I recently stumbled into a conversation at work where some colleagues were discussing the saneness of one particular gentlemen in the office. He’d just taken delivery of a bottle of water to his desk from the internal postal service. This in itself was odd I thought. Why bother to get water sent to you in the post when there is a tap 5 meters away dispensing the stuff for free. If that’s not good enough there is also a machine next to it that will filter it for you and serve it chilled, hot or even with ice. If you are feeling particularly indulgent there is a shop an additional 10m away that will sell it to you in a nice plastic bottle, direct from a natural spring.

However it turns out the delivery was of a bottle of water far more pretentious than that from a Scottish or even Alpine  natural spring. The water in question was made from a Polar iceberg and cost over £60 for 0.75l of water. Yes, you did read that right….an iceberg and £60!

Now I don’t know what is worse, the distinct lack of regard for the environment the company that sells this stuff or the idiocy of the consumers that spend their hard earned cash on this stuff.

It’s worth noting the hypocrisy of this company when they state that they aim to ‘mitigate the impact of global warming’ while their main product literally destroys polar icebergs in THE most direct way possible, before being shipped all around the world by air to it’s wealthy customers.

It still staggers me that this guy can justify spending €70 on a bottle of water. Don’t get me wrong the guy earns a good whack but he’s certainly at the lower/mid end of the office food chain. It’s the perfect example of a highly intelligent and financially literate person ignoring everything they have learnt in their professional life when dealing with their own personal finances.

The man has a child to support and a mortgage (if not other forms of debt too) yet is willing to literally piss his money away on such prolificacy. Under [ironic] questioning about why he didn’t indulge in a case of 6 bottles he honestly answered that he wanted to just test the waters (pun intended) and check the taste matched his expectations first before putting in a bigger order.

Meanwhile at UTMT towers I’m quietly regretting not gathering up and melting some of the snow we had a couple of weeks ago and bottling up to sell at the local boutique farmers market.

Merry Christmas all!

It’s an often debated question in the world of financial independence and one thats been done to death in blogsphere several times over.

In this article I won’t go in depth into all of the pros and cons of each side of the argument but instead focus on describing what I do and why. If you’re currently debating this issue internally here’s a good look at the subject from the ever reliable Monevator. For the lazy amongst you here is a quick summary:

Arguments to Overpay Your Mortgage

• It is equivalent to investing with a guaranteed rate of return
• No need to worry about volatility of your investments
• It reduces (and ultimately eliminates) what is likely your largest monthly outgoing making retirement more possible
• It gives you a nice warm fluffy feeling inside when you see how much interest you have saved yourself over the term of your loan
• There is no need to worry about what stock or fund to invest in, just send any spare cash to the mortgage company
• Investing in your home is free from capital gains tax should you decide to sell and take profit in the future so you are technically investing in a tax wrapper of sorts

Why you should invest instead

• Long term equity returns are almost certainly higher than the current rate of interest you’re paying on your mortgage. Why reduce a liability at 2% when you can earn 7% on the money instead?
• Having all your financial eggs tied up in one lump of residential property might not end well (see Ermine’s experience here as an example). Instead it’s better to diversify into stocks and bonds.
• Equity returns tend to be better the longer you’re in the market so the earlier you start investing instead of paying a mortgage the more benefit you’ll get
• If you hit a hard patch you can always sell of some investments to keep things ticking over, not so easy to do with a house
• It’s far sexier than overpaying the mortgage and is guaranteed to impress your friends!

My Solution

Like most things financial a balanced solution is usually best for me. I am currently taking the hybrid approach, or at least I was.

For the last few years I’ve been socking away cash into investments as well as overpaying mortgages. Given the long equity bull market we’ve had for the last few years I would probably be richer now if I had ignored the mortgage and gone all in equities. However the psychological pull of taking advantage of a low interest rate environment to make huge dents in my mortgage was too tempting.

Since moving recently our mortgage has been an offset savings mortgage on which the rate I currently pay is 1.79%. This beauty of a loan enabled us to navigate the risky path of buying our new property before selling the old one at very little cost.

Our loan is pretty much completely offset by the linked saving account for the time being, until planned works begin. This means that the mortgage currently behaves exactly like a giant (and currently cheap) overdraft facility. In the wrong hands this could be a very dangerous thing but thankfully under the money tree we treat access to such a large credit facility with the respect it deserves.

While I try and not time the markets the offset mortgage gives me more flexibility to choose when to invest and when to leave capital offsetting at 1.79%. If I have some cash spare and markets have just dropped a few percent I’ll usually invest. If they’re once again breaking record highs for no apparent reason I might opt to park the cash in my offset savings account.

It is essential if I am investing that it is done in tax efficient wrappers so I get the highest possible returns possible.

Fill ISA Allowances Before Anything Else

The current £20k ISA allowance is currently the most important tax break on offer to me. Given my wife and I are still reasonably young¹ and both still working, being able to sock away £40,000 per year into investments that are free from future income and capital gains tax is far too good an offer to pass up.

As the ISA allowance has risen (dramatically) over the last few years, so has their importance in our retirement planning. Once we’re done with work, ISAs should provide us with a meaningful slice of regular tax free income for the rest of our lives. They’ll also give us the option of lump sum withdrawals free from capital gains tax.

Given the above, filling our annual ISA allowances is a key priority each April. If we don’t have the cash at hand to do it I will more than happily ‘borrow’ it from my mortgage offset account at 1.79% for the short term as and when good investment opportunities present themselves.

Pension Contributions Give a Tasty Return

As a higher rate tax payer, additional pension contributions currently offer a tasty incentive in the form of a 40% tax break. An instant return of 40% is a damned sight higher than 1.79% that I am getting by overpaying my mortgage.

Before remortgaging to stuff our pensions full I need to bear in mind that the future returns of that money invested in pensions is far from guaranteed. It’s susceptible to not only investment returns,  but also meddling from the government who can change the rules about when I can access the money and how it is taxed in the future.

