on big houses.

Fact Check

Which really matters – house prices, or how much your mortgage payment is each month? The fact is that interest rates were much, much higher in the past.

We’ve taken the inflation adjusted average house prices going back to the 1970s, and worked out from the Bank of England base rate in each of those years roughly how much a family would be paying for their monthly mortgage, in today’s value of money:

Surprisingly, the current generation is living in one of the BEST times to buy a house, in terms of affordability, thanks to record low interest rates since the 2008 financial crash. People in the 80s, 90s and early 2000s had it much, much worse.

And looking next at the inflation adjusted house prices in isolation, though Gen Z really does have a deposit problem, it’s not a unique one – equivalent inflation adjusted prices were previously seen in the years before the financial crash:

Issue #2 – Taxes

Young people don’t seem as annoyed as they should be about ever-rising taxes – those who came before them didn’t have to pay anywhere near so much.

The tax burden right now is the highest it’s been since 1948, at 35.5% of GDP, and it’s expected to rise further before the next election. The trajectory since the 90s has been a steady upwards climb, and the government has big spending plans for the next decade that will need more taxes to pay for them, such as going green and ‘levelling-up’.

Tax is paid predominantly by those of working age. Pensioners, who are the ones who actually vote, tend not to tolerate big tax rises on their wealth.

Indeed, in a policy representative of the age divide, the government is hiking National Insurance taxes on younger, asset-poor workers so that the social care of older, asset-rich people can be funded without those retirees having to part with their wealth or insure themselves against the costs of care.

As the Resolution Foundation noted, ‘a typical 25-year-old today will pay an extra £12,600 over their working lives from the employee part of the tax rise alone, compared to nothing for most pensioners’. Pension income will not be subject to the levy.

You can double this hit when you factor in that Employers NI has gone up too by the same amount – an indirect tax on your future wage potential.

Fact Check

A counter argument in favour of the elderly holding onto their assets would be that those assets will eventually be passed on to Gen Z through inheritance. Indeed, inheritance may now be the only viable way that the average Gen Z-er can scrape together a house deposit.

But obviously, not everyone stands to inherit so you still have to question how fair this is.

Issue #3 – Education

University has been devalued as an institution. It used to be that only the brightest young minds went to university, and those who went found that it transformed their fortunes.

Now, everyone and his dog has a degree. People working on the checkouts in supermarkets have degrees. Degrees are increasingly worthless. It’s work experience that gets people the best jobs – not degrees alone.

But you still have to go to uni to be on a level playing field with your peers. You have to spend 3 years racking up £50,000 in student loan debt to get a basic job.

This generation is unique in that they almost have to be saddled with debt (which they’ll never pay off) just to get the minimum wage.

Young people suffered the worst financially from the lockdowns in terms of opportunities lost, damaged education, and careers interrupted – the current batch of school and college leavers have had a particularly rough couple of years.

Not only has their learning been disrupted but many of them have been given top grades as no exams were taken – damaging trust in the grading system:

Genuinely clever kids have the same top grades as kids who in other circumstances would have got lower grades. Will they unfairly miss out on places at the top universities as a result of the increased competition?

An obvious issue is student loans, which never existed in the modern form for previous generations. University even used to be free.

There’s no denying that university fees are high, but we don’t believe student loans are as damaging to your finances as they appear to be.

Fact Check

Student loans aren’t really loans: they’re a tax on your income that you only pay if you get a high enough salary, currently taxed at 9% on any income earned over £27k for Plan 2. That “debt” you think is weighing you down isn’t really doing anything of the sort.

The alternative to this student tax used to be to force the whole country to pay for your degree through higher income taxes.

Whether asking 20-year-old cleaners to pay the university fees of 20-year-old students through higher taxes is fair or not will depend on how you think a tax system should be run. There’s an argument that everyone benefits from having an educated population. We ourselves are split on the subject. Either way, the taxpayers would be footing the bill – the question is whether it should be just those with degrees paying that tax, or everyone.

Issue #4 – Changing Demographics

Mass immigration since the 1990s has pushed down wages in the UK. It’s simple supply and demand economics.

There was an almost infinite pool of people willing to take a limited number of jobs in the UK. That’s why you see office workers on close to the minimum wage, and why nobody wanted to be a delivery driver before the current food and fuel crisis. This has made it difficult for Millennials and Gen Z to earn good money from good careers.

Fact Check

Whether due to Brexit, or the knock-on effects of Covid travel restrictions, or both, there are signs that low wages are starting to improve in certain sectors, like truck drivers and brickies. But for as long as there are skilled social care nurses on low wages, the problem won’t have gone away.

What You Need To Do NOW To Not Be Left Behind

Despite a few positive signs, we think it’s fair to say that Gen Z is the first generation in a long time to be worse off than the generation that came before them.

Given this, it’s crucial that young people take extra steps that their parents and grandparents didn’t have to.

Step #1

To address your immediate money issues, you need to stop what you’re doing and reflect on your career. Do you need a better paid job or even a complete career change?

Could starting a business pay better than what you’re making now? One advantage of working for yourself is that you don’t have to split the profits of your labours with an employer.

Or could you top up your job income with a side hustle? Check out our matched betting guides for just one way to make extra money on the side for just a few hours a week.

Step #2

Something you must do is get a firm understanding of your pensions. Previous generations more or less had their retirements handed to them – you must work harder for yours.

Too many people are contributing too little to their pensions. The rule of thumb is that someone starting saving at age 20 should be putting aside 10% for the rest of their working career. Fall behind and you’ll have to pay much more later!

Where you invest your pension matters too. We’ve shown in this previous video how UK workplace pensions are geared towards underperforming investments, often with too little investment risk taken on the part of young people. The result is a mediocre growth rate and much smaller pension pot. We show you in that video how to take control of your own pension funds.

Step #3

Perhaps even more important than your pension is that you get on the housing ladder a.s.a.p, unless you’re happy to rent forever. With house prices growing ever higher, you’re only going to be left further and further behind the longer you fail to prioritise this goal.

If that means cutting back on the new car until you’ve built that house deposit, so be it.

If you know you won’t be able to afford a house for years to come, a good alternative would be putting your savings into investments like stock market funds and gold to protect against inflation. Those with houses already should be doing this too.

Houses, stocks and gold are financial assets, in the sense that their prices generally go up. Everyone who doesn’t own assets will be left behind financially in the years to come. Those who own assets will be swimming with the tide of inflation rather than against it.

Do you think Gen Z is being cheated? Join the conversation in the comments below!

Written by Ben

Featured image credit: View Apart/Shutterstock.com

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

5 Personal Finance Misconceptions Costing You A Fortune

Hey guys, in this post we’re going to be looking at some of the really common personal finance misconceptions that many people believe to be true. Some of these misunderstandings could be very damaging to your finances, so let’s set the record straight today. Let’s check it out…

As always don’t forget to grab your free stocks and free money when you sign up to any of a number of investing platforms and financial services. Check out the Money Unshackled Offers page for info.

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Misconception #1 – You Need To Avoid The Higher Tax Bracket

Everyone moans when the government has their hand in their pocket but it’s evident that many people don’t actually understand the tax system. Worryingly, some people believe that if they earn more money before tax, when they enter into a more expensive tax bracket, they’ll actually take home less.

The misconception is that when you earn over a certain amount and become a higher-rate taxpayer paying 40%, then this tax rate would apply to all your earnings. This is not true in the slightest.

In the UK we use a progressive tax system, meaning taxpayers will pay the lowest rate of tax on the first level of taxable income in their bracket, a higher rate on the next level, and so on.

For example, Max earns £60,000 a year. He gets the personal allowance of £12,570, which is tax-free. The 20% tax bracket currently applies to earnings between £12,570 to £50,270 or in other words the first £37,700 that exceeds the personal allowance. That means Max gets taxed at 20% on £37,700 and 40% on the next £9,730 earned.

For those who aren’t as fond with numbers as we are you can bang earnings into tax calculator, like the one at thesalarycalculator.co.uk, and it will tell you the amount of tax that will be paid.

Even if you don’t fully understand the numbers, it’s important to understand how the tax brackets are applied. Some people are even avoiding overtime or promotions because they think it will cause them to take home less.

If you’ve seen our videos or posts before when we’ve stated that’s it’s not worth working more, generally we mean that after income tax, NI, pension, and student loan deductions, the money earned is too small to be worth our limited and precious free time for the extra effort. But crucially, that overtime would result in more take-home pay.

Misconception #2 – Weddings Have To Cost A Fortune

According to hitched.co.uk the average cost of a UK wedding is £32,000. They surveyed over 2,800 couples to get to that eye-watering number. As someone who values their free time so highly, I cannot understand how that is the average cost of a wedding in the UK, which would take years of hard graft in order to save up for.

We reckon a couple could travel the world for more than a year and still have change to spare – some could probably travel for a few years on that budget and have the time of their life.

Alternatively, that’s a sizable deposit that could have gone towards their dream home. Or for those that want to set themselves free that is a very good-looking retirement pot that could easily grow to be worth more than £100,000 in just 25 years. And as for those taking on debt to get married… tut tut.

417) wedding expenses

Above are the top 10 expenses for the average wedding. £5.4k is spent on the venue, £4.6k on the honeymoon, £3.9k on food and another £1.6k on drink. Then you have huge amounts on the ring, dresses, photography, and on and on it goes.

