The Plan

Having saved as much as I can over a number of months I have reached the stage where I now need to start thinking about how I’m going to put my money to work.

One option would be to invest in the stock market. However, as I have alluded to before (https://millionairein7years.wordpress.com/2014/07/20/sheep-get-slaughtered/), I am wary of anyone who claims investing in equities is easy money. If what I said in that post is true then it would be somewhat arrogant of me to expect to do any better than the market average given that the majority of professionals, people with far more experience than me and who have the opportunity to research equities full time, fail to do so. The stock market is by no means a get rich quick scheme (unless you have inside information of course).

Though it seems unrealistic to expect to beat the market on my own, it is not unreasonable to expect to match it. I am a huge fan of indexed funds but, assuming I were to add £12,000 of savings per year and get an average return of 10% per year, I would still fall well short of my target of £1million in 7 years as the graph below shows:

12k_plus_10pc_yearlyMy Dad recently said to me how he used to look at his Dad and think how easy it would have been back then for him to accumulate a net worth through buying houses. They were ridiculously cheap.

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I look at my Dad though and think how easy it would have been for him!

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Obviously past performance does not necessarily guarantee future gains but even at the moment we are in the midst of yet further house price inflation.

Perhaps the biggest advantage I see in investing in property rather than equities is the easy and relatively risk-free use of leverage through mortgaging. Say I were to put down £10,000 on a £100,000 house and its value increased by 10%, I would have made 100% return on my money.

Other pros of this strategy include:

– Saving money that would otherwise have been lost through paying rent (£350pcm).

 – The opportunity to rent out any spare rooms to increase cash coming in.

– The opportunity to add value through renovating and extending.

There are also cons to be considered as well:

– The possibility of a house price bubble: leverage also increases potential losses.

– Interest payments on mortgage.

– Maintenance costs.

However, of the three cons listed above, 2/3 apply equally to investing in the stock market: the stock market could crash just as easily as the housing market and, if I were to use leverage to invest in equities, I would have to pay interest on the borrowed capital as well.

So I have now started looking for a house to buy. A few months back I had a meeting with a mortgage advisor and was told I could borrow £135,000 if I put £10,000 down as a deposit. The mortgage would be interest-only at a variable rate of around 4% per year (can’t remember the exact number off the top of my head). I was also told that the mortgage criteria has changed recently and that, had I come in just a few months ago, it is likely I’d have been able to borrow more with the same deposit. Oh well.

Ideally I am looking for a three bedroom house that I can get for a decent price and which has the potential to add value to. I plan to rent out the two spare bedrooms and sell up within a year.

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How I Save Money

The first step along the path toward financial independence has been to save enough money to be able to put toward a proper investment. This has felt frustrating at times as I’m impatient to get out there and start actively doing something to bring in more money. Though I haven’t been able to increase my cash flow coming in during this time, I have been able to channel this impatience toward reducing the flow of cash leaving my bank account.

I knew it was important to save money when I first started my job and this influenced where I decided to live. I picked somewhere that was within walking distance of where I worked so that I wouldn’t have to buy a car. I suppose this was an easy decision to make as a car would have made a significant dent in the amount of money I was able to save per month. That said, it has been hard at times to do without. I work in quite an isolated area that is only accessible by an infrequent bus which has caused problems at times. The best example to illustrate this was when I was returning home by train and missed the last bus back from the train station to my town. My phone was completely out of battery so I couldn’t call anyone for a lift and I wasn’t prepared to pay the £40 or so it would cost to get a taxi back. I ended up walking 17 miles along unlit country roads with no pavements to get home. It seemed to take ages but, weirdly, I enjoyed it. When I wasn’t diving into hedges to avoid oncoming traffic I thought about how I’d one day look back and laugh at the things I did in the name of saving money. It was a fun challenge and great experience although not one I’d like to repeat!

The house I moved into was an old one bedroom cottage with uninsulated walls and night storage heaters which didn’t make the slightest bit of difference.