Of course as things stand once I reach the appropriate age, the government will let me withdraw 25% of my pension pot tax free. If so inclined I could use such a lump sum to pay off any existing mortgage loan (residential or buy to let) if required. I expect the mortgages to be long gone before I get that tax free lump sum but it’s a nice option to have if i want to take it up.

So I will continue to make some additional pension contributions when I see fit or when the market looks cheap without going overboard. I need to bear in mind the dreadfully complex tapering of pension contribution tax relief and lifetime allowances. As I get nearer to being able to access my private pension I’ll ramp up additional contributions as the regulatory risks should be less uncertain.

Notes:

¹Clinging on to our 30’s for dear life ;0)

A friend once described kids as being ‘time sponges’. If you’re aiming to do a good job at his parenting thing then that’s a pretty accurate description.

Trying to be a truly excellent parent and devoting as much non work time as possible to the task means I’ve had to make changes elsewhere in order to get the most out of my time. Without making changes standards would slip and things get neglected.

This isn’t just the case at home. At work I’m trying to advance my career (aka earning potential) without sacrificing my work life balance. This roughly translates as getting more shit done in less time.

Over the last year or so  I’ve been trying to improve my productivity to help me achieve these goals. In no particular order below are some of the things I’ve found have helped me get more shit done in less time.

Define pockets of ‘GSD time’.

This is basically time set aside where I’ll focus purely on a predefined task or tasks and will not succumb to any distractions. It is time to dominate tasks in a ruthless way.

At work this means I set aside 2 hours after I’ve had my morning coffee to specifically focus on getting shit done.  I’ll turn the ringer down on my phone, close my email client, cancel meetings and focus on destroying items on my to do list. If people come to my desk I’ll snarl and send them away¹.

When I’m at home this might be an hour in the evening after the little one has gone to bed where I’ll put down the mobile phone and nail some paper work or diy jobs round the house.

A great example was the night before last after everyone was in bed I decided to clear the patio. The cracks between the slabs had become seriously overrun with various plants/weeds to the point that walking on the patio was hazardous. An hour and a half with a head torch, broom and trowel and this is what it looks like now:

Trying to clear that with UTMT  Jnr running around would have been impossible.

Find your sweet spot.

For mental tasks I find I work much more efficiently in the morning so I always try to structure my GSD time in the office first thing in the day. To do this I block out my Outlook calendar for 2 hours every day.

You might be a night owl in which case move you GSD time to late at night when your brain is more inclined to work effectively. For more manual tasks I tend to enjoy ‘getting on a mission’ in the dead of the night when all are sleeping which tends to work with with my current work/family life.

For some people shorter more regular bursts of focus might be a better approach. This works for me in the afternoon however for that first 2 hour block of GSD in the office I find i can power through 2 hours often without a break.

Focus on the right things.

Be laser targeted when it comes to prioritising what is the first task on your to do list. Focus on the activities that give you the biggest bang for your buck. Apply the 80/20 rule mercilessly.

Do the nasty tasks that you really don’t want to do first. Those ones that make the pit of your stomach turn when you think about them. The stuff that you’ve been putting off for far too long is usually the stuff you should be focussing on first.

Forget multi tasking.

Focus on one thing at a time. Don’t look at anything else until you’re finished. If your email drafts folder is overflowing then you need to have a word with yourself.

Many time management systems like GTD recommend only ‘touching’ tasks once if possible, particularly for task that will only take a few minutes. This works for me. Spending time re-reading work emails because you didn’t reply the first time around can soak up vast quantities of time if left unchecked. 

De-clutter.

If the environment around me is a mess, my ability to concentrate suffers. I always keep my desk free from clutter. A clear workspace gives me a clear mind. There’s not a lot I can’t do without a laptop, phone, notepad and mechanical pencil so I try to have just those things on my desk.

Cut your hair.

This one might sound a bit odd.

When my hair is long I feel like a mess. When I feel a mess my concentration falters and my productivity drops. Alternatively when my bonnet is freshly shaved I feel mentally sharp, on point and ready for action.

I don’t now why I just know I’m more productive when I’ve got a short back and sides. To keep the productivity spring coiled I tend to shave my hair once per week.

Capturing to do items.

Search ‘how to improve productivity’ and you’ll come up with thousands of apps, tools and techniques to capture to do items. Hugely complex methods to capture, categorise, organise and prioritise tasks. Much of this advise is a waste of time.

The key here is to not over complicate things. Find a simple system that works for you and stick to it.

I use a combination of the Reminders app on my phone and a basic pocket notebook to capture things that need doing. The phone gets used when I’m on the move, stuck in a meeting while I resort to paper mostly when I’m desk bound at work or on the train.

I don’t waste time trying to sync or transfer items from one format to the other, I just quickly review the lists and start actioning items instead. At any given time I’ll have about 10-30 items logged which gives me a nice level of granularity.

Automate where possible.

If you’re doing the same task regularly then you should look to automate it if at all possible. Of course there is the obvious stuff like funding your savings/investment accounts via standing orders but try to apply the principle of automation as often as possible. Below are a few more ideas

• Creating email templates for commonly sent content
• Remove yourself from distribution lists that just send you content that wastes your time having to sort/delete
• Use rules in your email client to auto file regular reports to folders in your inbox
• Build exercise into your commute (walk/cycle the long way)
• Pay all bills by direct debit (unless it’s cheaper to do annually)
• Do you grocery shopping online and get it delivered (this is a no brainer)
• Use dictation apps to enable you to write while out walking or doing the house work
• Write macros to create automations of reusable actions in commonly used software

Maximise dead time.

I subject myself to 2 hours of rail commuting each day I attend the office. While this isn’t ideal it provides me with a fantastic opportunity to get things done in a distraction free environment.

I could spend this commuting time playing angry birds or watching The Walking Dead Season 46. Instead I’ll make up for leaving work early by processing emails or reading documents. Alternatively I might work on personal projects such a writing, planning diy projects, sending admin emails etc.
Switch off.