Money Saving Expert have a useful article giving tips on how to slash the cost. We won’t repeat it all here, but one interesting point is that you can get an all-in wedding reception for £4,500 … at Wetherspoon’s. It includes a three-course meal with wine for 100 people, a DJ, decorations and a wedding planner. And apparently this isn’t just any Wetherspoons, it’s a swanky pub in the heart of central London.

Fair enough that might not be to your taste, but the point is that there are loads of stories of people getting married on the cheap – and in many cases for even less than the cost of a swanky Wetherspoons reception.

As someone who doesn’t particularly care for weddings, before even spending a penny I’d encourage you to first consider whether you’re getting married because everyone else does or whether you actually want it. Sounds obvious but many people are too busy going through the motions and following society’s life plan that they never consider what they actually want.

Misconception #3 – I Can’t Retire Until I’m 65+

This is a two-pronged misconception. Many people believe that they cannot retire until they are at least 65 when they qualify for the state pension – and also that they will need to top this up with a workplace pension, which they assume to be the only way to privately save for retirement.

Our regular viewers who have a keen interest in investing will know this is not true at all. You can retire whatever age you please and this could be 20, 30, or even 40 years before the state dictated retirement age.

The state pension dates back to 1908 and was originally reserved for those who were 70 but back then life expectancy was short. Only 24% of people reached State Pension Age and of those the average life expectancy was a further 9 years. Basically, the government was paying barely anything out.

Fast forward to today and people are drawing on the state pension for 20+ years, which is a huge and possibly unsustainable burden for the government. The state pension cannot be relied on still being around to fund your retirement when you get to your 60s.

You must save for retirement privately and if you use the right savings vehicles, you can start drawing down on your retirement pot at whatever age you like. The only caveat is you must build it big enough to out survive you.

Anecdotally, most people give no consideration to retirement planning other than saving into a matched contribution workplace pension. In the rare cases of having a good salary and a generous employer making big contributions this could be quite a chunky pension that allows you to retire in your mid to late 50’s, which is the earliest a pension can be accessed. Unfortunately, for everyone else, retiring in your mid 50’s is unlikely unless you actively plan for your retirement.

Crucially, you can retire even younger than this if you prioritise your future and utilise a variety of other wealth building tools. Someone that saves £500 a month for 30 years could quite easily have a retirement pot in today’s value of money worth £600k, allowing a 20-year-old to retire at 50. This can be done using a combination of a pension and a Stocks and Shares ISA, which allows you to access the money at any age.

Another powerful retirement wealth builder is buy-to-let property and there are no limitations in what age you can access any income that it generates, nor any restrictions of when you can sell the properties to release your wealth. Obviously buy-to-let property is not easy if you do it all yourself, but the gains can be life-changing.

Check out this post next if you want to see a worked example of how much profit property can produce by having someone else do all the work for you and find out how you can get help starting to invest.

One further way we’re growing our wealth fast is the use of spread betting to invest in S&P 500 futures. Here we explain exactly what we’re doing. Very briefly, we’re using leverage to earn mega tax-free returns that can be accessed with no age restrictions. It’s a super complicated subject, so tread carefully with this one.

Misconception #4 – Buying New Is Always Better

Whenever you buy something that you want are you guilty of always buying new? There’s a misconception that used items are old, tired, and trampy. Hands up, for most items I’m guilty of overpaying just to get my hands on a needlessly brand-new item.

But there are numerous times when buying used items gets you almost as good of a purchase as new ones, but for significant cost savings. The most obvious one is a car. Some used cars are in such good nick that they still have that new car smell.

Other items where old is almost better than new include exercise equipment. Many people buy these items with the intention of starting a get fit and healthy regime but fall off quickly and then try to unload these bulky goods that take up too much room. You can then snap up a bargain!

With items like dumbbells, you can even resell later for a similar price to what you paid on the second-hand market, so they effectively cost you nothing during the time you owned them.

Many things that your kids need can also be bought used for considerable cost savings, especially when your kids are far too young to even notice or care. A brand-new pram can cost hundreds or even thousands of pounds but buy used and it can cost less than £50. Trust us, your kid(s) won’t even notice.

Used furniture is another huge cost saver. I’ve cleared a few things recently to make room and have been selling them at almost giveaway prices, for items that are in close to perfect condition. Understandably, for those of you like me who are still a little snobbish when it comes to new items, maybe you can buy used for things you won’t use that often. Outdoor furniture is a prime example of something that you will only use twice a year, but you can save a small fortune by buying used.

New build homes are also often worse than older homes. Forget the new-build premium, which is another problem – we’re talking about build quality here.

Properties these days are thrown up in no time with poor quality workmanship and corner-cutting. They are also super stingy with space, trying to pass off cupboards as double bedrooms. Older properties – even those built just 15 years ago – are usually far bigger with additional space for stuff that is often overlooked when you’re shopping around; things like storage space.

Misconception #5 – A High Salary Makes You Wealthy

The average person on the street – and the government, and the banks – thinks a high income from a job means you are wealthy, but there is fundamental difference between income and wealth. Wealth – when managed right – should be permanent savings. But salary income is the money you earn and often disappears as fast as it comes in.

A smart person will slowly turn income into wealth by investing wisely over time. Conversely, a dumb person with wealth will run it down to zero.

Wealth is how much assets you have. For example, a pensioner living in a house valued at £1 million is wealthy, even though her pension brings in a tiny income of just £100 a week.

Moreover, not all wealth is the same. In our example, although our pensioner has £1 million in wealth it is in an unproductive asset meaning it’s not producing any income. Income generating wealth is superior and includes the likes of businesses that you own and investments you have.

People tend to be interested in how much another person earns in their job but cares less about their wealth. It should be the other way around.

Someone who earns £100k a year from their job but blows the lot will work every day until they die. But someone who has financial wealth of £500k held in productive assets and only lives on the £20k a year generated from their investments theoretically never needs to work another day in their life.

Furthermore, a high wage income can be taken away from you at any moment. You could lose your job and may find it impossible to get another paying anywhere near the same. This frequently occurs in older age.

Most professionals should expect their pay to peak between the ages of 40 and 49, according to earnings data from the ONS, while salaries fall to their lowest level during their 50s. Or to put it more succinctly, you have got to turn income into wealth before it’s too late!

What personal finance misconceptions do you think are most common? Join the conversation in the comments below.

Written by Andy

 

Featured image credit: Ivelin Radkov/Shutterstock.com

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

The 7 Biggest Money Lies We Tell Ourselves

When it comes to your finances have you ever told yourself a little white lie to justify spending, going into debt, or simply not saving, or made excuses why you haven’t done something when you know you should have? In today’s post we’re looking at the 7 biggest money lies we all tell ourselves.

It doesn’t matter how good you are with money; we reckon everyone tells themselves these money lies to some extent. Let us know down in the comments if you’ve been telling these porkies to yourself. Now, let’s check it out…

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Lie #1 – I’ll Be Happier When I Have £x

Some research done in the US from 2010 showed that people tend to feel happier the more money they make only up until the point that they earn about $75,000 a year.

Once your basic needs are met, more money will not make you any happier. The major issue we’ve identified with money and happiness studies is that they always seem to intertwine the concept of more money with more work.

This is the trap that we see so many professional managers up and down the land fall into. You’ve only got so much time, so giving away all of it to your employer in the pursuit of a little extra money is clearly going to have a negative effect on your happiness. If you’re not happy with £40,000, then you won’t be happy with £50,000.

Anecdotally, most people we speak to say they were at their happiest when they were in school and at university – times in their lives when they had little to no money.

Ben and I (MU cofounders) became mates at university and while there we had an awesome time, and in a single year we each must have lived on less than £10,000 a year to cover rent, bills, food and living costs. Lack of money certainly didn’t make us unhappy.

In the years following when we had to endure soul crushing work, our colleagues and managers couldn’t understand why we pursued shortened workweeks for less overall pay, when they and everyone else only ever wanted more and more money.

We think that once you earn £40,000 or more in the UK, then it’s not worth working longer hours to earn any more. At that point you need to think about earning more time to do things that interest you – new hobbies, spending time with family, rest and relaxation, or whatever you like.

Ideally what you want to do if possible is to break the link between your time and how much money you earn.

Lie #2 – I’ll Start Saving Later

Most people know they need to either start saving or save more but they convince themselves that everything is ok – they will “start saving later”. Deep down they know that if they are unable to put a few quid aside now, how on earth will they do it in the future? Their financial life is likely to get harder – not easier.

Some people are living with their parents and literally have no bills and yet still haven’t saved a single penny.

People move on to have expensive kids of their own and buy bigger and bigger houses – you don’t see many 45-year-olds downsizing to 1 bed flats. Also, once you have become accustomed to a more expensive lifestyle it’s extremely difficult to go backwards, which you’ll likely need to do in order to start saving.

As we mentioned we loved our no-frills student lifestyle, but I could never go back to living like that. My expectation bar is now set way too high. Ignorance was bliss.

Just recently I’m annoyed that my new flat doesn’t have soft close toilet seats as that’s now what I’m used to. I know that sounds ridiculous when said out loud, but my standards have been raised. These won’t be that expensive to replace but it’s just one example of lifestyle creep that individually is so small that it’s barely noticeable. Now, multiply it across your entire life!

Most people are no different, so if you’re young start saving now before you raise your expectations, and if you’re a little older you may just have to bite the bullet, slash some expenses, and find a way to save now.