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Per month I was paying £450 in rent, £96 in council tax, and about £80 for electricity and water. I didn’t bother to turn the heating on as the lack of insulation meant any heat would quickly escape through the walls anyway. It was a particularly cold winter and even when wrapped up in two hoodies and a dressing gown it wasn’t what you’d call comfortable. I also turned the boiler off permanently and started having cold baths in the morning. I doubt I saved a significant amount of money in doing so but it felt good to be doing something to save money and I liked the mental challenge of forcing myself into the cold bath every morning. I also made do without internet, a fridge, or a bed.

Despite living like a Victorian peasant I wasn’t saving anywhere near as much money as I am now that I rent a room rather than a place all to myself. You can go to extremes to eliminate bills as I did but living on your own will be expensive no matter what you do. My advice to anyone who is serious about saving money is to rent a room or, if you can, live with your parents. It may seem lame and like you’re giving up a lot of freedom and independence in doing so but you need to remind yourself that it is only temporary. Short term pain for long term gain.

I guess it goes without saying that I don’t spend money on non-essential items often. The subject of how much useless shit many people waste money on merits a whole post by itself so I won’t go into great detail about it here. There’s nothing wrong with living paycheck to paycheck if it makes you happy but if you’re serious about building net worth then you need to avoid the consumerist mindset of spending money just because you have it.

giphy

Though I can be pretty tight with money at times there are a few areas where I won’t compromise on. I spend £35 a month on a gym membership and always buy good quality food even if it sometimes can be a little more expensive. I think it’s important to invest in your health as there’s no point having loads of money if you’re not well enough to enjoy it. I’m also happy to shell out for experiences when necessary as it would be pretty boring to spend the next 7 years doing nothing but worrying about money. Also, as I mentioned in another post, spending money on experiences, not things, is supposed to make you happier (http://www.huffingtonpost.com/2014/04/03/life-experiences-happier-material-things_n_5072591.html) so if I am going treat myself it will typically be an experience I buy rather than a thing.

After 8 months I feel I’ve reached a point where the non-financial costs I’d have to incur to save more money are not worth the financial benefits I’d gain. Yes, I could live off 9p noodles everyday, cancel my gym membership, and never leave my house, but it wouldn’t be worth it.

At this level my monthly outgoings look something like the following:

Rent: £350

Food: £100

Leisure costs: ~£50 (averaged out over the year – includes two holidays)

Gym membership: £35

With a take home pay (after income tax, national insurance, and student loan repayments, not including non-contributory pension payments) of £1550 I should now be saving at least £1000 per month. Going forward I will be focussing more on areas to invest in order to maximise my money coming in rather than looking to reduce my outgoings further.

The lessons I have learned from the past 8 months regarding saving money are pretty obvious really:

1. Don’t spend money on unnecessary things. Ask yourself: ‘Can I do without this?’ (E.g. car: can I walk/cycle to work?) and ‘Will I use this in 6 months time?’ (E.g. impulse purchase of clothes).

2. Rent a room, not a flat/house. Better still, live with your parents.

3. Don’t take 1. to extremes. Just because you could live on the streets to save money, doesn’t mean you should. 

Sheep Get Slaughtered

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‘Ever wonder why fund managers can’t beat the S&P 500? ‘Cause they’re sheep, and sheep get slaughtered.’

I have heard this from a few sources – that the majority of managed funds fail to beat the average of the markets they operate in. A little research (http://www.forbes.com/sites/rickferri/2012/10/11/indexes-beat-active-funds-again-in-sp-study/) confirms this to be the case as well.

Is this common knowledge? Because it seems like a big deal. Why do these funds exist if this is the case?

A Fishful of Dollars

Futurama_106_-_A_Fishful_of_DollarsHave you seen the episode of Futurama where Fry returns to his bank account after 1000 years to find he is now a billionaire? The $0.93 he had in it, compounded at an average interest rate of 2.25%, ends up being worth $4,283,508,499.71 when he returns to it in the future.

Anyway, I have seen the following quote attributed to Einstein in a few places:

‘The most powerful force in the universe is compound interest’ 

Whether or not he really said it, it’s a good point. Once the snowball of compound interest gets rolling it becomes a very powerful force. Interest on interest on interest.