As soon as I get home the phone gets put down and I give my family my undivided attention. No work emails, no social media, no tv. Likewise during the working day I try to get out for a walk or go for a short run to clear my head and regain some energy part way through the day.

Work hard and play hard. Try and blur the lines between these two things and productivity is most likely to fall.

Get the right mentality.

As MMM would put it you can get all ‘complainypants’ about how little time you have. You can resort to plonking your kids in front of Peppa Pig for hours at a time. You can submit to a stress filled life of what feels like walking through treacle  or you can get in the mindest of this fine man…

Don’t be the pig, be the wolf. Oh and drink more coffee!

Notes:
¹A good technique is to wear your headset (if you have one) so people think you are on a call

• The entrepreneurial spirit of the Americans
• The passion for academia displayed by the Chinese
• The unwavering nationalism of the Russians
• The exuberance of the Italians
• The predictable efficiency of the Germans
• The often indifference of the French
• The humble, understated contentment of the Scandinavians

It’s the final one that has intrigued me more than any. Those Scandi’s always seem so contented and relaxed. Happy with their lot in life and happy go lucky. For a while I wondered what their secret was.

I’ve worked with quite a few Swedes over the years and have developed a liking of their national psyche. Several years ago I was introduced to the Swedish word ‘Lagom’. The literal translation of ‘just enough’ doesn’t really do it complete justice. According to Wikipedia the word originates from Viking times:

…a popular folk etymology claims that it is a contraction of “laget om” (“around the team”), a phrase used in Viking times to specify how much mead one should drink from the horn as it was passed around in order for everyone to receive a fair share.

That seems to sum up it pretty well. However others seem to think it might come form the Swedish word for ‘law’ and might be related to the time of food rationing many centuries ago. The right amount to take was what the law permitted. Whichever is correct it’s a word used to convey the sense that an excess isn’t required, less is more, there is a perfect amount.

To acheive Lagom you don’t need to ‘miss out on anything’. Lagom is just the right amount. A modest amount just enough to satisfy. It’s hard to define because even in Sweden there is no hard definition of the term. Lagom is more of a state of mind than an easily definable adjective.

The deeper i’ve delved into the Financial Independence scene the more I’ve unwittingly adopted the concept of Lagom. Whether it’s my efforts to implement the KISS approach to life or our attempts to declutter the home I realise that I’ve slowly been becoming a little Swedish in my way of thinking about various aspects of life.

Investment Returns

When I hunt through the UTMT investment archives most of my previous mistakes have been driven purely by greed. The desire for multi baggers, outsized returns or the fear of missing out and following the sheep have all led me to poor investment performance way back when.

Ploughing money into tech stocks in 1999/2000, punting on mining shares before that both saw me take losses at certain points. While i’m not as arrogant to think I won’t make losses at some point in the future I no longer reach for returns with a high risk/reward profile.

The desire to get/be rich can turn you into a horrible person if you don’t keep yourself in check…

It’s easy to say after nigh on 7 years of bull market but i’m much happier avoiding high risk high return positions in favour of slow and steady ‘market’ returns. Index funds work. If i can gain some modest outperformance and/or some fun along the way with some individual share selections then I’m up for that too.

As a result the money tree is a mix of buy to let (without much leverage), low cost index funds and what most would refer to as ‘defensive/boring’ stocks. The returns I get are Lagomreturns and I’m more than happy with them.

Exercise

There was a time many years ago when I frequented a fancy pants gym and lusted after an endless stream of expensive cycling kit. While these years saw my general fitness levels increase it took me a while to figure out that throwing money at the problem [of fitness] was making no difference at all. What really had an impact was my motivation and hard work.

These days I revel in crap kit. There’s nothing more satisfying that blasting past a Lycra clad cyclist riding a carbon framed road bike that is lighter than a gnats jockstrap (and worth more than my car) whilst on my way back from work. My attire will typically be some old football shorts, a crappy t-shirt with moth holes in and i’ll be riding my fixed gear bike made of old scaffold poles. My Lagombike.

I’m enjoying the feeling of less. Realising that it’s not the kit that makes me faster or fitter, but instead my desire to train/ride hard has enabled me to enjoy my cycling even more than I used to. Having less has enabled me to get more from my cycling.

Possessions

Our recent house move highlighted just how easy it is to accumulated belongings, most of which don’t add to your happiness.

When we moved from our little London flat to the old house 7 years ago it took a couple of car loads and a man and a transit van to move us to the sticks. This time it took a large lorry to get us moved a few miles up the road.

While I’m not particularly proud of that I do have the very valid excuse of owning a young child. Anyone that has owned one will know that despite your best intentions they are clutter magnets.

Sure we could sell up and move to a one bed flat again but that’s not a choice we want to make at this point in our lives.

Where we have scaled back hugely from where we were 10 years or so ago is on the amount of clutter that is put in the house. Gone are the days of buying endless gadgets, starting new hobbies as an excuse to fulfil our consumerist desires to buy more stuff. These days we tend to think long and hard before buying things. We value those that give us lots of pleasure or use and get rid of those that don’t.

Conclusion

It doesn’t matter whether to you it means more frugality, less greed, more contentment, modesty, humbleness or simply less chips on your plate, I think we could all use a little more Lagom.

Of course not everything Swedish (or sporty)is Lagom. I’m yet to be convinced that this guy’s ego is particularly Lagom…

Before we get stuck into any major projects we’ve started picking off the easy ways to reduce our future energy bills. Our first focus has been on electricity.

With our heating being provided by oil central heating, our main types of electrical consumption will come form the following:

• Lighting
• Cooking
• Gadgets (Music, TV, Chargers etc)

Let There Be Light

Straight after moving in I installed 10watt led light bulbs in most of our light fittings around the new house, replacing the old power hungry 100 watt incandescent bulbs left in place by the previous owner. The light they kick out is in my opinion just as good if not better than their energy hungry predecessors.