And if you’re still BSing yourself, saying that you don’t need to worry about retiring because you’re only in your twenties, you need to understand that money invested now is worth way more to your retirement than money invested later.

If a 20-year-old invests £100 a month for just 10 years and then stops contributing but allows the pot to continue growing until age 70, earning 8%, their final pot is worth £444k.

But if somebody else elected not to save a penny in the first 10 years and then invested £100 a month for the next 40 years, they would end up with just £349k, almost 100k less despite 3 decades of extra saving.

Lie #3 – It’s The Government’s Fault

We’re guilty of blaming the government for many of our and society’s money problems. While we truly believe that their financial mismanagement is indeed creating problems for everyone, they are not the underlying reason for everyone’s money difficulties. The government often make things harder but not impossible!

Constant tax rises and red tape really does grind our gears because it makes life so much more difficult for everyone but let’s be honest, we are still able to keep enough of our money to make it worthwhile earning more. And we all have the capability to make a boat load of cash if we work harder, smarter, and do what other people won’t. Our hypothesis is that most people don’t have the drive to earn more. Simple as!

We live in an age that allows us to access the world’s information at our fingertips. We can learn about any subject imaginable for either free or a very small fee. We can also connect with recruiters, business contacts, suppliers, and everyone else, anywhere in the world, with ease, at any time, in any language. No longer are we confined to traditional working hours either, so you are able to hustle when it’s convenient to you.

One of my favourite success stories is that of Phil Knight, founder of Nike. He started the shoe company by flying over to Japan and somehow negotiating with foreign speaking suppliers. He then had a torrid time dealing with a banking system that didn’t lend back then. Looking back this seems like it was impossible.

Today we have it so much easier, and the government don’t prevent us from being successful.

Lie #4 – Everyone Does This, So It’s Okay

This is a really common lie to tell yourself. There seems to be a herd mentality for getting in deep money problems. It’s the equivalent of being happy with an average BMI, which in the UK is 27 – or in other words still overweight!

And just because everyone else has chosen to jump into a money cesspit doesn’t mean you should follow them. So, what are we talking about exactly? Massive car payments, luxury holidays, expensive unnecessary tech, too many nights out, excessive monthly subscriptions, needless patio furniture, and branded clothes and accessories you don’t need. These are just some of the many ways people blow all their money away.

It really is a case of just copying everyone else despite knowing that you can’t afford it. Over time these unnecessary expenditures become almost essential. For example, how many monthly subscriptions do you have?

These are services that just a few years ago didn’t even exist but as everyone buys them you must have them too. A few years ago, we bet most people didn’t even spend £120 a year on music but today we all have subscriptions to Spotify or Amazon Music spending exactly this. By the way we’re not preaching to you; we’re probably as bad as the next guy and there’s no way I’m cancelling my music subscription.

If you do want to start resolving the problem, we suggest first tackling the easiest and most profitable win. Don’t fall into the monthly car payment trap. The car industry has somehow duped people into the perpetual new car cycle every 2 or 3 years. Just because everyone else does this and chooses to be broke doesn’t mean you have to. They can choose image while you choose wealth!

Lie # 5 – I Get Paid Well, So This Crappy Job Is Worth It

This is a really sad one because we’ve seen so many older workers in this trap. Literally decades away from retirement, working a job that zaps their life from them, but they convince themselves they must suffer the same repetition and corporate crap day-in, day-out.

Why do they tolerate this torture? Because it pays well, they are addicted to the pay, and they believe they cannot earn good money elsewhere and/or are afraid of the change.

We always urge people to regularly switch jobs to keep their skillset fresh, their earning power high, and so they can move up the career ladder more swiftly. But inevitably some people choose to stick to the same job for far too long and often become institutionalised.

Some of these workers find themselves on very high salaries that do not represent the market for their experience level, and so cannot leave without a huge salary cut, which most are reluctant to do. This is a dangerous mental predicament to be in!

We don’t have a miracle answer to resolving this problem for you once you’re in the mess. If deep down the job isn’t worth the pain, it’s time to make sweeping changes to your financial life and start pursuing a career or business that gives each day new meaning.

Lie #6 – A Little Bit Of Consumer Debt Is OK

Attitudes to debt have changed drastically over the years and so have the means of taking on debt. Our parent’s generation would have saved up before making a purchase but today it’s the norm to just buy on credit – credit cards, overdrafts, store cards, payment plans, loans, and buy-now-pay-later services.

In fact, although we’ve said the lie is ‘a little bit of consumer debt is ok’ it could be worse than this. Some people are actually bragging about their consumer debt as if it’s something to be proud about and is a badge of honour.

Let’s be clear – consumer debt is never okay because it makes you poorer and usually is offered by stores so you can buy things you can’t afford. Previously we highlighted the lie of ‘Everyone Does This, So It’s Okay’ and this is another perfect example of this.

Just because your friends are using debt to fund a lifestyle they can’t afford doesn’t mean you should too. This debt fuelled consumption is fed by a series of lies including: ‘I deserve the things I want’, and ‘I have to buy it; it’s on discount.’

If you have to borrow to buy something, then we’re sad to say you don’t deserve it as you haven’t yet earned it. And discounts are used by retailers to encourage sales. It’s not the first discount and it won’t be the last. Don’t let a perceived saving influence your buying decision, especially when debt is involved.

Lie #7 – I Can Spend My Savings

While being in debt is super common these days, many of those that are able to stay in the black are never able to grow their wealth any further because as long as money sits in their account it is there to be spent.

Every penny that comes into your life should have a purpose. When you save you should be assigning a reason for that saving. Retirement savings – or as we call it, a freedom fund – should be one pot that you won’t withdraw from until you’re retired, but it’s good practice to have savings pots for big purchases like holidays, cars, and other irregular expenses.

If you don’t do this, you’re lying to yourself as it’s highly likely that you cannot afford to spend your savings. Can you really afford that holiday using your savings if the money should really be earmarked for something else?

Kid yourself for long enough and you’ll fall into debt when an unexpected large expense arises. Moreover, managing your finances like this often means the retirement pot gets neglected the most because it seems like the need for it is the most distant.

Hopefully you’ve found this post interesting and helpful, and don’t forget to grab your free money with InvestEngine and start investing for your future.

What money lies have you told yourself or what have you seen other people do? Join the conversation in the comments below.

Written by Andy

 

Featured image credit: pathdoc/Shutterstock.com

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

9 Things Idiots Do With Money. Don’t Do This.

We’re looking at 9 things idiots do with money. By avoiding these blunders, you will be more financially comfortable, in control of your financial life, and dare we say it – happier.

Please don’t hate on us if you’re doing many of these yourself. We’re obviously using the word idiot in a light-hearted sense, and rest assured that we ourselves have done some of these foolish things with our own money.

There’s a wide range of silly things that people do with their money and in this post we’ve got many different angles covered – from terrible spending habits, saving and investing fails, general finance mistakes, and property mishaps. Let’s check it out…

As always don’t forget to grab your free stocks and free money when you sign up to a number of investing platforms and financial services. Check out the Money Unshackled Offers page, linked to here.

Alternatively Watch The YouTube Video > > >

#1 – All-In On Bitcoin, Tech Or A Single Stock

Although diversification must be one of the most talked about investing concepts, it amazes us just how few people actually diversify properly. Our guess is it’s because diversification is totally misunderstood.

These people tend to throw way too much of their money into Bitcoin, Tesla, or the tech industry, or whatever else has done well recently and give no second thought to a properly diversified portfolio. We know people that are 100% invested in Bitcoin – which is utter madness.

FYI, we’re not hating on Bitcoin. But this seems to be the one asset that even your typical “average” person seems to be investing in, with no knowledge of portfolio diversification, nor of investing generally. The same can be said for anyone who is only invested in a handful of stocks.

Many people hate on diversification believing it lowers returns. Do diversification incorrectly and yes, you will get a worse return – often called diworsifcation!

Diworsification occurs from investing in too many assets with similar correlations that add unnecessary risk to a portfolio without the benefit of higher returns. However, diversifying properly has been said to be “the only free lunch in investing” because an investor can potentially achieve greater risk-adjusted returns.

#2 – Paying Off Their Student Loans (UK Only)

This point only relates to UK student loans as the student loan system here is very unique in that what you pay on a monthly basis is determined by your earnings, not the amount of debt you have. Only in a few specific circumstances is it worth paying off your student loans early.

Most student loans get written off after 25 or 30 years depending on the plan, and most graduates who started uni in or after 2012 will never pay off the debt before it gets written off, so paying off early could be a costly mistake.

Secondly, most people borrow money throughout the course of their lives. They might borrow with a mortgage to buy a house, a loan to buy a car, a business loan to start working on their dreams, and in too many cases they carry very expensive credit card, store card and overdraft debt. It doesn’t make sense to overpay cheap student loan debt, to then have to take out other debt on normal commercial terms later.

#3 – Overpaying Their Mortgage

A mortgage is amongst the best type of debt you can ever have, as it has a relatively low interest rate, and is super long-term (meaning your monthly capital repayments are small compared to the size of the debt). When you overpay your mortgage, you can’t easily get that money back.

Paying down the mortgage early might knock some time off the length of your mortgage-term and the total spent on interest but that’s money that could have been invested and making even more money. For instance, it could be invested in the stock market at an 8% average annual return. You can always overpay your mortgage in later life, if you really wanted to, after you’ve built up some sizeable wealth first.