I don’t have 1000 years to wait like Fry did. 7 years isn’t nearly enough to see any significant effect from compound interest. However, over the course of a working lifetime, pretty much everyone can expect to retire a millionaire.

In another post I mentioned indexed funds. Putting your money in one of these takes no effort whatsoever. Assuming my source (http://swanlowpark.co.uk/ftseannual.jsp) is correct we can see that the FTSE all share has grown by approximately 11% per year since 1985. If I left just £10,000 in there for 50 years, didn’t save a single extra penny and relied solely on 10% or so interest, I would be a millionaire (£10,000 x 1.10 ^ 50 = £1,173,909).

Yes, in 50 years time £1,000,000 will be worth considerably less than what it is now. However, £10,000 today really isn’t a lot of money at all in the grand scheme of things. I would expect to save a lot more than this over the course of a working lifetime and so also expect the effects of compound interest to be magnified accordingly.

compound_interest

A lovely graph to make this post less dry

My Favourite Personal Finance Book

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‘Every gold piece you save is a slave to work for you. Every copper it earns is its child that also can earn for you. If you would become wealthy, then what you save must earn, and its children must earn, that all may help to give to you the abundance you crave […] learn to make your treasure work for you. Make it your slave. Make its children and its children’s children work for you.’

The Story So Far

I have had my current job for approximately 8 months during which time I have run my personal finances like a business. I am constantly looking for ways to drive costs down and make the most from the money I already have.

That said, I wouldn’t turn down a fun and exciting experience for the sake of saving a few quid. I remember reading some study about how spending money on experiences rather than possessions makes you happier and so if I do spend money on something non-essential it is usually something like a night out or a holiday.

The biggest change I have made recently in the name of driving down costs has been to move out of the house I was renting (costing £450pcm plus bills) and instead rent a room (£350pcm with all bills included). This should save me approximately an extra £300 per month.

Having my own house was relatively expensive considering there were other options available to me. The house was an ancient old cottage with no insulation but even during the coldest winter I wouldn’t turn the electric heaters on. Yes, it was freezing, but I enjoyed the challenge! I even kept the boiler off permanently and resorted to having cold baths in the morning to save money. My friends and colleagues thought it was a bit mad how I lived but it was a great experience to see how much I could do without. Despite all this it was still an expensive way to live when compared to renting a room. I realised it made more sense to just rent a room even if this meant giving up a certain level of independence.

After 8 months of saving I have the following to show for it :

My bank account: £3.6k doing nothing.

bank-19-07-2014

£3.5k in the FTSE All Share Vanguard indexed fund. Historically it has returned around 10% per year (averaged out over 25 years) but as you can see it hasn’t done much recently. I recently sold my holdings in the S&P500 index and moved them into the FTSE for no real reason other than the PE ratios (S&P was around 20, FTSE more like 15). I think these kinds of funds are more a long term tool for building wealth and, as I anticipate needing this money soon for other, more lucrative, projects, I am not planning to put any more money into these funds in the near future.

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This is a monthly payslip:

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Even if I saved every penny of it until I am 30 I would only have saved about £175,000 – and that’s before tax! Fortunately I am not relying on huge pay rises in my pursuit of financial independence (though it would be nice!). Instead, I will leverage my savings and invest. I will talk more about these plans in later posts.

 

First Post

My goal at the moment is to make as much money as possible as quickly as possible and in this blog I am going to document the steps I take as I attempt to become a millionaire before I reach age 30.

I am 22, soon to be 23, and have just started my first proper full time job which, at times, I hate and at other times I quite like. Either way, I don’t like the feeling of powerlessness that comes with having to go to work, which is my main motivation for embarking on this challenge. My dream is to escape ‘wage slavery’ and become financially free so that I can dedicate my life to the things I really want to do: travel the world, build my own house, start my own business. Time is money and I don’t want to sacrifice my entire life doing things I don’t want to.

Plus I like setting goals and achieving them.