LED light bulbs have in my opinion finally reached their full potential. While early LEDs produced a narrow beam of cold white light newer versions are available in 2700k ‘warm’ light, beaming around 240 degrees that replicates a standard incandescent light bulb. Another string to their bow is that LEDs don’t mind being cycled on/off regularly unlike their energy saving predecessors Compact Fluorescents (CFLs).

There’s something hugely satisfying about instantly making a 90% future cost saving on something. Replacing a 100 watt bulb with a 10 watt LED cost me approximately £3.20 per unit and the difference in the quality of light is virtually unchanged.

While the initial outlay on LED bulbs can seem high, with an expected lifespan of 50,000 hours, combined with the fact that we’re unlikely to move house anytime in the next 20-30 years, the long term payback should be significant.

When we moved in there were 24 bulbs in various shapes, sizes and wattages throughput the house which if they were all turned on would be chewing through just shy of 2,070 watts of power which on our current tariff would cost roughly 27p/hour. After replacing them all for LEDs this was reduced to approximately 190 watts consumption and 2.5p/hour, a saving of circa 24.5p / hour.

Of course the lights aren’t all at the same time 24/7 so to get the real projected saving I needed to work out the average usage of each light per day. After some quick calculations I worked out we are likely to achieve an average daily saving of £0.80 per day. The overall cost of updating the bulbs was £89.60 meaning that it’ll be 112 days until I break even on the initial investment.

Run the same savings (£0.245/hour) over the expected lifespan of the bulbs (50,000 hours) and the projected saving is £12,250 should the bulbs last as long as the manufacturer claims. Thats worth having, even if the bulbs only last half the projected 50,000 hours.

Naturally the more you use your lights, the higher the savings you’ll see are. In our household there’s almost always a couple of people in (family on childcare duty, one of us working from home, family visiting/staying etc) so our usage is relatively high compared to a household where everyone is out working or at school 5 days a week.

Smart Meters

The seemingly profligate approach to energy consumption of the previous owner of the house is surprising given they had a Smart Meter fitted.

These devices are being rolled out by all energy companies. The sales pitch seems to be that they save us time by beaming meter readings back to Energy Supplier HQ automatically removing the need for making manual readings. Of course the cynics say they’re a way for energy companies to track hour by hour usage better such that they can charge more during peak load times.

Anyway a nice benefit of Smart Meters for the likes of UTMT is that you get a small display that can track your the current/past consumption either in watts or £/hour. This is incredibly powerful as it gives you realtime feedback on how much energy you’re using.

Once you can see your usage you can eliminate wastage and improve your efficiency with immediate tangible effect.

I love this stuff

The parallels to shaving a few basis points off your investment fund costs are high. While saving a few watts here and there may seem insignificant, looking over a multi year/decade timeframe can show some serious £ savings are there for the taking. As stated above there’s £12k at stake over the lifetime of the bulbs i’ve installed.

It’s not so much the £ saving that I like about an activity like this but more about the process. I find it incredibly cathartic to measure, identify and eliminate inefficiency. The fact that it leads to long term wealth creation is an added bonus. Whether it is decommissioning a koi pond or squeezing the cheese on your pension fund i’m not fussy. It all gives me a warm glow inside by making things work a little more efficiently.

Lower Bills

We’re only 3 weeks in to the new pad and the projected electricity usage for the period is amazingly low compared to our previous home. Just before moving I was engaged in a dispute with our power company who wanted to  double our monthly direct debit from £80 to £160 per month despite us using nowhere near that amount of electricity.

It’s still early days but if these first 3 weeks are representative of the future then our monthly electricity costs should role in somewhere shy of £25/month which is incredibly low considering the low vacancy times of our house.

Everything Else

Our cooker is all electric so we also do all our cooking via electricity. Due to our work schedules there is someone in the house during the day on 6 days a week typically so our general electricity usage is pretty high.

As well as reducing our ongoing lighting costs to 10% of their former selves via LEDs there is also a number of other measures I’ve used to attack and minimise our electrical wastage:

• Never use the clothes drier¹
• Avoid leaving electrical appliances on standby mode²
• Switch lights off when not necessary
• Switch off chargers at the wall when not in use
• Ensure we’re on the cheapest electricity tariff
• Look for energy efficiency when replacing old appliances
• If using multi socket extension leads use ones with individual switched for each socket
• Charge my phone/laptop at work or on the train rather than at home
• Run the washing machine at 30 degrees celcius

Given this house is supposed to be a keeper I’d love to add a solar or wind turbine installation to improve efficiency. I’m aware that the Feed In Tariffs have been reducing in recent years making solar and wind less attractive from a ROI perspective. While install costs have also been falling, the reduced FITs and a low daily usage to offset mean that I suspect neither option makes sense.

Perhaps a smaller solar install to get the hot water going (saving on oil) and provide some free usage during the days might be the way to go at some point in the future as opposed to a full blown install connected to the grid. I’ll need to research further on the various options available.

Notes
¹I wanted to leave the drier in the old house but Mrs UTMT insisted we bring it ‘just in case’. The reality is it’s not even plugged in. Even in our last place I reckon it got used maybe twice a year, if that.
²The main exception being our freeview box that tends to be set to record certain series so needs to be on standby 24/7.

Information Underload

I’ve been experimenting with a low news diet to some extent, similar to that discussed by TEA recently. This has involved doing my best to avoid the sites/news outlets listed below.

• Feedly (my chosen tool for aggregating blog post updates)
• BBC News
• Bloomberg
• The FT
• Facebook
• Twitter

The relevant  apps were deleted from my phone and with the exception of Bloomberg (for work) i’ve rarely visited the others over the last few months. When I have visited them it’s been short, sharp and snappy. No loitering, no spending vast amounts of time everyday reading nonsense that in no way improves me in any way.

As part of this diet I purposefully restricted my portfolio updates/checks to once a month (which is the frequency I use to update my portfolio xls). When deciding to do this a little part of me was scared stiff one of my investments would have gone bankrupt or encountered some massive decline in price. Guess what…it’s been chugging along all tickety-boo without me fretting over my monster xls every few days. I guess this is thanks to my passively active strategy.

