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:

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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 step-by-step 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:

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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:

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Best Money Decisions We Ever Made!

In a recent post we looked at our biggest money regrets and we thought rather than just dwell on the stuff we got wrong, let’s also look at the stuff we got right. So, in this post we’re looking at our 5 best money decisions ever!

Hopefully these inspire you with your own money decisions. Now, let’s check it out…

Today’s offer: New users to Genuine Impact, the research and analysis tool, will receive 1 month’s PREMIUM access for free when you sign up via the link on the Offers Page. Be sure to check them out!

Alternatively Watch The YouTube Video > > >

#1 – Quit Job, After Job, After Job!

This applies no matter what age you are but it’s particularly important if you’re young. The fastest way to increase your salary is to job-hop and that is exactly what we both did, earning big pay rises each time. Job loyalty will cost you a fortune in missed promotions and pay rises!

When you first set out and enter the workforce as a bright-eyed and bushy-tailed graduate or school leaver you will be paid a pittance – and rightly so because you have no experience. You need to get experience pronto.

After Uni – so we were 22 – we both got jobs earning around £23k but we were both able to double that by the time we were 30. We didn’t do this by working ridiculous hours, being the best, or kissing the boss’s ass. Hell no!

Unless you’re a massive overachiever who is able to fly up the ranks within one company – which is rare – we find that most people who stick to one job end up getting stagnated.

They find themselves doing the same crappy job for way too many years and learning nothing new. You pretty much learn the entire role within a few months and then only gain additional experience in very small increments, over years. An employer will not pay you more unless you offer more.

To offer more, you need experience, which you get by changing jobs. Even if you end up doing the exact same job at a different company your CV or profile is boosted because of it.

Don’t believe us? Put yourself in the shoes of an employer who is interviewing candidates for a job. Who are you more likely to hire? The candidate who has been doing the same job for the past 10 years, learning nothing new, or the candidate who has worked at multiple companies and gained a wealth of knowledge?

My first ever full-time job was at IBM. I don’t know the exact reason how I got the job, but I do remember seeing the interviewer’s eyes light up when he heard I had previously worked for their direct competitor.

#2 – Lifetime Tracker Mortgage

Most companies like to lock you in to whatever service they provide. Take out a Sim-only phone contract and you’ll get a better deal if you agree to a 12-month or longer contract compared with a monthly rolling contract. It’s the same with Sky TV. Agree to an extended contract and you only need pay 8 kajillions each month instead of 10 kajillions!

A similar pricing strategy is used by the banks when providing mortgages. These days most people end up taking out fixed-term mortgages for 2-5 years. The bank hopes that you:

  1. a) roll onto the much more expensive standard variable rate; or
  2. b) remortgage with them, so you’re locked in once again; or
  3. c) pay off the mortgage early and thus incur rip-off early repayment charges.

I have always hated being tied down and tend to avoid any company that tries to lock me in, even if I have to pay more for the added flexibility. My first ever mortgage had a 3% early repayment charge, which would have cost me £11,000 if for whatever reason I needed to sell the house.

When it was time to remortgage I vowed to myself that I would never do that again, so when the time came, I opted for a lifetime tracker mortgage. The monthly repayments were slightly more expensive than the alternatives, but you can’t put a price on freedom.

It turned out to be one of the best financial decisions I ever made. My girlfriend and I ended up breaking up and selling the house. Thankfully, we could walk away with no financial penalties.

Strangely, we don’t get that many people asking us for help about which mortgage to pick, even though it’s one of the biggest financial decisions of your life. Life is too unpredictable to be locked into a mortgage for several years, so if we can provide any assistance with choosing a mortgage it would be this: think twice before accepting any mortgage with early repayment charges. If you are forced to sell it could be a financial disaster.

It might be a relationship breakup, redundancy, or worse – a debilitating illness. Sadly, all these things are more common than you think and could quite easily happen to you.

#3 – Financial Freedom Insurance

Half of you might be thinking, “Wow, financial freedom insurance. That sounds cool, what’s that?” The other half will be thinking, “Yawn, insurance is for mugs.” But don’t scoff just yet: hear us out.

Financial Freedom Insurance is the cool name we call Income Protection Insurance, because that’s what it is to us. It’s insurance that we’re taking out to cover us while we’re on the path to freedom, between now and the time our investment pots grow big enough to pay us our forever-incomes.

We are both on the path to financial freedom and one of the biggest risks that could derail these awesome plans is a debilitating illness or accident leaving us unable to work. It needn’t even be anything that major – just enough to stop us from producing videos. Losing the use of our hands or voice for example.

After reading about a voice actor who suffered a stroke and was left unable to speak and so sadly would likely never be able to do voiceover work again, we decided we couldn’t let something similar happen to us.

By taking out Income Protection Insurance we have effectively guaranteed our financial futures today. Either we become financially free through illness, or we achieve it the good old-fashioned way – by grafting and investing as much money as we can.

Income Protection Insurance comes in many forms but we both chose policies that will pay us an income right up until we’re 68. Surprisingly, attaining this peace of mind is far cheaper than you would ever imagine – for Ben (MU co-founder) it’s just £17 a month.

If securing your financial future is something you’re interested in, then check out this page and you can get a no obligation quote from the same broker that we both used.

This might sound like we’re trying to entice you into using one of our referral links, but it’s really not the case. We both took out Income Protection Insurance and consider it essential for any sound financial freedom plan.

#4 – Decided To Go Into Business

Changing jobs regularly was the best thing we did to boost our salaries but the decision to go it alone was the action that had the most far-reaching impact on our lives.

The story is Money Unshackled legend. We both knew that simply working for somebody else was never going to give us the money or freedom that we longed for.

In January 2018, we met up at a hotel bar on the side of the M62 motorway to brainstorm business ideas. Days later Money Unshackled was born, the company registered, and website domains and social media tags claimed.

As inspiration for you guys, we’d like to say that we became millionaires soon after this as all that internet money came flowing in but that wouldn’t be entirely truthful. The truth is we’re not there yet and it’s been a grind, but we do get paid to do what we love – which is talking about money and investing.

An added benefit of starting this particular business is we literally get paid to think about money 24/7. Our investing strategies have been massively improved because we’ve had more time to learn the best ways to invest and manage money.

One such example is that we recently put together a long-term spread betting strategy that should comfortably amplify our investment returns into the double digits. We’re so excited to see how this plays out and the returns promise to be life changing. You can read about it here. It’s definitely worth checking out if you too want to supercharge your investment gains.

The best feeling you get from starting a business is when that first bit of income comes in, because it’s money you’ve made for yourself from nothing. Our first £50 earned from Money Unshackled means way more to us than all the money earned from a job.

#5 – Make Short-Term Sacrifices

This last one is a catch-all point. It covers all the sacrifices that we make and continue to make to achieve our financial goals. Dave Ramsey says it best when he says, “If you live like no one else, later you can live like no one else.”

Everything worthwhile in life can only be earned by paying the price. If you want to be the next Ronaldo, you have to eat the right food and train day and night. If you want to get the best grades and get into the best University, you need to put in the time and study hard. Those are the sacrifices required. There are no shortcuts.

If you want to get ahead financially you need to cut expenses and maximise income.

In my early twenties I was prepared to sacrifice my independence by living with my parents for a few years, and doing so allowed me to save and, crucially, invest a small fortune.

Forget the stigma about not flying the nest. Nobody will be laughing at you when you’re financially free while they’re still toiling in the mine.  On reflection this might have been my best ever financial decision.

Most young people will do the same but blow all their money on toys, holidays, and cars – completely squandering the opportunity to build wealth. They have sacrificed their independence and have nothing to show for it. Even on minimum wage if you live practically rent-free you should be able to put aside several thousand pounds a year.

Disposable income in your twenties is worth way more than disposable income later in life because the sooner you earn it, the sooner it can be invested, and the sooner it can begin to compound.

Ben too sacrificed his personal living space by getting a lodger for the best part of 2 years. He was able to earn around £8,000 at a crucial juncture in his 20s, when a few grand at the right time can be the difference between life success and life failure.

This additional cash buffer enabled him to feel comfortable jumping jobs frequently without having to have the next job lined up, leading to better choice of opportunities and more cash!

#6 – Live Plan B

We said 5 but here’s a bonus. Like most young people I didn’t know what I wanted to do career-wise. But I did know I couldn’t sit around waiting to figure it out. Weeks turn into months, months turn into years, and before you know it you’ve wasted the best years of your life working for peanuts.