Ben once whacked £1,000 into his mortgage as an overpayment when he was 27. He’d just bought his first home, and thought it was the right thing to do. Luckily, he soon realised the error of his ways before he sunk any more cash into what is effectively a glorified no-withdrawal savings account.

#4 – Fail To Insure Their Biggest Asset

Insurance always feels like a waste of money when you don’t ever claim on the policy but when the unthinkable happens, you’ll be glad that you were pro-active with your emergency planning.

Financial idiots think that it will never happen to them. They will never get a debilitating illness leaving them unable to work. They will never die at a relatively young age leaving their loved ones unable to cope financially.

Risk statistics - Income Protection Insurance

Here are the risk statistics for a 25-year-old male during their working life. Effectively 1 in 2 people will face a disaster!

We don’t think it’s smart to insure low ticket items like mobile phones but for the big stuff that would shatter your finances if they were to occur, it’s only logical to take out a policy. Everyone rightly does this with house insurance and car insurance. But why not insure your biggest asset? You!

We both have income protection insurance – with Ben’s costing just £17 per month – and he also has life insurance to help his wife and child in case he was to die prematurely.

A while back we did an entire video on income protection insurance specifically aimed at those who want to lock-in their financial freedom today, linked to here – it’s definitely worth checking out!

We also have a little more info on lifestyle insurance here, and you can get a quote from the same company we use ourselves, here.

#5 – Unintentional Saving

A fairly new saving technique that is popular with younger people and many innovative finance apps have introduced is a feature known as round-ups. This is where every time you buy something, the app will round up the price to the nearest pound and automatically save or invest the change.

Savvy savers and investors do not use gimmicky services like this because they know exactly what they can save each month from day 1 as they have budgeted for it – their saving is planned for and intentional.

Secondly, the act of saving should not be linked to how much you spend. A service that encourages you to spend more is not good for your wallet.

And thirdly, from the round-up services we’ve seen, they don’t collect the spare change as and when the transaction happens. Instead, the money is collected weekly or every 2 weeks, so you will have random amounts of money leaving your account when you’re not expecting it – obviously not good for sensible budgeting.

If you are incapable of saving anything and this is the only way that you can put money aside, then don’t let us talk you out of it, but just know it’s far from a sensible saving plan.

#6 – Don’t Prioritise Spending Where It Matters Most

We’re probably all guilty of this at times – I know I certainly am. The fact of the matter is that for the majority of us money is a limited resource, so we need to allocate it to the parts of our life that is most important and where we get the most value. Essentially, don’t spend a lot of money on stuff that you will barely use.

People spend about 8 hours a day or a third of their life in bed, so it makes financial sense to spend money on a good mattress and a good pillow. Recently, I bought an expensive pillow made from Nordic Chill fabric. God knows what this is but now I’m more likely to get frost bite than I am to get hot and bothered in the night. That’s a good thing by the way: I was previously always flipping the pillow over looking for the cold side!

Conversely, Ben may as well have thrown money down the drain when he bought some expensive outdoor furniture, that he almost never uses. Foolishly (his words), he spent more on this than he did on his sofa which he probably sits on every day, compared with the outdoor furniture that he sits on just a handful of times a year in the UK’s glorious weather.

A common money saving tip is to cancel your gym membership, but for some people this could be some of their most worthwhile spending. A gym membership allows them to stay fit and healthy, and for some is a great way to socialise with likeminded people.

How many people are working from home and still sitting on that backbreaking kitchen chair? For them it would probably be a good idea to open the wallet and buy a comfortable office chair. This is somewhere you’re sitting for 8-hour days after all – you only live once, and you may as well be comfortable.

Generally, you want to spend good money on stuff you will use extensively except when cheaper alternatives will offer a similar experience like a used car, rather than a brand new one. And don’t spend much on the stuff that doesn’t matter to you. Sounds obvious but everyone seems to be spending in the wrong places.

#7 – Buy The Biggest House They Can “Afford”

Financial idiots buy the most expensive house they can afford, and to be clear we’re not talking about someone who earns an average salary or less and is forced to buy an expensive house. For low earners they may have little choice – it’s either an expensive slum (as is the state of the sorry UK housing market) or it’s never getting on the housing ladder.

We’re saying that higher earners who chose to cripple themselves with mortgage debt in order to buy the most expensive house they can afford is idiotic. They believe (and are probably right to) that the housing market will continue to rise, and they will benefit from huge leveraged gains.

But your home is not really an asset like an investment is, as your home takes cash out of your pocket. It would make far more financial sense to buy the house they want that is comfortably within their means, and use what’s left of their cash to invest elsewhere.

For example, if these people want to benefit from the housing market, then with the extra money they now have they could invest in BTL property, which has the benefit of putting cash into your pocket and still benefiting from the same leveraged house price appreciation.

#8 – Long-Term Mortgage Fixes

It amazes us that nobody seems to be critical of long-term mortgage fixes such as 5 or 10 years except us. In some rare cases it might make sense, but we can’t think of any. Long-term mortgage deals are a bad idea because life is too unpredictable. These products usually come with higher interest rates than short-term fixes, and with early repayment charges of around 5%. For example, that’s a £15,000 fee on a £300,000 mortgage. Outrageous!

With a timeframe of 5 years anything could happen that forces you to sell the property and incur the wrath of the Early Repayment Charge. You might break up with your partner, you might lose your high paying job, you might want to move up the property ladder, you might want to relocate, you might want to release equity… it could be any reason.

It might seem like locking in the interest rate is a good idea right now but that’s only true if somehow you’re immune to all of life’s curve balls.

If you’re concerned about sudden interest rate hikes, we don’t think this is likely. The Bank of England, who sets the base rate, knows that any sudden large increase would destroy the economy as millions of homeowners would be in deep water. We expect interest rates to rise slowly, giving homeowners chance to circumnavigate any problems.

#9 – Don’t Save Enough For Retirement

The UK’s private retirement savings are in crisis. A few years back the government did a great service and introduced auto-enrolment for pensions. Many good companies were already offering pension plans to their staff, but many weren’t, so auto-enrolment forced these disgraceful companies to do the same.

The problem is auto-enrolment is extremely misleading and even on the government’s own site we didn’t find the truth. Everyone believes that they pay in 4% of their earnings but the hidden truth is that only 4% of qualifying earnings is paid into a pension. This is topped up to 5% with tax relief.

Qualifying earnings is the name given to a band of earnings that are used to calculate contributions for auto-enrolment. For the 2021/22 tax year this is between £6,240 and £50,270 a year. This means on a £25,000 salary you only make pension contributions based on £18,760.

Earning £25k, you would only save £62 a month with a 4% contribution, your employer would only pay in £47, and you get less than £16 tax-relief, giving a total of just £125 per month. According to uktaxcalculators.co.uk that would give an inflation adjusted pension pot of just £100k after 47 years.

That’s better than nothing but not much for a lifetime when you thought you had been saving diligently. You would burn through £100,000 in no time. Most studies suggest you need closer to £400,000 to live a £25,000 per year lifestyle in retirement, and that is assuming the state pension still exists to top it up, which is a big if!

Things get far worse when we consider other savings. According to Raisin.co.uk, the current average savings pot of someone in the UK is £9,633. Those in the younger age brackets have considerably less savings. One shocking figure is that 42% of those aged between 25-34 have stored away less than £1,000. This is financially irresponsible and a ticking time-bomb.

What else do financial idiots do with their money? And be honest – which of these have you done? Join the conversation in the comments below.

Written by Andy

 

Featured image credit: photoschmidt/Shutterstock.com

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

Big NI Tax Rise Rant: How Much Poorer Will You Be?

The UK government is out of money. They’ve borrowed to the hilt to pay for irresponsible spending over the past few decades and more recently to pay for the economically ruinous lockdowns, and with inflation looking to hit over 4% by the end of 2021, interest rate rises are sure to follow.

This terrifies the government: every 1% rise in interest rates would increase the UK’s debt financing costs by another £25bn every year, and it’s already eyewatering at a budgeted £45bn.

With debt exhausted, Boris now turns to taxes to pick up the slack in his ambitious spending plans.

National Insurance is being raised to 13.25% from 12% in just one of many planned tax rises, which the government promised NOT to do in the 2019 election.

It’s a direct tax on workers’ incomes, reducing your monthly take home pay and effecting all families, especially those with smaller disposable incomes.

Raising taxes just as a cost-of-living crisis is taking off must be a bad joke – it will result in the loss of a few extra hundred quid each year that you already don’t have to spare, which you’ll now have to hand over to HMRC.

Just how badly will the tax rises affect you? Let’s check it out!

Console yourself against the upcoming tax grabs with some free goodies from investment platforms on the Money Unshackled Offers page, including free £50 cash rewards for opening an account with easyMoney or Loanpad, and free stocks from Freetrade, Trading 212 and Stake worth up to £200.

Alternatively Watch The YouTube Video > > >

The Timing Of This Tax Rise Couldn’t Be Worse

Britain is heading into winter in a bad shape economically. Runaway inflation is dragging us into a cost-of-living crisis.

Drivers will be painfully familiar with the petrol shortages caused by a lack of truck drivers. Especially if you rely on being able to drive to get paid.