House Move & Renovation

After some time debating at length whether it was a good idea, we’ve recently moved house. As a result time has been very short. It’s a bit of a fixer upper but is [just] liveable in in it’s current form. We’ve had to give the kitchen a quick once over to make it useable as it was even more frigteneing thatn we thought once we moved in.

Longer term we’re planning some pretty major home renovation works. While it’s likely to be a multi phased project it’ll involve the following:

• Insulating the shit out of the place
• Optimising the efficiency of existing lighting/water/heating systems to reduce ongoing costs
• Bathroom renovation
• A single story extension (to dramatically improve the living space as well as free room for the below)
• Conversion of part of the house to a holiday let/BnB/rent a room/annex/sub let (i.e. another potential branch for the money tree)
• Some minor external landscaping works

Embarking on a project like this has been something we’ve wanted for a long time. While it’ll likely involve significant financial outlay we’ve satisfied ourselves that the expected ¹ financial paybacks (a three pronged attack of lower running costs, long term asset appreciation and income generation) are worth the initial outlay and hassles during the execution phase.

Given I’ve been gorging on various DIY/renovations blogs and forums recently there’s also a fair likelihood that i’ll share some of the works/improvements on here as and when the time comes.

Family Time

Its been (and continues to be) an incredible journey into fatherhood. Witnessing a mini version of yourself enter the world and be so dependant on you, while at the same time steadily battling to become independent is an amazing thing to witness.

Spending evenings and weekends with UTMR Jnr has unfortunately left far less time to post here. Going forward i’ll be aiming for more consistent but less frequent posting.

Technical issues

Unfortunately the site encountered a technical issue a while back due to a conflict between one of the WordPress plugins and the customised theme I’m running. Lack of time meant it took me some weeks to finally get round to fixing this. Soz.

Work

The finance industry has been a damned busy to be working in the finance industry what with all the excitemnt of Brexit and then Trumpageddon. It’s been fascinating to see just dramatic market moves, expectations, anticipation, panic and general bemusement over the last few months.

After all the panic, stress and worrying I’ve witnssed at work since I last posted here almost 6 months ago here we are with the FTSE 100 broadly where it was when i left…infact it’s up around 3.7%!

Finally many thanks to those readers that have emailed/tweeted/messaged etc to check up on me. I promise I won’t leave it so long next time.

Notes:
¹Nothing is guaranteed

Nobody Has a Clue

Most people who work in Finance have no real investment advantage over you. In fact most of them don’t have a clue how to keep hold of their money let alone invest it successfully to grow their wealth. Given this truth most shouldn’t be trusted to manage anyone else’s. I work amongst what some might call the ‘elite’ of financial talent but i certainly wouldn’t trust any of them with my own investment funds.

Most of the money made in investment banks these days is via ‘the spread’. When you log onto your online broker you’ll be quoted two prices…a bid and an offer depending on if you want to buy or sell a particular investment. This spread is the ‘fee’ the broker will make from offering you the chance to either buy or sell. The more times financial institutions can get you to cross the bid/offer spread the more money they make and the more you lose. Their interests are usually not common to yours.

Sophisticated trading floors, fund and wealth manager do not have crystal balls. They have no way of knowing whether oil will rise or the USD fall. Sure they monitor all available news and make educated guesses but they honestly have no more of a clue than you or me.

They make most of their money by charging you the customer a fee on every transaction you make. Save yourself some money and trade less.

Know Your Risk

One of the most common reasons I see big losses being made in the office is because the risk taker (in my work usually a trading desk) wasn’t fully aware of the risks they were running. In my workplace this is usually some obscure second order risk mathematical risk (credit/fx/interest rate cross gamma, vega convexity etc) related to the limitations of the derivative pricing model being used.

Thankfully us private investors need not worry about such complexities. However we still need to be fully aware of the risks we are running. Sometimes its all to easy not to see the wood for the trees.

The price you pay for a share is no reliable indication of the long term value that will be realised. Buy any security and you are running the risk that the market will re-price it lower than what you paid. Understanding this and being able to understand the level of risk this adds to your portfolio is key to maximising your investment returns.

By investing in securities where this risk of repricing is low moves the odds of financial success significantly in your favour.

Stress Test Your Portfolio

I’ve discussed before about the importance of preserving your capital is something that a private investor should not ignore. No matter what investment strategy you adopt  you’re guaranteed to be taking on some form of risk. As an investor it is crucial you are aware of and comfortable with the levels of risk you are taking.

At work we attempt to gain a better understanding of the risks being run by creating stress tests or ‘what if’ scenarios. You don’t need a complicated analytical model that requires daily calibrations of market data inputs to be able to do this. Sit down and ask yourself some of these type of questions:

• How much would I lose if the market fell X?
• What would need to happen for me to lose X?
• Could I cope if I lost 50% of my portfolio value?
• If prices fell 50% would I be a buyer?
• What % loss would need to occur before I called it a day and sold out of my investments for good?

It sounds simple but asking yourself these types of questions will help you get a better understanding of risks you are currently running. Perhaps even more importantly the answers should tell you if the level of risk being run matches your appetite should markets turn against you.

Regulation is a sh$t

It’s probably not news to any of you to hear that over the last few years the financial industry has become a sea of regulation. By intent this of course is a good thing however from a practical perspective, regulation almost always has huge unintended consequences. Heavily regulated industries (such as finance) are constantly having to evolve as the regulatory environment changes and this in turns puts a huge cost burden on these companies.

Over the last few years the large banks have spent tens of billions upgrading their previously weak control systems. At the same time regulations like Basel 3 and Volcker are making it much harder and expensive for them to take risks in order to generate higher profits. It’s a double whammy of higher costs and less profit.

I’m firmly of the opinion that large investment banks are slowly becoming a bit like giant utility companies. The regulators are in effect capping their ability to make profits.  This trend will continue for some time yet and should be a warning to investors in the industry.