Like most people I never had a solid Plan A… so I got to work on Plan B. I ended up pursuing a career in financial analysis and becoming a Chartered Management Accountant.

Ben too became Chartered. Working in accounting and finance may not have been a dream job but it was relatively well paid and allowed us the time to work on Money Unshackled in the evenings and at weekends.

There’s a fantastic YouTuber called Sean Cannell, who helps people grow their influence on social media. One thing he said really resonates with us: “I worked a day job at a restaurant for 10 years while working on my dream job on the side… keep grinding.”

Worst case we have a solid career to fall back on. The point we’re trying to make is: a good plan B is better than no plan at all. You can figure out Plan A later.

What are the best money decisions that you’ve made? Join the conversation in the comments below.

Written by Andy

Featured image credit: diy13/Shutterstock.com

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

Go To YouTube Channel

How To Retire With A £1 Million Pension At Age 50

In previous articles we’ve looked at retiring really young, and there were two themes that were evident:

1) You had to save and invest an enormous amount of money; and

2) Pensions were of little use because they cannot be accessed until your mid to late 50s.

However, if you are willing to retire a little later, such as in your 50s, pensions are an incredibly powerful tool for building up a huge investment pot that can provide you an income for the rest of your life. What’s more, if you’re aware of smart strategies – the kind that we’ll introduce you to today – then you can in effect access your pension pot early.

In this post we’re looking at how you can retire with a £1 million pension at age 50, in today’s value of money. We’ll cover how much you need to save, the benefits of starting as early as possible, some strategies at your disposal, and more. Let’s check it out…

If you’re going to do the following strategy properly, at some point you’re likely going to need to use a SIPP. We’ve compared them all and handpicked our favourites. Check out the Best SIPPs page for guidance.

Alternatively Watch The YouTube Video > > >

Do You Really Need A £1 Million Pension?

How much retirement pot you really need is dictated by your desired income. The more income you want, the bigger the pot required!

Which.co.uk spoke to thousands of their members and they published some really interesting figures on how much money you need in retirement, whether you’re living alone or in a couple.

Couples would need just £18,000 for the essentials, £26,000 for a comfortable income and £41,000 for a luxury lifestyle. The comfortable lifestyle covers all the basic areas of expenditure and some luxuries, such as European holidays, hobbies and eating out. The luxury lifestyle includes all this plus more, such as long-haul trips and a new car every five years.

If you don’t mind popping your clogs and having nothing left to leave to your family, friends or favourite charity, then you’ll be able to drawdown on that pension much faster than someone who doesn’t want to deplete the pension pot. If your goal is to retire at 50, as per the title of this article, you might want to consider trying to maintain the value of your pension for as long as possible.

A good rule of thumb is to use the 4% safe withdrawal rate. We won’t cover it today because we’ve covered it a lot previously but in theory you would need a pension pot of £1,025,000 to achieve that £41,000 per year luxury lifestyle for a couple.

The pension lifetime allowance for most people is £1,073,100 in the tax year 2021/22. Up until the allowance limit, pensions are a very tax-efficient way to save for retirement. Past this mark, they start to become inefficient as the government start hitting you with hefty tax charges.

If you’re hoping to hit that £1m pension and you’re in a couple, you should definitely consider splitting it across the pair of you so you’re less likely to fall foul of the lifetime allowance from further growth, but at the same time you also need to consider the most tax efficient way to save.

How Much Do You Need To Save To Get To The £1 Million Mark?

For all the following figures, we’ve used a 5% real rate of return. We always assume that market returns will be 8% based on history and then deduct 3% for estimated annual inflation and investment fees.

Let’s first look at what you need to save, assuming that you’re going to save into a pension until you hit state retirement age at 68.

The amount you need to save per month depends on your age. As you can see in this chart the younger you are your required savings per month are far lower than if you start later in life. If you’re 25 you will only need to save today’s equivalent of £555 per month. But if you start at 40 you will need to save almost triple at £1,359.

We’d say that for anyone under 30 who wants to be a millionaire it is absolutely within their reach. 30-year-olds only need to save £737 per month. In fact, we’d even say that if you’re 40 you can still quite easily become a pension millionaire despite the seemingly higher savings rates required.

You can access your private pension before the state pension age, so let’s recalculate as if you want to access as early as possible. The current minimum pension age for taking benefits from a private pension is age 55. This is expected to increase over time. For this example, we’ll go with 58, which is probably most likely for those currently in their 30s and younger.

The required savings per month is noticeably higher than when the target date was 68. We have 10 years less to contribute and 10 years less of compounding returns. The later you start the harder it gets, like before, but every year later is so much harder. This is based on 58. Doing it by 50 is probably going to be a Herculean task. Let’s take a look…

This chart looks different to the other charts because you can’t actually access the money in the pension at 50. So, although you will stop contributing at 50, the pension pot will continue to grow until 58, hence why all the lines come together at 50.

What might surprise you is that the savings per month for the younger ages are not that different to those required for retiring at 58. At that point growth is far more important for compounding than the relatively low contributions.

Let’s look at all the figures together to more easily see how they compare. The later you start investing would make getting to £1m a very difficult task indeed. But for those who are currently 30, retiring by 50 looks very doable as you only need to save £1,625 per month.

I imagine that some of you are screaming expletives at us right now because unless you’re on the younger end of that scale some of those numbers are beginning to appear ridiculous. Well let’s take a look at how those numbers can be drastically cut down.

Taking An Axe To The Required Savings

All the numbers we’ve seen so far are the total contributions. The beauty of pensions is that thankfully you don’t need to pay all this yourself. You will get employer contributions and tax-relief, which can be enormous.

There’s also a smart hack that some companies use to avoid National Insurance (NI) called ‘salary sacrifice’, which saves you a bucket load of money. You can then make further contributions to your pension with the tax saved.

Better still, some companies who operate a salary sacrifice scheme will also pass on their employers NI savings of 13.8% to your pension pot too.

All in, this will be an effective boost of 83.8% for higher-rate taxpayers on top of whatever you put in. For lower-rate taxpayers it works out at a still impressive 53.8%.

If that wasn’t enough, if you have outstanding student debt, using salary sacrifice to increase pension contributions lowers the amount you need to pay back each month. This would further increase those figures to 98.8% for higher-rate taxpayers and 65.1% for lower-rate taxpayers.

For the purpose of the rest of the article we’ll assume you have no student debt and so don’t benefit from avoiding that.

Also, some companies don’t offer a salary sacrifice scheme simply because they’ve never heard of it. There’s no harm in asking and perhaps educating them why they should introduce salary sacrifice.

How Much Do You Really Need To Save To Get To The £1 Million Mark?

This is what both a higher-rate taxpayer and their employer will contribute to their pension, plus the tax relief they will receive, in order to hit that £1m pension. In this first example shown we’ve assumed a salary of £75,000 and 10% matched employer contributions.

Most companies will pay less than 10% but there are also many who do respect their employees and pay this or even more. If you’re serious about building a £1m pension, then it might be in your interest to seek a good employer out.

That 10% matched limit is why the company contributions are frozen at £625 for some of the ages. It means that you will have to pay in more yourself to compensate for lower company contributions. Hence at 35, to retire at 50, you will pay in £1,014 per month but only receive £625 from your company. Of course, if you earn more or have higher matched contributions your company will pay more than this, meaning you yourself can pay less.

Let’s look at what a lower-rate taxpayer earning £45,000 would have to save. As you can see the lower salary means the employer contributions are capped at £375 per month causing you to have to contribute more yourself. At 30 you would only have to save £812 a month to retire at 50 with a pot that would soon grow to £1m. For those age 40, the required monthly savings are a tall order, requiring £2,533 per month. This can be slashed for those willing to work until 58 and later.

How To Access Your Pension at 50?

As we mentioned earlier you cannot access a private pension until probably 58 in normal circumstances.

Our first lifehack is to take out debt at your chosen retirement age of 50, most likely mortgage debt as it’s very cheap, to fund your lifestyle until you reach the pension age of 58. When you can finally access the pension, you can take a 25% tax-free lump sum, which you could use to pay down the debt should you wish. If you did manage to build a £1m pension that’s a tax-free lump sum of £250,000.

If you had remortgaged your property and extracted £250,000 at age 50, that would give you £31,250 each year to live on. This could be supplemented with any other savings or investments that you hold outside of a pension, such as an ISA.

Our second lifehack also involves using debt smartly, but in the early years of pension building.