Food shortages, again due to us not having enough lorry drivers, are expected to push up food prices over Christmas. And the furlough scheme having ended at the start of October means there could be up to a million redundant jobs and incomes.

The cost of wholesale gas has increased 6-fold and electricity 4-fold, and it is yet to be seen how much of this will be passed on to customers this winter.

The price rises are due to lockdowns messing with supply and demand, and outlawing cheap and readily available coal to rely on wind farms that haven’t been spinning because apparently, it’s not been windy.

As these price hikes are passed on to consumers, experts say many will have to even sacrifice meals to keep the heating on this winter – a dire state of affairs for modern Britain.

Regardless of where the blame lies for these price rises, the economically literate thing to do when people can’t afford to buy food and fuel is to immediately lower income taxes. This gives people that little extra money in their pockets to be able to struggle on as normal.

Alternatively, they might lower VAT, to bring down the prices of goods. Either way – the answer is to lower tax.

Instead, they are choosing this moment of national crisis to announce the opposite – that everyone will be given a kicking when they’re already down.

What It Will Cost You

Paying National Insurance is mandatory if you’re 16 or over, and either an employee earning above £184 a week, or self-employed making a profit above £125 a week.

From April 2022:

  • the current 12% rate on earnings between £9,564 and £50,268 will rise to 13.25%
  • the current 2% rate on earnings over £50,268 will rise to 3.25%
  • employers will also have to pay more, contributing 15.05% in National Insurance on employees’ earnings over £170 per week, up from 13.8% now. Expect these costs to be passed on to you, the worker, in lower future pay rises.

Here’s how much extra tax you’ll have to pay as a result of this tax rise, depending on your salary:

  • £20,000 salary: £130 extra each year
  • £30,000 salary: £255 extra each year
  • £40,000 salary: £380 extra each year
  • £50,000 salary: £505 extra each year
  • £80,000 salary: £880 extra each year
  • £100,000 salary: £1,130 extra each year

Those on a higher salary pay more in actual pound terms, but remember that people tend to live within their means, and have houses and other living expenses to pay for that are proportional to their salaries.

Also, realise that employers NI is going up too by the same amount, which is tax they have to pay on your salary as your employer. That is money that could otherwise be spent on giving you a better pay rise or bonus. Look at these numbers, and double them. That’s likely the true cost you’ll have to bear.

Promises Broken

In the election of 2019, Boris promised not to raise National Insurance. Here’s the manifesto pledge, signed by Boris himself. Iron-clad, some might say.

The Conservative party is no longer the party of Low Taxes; in fact, they are the party of the highest taxes in UK peacetime history. But if you’re not happy with that fact, what can you do about it?

The UK is a 2 party system, where either Labour or the Conservatives have been in power since 1915, and our first-past-the-post method of elections makes it almost impossible to change this.

Both Labour and the Conservatives are in favour of big tax rises, and of massive borrowing. If they say they’re not, look at their actions; not their words.

Whether it’s stamp duty, corporation tax, dividend tax, council tax, national insurance, capital gains tax – all the main parties are keen to raise them, or at best keep them as they are. No one is talking about lowering any taxes.

There is no established party to the economic right of the Conservatives: no party in favour of lower taxes, lower borrowing and lower government spending. Vote for any party right now and under our system you will get a high spending, high borrowing, high taxing government.

A Record High Tax Burden

After the income tax and corporation tax increases in the March Budget, the government had already raised the burden of taxation to 35% of GDP, the highest since 1969. GDP is the value of all the goods and services that we as a country are able to create in a year by working, so the government was already planning to take 35% of our earnings through all taxes combined.

The new tax rises will increase the tax burden to about 35.5% of GDP, the highest since the second world war.

Voters Are Gullible When It Comes To NI

Voters prefer an NI hike to an Income Tax hike, because they wrongly think that NI is set aside for the NHS. It isn’t. It all goes into the central pot.

This delusion is helpful to the government, and is probably why they raised NI, not Income Tax – even though it amounts to the same thing. They can also raise NI more stealthily than Income Tax because Income Tax gets headlines, while NI is generally ignored.

A Third Income Tax

The NI tax rise will start out as an increase to the NI line on your payslip by 1.25%. But from April 2023, this will be split out into 2 taxes: National Insurance will go back to 12% and 2%, and there will be a new tax on your payslip called a Health and Social Care Levy, at 1.25%.

That’s right: as if the tax system wasn’t baffling enough, you will now have 3 income taxes on your payslip, all going into the same central pot.

You might assume that something called the ‘Health and Social Care Levy’ would definitely be spent on Health and Social Care, but remember that National Insurance started out as being money earmarked for ‘insuring the nation’ against illness and unemployment. Its original purpose has been forgotten. It’s now just the 2nd income tax on your payslip. Now there is a 3rd, it gives future governments more options to increase income taxes sneakily over the years.

Where Will Your Money Go?

The tax rise will reportedly raise £12bn per year, which is supposedly earmarked for the NHS, specifically for reforming the social care system. But will it make much of a difference? The NHS already costs £230bn a year. It’s hard to believe that voters will see results for the extra tax they’ll be charged.

But the Treasury has many ways to get around the earmarking of funds – all the money effectively goes into the same central pot. So is this tax really being used to fund the NHS?

The UK’s addiction to debt costs us £45bn a year, according to the UK’s budget for 2021-22. But this figure is already out of date – in June 2021 alone, according to Bloomberg we spent £8.7bn on debt interest, due to inflation pushing up the cost of servicing index-linked gilts.

That works out at a £104bn annualised cost, an extra £59bn above budget. Is this the true reason we are being taxed more?

Or is it green energy? At the COP26 climate change event that the UK is hosting in November, the UK will announce it will start paying £12bn a year in “Climate Finance” to developing nations, the same amount incidentally as will be raised by this NI increase.

Social Care: What’s All The Fuss About?

A common argument from the pro-high-tax side of the argument is that tax rises are needed to pay for the damage caused by the response to covid. Maybe so. But the NI tax rise has specifically been justified as being to pay for a social care reform, NOT covid. So, why is social care an issue?

Social care is a political hot potato dodged by government after government over the decades. It was the topic that destroyed Theresa May’s election campaign in 2017.

Social care is a really important problem to solve, to make sure that we all get treated with the best health care and with dignity in our old age. Apparently, the system is falling apart at the seams.

Theresa May’s answer was for the rich to sell their assets to pay for their own social care. Boris is raising taxes on everyone as an alternative. There’s a good argument that this is fairer, as everyone uses the system.

But is now the right time to be splashing the cash on a mega-project like this at the expense of the workforce when we’re coming out of an economic disaster? Maybe there never will be a good time, and we just need to bite the bullet?

Other Tax Rises Heading Your Way

If you’re an investor or you are a self-employed small business owner, your income is being taxed more from April 2022. The tax rate on dividends is increasing from 7.5% to 8.75% for basic rate taxpayers, and from 32.5% to 33.75% for higher rate taxpayers.

For an entrepreneur on £40k a year who takes his pay in dividends, his tax bill is about to go up by £320 a year. If you are an investor and get paid dividends, make sure you’re shielding your assets in an ISA.

The government is also ramping up corporation tax to ridiculous proportions – up from 19% to 25%, effective April 2023.

This effects employees, business owners, investors, pensioners and consumers – basically, anyone who relies on companies to do well in order to be paid an income and/or have access to cheap products.

Employees can expect this tax on companies to be partially offset in their future pay rises, or lack thereof. Consumers can expect the tax increase to be partially passed on to the price of products in the shops.

Business owners are being taxed directly. Investors and pensioners are being taxed indirectly, as the stocks that make up their portfolios and pensions become less profitable and are less able to grow or to pay dividends.

Find out more about this insidious tax rise and many others not covered here in our video on tax rises announced at the last Budget, linked here.

The Future Of Tax In The UK

We are now stuck in a cycle of bigger spending, funded by bigger borrowing and bigger tax burdens, to offset problems in the economy – many of which were caused by over-borrowing and over-taxing to fund over-spending.

Companies and people are taxed too much which leads to low productivity, which means less tax is created, which then leads naïve governments to increase the tax rate. And also, to pay for the ever increasing cost of borrowing, the government also has to either borrow more or tax more. And on it goes.

The future of the UK – and sad to say of much of the developed world too – is unfortunately towards an ever bigger state, with an ever higher tax burden.

What do you think about the tax rise, and is it the right thing to do? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: Simev/Shutterstock.com

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

What Net Worth Do You Need To Be In The Top 10% In The UK

Hey guys – I don’t know about you, but when I’m adding up my finances each month, I like to think that I’m probably doing OK versus the average dude in the street. The problem is that the bar has been set so low.

What we should all be wondering is how we compare against the highest net worth savers in the UK – what are they doing differently to us?

Today we’re deep diving into some fascinating data on the net worth of people in the UK, focusing on those in the top 40% of the population by wealth, taken from some analysis done by the Resolution Foundation.

Not only will you see how you compare to others on the wealth scale, but there are also lessons to be learned here from how those with a high net worth have structured their finances.

  • We’ll look at how wealth breaks down into main residence, pensions, investments and so on at each level of net worth.
  • We’ll look at the level of risk being taken by the rich versus those in the middle.
  • We’ll also look at the rates of return the wealthy are getting compared to those of the Average Joe.
  • And, we’ll find out the main reason why the wealth of the middle classes has shot up in the last decade.