Ignore the effects that the current and future regulatory landscape will have on your potential investments at your peril.

Slow & Steady (Usually) Wins the Race

Over the years I’ve seen people and business divisions make good money of the latest complicated financial product. Thinking back most of them are no longer around and those businesses are either dead or have been set out to pasture in the banks ‘Non Core’ portfolio (anyone remember ‘synthetic CDO squareds’?).

The businesses or strategies that have played the long game tend to be the ones that survived and have made the most money in the log run. Steady strategies with well controlled levels of risk. The same principles can be successfully applied to your investment portfolio.

For me this tends to mean investing in boring companies that produce lots of cash, turn regular steadily growing profits, experienced management teams, have controlled levels of debt and don’t have to make huge capital investments to generate profits.

While it’s tempting to jump into hot of the moment stock investments like Tesla where short term returns can be fantastic:

I much prefer my returns to look like the below chart from Unilver.

I prefer to invest either in index fund or in steady blue chip businesses that are making money today. Ones that future profits should be relatively resilient to technological innovation, changing fashions or future economic troubles.

Control Your Spending

All this investing stuff is terrible exciting. There is nothing like logging into your brokerage account and seeing a sea of positive %’s in the ‘return column’ of your holdings to get your adrenalin going.

However if you’re on the path to financial independence investment returns are not the most important aspect to focus on. The reason I believe this is because they are not 100% in your control.

What is 100% in your control are your spending levels. What’s more, how much you spend each month determines how much you’ll need your investments to throw off in order to sustain your post 9-5 life. Much like any business if you reduce your costs and maintain your income your profits rise.

A good friend of mine that is in the same line of work as me once witnessed a guy in his office cry like a baby on bonus day. Apparently he’d been handed a doughnut¹  and was lamenting his new found inability to afford the astronomically high mortgage repayments on his multi million pound Swiss ski chalet.

On a similar vein yesterday I was listening to the lady that sits opposite me describing to a colleague how she has just spent £9,000 installing a fountain on her driveway. Rarely a day goes by without me having to listen to her complaining about the nanny/gardener/cleaner/concierge company. I reckon if I had 1/4 of the money she and her husband must have earned in the last 10 years I could easily give away all my assets and retire tomorrow.

Both of these are classic examples of people suffering from lifestyle inflation. The Escape Artist has discussed this previously and highlighted the negative effect being a bit too spendy can have of your bid for financial freedom.

Notes:
¹Slang in the industry for a zero annual performance bonus.

After a fantastically care free bank holiday weekend spent with family and friends, the gloomy commuter train to the office had brought me back down to earth. I even checked my email just incase there was one from my tenant…which thankfully there wasn’t.

Anyone that has been in the buy to let market for any length of time will know that it is not a source of passive income. Over the last 12 months I’ve had the following things to oversee/deal with in regards to my property rentals:

• Replacement windows in one property
• 1 boiler breakdown/repair
• Faulty bath/shower mixer valve
• Wardrobe door repair
• Replacement door bell
• Gas safety certificate renewals
• 1 new tenant to find/onboard

Meanwhile all year my equity portfolio has been furiously pumping out dividend income each month with very little input required by me. On reflection this dividend income has been far easier to ‘earn’ than the rental income.

The active investments of course require more maintenance than the passive part of the portfolio. This tends to involve:

• Regular checking of price performance
• Reading of quarterly trading updates
• Reviewing annual reports
• Monitoring the news/performance of companies on my short list to invest in
• Varying levels of worry about all sorts of idiosyncratic things like oil prices, tobacco law suits, brexit, regulation, noodle scandals etc

However even further down the stress scale is the passive/index fund element of the portfolio (roughly 50%) that has required zero maintenance over the last 12 months. That’s a slight lie, occasionally I’ll check the expected dividend yields or ongoing fees of my chosen funds haven’t deviated too much to ensure they’re still ticking my requirements, but thats it really.

Most of my effort on these passive funds involves counting the dividends deposited into my brokerage account each quarter and decided where to reinvest them.

The satisfaction of money being deposited regularly into your account without having to do anything is a great feeling and gives me one less thing to worry about on a rainy Monday morning.

Say What….So Nothing to Worry About?

However it’s not all plain sailing with passive investments.

I’m sure I’m not alone in having concerns deep down into my psyche that tell me I’m leaving money on the table by investing passively. Here’s how the logic in my mind works:

1. The fees are too high

Despite the incredibly thin ongoing charges on funds like VHYL (currently 0.29% p.a.) there is a part of me that resents paying that 0.29% each year. The reason is most of my ‘active’ share investments are buy and forget investments. I enjoy stock picking but i’m a long way from being truly active.

I try to emulate the Sage and buy shares that i’ll hold forever. On these holdings I’ll typically pay around £15 in fees on purchase and £1.50 each quarter to reinvest the dividends. On a holding of say £5,000 that dividend reinvestment fee works out to 0.03% a quarter or 0.12% on an annual basis. In other words quite a slice less than 0.29%. Of course the larger the holdings, the smaller the dividend reinvestment fees are when they’re expressed as a %.

2. I can outperform the indices

Looking back at my historical portfolio performance I have outperformed my index trackers with my active portfolio consistently over the years. When I see the xls tell me this it makes my head swells and my ego tells me to do more of it.

So if I can create a portfolio with lower fees and better performance than my low cost index trackers why bother to go passive at all?

Well, first off as the old mantra goes:

Past performance is not a predictor of future performance.

Secondly and perhaps more importantly the big thing I get in return for these fees is diversification.

VHYL for example currently contains 1,152 holdings. If one of those companies goes bust it’ll barely register on my investment returns. If one of my active investments goes pop in the night then I’ll be much more likely to notice the hit to both the portfolio value and annual investment income.

The need for diversification is the main reason why I also hold direct property investments, a bit of quasi gold, cash, peer to peer lending etc etc. I want diversification not just across asset classes but also across brokers, fund platforms, sectors, asset types and asset classes.