The irony of investing is that it’s far preferable to inject lots of money in the early years rather than later, in order to produce better compounding. But inevitably, your salary will be lower in the early years and your pension pot will be small, meaning it’s only in the later years that your pot grows to a size that the compounding starts making an impact.

Why not flip that on its head? By taking on a large amount of low interest debt in your twenties or thirties and investing it into your pension, you can then watch as your pension snowballs over the years from strong compounding returns.

Preferably the debt will be long term, cheap mortgage borrowings like the first hack, so you can defer paying it back for 2 or 3 decades, as before.

Other Key Tips

#1 – Consolidate Old Pensions

Most people will have several jobs or more during their lifetime and accumulate multiple pensions. This not only makes them a pain in the butt to manage but also many of them will be expensive and underperforming.

In many cases it’s worth consolidating them into one easy to manage, low-cost SIPP. Before doing this do your research and perhaps speak to a financial advisor if you’re unsure.

#2 – Partial Transfer Your Existing Workplace Pension

Following on from the last point, it might be worthwhile partially transferring your existing workplace pension into a SIPP if your existing pension is costly or badly run. Many workplace pensions have poor investment options and are likely to not be invested according to your risk profile and goals.

We’re suggesting a partial transfer because otherwise your employer will likely stop contributing, which you want to avoid. Before doing a partial transfer make sure your existing pension provider allows this.

#3 – Ramp Up The Risk

Generally, the higher the risk, the higher the potential reward. To build a £1m pension is no mean feat and will require great returns. In this video we think we’ve been quite conservative using just 5% real returns, and if you increase risk, we think there is a good possibility that you will get returns exceeding this.

#4 – Use Your Spouse’s Pension Too

If you’re fortunate enough to have a spouse who has a good workplace pension too, then take full advantage of this. You’ll get even more employer contributions and will now have two salaries to make quick work of those required savings rates.

Also, on your own you will likely eventually breach your pension lifetime allowance if you have a pot already worth £1m at age 58 as it will continue to grow. If that was spread across two people’s allowances, that is much better.

#5 – Don’t Neglect Your ISA

Pensions are incredible, but Stocks & Shares ISAs are also extremely powerful in their own right. Together they can be used to balance tax efficiency and accessibility. Check out this article and video next to learn how they can be strategically used together to retire early.

Were you surprised by just how little of your own money is required to become a pension millionaire? What’s your retirement strategy? Join the conversation in the comments below.

Written by Andy

 

Featured image credit:  Rus Limon/Shutterstock.com

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

Go To YouTube Channel

Don’t Do This… Our 5 Biggest Money Regrets

“It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.” – Warren Buffett.

In today’s post we’re looking at our 5 biggest money regrets. Hopefully, you’ll find this article entertaining but more importantly we hope you find it useful.

Some of these regrets are in direct opposition to popular opinion, which in some cases is why it has taken us so long to identify the bad practice in the first place. We like to think that we’re quite knowledgeable when it comes to financial matters, but even now we’re still perfecting our financial strategies, making mistakes along the way, and sharing it all with you. Let’s check it out…

If you’re looking to get a boost to your investments head over to the Money Unshackled Offers page where platforms like Freetrade, Trading 212, Stake and others are giving away free stocks and welcome bonuses when you sign up.

Alternatively Watch The YouTube Video > > >

What This Article Is Not About

If you’ve ever read or watched anything before on the topic of money regrets, you might be expecting us to reel off a list of predictable mistakes that any self-respecting financial blogger should not be making in the first place.

Things like racking up a huge amount of consumer credit card debt is the obvious one or blowing their life savings on a brand-new car. We’ve always been sensible with money and never squandered it, so we don’t have any major spending regrets as we’re too damn tight!

Sure, back in my student days I was living in my overdraft just like everyone else seemed to be doing, but it was interest free, and the debt was small enough to easily be paid back with a summer job.

Our financial regrets are stuff we would actually go back and change if we could.

Regret #1 – Focussed On UK Stocks And Dividends

This one must have cost me tens of thousands of pounds since I started investing properly in 2010. All we ever heard back then was the FTSE this and the FTSE that. The financial news would come on and tell you how many points the FTSE 100 had moved that day but there was never any mention of the performance of a world index.

Investment platforms would actively discourage investing in foreign markets like the US by charging extortionate trading fees on non-UK investments. Popular investing website The Motley Fool would run seemingly daily articles of 5 UK dividend stocks that every investor needed in their portfolio.

Dividends were spoken about as if they were the only way to make money in the stock market. You’d hear facts like 40 or 50% of overall long-term returns come from dividend reinvesting.

With all this potentially misleading information it’s easy to see why a new investor might be led down the wrong path.

Over the last decade or so the returns on UK stocks have been lacklustre at best, while US stocks have powered ahead. With hindsight it’s always easy to say you should have done this or should have done that. It’s not the past returns though that make me regret going heavy with UK exposure. It’s the fact that UK stocks only make up around 4% of the world’s market capitalisation.

Also, with my human capital (that being my ability to work and live) limited to the UK, it makes no sense to invest with home bias. Exposure to the whole world – or at least mostly US stocks which make up about 55% of the world’s market cap – would be a far more sensible allocation.

As for dividends, there’s nothing wrong with them per se, but by only targeting high yield stocks meant better growth stocks like Amazon, Google and Facebook were ignored. You don’t need to be an investor to know these stocks have left most others in their wake.

Regret #2 – Wasting Our Early Years

This regret is two-fold. Firstly, we both wish we had started investing earlier. Growing up, my parents saved up a small amount of money in a building society for me and I remember how cool it was to see money making money – back then of course interest rates were something like 5% so passive income and the magic of compound interest was clear for all to see.

However, you have to wonder what would have happened to my small pot had it been invested instead. Moreover, later in my early twenties when I did start investing, I was so slow to shift what cash I had into equity, that much of my cash was sitting idle as the stock market went on a bull run.

For Ben (MU Co-founder), he sat in cash even longer. But rather than gradually moving from cash to equity as I had, he had an epiphany after reading Rich Dad Poor Dad at age 27, which was six years ago.

From that moment on he was all in. He went on a buy-to-let shopping spree, buying as many as he could as fast as he could. This even included extracting equity from his own home to jumpstart his asset purchases.

The second part of this regret is about wasting our early years when we had so much time on our hands.

Ben and I lived together at Uni with a bunch of other likeminded people, all of whom had big dreams like we did. Looking back, we had so much time on our hands but did nothing productive with it. We drank, watched Lost, and became rock gods on guitar hero. Could that time have been used to build a business empire like Mark Zuckerberg did?

Most people who don’t start a business use the excuse that they have no time, but we know from having lived it and squandered the opportunity, that students have an abundance of time. We literally must have only spent around 15 to 20 hours a week doing Uni work, spending the rest of the week chilling. If only we had that time back now!

Regret #3 – Pigeonholing Ourselves In An Unscalable Career

A lot of people’s careers start when they’re around 17 and they choose a university degree with little understanding of where that leads to in terms of career. That decision in many cases dictates what they will likely do for the rest of their life. A frightening proposition for any 17-year-old, if only they understood the impact of their decision.

At best, a clued-up youngster might consider the earnings potential of different careers and choose one of the best paid.

Back then, we had no idea about the difference between trading time for money, owning passive income streams, or scalable income. We ended up learning accounting which does lead to a relatively highly paid job, but the work doesn’t lend itself well to scaling.

The best paid work is scalable, which means it can be rolled out to multiple customers with little to no additional work. For instance, if you provide online training courses, then you can create a course once and sell it to an unlimited number of customers.

The same can be said for software engineers who are able to code computer programs, apps and games that have endless reach. Do you remember the game Flappy Bird? Its developer said that it was earning $50,000 a day during its peak popularity. Incredible. That’s the difference between scalable income and trading time for money.

Generally, once you’ve learnt a skill, you become pigeonholed, but we think anyone that has something between their ears can apply themselves to any profession.

While basic accounting is an absolutely vital skill for any business owner to possess, it probably isn’t necessary to study for 6 years of combined university and professional level qualifications in the subject. Better we think, to learn a scalable set of skills.

Regret #4 – Lack Of Leverage

Leverage is the use of debt to amplify potential returns. So, if the stock market rose by, say 8% and you were using 3x leverage, you would get 24% returns, less any financing costs. High returns like this make an enormous impact when compounded over time.

Our regret of not using enough leverage runs contrary to what most people feel about borrowing money to invest. Most people believe that debt and therefore leveraging is inherently risky and so won’t ever touch it. They may regret using debt, while we regret not using enough of it.