All this, and so much more, in the video below. It’s jam packed full of charts and analysis (that we know you’ll love)! Check it out 😊

First, an offer: commission-free trading platform Stake are giving away a free US stock worth up to $150 to everyone who signs up via this link. Stake are the go-to investing app to buy and sell US stocks – there are thousands of stocks to choose from, and they charge zero trading fees, and zero FX fees when you trade.

Watch The Video Here > > >

How do you compare to high net worth savers, and what are you doing to advance up the ranks? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: iQoncept/Shutterstock.com

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

Runaway Inflation – Will The ‘New Normal’ Ravage Your Portfolio

Since 2008, major central banks have pumped over $25 trillion into the global economy, with over $9 trillion in response to Covid-19 alone. Around half of that has come from an America that is addicted to money printing, doubling their magic money tree from $4trn to $8trn during the pandemic.

These are astonishingly huge sums. The thinking goes that all that extra money sloshing around, along with record low interest rates, may have already pushed stocks to unsustainable highs. But is this the calm before the storm?

The UK consumer price index, which measures the cost of a typical basket of goods and services, flew up from 2% in July to 3.2% in August, and it’s forecasted to keep climbing.

In America, the Biden money-printing could “set off inflationary pressures of a kind we have not seen in a generation,” wrote a prominent figure in Biden’s own party. Bank of America estimates that the U.S. government will have spent $879m every hour in 2021. The results could be devastating.

The shut-down of the global economy and subsequent policy responses have us teetering on the brink of a period of runaway inflation. Whether or not it happens will depend on the competency of Western politicians to fight it – the same politicians, incidentally, who got us into this mess in the first place.

So, assuming they cock it up, what impact will runaway inflation have on your investments and home finances? Let’s check it out…

And the end of the article we cover the best investments to defend against runaway inflation, along with the best places to buy them. Offers for all of these investing platforms are available on the Money Unshackled Offers page.

Alternatively Watch The YouTube Video > > >

Panic In The UK

There are lots of reasons to be startled by the latest inflation figures. A CPI of 3.2% in August not only puts it at the highest level in nearly a decade, but the month-on-month change from July to August is the biggest increase since the CPI was introduced as a measure of prices in 1997.

That’s high, but fine if it’s a temporary thing. We know the world has gone mental recently, and crazy economic statistics are becoming the norm in 2021.

But what if it’s not temporary? There are still inflationary pressures heading down the tracks, including a massive shortage of truck drivers set to result in food shortages and increased prices over winter. There’s even talk of Christmas dinner being cancelled for all but the wealthiest of families due to the shortages. All this continuing pressure on prices may cause high inflation to become “sticky” – meaning it hangs around for the long-term.

It’s now looking like the best outcome would be inflation rising to just 4% by the end of 2021. And that’s double the target rate of inflation desired by the UK’s central bank.

Across the board, prices are rising far faster than usual. In the past few months, the wholesale price of electricity in the UK has almost quadrupled from £40 to £160 per Mwh, spiking in the past fortnight to the highest level on record.

It is widely predicted that due to a shortage of gas and greater reliance on expensive green energy that we are facing further sharp increases in both electricity and gas bills in the coming months.

The Bank of England warned earlier this year about a “nasty surprise” coming our way. They’re right to be worried. An inflationary spiral, where prices rise ever higher, is what inflamed the economic instability and high unemployment in the 1970s, an ordeal which took many years, if not decades, to recover from.

House Prices Through The Roof!

The CPI measure of inflation doesn’t include the cost of buying homes. If it did, we would see a far higher figure for inflation.

The latest house price inflation data runs to July 2021, and shows house prices up a massive 8% annually, reported as a good thing by the press because that’s down from an even higher 13% in June.

“Ah, but this is due to the meddling of the UK government in temporarily relaxing stamp duty”, I hear you say. But that’s not the whole story.

Over in America, the median sale price of a home rose 22.9% in the year from June 2020 to June 2021, smashing all records. And this obviously has nothing to do with relaxing stamp duty in the UK.

The so called ‘new normal’ of home working, combined with low interest rates, has massively increased the demand for homes.

Where before 3 or 4 people would be content in a house share, they all now want their own space. But new houses are not being built fast enough.

These same economic forces are at play in the UK. House prices are creeping up, and up, and up, stamp duty holiday or not.

Is Inflation Good Or Bad For Investors?

Inflation means the prices of things go up… so good if you own assets… right? Well, inflation typically refers to the price of consumer goods, not investment assets, and is in fact one of the main reasons you need to invest – to try and beat inflation. A higher rate of inflation makes that task more difficult.

There is inflation itself; and then there is the government response to it.

If inflation gets too high, governments will try to squash it back down. This could include raising interest rates or cutting back on the money printing… or both. Doing either is bad for investors.

Increased Interest Rate

Increased interest rates are bad for leveraged investors, such as landlords with mortgaged properties, because their loan interest costs go up, and there are fewer people in the market who are able to afford to take on debt to buy your assets from you, reducing their market prices.

Increased interest rates are bad for owners of stocks too, because the businesses they are invested in have increased costs of borrowing, reducing profits, and with them, dividends and stock prices.

Cutting QE

It’s widely accepted that ridiculous levels of quantitative easing are responsible for record high prices in the stock and other asset markets.

Pumping cash into the economy makes cash less attractive, and pushes up the prices of assets like stocks, bonds, property, gold, crypto, and so on.

To fight inflation, central banks could claw back some of their money printing. When they magic money from thin air, central banks like the Fed typically lend it to the government in return for government bonds. In 2019, the Fed was selling down their holdings of these securities, reducing the amount of cash in the economy. They would need to try doing something similar now if inflation got out of hand.

Taking cash out of the economy would make cash more attractive again, moving money out of stocks and other investments and reducing their market prices.

High Inflation Impact On Stocks

High inflation itself also drives down the profitability and growth potential of companies, and hence share prices. Fewer customers can afford to buy products, and the costs of materials and labour go up.

And if inflation suddenly goes from 2% to, say, 4% very quickly, investors will want a higher return to compensate. The stock market will likely drop as a result to give investors that extra value.

Is Inflation Ever Good For Stocks?

Inflation is not all bad. Some inflation can be beneficial. Mild inflation is generally good, because it’s a sign the economy is growing, and businesses can raise prices.

“When examining S&P 500 returns by decade and adjusting for inflation, the results show the highest real returns occur when inflation is 2% to 3%,” says Investopedia. That’s about where we are now. So, a modest amount of inflation is in fact a good thing.

High Inflation Impact On Investment Property

We’ve mentioned how a government response to inflation could push up interest rates, putting the boot into the ribs of hard-pressed property investors and homeowners alike.

But the run-up period of inflation before this will likely send your properties’ prices soaring.

As an owner of multiple properties, I’ve been rather enjoying the recent double-digit inflation in the housing market. But it must be a bitter pill to swallow for new investors.

This initial inflationary boost to your equity may provide a cushion that helps to counteract any negative fallout if interest rates do go up.

Savers May Be Glad… At First

Savers may initially rejoice at a raising of interest rates, as they watch their high street savings account go from a 0.5% rate of interest to perhaps a 2% rate of interest.

That joy will turn to ash though when they realise that inflation in the shops has gone up by more than this, meaning their actual real returns are EVEN MORE negative than they were before. No matter how high inflation gets, central banks can only increase interest a LITTLE, or risk collapsing the economy.

Presumably cash savers are 100% reliant on their job for their income too, as opposed to investors who may own passive income generating assets.

We are all familiar with the pathetic 1% annual pay rises in the UK. When inflation is 5%+, but wages are stagnant, how will cash savers be able to keep building their wealth?

High Inflation Impact On Bonds

Holders of fixed income securities like bonds do poorly in a high inflation environment, because that fixed income has less and less purchasing power, driving down the price of bonds. Higher interest rates on newly issued bonds drives down the value of existing bonds as their lower coupons are less attractive.

How To Defend Against Rampant Inflation

So, stocks overall do poorly in a high inflation world, as do bonds, as does cash, as does property. So where exactly can we store some of our wealth to help defend against runaway inflation?

Many investors, including us, believe gold offers protection from long-term inflation. Gold is a store of value: its supply is limited, unlike cash which can be magicked in and out of existence.

Also, its history doesn’t lie. We see below how the gold price shot up in response to inflation in the 1970s, then loosely tracked it. In 2008 there was a massive correction in gold’s favour when people lost all faith in cash following the 2008 crisis and the resultant quantitative easing. During the pandemic, gold has shot up again when the banks once more fired up the printing presses, ahead of the inevitable inflation wave that is now hitting us.

We buy gold through the iShares Physical Gold ETC, and it’s free to trade on platforms like Freetrade, Trading 212 and InvestEngine. If you buy your gold through any of these platforms, new customers will get free shares worth up to £200 or a £50 welcome bonus.

Cryptocurrencies like Bitcoin, in theory, should do the same job as gold. They have similar qualities to gold in that there is a limited supply, and they are beyond the reach of meddling central bankers. But unlike gold, we can’t prove this hunch with a nice historical graph because, well, there is no history!

New users to Coinbase, one of the most popular crypto trading platforms, will get some free Bitcoin when you sign up using this offer link.

You can also hedge against rampant inflation by investing in certain stocks that benefit, or at least are not disadvantaged, by a high interest, high inflation environment.