Sure when the next big fall in global stock prices comes (i’m talking a  -50% ish move) I’ll be stressing, even over the index funds I own and how much their value has fallen and future income might be at risk.  

However this would be no different to how i’ll feel when the next big house price crash comes. As I’ve stated before the primary metric I focus on with all of my investments is not capital value but income. The aim of my investing journey is to live off the fruits of the money tree. I’m planning to retire early and live entirely off generated income¹.

As the Money Tree continues to grow in size, so too do the potential risks/rewards associated with the active/self select component of the portfolio. An increase in risk is not something one should generally entertain as you get closer to retirement, quite the opposite.

As both the portfolio and I grow older, I find myself becoming increasingly drawn to passive investing and the advantages it brings. The appeal of a hassle/worry free income hitting my bank as I potter around enjoying life is an increasingly appealing on. As a result I’ll probably continue to increase the part it plays in my portfolio in the future.

Notes:

¹I’m not yet close enough yet, or old enough to worry seriously about drawdown rates.

***Apologies reader but I’ve just found this post languishing in the UTMT drafts folder. It should have originally been published back in early February***

Apologies for the absence but the UTMT clan have been away…in India. It would be wrong not to share a few comments about this bonkers place so below is a random collection of thoughts and observations collected during the trip.

It is Possible to Travel with a Baby

Babies don’t mean an end to your life. Traveling with a baby certainly brings its challenges but we found it also bring its own benefits. On previous sprog free trips we’ve always tended to over do it, packing our days with a never completed list of activities, things to do and places to see. Having a baby with us has forced us to slow down, do less and enjoy the activities we did even more.

Of course to ensure you don’t have a nervous breakdown you’ll need to take a laissez faire approach to ‘routines’, stay flexible and travel as light as possible. When you see Indian mothers bringing up their children without the plethora of tat we tend to buy in the West you realize how simple this parenthood lark should be.

Another benefit of travelling with a small child (with a very cute smile for anyone that will look) is that it helps you meet new people in any/every situation. Of course the more locals you meet the richer the travel experience tends to be.

The Burgeoning Middle Class

As mentioned previously I’m a big fan of investing in companies that have exposure to the burgeoning middle classes of the so called developing countries (like Unilever). Since our last trip here 5 years ago it’s interesting to note some radical changes that appear to have taken place, particularly in the big cities:

• There are many more cars on the roads, particularly in the cities (less auto rickshaws, bikes and semi domesticated cattle!)
• Modern shopping malls are popping up everywhere
• People love all things western (clothes, styles, gadgets, consumables, even the people!)
• Previously dominant local brands such as ThumbsUp appear to have been replaced in many areas of society by their international rivals such as CocaCola

There is a Price for Everything

If you navigate past the big brands and look at unbranded consumable products there is a huge array of quality on offer to the consumer in India. Sarees, stainless steel crockery, rice, and jewelry can all be bought for a vast vast array of different prices depending on the quality of product you want. Of course the main reason is the vast spread of wealth throughout the society.

We complain in the UK about the widening gap between the poor and the rich but it is nothing compared to India. It’s common to see people sleeping in slums (or even on the pavement) and be within eye shot of 5 star hotels. Bentleys and Ferraris jostle on the streets with buffalo and vendors pushing wooden carts of fruit. It’s a well known cliche but the contrast between the haves and the have nots is vast. What’s more, the distribution in the middle is equally huge. Until you see it it’s hard to comprehend.

Needless Complication is the lifeblood of India

In my opinion one of the biggest charms of India is the way that the simplest of things get over complicated. Why should a restaurant have 1 waiter to get your order wrong when they can have 5? Here is a transcript of a conversation I had after checking in to a hotel we were staying at:

Me (to the hotel bell boy in the lift showing us to our room): Which floor is our room on?

Bellboy: 14th floor Sir [as he pushes the button in the lift for the 14th floor]

Me: Wow, the view much be spectacular?!

Bellboy: Yes Sir [head wobble], actually the 14th floor is on the 3rd floor Sir. Hotel only has 5 floors Sir. Reception is on floor zero. 1st floor is on level 12. 13th floor is on 2nd level.  Top penthouse floor is on 18th floor Sir.

Me: Er ok…….what time does the bar open…oh and which floor is it on?!

Nothing in India is straightforward. Chaos reigns everywhere but somehow things get done. Something will always go wrong, get forgotten or misplaced but it always works out OK in the end somehow or other. What’s more you’re always left with an amusing story to tell.

On our last night we went for a drink in a bar in our hotel. Having ordered a fresh lime soda and a beer we were a little baffled when the barman brought over a beer and a mojito. After a confusing chat we were told they’d be complimentary and he’d bring the right drinks over. Next time a beer and a tomato juice turned up. Same confused conversation before third time round the correct drinks arrived. The net result was 6 drinks on the house!

The Grass Is Always Greener

We saw a lot of adverts for ‘tanning’ while out and about in the city. Of course in India a fair complexion is revered while a dark complexion implies you have to work outside labouring for a living.  As a result the middle classes now pay for ‘tanning’ which is the reverse of and English. I’m not sure how they do it but there is clearly some system to lighten the skin (hopefully not involving bleach).

On reflection it is odd that many of the western tourist (me included) arrive in India and marvel at the relatively simple life it has to offer. Seeing out my days doing some serious yoga every day, eating a simple vegetarian diet with no processed foods and listening to lots of local music is incredibly appealing. Meanwhile most Indians are frantically running away from this traditional lifestyle in a mad rush for office jobs, starbucks coffee and binges on electronic consumer goods imported form China.

Delhi Belly Is Optional

It is possible to visit India, eat local food and not submit to ‘Delhi belly’. Absolute key is to only drink bottled water, avoid ice, ignore salads and only eat freshly cooked foods (avoiding the buffets most hotels and many restaurants offer) by asking locals for recommendations for restaurants.