Leverage is a useful tool that can enhance returns when used appropriately. For us, the biggest money risk is having to spend a lifetime working and not having the time left at the end of a career to live the life of our dreams. Leverage can be used to more easily achieve that dream life!

In fact, we’ve recently been swotting up on the use of leverage and came across some really interesting theories. One put forward in the book Lifecycle Investing, argues that we should all be using leverage in our early years to diversify across time, and the book makes a compelling case that this actually reduces risk. Can you believe it? Leverage being used to reduce risk!

We’ll probably do a full video on this soon because the theory is so eye-opening and deserves a full explanation, but to summarise, the theory says that because you have so little wealth at the beginning of your life, the movements of the stock market make almost no difference relative to the impact it has later in your life when your pot is large.

From a temporal diversification perspective, it’s as though your 20s and 30s didn’t even exist.

Another use of leverage that we’re only just beginning to use ourselves is a risk parity strategy. Again, this needs a dedicated video as we can’t give it the credit it deserves here.

In brief the asset allocation in a portfolio is adjusted, so that the assets have the same risk level, but then leverage is used to obtain the desired return. This risk parity strategy should have the same return as a stock dominated portfolio but crucially with less risk.

For example, a traditional portfolio might be 60% stocks and 40% bonds, but stocks contribute 90% of the volatility. A risk parity strategy might allocate 20% stocks and 80% bonds but then leverage the portfolio to obtain the desired returns.

Regret #5 – Trapped In A Fixed-Term Mortgage

Fool me once, shame on you; fool me twice, shame on me. Well, it looks like Ben’s a fool (his own words) as he’s made this mistake twice and regretted it both times.

Fixed-term mortgages look appealing. You can lock-in a low interest rate for a number of years and he’s done this with a 5-year fixed term mortgage twice.

Fixed-term mortgages have their uses, such as giving you certainty over repayments – you won’t ever get any nasty surprises from your bank telling you your monthly repayment is going up. But the downside is that they’re very inflexible, and life is bound to throw up many surprises during a 5-year timeframe.

The first time he wanted to release some equity from his house to invest in Buy-To-Let property, he was forced to pay an early repayment charge of a few grand. He then somewhat sensibly chose a 2-year fix, which allowed him to extract more equity just 2 years later.

At the end of the two years, he convinced himself that he wouldn’t ever want to extract equity again, so foolishly (his words again) opted once more for a 5-year fixed term.

Surprise, surprise, he changed his mind and wants to extract some further equity now that the property market is sky high – only to be facing another hefty early repayment charge. The moral is, think twice before locking yourself into a mortgage term… and if thinking twice doesn’t work, definitely don’t get it wrong a third time!

What financial regrets do you have and why? Join the conversation in the comments below.

Written by Andy

 

Featured image credit:  Golubovy/Shutterstock.com

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

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10 Tips For Supercharged Matched Betting Profits (How We Made £500+ A Month)

Do you want to make easy money, sitting on your backside, with a beer in one hand and a pizza in the other, and the football playing on the big screen in the background? This doesn’t sound like the sort of environment to make money but with matched betting you can make a few hundred extra quid a month tax-free from home – You don’t even need to like sport or gambling!

You can make good money in just half an hour a day but the serious matched bettors who are either prepared to put in more time or streamline their approach can make several hundred quid a month or more.

In today’s post we’re sharing our top 10 tips to supercharge your matched betting profits, so you can make more money, faster!

One of the main players in the matched betting market is Oddsmonkey. Oddsmonkey provide the tools and guides that will allow you to supercharge your matched betting profits. We have free trials and discounts when you sign-up to OddsMonkey through our offers in the Matched Betting area.

Alternatively Watch The YouTube Video > > >

What Is Matched Betting?

For a detailed explanation feel free to go back and check out our introductory matched betting guide. In brief, matched betting is a technique to unlock the free bets offered by the bookies, turning them into cash that you can bank.

For most of the offers (and if done correctly) normal gambing risk is removed, but human error doesn’t make it fool-proof as you may follow the instructions incorrectly.

Gambling sites love to entice their customers and potential new customers to gamble, and they regularly chuck free bets to keep ‘em gambling. Don’t be a sucker and fall for this. Instead, beat them at their own game. At first you want to rinse them for their new customer offers like “bet £10 and get £30 in free bets”.

At any one time there could be between 50 and 100 such offers, with several hundred quid up for grabs. As they say in Pokémon, “Gotta Catch ‘Em All”.

The reason we can say it’s practically risk-free (but we must reiterate the human error thing again!) is because you never have to risk your money by betting on an outcome to come true. You bet on both sides. For example, you place a bet for say Man United to beat Arsenal, and then you place another bet for Man United not to beat Arsenal. The technical jargon for this is that we placed a back bet on Man United to win and also a lay bet on Man United.

You have covered all potential outcomes. The end result is you lose a few pence, which is the bookmaker’s profit margin, but you unlock the free bet.

You repeat the process using the free bet, and you typically earn around 70% of the value of the free bet as profit – turning a £30 free bet into £21 easy profit. It’s that simple. Now repeat something similar for about 40 or 50 bookies!

Once you’ve raked in all that easy money, you then need to move on to what’s known as the ‘reload’ offers, which is just a cool name for existing customer offers. Don’t be tempted to quit at this point: for those who are prepared to learn and use the tips and tricks like those we’re about to share, ‘reload’ offers can be way more lucrative, and in a way it’s also less effort because you don’t have to open new accounts.

Some matched bettors even claim to make £1,000+ a month using ‘reload’ offers. Now that we’ve covered the basics, let’s jump into the tips that will supercharge your matched betting profits.

Tip #1 – Use Matched Betting Software

There are a few sites to choose from but one of our favourites and today’s sponsor is OddsMonkey. We say this sincerely that you absolutely must use software if you are doing matched betting.

OddsMonkey will collate all the best available offers, so you don’t waste time sourcing them yourself. And they create excellent written and video guides that walk you through each and every offer step-by-step. Their support teams are active 7 days a week if you need help!

But the most vital tool of all is the ‘oddsmatching’ tool. This is where the magic happens and is worth its weight in gold. They fetch all the live betting odds from all the bookies and allow you to filter on a multitude of different options to find the best matched bet for you.

Within this tool you select an event, and it will tell you exactly what you need to bet to maximise your profits. A typical example would be that you lose 14 pence and presumably you would be doing this to unlock a free bet.

Then there’s the forum, where OddsMonkey and other Matched Bettors are active. You might want to join some of the threads to find offers that might not be listed elsewhere on the site. New offers are added daily, so check those out!

Tip #2 – Integrate The Betting Exchange

If you’ve done matched betting before, you’ll know time is the key factor that determines how profitable it is. Having to place a bet on the bookies website and then place the opposite bet on the Exchange is time consuming and a potential weak spot where human error may occur.

Amazingly, the two biggest and best betting exchanges – Betfair and Smarkets – are integrated into the ‘Oddsmatching’ tool. You will be able to place your Lay bet without ever leaving OddsMonkey.

Fig.1: Exchange Integration with Betfair

If you hit the ‘Lay The Bet’ button your lay bet is instantly placed with the Exchange. You will still have to visit the bookmaker’s site to place the back bet, but half the work is now done for you. This was a game changer when we discovered this integration!

Tip #3 – Use 0% Exchange Commission Offer

Betting exchanges make money by charging a commission on players’ net winnings. At time of writing there are 0% commission offers for both Matchbook and Smarkets for OddsMonkey customers. This alone could more or less make the OddsMonkey membership pay for itself. Betfair’s standard commission is 5%, so gradually you can have quite a large slice of your profits eaten up.

Let’s say you’re making £500 each month and hypothetically you’re winning half of that at the betting exchange. After a year’s worth of winning £250 each month at the exchange, you would have made an extra £150 in profit just by using the 0% offer at Smarkets over Betfair.

Tip #4 – Use A Password Manager

Typing your login details in manually each time is a costly waste of time for Matched Bettors with multiple betting sites on the go, when they could be placing bets instead of keying in passwords.

You should always have different passwords at different sites for security in case one should be hacked. That’s a good life-rule whether you’re matched betting or not. But having different passwords across your betting sites could be time consuming and will be impossible to remember.

We recommend a password manager that manages and encrypts your passwords, so you can safely log in to any site at the click of a button. There are a few different password vaults to choose from, but our favourite is LastPass. It’s free to use and if you’re only using it for matched betting, then this is all you need.