These include:

  • banks like HSBC and Lloyds (who love it when interest rates on their loans can go up);
  • big blue-chip stocks like Coca Cola that sell everyday essential products and have little in the way of debt;
  • quality high-dividend stocks like British American Tobacco, who have a history of growing their dividend in real terms.

Grab a free trial subscription to Stockopedia here to get a full analysis of these stocks, and thousands more. The link also gets you a 25% discount on a paid subscription.

Are you worried about runaway inflation? Or are you upbeat about the economy? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: Brian A Jackson/Shutterstock.com

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

How To Release Equity From Your Home To Get £50k+ In Cash

Imagine transferring £50k of extra cash into your bank account, without having to work to get it. Think what you could do with that money. The world would be your playground. This is what I did in my late twenties, and by investing the cash wisely, it transformed my life.

The way I did this was with equity release. Equity release is the popular name for products that provide homeowners with a way of releasing wealth tied up in their property, without having to downsize and move house. I got £50,000 out, but you might be able to get much more.

Your ‘equity’ is the difference between the value of your home and any mortgage you might owe. Equity release can give you access to some of this money, which would otherwise stay tied up in the value of your property.

If you’ve owned your home for even a handful of years, it’s likely that the property may be worth considerably more than what you first paid for it. On average, UK house prices increased by 17% in the five years to 2020, and are up a further 6% in the first half of 2021 alone! This could mean that you have an enormous sum of money locked away waiting to be accessed.

Here we’ll explain how equity release works and show you the different options available to do it no matter your age.

Maybe you dream of home improvements or a holiday, or maybe you intend to live off the money. For us, we’d use the cash to buy some income generating investments. Whatever you’d like to use the money for, equity release will help get you there. Let’s check it out!

Another way to make easy money for minimal effort is with Matched Betting, a risk-free technique to profit from the free bets and incentives offered by bookmakers. It can make you £500+ every month for less than an hour a day of effort.

Go to the Matched Betting guides to find out more, and for all the latest offers.

Alternatively Watch The YouTube Video > > >

A Plan For Any Age

Traditionally, equity release products are aimed at the over 55s. A specialist industry has grown in this space, with a very interesting range of products aimed at lump sum and regular income withdrawals.

But if you’re younger than 55, fear not: I just told you that I’ve already done this, and I’m 33. But if you’re over 55, or you can wait until then, the specialist products for this age group – known as Lifetime Mortgages – are tailor made for this job, so are worth prioritising.

For Lifetime Mortgages, the most common qualifying criteria are:

  • The youngest homeowner is 55 or over;
  • You own the property, either outright OR with a mortgage;
  • The property is worth more than £70,000;
  • If you have a mortgage, you will have to pay this off with the money you receive from the equity release.

If you’re under 55 this option is closed to you – to release equity, you’ll just need to be able to qualify for a regular mortgage on your house’s current market value.

How Much Equity Can You Release?

This comes down to your property’s value, and if you’re under 55, your income. For Lifetime Mortgages, your age is also factored in, and with some providers, your health.

The two times I have released equity, the gap had widened between my mortgage amount and the value of my home. This is due both to monthly mortgage repayments reducing the size of the loan, and to market prices pushing up the property value.

With the specialist products for the over 55s, the amounts you can release are much more clearly defined.

For Lifetime Mortgages, typically you can release between 20-50% of your property’s value. The older you are, the more you can release. You can withdraw even more than this with a product called a Home Reversion Plan: more on this soon.

In terms of timeframe, most equity releases take between six to eight weeks to complete.

What It Costs

Let’s be clear: most equity releases result in an increased mortgage amount against your property. As such, there is a cost. The main cost is the annual interest on the loan, currently around 2.5% on Lifetime Mortgages, fixed for the rest of your life.

If you’re averse to debt, this might sound expensive, especially the “for the rest of your life” part, but consider that 2.5% is essentially the same as inflation. Your property is likely to grow even faster than this, based on historic property growth rates of 5-7% annually.

And it depends on what you are using the cash for. If you choose to invest it over the long-term, 2.5% is perhaps a small price to pay for the rate of return you could get from the stock market for example, typically between 8-11% historically.

There will be some other upfront costs, including loan arrangement fees typically in the region of £1,000 which can be added to the amount you’re borrowing, and any brokers and solicitors’ fees for sorting this all out, which will typically add up to another grand or so.

The Specialist Products: How Lifetime Mortgages Work

Lifetime Mortgages are a growing but relatively unheard-of industry, serving only 500,000 UK homeowners since 1991. Barely anyone has taken advantage of these life-changing products!

If you take one on, you have the right to remain in your property for life, or until you need to move into long-term care: you can’t be evicted by the bank. You also have the right to move to another property so long as your new home is suitable collateral for continuing the arrangement.

With equity release, monthly repayments aren’t necessary. You can choose to enjoy the money now, and let the interest be taken from your estate upon the sale of your property, typically after you and your partner have passed away.

Alternatively, if you decide to pay the interest each month, your loan balance remains static.

Finally, with a Lifetime Mortgage you get an amazing feature called a “no negative equity guarantee”. You don’t get this with a normal mortgage.

A “no negative equity guarantee” means that when the property is sold and all selling fees paid from the proceeds, EVEN IF the amount left over is not enough to fully repay the loan, the difference will be written off. Sweet!

The Different Types Of Equity Release Products

First let’s look at the different products available in the equity release market for the over 55s, and then we’ll look at how you can manufacture your own equity release by using normal mortgages, regardless of your age.

#1 – Lifetime Mortgage

If you want to release a lump sum of cash up to 50% of the house’s value, a Lifetime Mortgage could be for you.

There is no requirement to make monthly repayments, as the amount you release, plus any interest, is repaid from the proceeds when the property is eventually sold. You can choose to pay towards the interest if you like, for those worried about leaving a more intact inheritance to their heirs.

#2 – Income Lifetime Mortgage

This one is really interesting because it allows you to turn your home into an income stream! An Income Lifetime Mortgage gives you flexible access to your equity. Rather than releasing a lump sum upfront, you can release your cash over time as a regular income.

If the value of your house is expected to go up by X amount each year, you might decide to withdraw that amount, less the interest cost and perhaps less inflation too, as an income each year.

Think about it! You can add an extra income stream to your other retirement incomes, without depleting your home equity!

#3 – Home Reversion Plan

This is an option for those who really need the cash. With these, you can take out even more equity than with a Lifetime Mortgage, typically up to around 60%. But it comes at a terrible price.

In exchange for a lump sum worth 60% of the value of your home, you would be signing over the entire ownership of your house to the product provider. Not the best of deals. But, you would not be taking on any debt, and you would get the right to stay living in the property for your lifetime, so this will no doubt appeal to some people.

How To Do It Yourself If You Are Under 55

If you are under 55, the only way to release equity from your home – other than moving house – is to get clever with how you use normal mortgages.

I’ve done 2 equity releases on my house over the years. Here’s what I did the first time. I ran a quick calculation to make sure that the finances worked, which was as follows:

  • I got my house valued for free by Yopa at £230,000. I was confident then to start the formal remortgaging process, as you need the bank to agree with your desired valuation. They did, and also valued it at £230,000.
  • I knew the new mortgage would be around £207,000 at a 90% LTV. The bank would pay this amount to my solicitors, who were provided by the bank as part of the service.
  • My old mortgage would need to be paid off by the solicitors, at £179,000. This would leave the solicitors holding nearly £28,000, payable to my bank account.

So I pushed ahead with the plan, and received nearly £28,000 in my bank account a few weeks later.

Was It Worth It?

We’re not suggesting you release equity to squander the money on frivolous things like holidays or fast cars. Although you could.

I put the released equity into a buy-to-let property, the expected investment returns on which were 20% annually. Minus the additional interest payments from the equity release, the net annual benefit was £3,600.

If you ever plan to release equity, you want to be able to do so on your schedule and at the opportune moment. If there is an Early Repayment Charge on your existing mortgage, you would either have to wait to be clear of the fixed-term period, or pay the price. I had to pay an ERC to break contract when I did this, but it would have been unnecessary if I had avoided a long fixed period in the first place.

Things To Consider

The new lender may ask you what you plan to do with the money. While we think it’s really none of their business, it’s best to be honest.

Banks are usually uncomfortable with the thought of you investing your borrowed money, when you could be spending it all on a holiday like a normal person. It’s a strange world we live in.

Here’s where using an independent mortgage broker comes in handy, as they will know how best to circumnavigate any uncomfortable questions in the application process.

And if you’re going for a Lifetime Mortgage, a chat with a financial advisor who specialises in these products would be sensible too.

It’s also worth remembering that just selling up and moving to a cheaper property could be a simple alternative to equity release, resulting in a similarly large lump sum of cash. This might be done through downsizing, or by moving to a part of the country with lower house prices.

For Lifetime Mortgages, releasing funds in your lifetime that would otherwise stay tied up in your home until you pass away will reduce the size of your estate for inheritance purposes. Lifetime Mortgages aren’t designed to be repaid in your lifetime.

Finally, consider what your life could be like with a huge injection of cash at just the right time.

Equity release changed my life: it bought me a couple of extra sources of income from investment properties; as a cash buffer, it gave me the confidence to quit jobs with nothing else lined up; and it eventually let me quit my career altogether and go full time on YouTube. What will it do for you?