We ate local food 3 meals a day and survived to tell the tale with the same amount of Imodium in our suitcase at the end of the trip as the start. Hell, we were even weaning UTMT Jnr and managed to continue this while away using predominantly local grub e.g. Idly, Dosa, Roti, Dal etc.

If you ever get the chance to visit India be sure to take it.

If you’re smart enough to get yourself in a position to reach FI or early retirement then you’ve most likely got a brain that needs more stimulation than daytime TV can provide.

It strikes me that most of us FI seekers are not looking for total retirement but some sort of compromise where we’re working on our terms, be it working from home, doing charitable work or monetizing a hobby we have. The key to defining this seems to be finding the right balance between giving up our time, earning money and being intellectually stimulated. The first two of these factors is usually the focus of most peoples efforts to reach FI.

I’ve got two good friends both with very well paid jobs. One works in recruitment for a hip tech company while the other is a slave to the Finance industry (a bit like me but a lot worse). By my reckoning they both earn around the same money however Mr Finance’s average day in the office is around 12 hours (often a lot longer) while Mr Tech rarely does more than a 9-5pm and works from home two days a week.

After meeting up with them both recently I started thinking more about how much I was paid per hour. All to often we focus on the headline ‘earnings’ figure and ignore the time we have to sacrifice to get our hands on the filthy lucre.

I recently sat down and worked out what my real earnings per hour are. To be honest the result was quite a shock.

How I calculated My Hourly Wage

Your hourly rate can be calculated using a pretty simple formula:

Hourly Rate = Money Earned / Hours taken

…meaning there are two areas to consider.

1. Earnings

Net/Gross Earnings: Unless you’re a large multinational internet company, or have friends in Panama, then you’ll almost certainly have to pay some tax on your hard earned income. I’ve discussed before how mad our marginal tax rates are in this country. The earnings I use for the calculation are net of tax. I do this by picking up the net income figure from my PD11D tax statement.

Bonuses: I’m lucky in that I tend to receive an annual discretionary bonus. I took the average from the last 3 years into account, again net of any tax paid and adjusted the above figure form my P11D erring on the side of conservatism.

Commuting costs: I deduct the cost of my rail pass (an exorbitant amount) from my net earnings as this is a material costs for me.

Nursery fees. If you have darling sproglets that attend a nursery while you’re in the office then you should also deduct these fees from your net earnings.

Pensions. I also included net pension contributions in my ‘earnings’ part of the equation.

If you wanted to get bogged down in the detail you could also exclude any other work associated costs such as additional food costs, spending on work clothes and any other associated costs you incur as a result of your employment. For a frugal guy like me these tend to be pretty controlled so I didn’t exclude them to keep things simple.

2. Time

Assuming you’re salaried or paid per project, how many hours you work will of course impact your real hourly earnings. As a start point I took my average hours in the office.

Commuting time: I include all commuting time into my calculations, apart from the cycle to/from the train station as this is optional and I view it as leisure time.

Lunch/Breaks: In my line of work lunches are usually spent at the desk eating while working so I don’t take any time off for breaks.

I’ll be a little honest, the number that plopped out the bottom wasn’t quite as big as I expected. That said it’s hardly surprising given I work reasonably long hours and have a long commute.

To help you get a rough sense of what your real hourly rate it below I’ve put together a table showing a wide range of gross salaries, take home pays (based on the 2016 tax year) and what those equate to as an hourly wage (net of income tax) for a range of working weeks. To calculate these rates I’ve kept things nice and simple and ignored all of the time/cost adjustments I mentioned above.

I simple took the gross salary, deducted income tax and I’ve assumed a 48 working week year in order to calculate the hourly rates.

What is very interesting when looking at the above table is that it becomes immediately clear that the number of hours you work is just as important as your salary. For example someone earning £50k and working a sociable 35 hour week who live round the corner from work (i.e. no commute) is picking up around £21.60 per hour. That hot shot city analyst you know earning £120k only pulls in the same (well, £21.75) hourly rate by the time they’ve done a 70 hour week including the commute.

So What?

If you work in an industry like me (finance) where there is a culture of long hours and seemingly big salaries then you might be surprised how your hourly earnings may not be quite as spectacular as you thought. All of a sudden after looking at these tables I began questioning how I could improve the number that fell out of the bottom. Below are a few ideas…

Work from home. I’ve recently began working from home on a regular basis, one day a week. Doing so saves me valuable commuting time that I can divert to more pleasurable activities as well as increase the real hourly earnings.

Work smarter. Since becoming a father my time has become even more precious. I’ve been making a concerted effort to work harder and faster but for less time. I reckon I work between 1-1.5hrs a day less than I did about 1-2 years ago but manage to maintain at least the same level of productivity, if not more. Here’s a couple of ways I’ve done this:

• Only ever touch an email once. Either delete it or reply straight away, never waste time reading it twice.
• Ignore the peer pressure to work long hours just for the sake of it. Be open with your colleagues about what you’re trying to do.
• Ignore the crap. I receive around 500 work emails a day. If i’m not careful I spend the whole day sorting through them and achieving nothing. Be ruthless and delete the crap. If it’s that important they’ll pick up the phone or come to your desk.
• Block out chunks of your diary in order to ring fence uninterrupted work time

Push for That Promotion. I’m firmly of the opinion that if you’re in it you might as well win it. At points in the past I’ve been content with my generous remuneration and happy enough to drift along taking the wage an not getting too stressed or caught up in the politics of climbing greasy poles. This strategy served me pretty well over the years and it hasn’t really impacted my career progression.

More recently however I’ve opted to be more aggressive in my pursuit of gains from my employer. As mentioned recently I’ve managed to negotiate working from home one day a week. In addition I’m pushing hard for promotion, and more specifically the pay rise that will come with it. The way I see it is if I’m playing the game, I may as well get a better seat at the table.

Of course, the real satisfaction will come when I perform the same calculation in a few years time when I’m resting saefly under the money tree, working (probably) very little, if at all, and reaping an income from my investments that sustains the lifestyle I want to lead.