If you plan to use it for all your non-matched betting stuff and across devices – which we think you will once you’ve trialled it – you can upgrade to the Premium plan. Check LastPass out here.

Tip #5 – Use A Dedicated Bank Account

Money will be coming at you from all angles when you’re raking it in from multiple bookmakers but this can be messy. But an easy way to keep your main bank account tidy is to set up a dedicated bank account for your matched betting transactions.

This will also really help you to keep track of your matched betting profits, and there’s no way you can miscalculate when it’s all there in a dedicated bank account and as clear as day.

Tip #6 – Set-Up A Matched Betting Email Address

I never did this, and I wish I had. Just as your bank account will be full of matched betting transactions, your inbox will soon be collecting multiple offers for free bets and other promotions – but you could be getting up to 50 emails per day, so you can imagine the mess this will cause.

If you were thinking you could just opt out of these emails – hold your horses. Excuse the pun. It’s vitally important that you opt in to all their email marketing because they will send you personal offers, which are often some of the most lucrative.

To maximise profits matched betting is all about speed, so you want all your matched betting emails together.  The majority of bookie emails are useless newsletters, so with time you’ll need to learn to separate the wheat from the chaff. You can often do this by scanning the email subject line and you’ll have it down to a fine art in no time!

Tip #7 – Mug Bet Regularly

The biggest complaint from those that quit and say that matched betting cannot be done forever is that the bookies can eventually ban you from their free bets – what’s known as gubbing.

But don’t worry – there are easy ways around this. It should come as no surprise that the bookies don’t like matched bettors because they are in effect abusing the system – they’re beating the bookies. Bookies want you to lose more than you win.

The bookies have sophisticated systems in place to detect those who are matched betting but there are steps you can take to minimise the chances of your accounts being gubbed. If you only ever place bets that earn you a free bet or you only ever bet the minimum to qualify for free bets, then your matched betting career may be over before it’s even begun.

To avoid this, you need to place mug bets on a semi-regular basis. Mug betting is the process of placing matched bets which do not qualify for a free bet or promotion. These bets are designed to hide your matched bets and keep your bookie accounts open.

Tip #8 – Use A Big Bankroll

A matched betting bankroll (also referred to as a cash float by some) is a set amount of money you use for placing your bets at the bookmakers and exchanges when matched betting. If you’re new to matched betting take your time and don’t have several bets open at once. Doing this makes it possible to start with a relatively small bankroll of, say £50, but we recommend having around £200 to begin with.

A larger bankroll will allow you to bet faster as you can have more money tied up in bets and allow you to place bets with higher odds. For example, if you place a £10 lay bet at the exchange with odds of 8 the exchange will temporarily lock £70 as a liability in case the bet loses.

Once you’re up and running and doing matched betting regularly we suggest using a bankroll of around £500 or more. Don’t fret if you don’t have that amount yet. As you win you can retain some for use as an increased bankroll.

A business would refer to this money as working capital. It is the money needed to keep the cogs turning. As you’ll be moving money between bookmakers and your bank account and back to other bookmakers, money can get tied up in the ether. A larger bankroll means you can continue to bet while the money is flying through space.

And on that note, it’s a good idea to leave some money in the bookies that you use most frequently rather than constantly withdrawing because having to deposit for every bet is more time lost, when instead you could be betting and moving on to the next offer.

Tip #9 – Go Big During The Big Events

Some free bets can be so small that you might think it’s not worth your time. We get that. Rather than doing matched betting continually you might prefer to have breaks and then go heavy during big events like the Euros or the World Cup, The Super Bowl, The Grand National, Wimbledon, and so on.

We’re writing this during the Euros and right now the bookies are giving away free bets like there’s no tomorrow to both new and existing customers.

Tip #10 – Don’t Bet Last Minute

Sooner or later, you will make a mistake. This is okay as long as you minimise the frequency of these mistakes and take action to reduce the size of the loss when they happen.

The best way to avoid problems in the first place is not to bet last minute, especially on the horses. The odds can change rapidly and drastically in the moments before a race. And always double check that the odds at the betting site match those stated on OddsMonkey.

Sometimes the odds will change in between the time you place your first bet and the second, but as long as you are doing it well in advance you will have plenty of time to recalculate and fix the error. Tools like the Unwanted Lay Calculator can help you neutralise erroneous bets.

Just the other day I was foolishly betting last minute chasing the best rating and I accidently placed my lay bet first as I was rushing. The Back bet odds suddenly changed also, and I was looking at a potentially sizable loss. I frantically placed a back bet with no time to think in an attempt to minimise my potential losses.

The lesson to be learnt is don’t bet last minute, and bonus tip: always place your back bet at the bookies first before the lay bet at the exchange.

Have you given matched betting a try yet and if not, why not? Join the conversation in the comments below.

Don’t forget to check out the latest Matched Betting offers here, which include fee trials and discounts.

Written By Andy

 

Featured image credit:   Eugene Onischenko/Shutterstock.com

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

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Should You Just Live In A Caravan? | Extreme Financial Freedom Now?

When you’re several years or even decades away from your financial freedom goals, your mind turns to crazy ideas to speed up the process. Could you just sell up the house, ditch the mortgage, buy a caravan, and declare yourself financially free? Thoughts like this have surely crossed your mind if you’re pursuing financial independence but are still years away from retirement.

After all, a holiday home at a beautiful caravan park by the sea might cost £60,000 to buy – that’s a damn sight cheaper than any house made of bricks, other than in the most deprived of areas.

You wouldn’t want to live in a cheap, run-down 1-bed flat in a horrible area for the rest of your days. But maybe a static caravan in a gated community wouldn’t be such a bad way to live, for the same upfront price.

Or maybe you’d like to tour the world in a mobile home? Is that much cheaper than owning a house?

If you could drive down the most significant cost of living – housing – while still enjoying life, that would be a great way to reach retirement earlier.

In this article we’re looking at the real costs of doing exactly this; whether it’s a feasible early-retirement solution; and how many years it can knock off your working career. By the end you’ll know whether this early-retirement strategy lifestyle is right for you.

Alternatively Watch The YouTube Video > > >

The Dream

The dream for many in the financial independence community is to retire young, or at the least, earlier than the state pension age.

The dream will usually involve travel, or spending your days on the beach, or just escaping the hustle and bustle of city life. Why not do that right now by buying a cliff-top static caravan overlooking the sea, or a motor home to drive around Europe in?

If it means you’re not having to pay a big mortgage each month and you get to see more of the world, it sounds on paper like an exciting (if radical) route to financial freedom.

Stated in financial independence language, it feels like it should allow you to reduce your required retirement pot size, and hence the number of years until you can retire – perhaps right down to today.

Retiring Earlier

We’ve built a handy early retirement, or FIRE calculator, here, that you can use to work out how many years away you are from retirement; and crucially, how big your investments need to be to get you there.

That’s how big in £s your retirement portfolio needs to be to allow you to live fully off the income that those investments provide.

To kick start your own investment journey, check out the deals on the Offers page which include a free £50 cash bonus when you open an investment account with InvestEngine or Loanpad, or free stocks when you open accounts with Freetrade or Trading212, plus a bunch of other stuff. Our investment guides will help you to choose the right platform or pension provider for you.

As an example, the required portfolio size for my family to retire early is £900,000, which should allow us to withdraw an income of £36,000 a year using a 4% withdrawal rate.

But that’s based on the assumption that we’ll continue to live in a house worth £300k at today’s value of money in our early retirement. If we could make a trade-off of living space for a reduction in living cost, maybe that retirement pot size could be a lot smaller, and we could start living our best lives sooner.

Static Caravans

Let’s kick off with the actual costs involved in rebooting your life in a static caravan overlooking the sea in the UK. This involves living at a holiday park in a holiday home like this one, with on-site facilities typically including a shop, a pub and kids’ clubs, in a community of like-minded people.

Is it cheaper than running the average UK home? You’d better hope so, since you’ve got just a tiny fraction of the floorspace!

Yes, it IS cheaper, but not by as much as you might expect:

Let’s kick off with the actual costs involved in rebooting your life in a static caravan overlooking the sea in the UK. This involves living at a holiday park in a holiday home like this one, with on-site facilities typically including a shop, a pub and kids’ clubs, in a community of like-minded people.

Is it cheaper than running the average UK home? You’d better hope so, since you’ve got just a tiny fraction of the floorspace!