Have you ever considered releasing equity? And when you’re over 55, would you draw an income from your home? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: Dean Clarke/Shutterstock.com

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

Saving A House Deposit Or Building Your Investment Portfolio: Which Comes First?

Getting onto the housing ladder is becoming increasingly difficult. In fact, latest figures show only 50% of all 35-44 year olds had a mortgage, down significantly from 68% in 1997. When this dataset is next updated by the ONS, the decline will no doubt be even worse.

At the same time, people in their 20s and 30s are becoming more aware than ever of the importance of investing for their futures.

Unfortunately, the state pension is unlikely to exist in its current form for them, and gone are the days of final salary pensions. If you’re not investing from a young age, your future is looking grim.

Investing and home ownership are both worthy financial challenges to tackle, but the 2 goals are conflicting. How can you save up for a house deposit, AND invest adequately for your future?

Which target should you prioritise first? The roof over your head, or avoiding a miserable retirement?

Today we’re going to try to solve this problem facing the majority of young people, on which goal to tackle first from a financial perspective. Should you save for a house or invest in the stock market?

And if you’ve already saved up for a home, has the missed opportunity of many extra years of compounding investment returns done irreparable damage to your investing potential?

If you’re new to investing and want the professionals to manage your money, a great option for hands-off investors is to open a Stocks & Shares ISA with Nutmeg. They also offer Lifetime ISAs to help with saving for a house deposit.

New customers who use this special link will also get the first 6 months with ZERO management fees. If you’d rather manage your investments yourself, check out our hand-picked range of ‘do-it-yourself’ Stocks & Shares ISAs, here.

Alternatively Watch The YouTube Video > > >

A Growing Problem

The dilemma facing young people about whether they should start investing or save for a house deposit is getting more obvious with each passing year.

Firstly, investing is now more accessible than ever. You can now invest on many platforms without fees, and with minimum investments as little as £1. Information about the stock market is plentiful, is easily accessible and is free on places like YouTube.

Investing has been made omnipresent and accessible to the point that anyone can pick up a phone and buy some stocks.

This openness has removed a barrier that previously would have stopped most people from even considering investing, and made young savers think that maybe they should be abandoning the decades long attempt to build a house deposit and build a financial future through stocks instead.

However, at the same time, the prospect of ever owning a house is receding into the distance. House prices have gone up by an average of 5.2% over the last 20 years.

Why is this a problem? Because that is MUCH higher than wage inflation, which has averaged just 2.8% a year over the last 20 years. Incomes are not keeping up with the rate that house prices are increasing.

While you’re saving, house prices are going up in real terms. So more and more it feels like if you don’t try and buy a house right now, you’ll never get a better chance.

Why Not Do Both? Couldn’t You Whack Your House Deposit In The Stock Market?

Seems reasonable right? You’ve got a lump sum of cash just sat there idling in the bank while it slowly gets added to from your saved wages. Why not take it out, invest it, and get to your goal quicker?

Many people do this, and there are certainly success stories – but the same can be said of people who put it all on black on the roulette wheel.

The stock market can go up as well as down in the short to medium term, so we would not advise anyone to put their house deposit into the stock market unless you don’t plan to buy a home for at least 5 years, and preferably longer.

Otherwise, there’s a good chance you could have lost money on your house deposit at the point when it’s needed. It’s therefore usually best to keep the 2 goals separate.

3 Reasons To Save For The House Deposit First

#1 – A House Can Be An Investment

Your home is not an investment in the traditional sense of the word – a house costs the owner a fortune to maintain, and any capital growth can’t easily be accessed unless you decide to sell up and live on the streets.

But there ARE ways you can make the house turn a profit, by charging other people for the use of your assets.

The usual thing to do is to get a live-in lodger or two, or do Airbnb. A couple of lodgers paying rent could easily cover the cost of your mortgage and eliminate your biggest cost of living – a great investment.

But you can also rent out your driveway for day commuters; let someone park a mobile home or trailer on your land; or lease out your garage, attic, and spare room for storage space.

A house can also be a great investment if you geo-arbitrage it. This is when you intend to sell up the house in the future and move to a less expensive area.

Maybe you’ve managed to get on the housing ladder in London and can afford it due to your high London banker’s salary, but could see yourself retiring to Yorkshire. You might one day liquidate a £1m townhouse to buy an equivalent sized semi in Leeds for £300k.

#2 – The Emotional/Cultural Need

For most people in this country, home ownership is a defining feature of whether or not you’re a proper adult. This is an aspect of British culture, where 63% own their homes. This is down from 71% in 2004, when buying a house was much easier.

On the continent they are not as fussed as we are about this. The Germans and Austrians quite like to rent, with only 51% and 55% respectively owning homes. The Swiss care even less about home equity, with just a 42% rate of home ownership.

On this channel we don’t think whether you own a home or not defines you as an adult – having an investment portfolio and choosing to rent is just as valid a life-choice. Nor do we buy into the myth that renting is dead money: check out this article next on the merits of buying vs those of renting.

But if you’d sleep better at night by keeping up with the Joneses, then buying your home first is the right choice for you.

#3 – Investment Returns Don’t Matter So Much Initially

If you’ve got 2 or 3 grand and you’re stressing about where to put it… don’t. Your investing returns are likely to be miniscule in terms of pounds and pence, compared to what you’ll be able to make one day when your pot is much larger.

When you’ve got a decent sized house deposit built up, this might be a different story. If you’re enjoying this content, give us a big like to let the YouTube algorithm know that this video rocks! You can also show us some appreciation with the new Super Thanks button below.

1 Big Reason To Focus On Investing: The Compounding Boost Is Insane

First-time buyers now need an average of £59,000 to get on the property ladder, a 2021 report by Halifax bank has revealed.

That’s up £12,000 from the previous year. This is the national average: in London, first time buyers need an average deposit of £133,000!

Those numbers are huge, and represent many years of saving hard. How many years? A lot. ONS data tells us that of people between the age of 22 and 29 years, about 40% have not yet managed to save anything at all, while around 10% have savings of between £2,000 and £3,000. Only around 25% have saved more than £6,000.

And £6,000 is the also average savings for people aged between 35 and 44. Clearly saving for a house deposit is now a decades long task for most people.

These are decades that you can’t afford to be wasting sitting out of the stock market. Let’s assume money flows naturally to you, and it takes you only 10 years to save for a house deposit, from age 20 to age 30. You save £6,000 a year towards a £60,000 deposit.

Example 1 – Buy House First (Save During 20s)

Here’s how much money you could have when you retire at age 60 if you only started investing into the stock market at age 30, once you’d sorted the house deposit. Keeping it simple we’ll assume you continue to be able to invest £6k a year, or £500 a month, at 6% after-inflation returns. This gives you £500k at retirement, enough to draw an income from.

Example 2 – Invest Instead & Never Buy A House

Now here’s what happens if you choose never to buy a house, and you’d been able to start investing in the stock market from age 20, with an extra 10 years of compounding: you retire with £1m at age 60. The money you had put away in your 20s accounts for HALF of your ENTIRE retirement wealth. That’s the power of compounding over time.

Example 3 – Invest First (Invest During 20s, Save For House During 30s)

If you instead decided to delay buying your first home until you were 40, what effect would that have on your investment pot? Well, you’d be able to invest for that important first decade, which following on with our example provides £494k of after-inflation net worth to your retirement funds.

You then take a decade off from investing between age 30 and 40 to save for a house deposit. Your initial investments are cooking away merrily during this time.

Bear in mind that your required house deposit will likely be higher by then. If houses increase in value by 3% above inflation annually over 10 years, your required house deposit would move from an average £59,000 to £80,000 in REAL terms; a third higher. And a higher house price likely means higher mortgage payments and a reduced ability to invest.

Then you resume investing at age 40, and are able to build up to a further £231k over the next 20 years from your contributions plus growth. This assumes your mortgage repayments didn’t increase.

This amount takes you twice as long to attain, for half the end value of the money you invested in your 20s, again demonstrating the importance of investing early in life. You could end up with £725k, much higher than the £500k you would have got by saving for a house first. But even though your investments are larger, you’d still have a small outstanding mortgage at age 60.

But It’s Good To Own Property, Right?

Unless you’re planning to access the equity in your home by moving to a cheaper city or downsizing later in life – most people don’t – the growth in your house’s market value doesn’t really matter for your finances. Only the size of your initial deposit matters.

You’ll always need a roof over your head – you can sell your house for more, but your next house will cost more too as a result of the whole property market going up together.

Our Preferred Order

Before you set money aside each month for your house deposit, earmark some for investing on a small scale. If you can afford to save £500 each month in total, maybe you just invest £100 of that.

The goal is to learn while the stakes are low, with a large enough amount for you to care about how the investments perform, but not enough to get in the way of your other objectives.

You should always have an investment account even if it only holds a few hundred quid, so you can spend your formative years figuring out the stock market. Like anything worth doing, investing takes experience and time to perfect.

Ramping up your commitment to investing earlier means you get to experiment and make mistakes while your pot is small and it matters less. Once you’re older with a family, a mortgage, and responsibilities, you’ll be too scared to start once you have more to lose.

With your remaining savings you can save for the house deposit if that goal is on your dream-list. When the house is bought, every spare bit of cash you have should be going into building your investments. Nobody cares more than you do about your retirement, least of all the government. Your future finances have to be YOUR priority.

Which do you think should take priority – saving for a house, or building a freedom fund? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: Dean Clarke/Shutterstock.com

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