Yes, it IS cheaper, but not by as much as you might expect:

Fig.1: Static Caravan Annual Costs vs Average House

The standalone costs of running a £250k average house are around £8,400 a year by our estimates – this excludes ever-present costs like internet, which you’ll be buying regardless of where you’re based. The saving you’d make by moving to a static caravan might just be a couple of grand a year.

If you look at the split of the costs, the big ones are caravan depreciation, and site fees. A big problem is that caravans have a life of around 20 years, before they depreciate down to nothing.

They are made of plastic, wood and sheet-metal, and are not built to last forever like a house is.

Surprisingly, there’s not a great deal of difference between buying new or buying second hand – an average second hand one might cost £30k and last you 10 years, while an average new one might cost £60k and last you 20 years – either way, it costs you about the same, as a yearly average.

The site fees really sting you, with even a mid-range site costing £2,500 a year. You could cut these fees to £1,000 a year if you were happy to pretty much live in a field with no facilities other than your gas, electricity, and water.

If you went down the static caravan route to retire faster, you might shave up to £83k off your required portfolio size.

Not exactly life-changing, but – (a) you do get to retire a little sooner, and (b) if you wanted to live like you were on a permanent holiday now, this ticks that box.

The Max and Paddy Option

Statics are expensive, no doubt. But motor homes and campervans ought to be a lot cheaper, as they’re smaller and your standard of living is far less luxurious.

But as this is a life on the road, it may only appeal to a certain brand of financial freedom fighter who pictures their early retirement being one of travel and exploring the world.

Here’s a couple of options – a decent 4-Berth tourer, and a little 2-Berth campervan, both making use of campsites around Europe:

Fig.2: Campervan Annual Costs vs Average House

This lifestyle would fit someone who was able to work remotely from their laptop.

The tourer works out as a more expensive lifestyle than the static caravans, and just a little cheaper than owning an average house. The little campervan saves you the most money, reducing your required retirement pot size by £92k.

What’s obvious from these numbers so far is that taking the radical step of selling your home to live a cheap life in a caravan isn’t all that realistic financially.

It’s not the extreme early retirement shortcut that we had hoped it would be.

It CAN Be Done Cheaper

The site fees are the real killer, and could be avoided if you really wanted to make this lifestyle change work.

In the UK, campervans are allowed to park at the side of most roads overnight, and you’re allowed to sleep in them. If you’re travelling in England and Wales, there are still places that you can go wild camping, such as the Lake District and parts of Dartmoor. You’d have to source your own gas, and presumably use public washrooms.

But this could shave nearly £150k off your required retirement pot size (3rd column):

Fig.3: Doing It Cheap

If this was the lifestyle you wanted to live in retirement, you might only need £300k or less in total to draw a very basic income, so this saving is significant.

You could also go really cheap and live in a knackered old caravan in the wilderness or even on an old canal boat for just a couple of grand upfront cost, with no site fees.

For the static caravan enthusiasts, make sure you pick a site that allows you to rent your caravan out to tourists. You could make back a few grand a year by renting it out while you go on your holidays elsewhere.

Other Things To Consider

While you own a house, you’re on the property ladder, and your property is likely going up in value. Not only that, but if you have a mortgage, you’re getting leveraged growth on your equity due to the mortgage debt.

If you have a 10% deposit in the house and a 90% mortgage, and if property prices go up by 10% one year, your equity just went up 100% (which is the 10% rise in house prices divided by the 10% deposit).

If you own a caravan instead, your money has likely been either (a) used to buy the caravan, (b) sat pointlessly in a bank account, or (c) invested without leverage in somewhere like the stock market.

You could of course keep your property and rent it out to someone else to cover all the bills, while you move into a caravan. This could be the best of both worlds.

You should also consider that the cost of saving up to buy replacement caravans never stops, while at some point the mortgage interest payments would stop on a house, once your mortgage is paid off.

These advantages of property are difficult to quantify and depend on your own circumstances. But this next point is pretty universal: UK winters suck!

If you really wanted to go down the caravan route, just remember how cold it can get in January, sat in a glorified shed on a cliff top.

A Nice Holiday… But A Retirement Hack?

Having a second home at a caravan park is a nice way to spend the summer if you can afford it – but it’s probably not worth having one as your main residence as an early-retirement hack.

That said, if you’re up for this lifestyle one day in the future when you’re actually retired, it’s good to know that it is a slightly cheaper way to live and you can still factor this annual living expense reduction into your retirement plans.

Or if you’re at the point now that you could declare yourself financially free with a caravan, then the benefits of staying on the property ladder might no longer interest you – you’re free, so it’s mission accomplished.

Alternative Early-Retirement Living Arrangements

Let’s face it, the reason you might be even considering living in a caravan is because housing is so damn expensive in the UK! Here’s a few other ways we can think of that get a similar result in terms of speeding up your early retirement date:

#1 – Move Abroad

If you’re willing to live in a caravan, then you’re probably willing to do just about anything to retire early. So why not move abroad to somewhere super cheap?

Places like Thailand and Spain are great places to stretch your money to the max. Obvious hurdles to overcome are the language barrier, and being far away from family and friends.

This lifestyle is suited to someone who can work remotely from anywhere, which as this last year or two has shown, is perfectly possible for most office jobs.

If you can work for your company from your bedroom during lockdown whilst getting paid in British pounds, you can also do the same work from a cocktail bar in Thailand and be paid in British pounds. With the cost-of-living difference, you could live like a king.

#2 – Co-Habit

This one is all about getting someone else to pay towards your mortgage, or splitting the cost of a place that you rent with friends. You could rent out a room in a house you own, or you could group together with friends to buy or rent a house together.

You could even convert a house that you buy into a duplex – two entirely separated homes within one building. This should add enormous value to the property, and means you can rent out half the building to a tenant for a regular income.

#3– Just Downsize A Little

It doesn’t have to be all-or-nothing. You could downsize your home a little, or maybe move to a cheaper city.

If you can save even a few hundred extra pounds a month on your mortgage and bills, that could go a long way towards reaching your early retirement goals faster.

Is downsizing to a nice static caravan or mobile home something you’d ever consider, or something you’ve already thought about? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: Duncan Cuthbertson/Shutterstock.com

Static Caravan image credit: gbellphotos/Shutterstock.com

Campervan image credit: Andrey Armyagov/Shutterstock.com

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

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Are Middle-Earners Getting Screwed By The Taxman? | New Data Reveals All

What goes through your mind when you look at your payslip, and you see big slices of your money taken by the taxman?

Do you think “fair enough, I’m sure I’ll get that back in NHS treatments, state pensions, and pothole repairs” – or are you thinking you’re being asked to pay way over the odds compared to the size of the income that you make? Are you being mugged by the taxman?

Today we’re taking a look at who benefits when you pay your taxes, and whether or not you’re losing out based on your income level. In other words are you getting back more or less than what you put in?

We’ll take a look at whether the tax system is progressive, whether it’s fair, or whether it just punishes aspiration, and we’ll look at the actions you can take to keep the taxman’s hand out of your pocket. Let’s check it out!

Commission-free trading platform Stake are giving away a free US stock worth up to $100 to everyone who signs up via our link. Be sure to check that out.

Alternatively Watch The YouTube Video > > >

The Effect Of Tax On Your Income – From Poor To Rich

Let’s kick off with what percentage of their take-home pay people actually get to keep, depending on how much they earn.

Fig.1: Tax as a % of income, showing bottom to top Income Quintiles

As you might expect, direct taxes are higher as a percentage of your income the more you earn. This makes sense when you consider that the higher income tax rate shoots up to 40% from 20% once you start earning a little over £50k.

Direct taxes include income tax and national insurance (which are payslip deductions), and Council Tax (which is a tax on your house).

If you get your income from a pension, dividends, or rent from property, those taxes are included in income tax.

Perhaps more surprising is that indirect taxes run in the opposite direction, with the poorest spending 24% of their incomes on indirect taxes – things like VAT and other taxes that apply when you buy things – while the richest spend just 7%. Maybe the rich are just able to save proportionally more of their incomes.

Fig.2: Tax as a % of income, All Taxes, in chart form

When everything’s added together, we see that the people being stung the most are the richest, but ALSO the poorest. While higher earners get stung on their payslips, lower earners are feeling the sting when they enter the shops. It looks like middle earners are doing ok. But this is not the full picture.

Are You Getting Back What You Pay In?

Next, we need to look at the value of what we get back from the taxman in terms of benefits. And here we don’t just mean things like the dole and the state pension.

The ONS makes reference to “Benefits-In-Kind”, which include things like the annualised cost of your state education spread over your lifetime, and the annualised cost to the NHS from having you as a patient over your lifetime.

Fig.3: Income, Tax and Benefits by Income Decile (working population)

This table shows the average household incomes in 10% bands of the working population, from the poorest 10% of people to the richest 10% of people.

The top line is the equivalent of pre-tax salary – take a quick look and work out where your household sits on this line. Soon we’ll be telling you if you’re likely to be winning or losing to the taxman based on your income band.

Let’s look at the 7th decile as an example, which is the top 61-70 percent of earners. If you’re a regular visitor to our site we can assume that you one day plan to be at least this high up the income scale.

Total money earned for this average household in the 7th decile is just short of £48k, so a 2-adult household might contain a couple each with a £24k salary.

We don’t consider this to be particularly well-off – it’s a middle-income salary, which just about affords you a basic level of financial security.

The ONS adds to this £2.4k of benefits – things like entitlements to childcare and maternity leave, as an average annualised figure spread over your working life.

Then the taxman comes a’knocking for his first slice of your pie. £10.4k is immediately taken from you before you’ve even seen it. You lose out a further £7k indirectly, like at the shops when the taxman increases the price of your shopping basket by 20%.

But you do get a good chunk back in value from society. The cost of providing you with national services like the NHS and the school system are added back to give your theoretical Final Household Income. But at just 85% of the original, it looks like someone in the 7th decile is losing out to society.

Winners And Losers

So who’s winning and who’s losing? According to the data, the top half of earners are losing out to the tax system, while the bottom half of earners are getting a great deal.

What this doesn’t factor in though is the indirect benefits of national spending which aren’t easily apportioned out by wage bracket.

These include the value you get from the national debt (which has grown the country’s GDP), the value you get from the police and emergency services, from the army who defend us, from infrastructure like roads, and even the cost of the government (it’s arguably better than anarchy).

We’ve added these costs in equally on the assumption that the overall average win or loss for all citizens should be zero, on the further assumption that a country’s budget all boils down to its citizens’ incomes in the end.

What this means is that earners in the 6th decile are now beating the system, if only slightly, but people in the 7th decile continue to be expected to pay out more than they get back.

This is pretty much how we should expect a tax system to work, with the rich subsidizing the poor. But are a young couple on £24k pre-tax salaries in the 7th decile rich? Of course not – they’re middle earners, likely just barely scraping by.

But they are taxed as though they were rich, and are being asked to find room in their budget to subsidize everyone who earns less than they do.

So next time someone on a below average income moans to you that they are paying too much tax, educate them that they’re actually getting back heaps more in value than they pay out. It’s people in the 61-70% bracket and above who perhaps have the more reasonable cause for complaint!

What About When You Retire?

When you retire, does the benefit you get from the state pension and your greater dependency on the NHS mean you get to recoup some of your losses?

Fig.4: Income, Tax and Benefits by Income Decile (including retirees)

No, not really. Here’s the same data as before, but now including your expected state benefits in retirement, averaged out annually. The numbers have moved a little, but the bottom 6/10ths of people are still ahead, while everyone else continues to pick up the tab.

More Net Takers Over Time

Over the last 20 years, more and more people have moved from being net payers of tax to net receivers of tax. This might seem like a good thing, but in reality it means more people are becoming poorer and are in need of help from better-off taxpayers.

Fig.5: % of people who get back more than they take over their lifetime

This chart shows it nicely, with the real figures in blue and the average trendline in green. This data runs contrary to the much-cited complaint by the less well-off that higher earners don’t pay enough taxes. The trajectory is actually that higher earners are being asked to subsidize an ever-growing majority of the British population.

Of course, the other way to read into this is that more people are getting better value from the tax system.

Fig.6: Adjusted Income as a % of Salary

This next chart shows that on average, peoples’ final adjusted income is much closer to their original incomes than it used to be. Remember, final income is after adjusting for both taxes and the value you get from national services.

One possible explanation is that the tax burden for the average citizen has decreased over the years. Another is that the value they’re getting from the state has increased relative to wages. Which is it?

Fig.7: Tax and BIK as a % of Salary

It’s actually a bit of both, according to the ONS data. Total taxes as a percentage of original income for the average person has been steadily falling as far back as this data goes, which is to the 1970s. Benefits-In-Kind, such as the per-person spend on the NHS and schooling, have been increasing over time.

Taken together, this suggests that the average worker is not being screwed by the taxman. But how do we reconcile these findings with the well reported fact that the UK’s overall tax burden is increasing?

Fig.8: The evolving UK tax burden

The Office for Budget Responsibility, another semi-governmental body, recently released the above chart which shows the tax burden for the UK as a whole increasing since the mid-90s. What are we to make of this?

If the average worker is getting slowly better off over time, and yet the overall tax burden is increasing, it must be either the richest or the poorest who are picking up the tab.

As we saw in Fig.2, it’s true that the poorest and the richest have the highest tax burdens. But the poorest get a sweet deal from the free use of our public services. So who’s taking the brunt of the increased tax burden?

The answer is in part the rich, but more so, the middle classes. According to the IFS, the bottom 42% of adults by income paid zero income tax in the 2019 tax year, thanks to generous personal allowances built into the UK tax code.

That’s nearly half of all adults! When we report that the tax burden has fallen for the average worker, this is a big part of the reason right here.

Meanwhile, the top 10% of earners contributed 61% of the UK’s entire income tax takings in 2019.

And while taxes on lower earnings have reduced, taxes at the higher end have been on the rise. The top 1% of taxpayers provided 24% of the entire country’s income tax receipts in 2008; in 2019, that had increased to 30% of all income tax receipts!

A Progressive Tax System?

It’s fair to say the UK tax system is progressive, in that the bottom half of earners get an amazing deal by being subsidized by those who earn better-than-average salaries.

Whether it’s a fair tax system is another matter, and we’ll let you be the judge of that.

Keeping The Taxman’s Hands Off Your Money

If you’re more inclined to think that the tax system punishes aspiration by going heavily after those with slightly better-than-average incomes, you might want to think about the following:

#1 – Paying The Taxman Second

As an employee, you get robbed by HMRC before your hard-earned wages have even hit your bank account. You can break free from this unfair system by being self-employed, or by incorporating as a limited company.

Many careers could exist within these tax structures. Have a think about your own line of work. Could you do a similar role, but as a contractor?

These structures also allow you to offset work expenses against your income. You can’t claim the cost of your petrol or your work clothes back as a lowly employee, but a self-employed contractor could, meaning they pay less tax.

#2 – Tax Advantaged Investments

Take full advantage of Pensions and Stocks & Shares ISAs. Every pound that you put into your workplace pension avoids unnecessary income taxes.

And any income or capital gains that you make within a Stocks & Shares ISA are yours to keep tax free. Even outside of an ISA, the tax rates on dividends and capital gains on your investments are much more generous than those imposed on employee income.

Our plan is to build our investments ISAs so big that we can live off the incomes that they produce. In theory, by doing this you could avoid having to ever pay direct taxes again. For more ideas on how to limit your personal tax burden, check out these 2 videos next, on dodging tax legally, and on limiting the taxes on your investments.

Are you winning or losing to the tax system, and do you think the system is fair? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: supawat bursuk/Shutterstock.com

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

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10 Outdated Money Rules That Just Aren’t True

In todays’ post, we’re looking at 10 outdated money rules that just aren’t true anymore or in some cases never were. Forget this nonsense and instead live by the new money rules that apply today.

Money plays such a pivotal role in our lives that it’s essential to be playing the game of money properly. Some of the outdated rules mentioned here have not stood the test of time and others only lead you down the path of mediocrity.

If you’re living by any of these outdated rules you’ve probably picked them up from your parents and society, but are they living the life that you want for yourself? Let’s check it out…

Keeping your investment fees down is vitally important. Make sure you have the best investment platform for your circumstances. Don’t forget to check out the curated list of the best Stocks and Shares ISAs, along with free stocks and other discounts.

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#1 – Don’t Talk About Money

Financial losers don’t like talking about money, which means most people don’t like talking about money – making it a taboo. You can’t talk about money with your colleagues, with your friends, or even your loved ones. But this relationship and attitude with money keeps you broke.

Your employer may even actively discourage you from talking about salaries and bonuses with your co-workers. Why would they do that? They know knowledge is power and putting you in the dark about how little they’re paying you compared with others makes you less likely to kick up a stink and demand more readies.

Winners talk about money all the time with anyone and everyone that is willing. They love it! They talk about salaries, income, expenditure, tax, investments, pensions, stocks, property, gold, crypto, budgeting, business ideas, money making schemes, the economy, and everything in between.

The fact is, money flows from those who value it least to those who value it most, so the new rule is: Don’t stop talking about money!

#2 – Rent Is A Waste Of Money

This might be the rule that we hear most frequently. Young people often refuse to rent because – in their words – “rent is just throwing money away.” Of course, this is total nonsense, but we reckon the majority of people believe this.

Renting gives you somewhere to live, independence, flexibility to move at a whim and hence opportunity, and saves you the hassle (and costs) of buying and maintaining a property.

Long-term home ownership is likely to be better financially than renting. However, young(ish) people who are likely to want to move home every so often – due to say moving from a city to a more rural area, or the need for a bigger home due to becoming a family – are likely to be better off renting for a short time.

Moving costs like surveyors, solicitors, mortgage arrangement fees, and stamp duty, can make short-term home ownership a financial disaster. Most people aren’t aware of this because they’ve been saved by increasing house prices, which is not guaranteed to continue every year.

The new rule should be: Buying for a short timeframe is likely to be a waste of money.

#3 – Pay In Cash

Now, this rule has two meanings. The first is you should pay in cash because you’ll be able to knock the purchase price down, saving you money.

The second meaning is that physically paying in cash has a psychological effect on you. Those who pay by card statistically spend more money – probably because it’s so effortless. Actually digging into your wallet and handing over those crispy notes is more noticeable and more likely to be resisted.

Let’s first address point one. In some situations, cash might get you a cheaper price. If you’re selling your home a cash buyer is more attractive because there is no chain and risk of mortgage decline. However, in most other circumstances credit is better than cash. It used to be believed that a car salesman would prefer cash and be willing to mark the price down, but this isn’t true today. They make a good chunk of their money selling you the car on expensive credit.

On point two about the physical handing over of cash – there are more downsides than advantages. Card payments offer payment protection, an audit trail of transactions, make budgeting far easier, and is much safer – you’re less likely to be mugged for a useless card that will be blocked within the hour.

We think reckless spenders are skewing the figures. Those that live to an intentional budget – which we all should – are unlikely to spend more. In fact, we actively avoid places that don’t accept card, so not carrying cash saves us money.

The new rule should be: If you’re good with money – pay on credit card, if not – pay by debit card.

#4 – Don’t Pay Someone Else When You Can Do It Yourself

Poor people think they must do everything themselves. They mow the lawn, do the cleaning, do the ironing, cook meals, decorate their house, and some even install their own new kitchen and bathrooms.

Whereas if it doesn’t bring them joy, rich people pay someone else to do it. You might think this is because rich people can afford to pay and poor people can’t, but this isn’t true.

Doing everything yourself can only save you so much money – but saving the time that would have been spent on these boring, and in some cases difficult and high-skill chores, has potentially an unlimited upside. Rich people outsource all low value tasks, so they can work on higher valued income generating tasks.

You might be thinking that your spare time isn’t worth anything because you can’t bring in extra money during that time. This might be true now, but it will always be true unless you make the decision to start working on income generating tasks.

Not that long ago most people would have had very limited opportunities to bring home extra bacon outside of a day job. Thankfully, the internet has revolutionised how we can all make money. The world doesn’t sleep, so you can make money at anytime from anywhere.

From now on the rule should be: Outsource all low value tasks.

#5 – Overpay The Mortgage

This was probably a very good rule back in the day when interest rates were much higher.

Back in the 70s and 80s the Bank of England interest rates were in the double digits, so you can expect the rates by the mortgage lenders to be slightly higher. Even in the 90s and 00s they hovered around 6%.

Rates like this would have meant paying down the mortgage was a good idea because it would have been far more difficult to get a return greater than this elsewhere – at the very least it wouldn’t haven’t been worth the risk.

This is not the world we find ourselves in today – with interest rates being almost zero for a decade.

Unfortunately, there are influencers and self-proclaimed experts in the media still preaching this rubbish and telling everyone to pay down their mortgage as fast as possible. On YouTube, we’ve seen these misguided souls foolishly telling their audience that by overpaying their mortgage you can shave a few years off its life and save thousands in interest.

While that is true, this money has an opportunity cost. You would have been much better to have invested the overpayments instead.

With interest rates looking like they will remain low for a very long time the new rule is: Pay as little as you can on the mortgage and invest the surplus.

#6 – Buy Low, Sell High

Buy low, sell high could well be the most overused phrase in investing. If it’s not obvious it means buy investments when they’re cheap and sell when the price is higher.

The problem with this rule is that it’s notoriously difficult to do. So difficult in fact, that barely anyone on the planet can do it. Buying and selling incurs fees and taxes, and theory says that markets are mostly efficient, and so already factor in all known information into the prices.

Moreover, the long-term trend of the stock market is that it’s always climbing ever higher. Waiting for lower prices is likely to result in you sitting on the sidelines and missing out on years of stock market gains.

We analysed the S&P 500 going back to 1988 and we discovered some fascinating insights. See that post here.

One interesting nugget that we found was that in 99.3% of cases, an all-time high was followed by another in less than 6 months.

The rule should be: Buy whenever and hold forever.

#7 – Money Is There To Be Spent

People see money and they spend money. Consider any gameshow. The host always asks what the contestant will spend the money on if they win. Every time, without exception the answer is a holiday, new car, or a house extension.

We’ve never heard any contestant ever respond with “investing in income generating assets”

Likewise what people refer to as savings is really just ‘delayed spendings’. They call it saving but the reality is they are just putting money aside for an expensive infrequent purchase like Christmas or a new TV.

Money that is invested or saved for your long-term future gives you options, opportunities, and freedom.

A healthy pile of cash gives you the freedom to tell your boss to do one if you don’t like the way he talks to you, or perhaps you need the financial breathing space to start a business but can’t because you squandered that money on a new conservatory.

Some people argue that you don’t want to be the richest guy in the graveyard, but we’d counter this with it’s not a waste to die with some money if it provided liberty while you were alive.

The new rule should be: Money kept gives you options, opportunities, and freedom.

#8 – Investing Is Risky

We blame the terrible education system (including the financial regulators) on why this rule is so pervasive. People believe that investments are risky because they can lose money.

The reality is cash stored in a bank loses value. The figure you see – known as the nominal value – might be the same or even slightly more than what you deposited due to interest, but the real value has declined. This explains why your grandad could buy a house for under £10,000. The average person doesn’t understand this.

Real returns are calculated after inflation and is the only thing that matters. The formula is dead simple. Real return = nominal return – inflation. As the interest rate your bank pays is likely zero, and the target inflation rate is 2%, your bank savings fall in value in real terms by 2% every year.

Investing doesn’t guarantee real growth but at least it gives your money a fighting chance.

The new rule should be: Not investing is risky.

#9 – Buy The Most Expensive House You Can Afford

Another rule that is total nonsense and potentially very damaging. This is perhaps built on the belief that house prices always go up, so the mortgage leverage will make you rich.

Long-term we do think house prices will continue to rise but if you want exposure to property, it should be through a proper cash generating buy-to-let investment.

Owning the most expensive house you can afford will cripple your cashflow and limit the opportunities that you can seize as your mortgage payments will always be overbearing – you become a mortgage slave.

A buy-to-let investment on the other hand will get you same market exposure but you’ll also receive cashflow in the form of rent.

The new rule should be: Buy the house you need, and invest the rest.

#10 – Reduce Investment Risk As You Age By Buying Bonds

Bonds have their uses – such as being great at stabilising portfolio returns. Back in the day you could quite happily switch from stocks to bonds as you age to reduce investment risk without sacrificing too much return.

This strategy worked well because you were forced to buy an annuity with your pension pot, so you wouldn’t want the value of your investments to tank right before buying the annuity. An annuity is an insurance product that pays a guaranteed income until you die.

Today though you are no longer obliged to buy an annuity, which is handy because their rates are woeful in today’s low interest environment. The alternative is to leave your investments more heavily allocated to stocks.

This is necessary as the return on bonds is likely to be low, causing your retirement pot to run down to zero before you die and leaving you broke in old age.

The new rule should be: Maintain risk as your portfolio needs to out survive you.

What other money rules do you think are outdated? Join the conversation in the comments below.

Written by Andy

 

Featured image credit: Andrew Rybalko/Shutterstock.com

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

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