FIRE, budgets and relationships

Without turning this blog into a personal drama diary, after starting reading about FIRE, practicing the core ideas, and writing here, I had to try this from the relationship angle. Thinking about my personal experience, there are 3 levels of a relationship, from a finance angle:
  • The beginning No financial aspect is shared. Depending on culture, expenses may rise during this stage (dates, cinema, etc). For me, this stage lasts a few months at most.
  • Things are getting serious This is where the couple is travelling together, may use a single car together, and to some extent, the common costs have to be budgeted. This is where the cracks show up when there are either income or cultural differences. On a brighter side, this is where you can discuss “Hey, when your rental contract is up, let’s move in together“.
  • Financially married You may or may not use a single joint bank account, but living together, doing most things together, and having a common budget falls in here. Pragmatism plays a big role here in order to have a healthy relationship.
Now, my experience at each of the 3 stages: The beginning This is where I absorb most of the cost, and historically I’ve made some terrible mistakes. This is the stage where I’m trying to pay attention to the spending patterns, to spot any differences. This is also where I take an educated guess on someone’s income level, in order to estimate what common plans are possible, and what expenses I’d need to absorb. My most common mistake: trying to impress someone by spending more than I should Something I’d do differently: I’d talk early, in an open manner, about my interest in investing and FIRE. If the other person is interested, that’s a good sign. If not, or there’s a strong disagreement, I’ll take that as a serious negative sign. The “things are getting serious” stage Being recently out of such a relationship, I have a fresh recollection of every issue I’ve noticed. This is where my weekend-city-break hobby creates problems when the SO’s income is half. This is where I’m trying to argue that buying a car in a big city like London is not a good idea, especially while sharing a small flat with 3 other people. This is where I realize that I’ll have to pay for most holidays, if I’d like to have a happy relationship (hint: it didn’t work). This is where I will get criticized that I should live my life while I’m young (#yolo) and not care about saving money. This is where I realize that there is a cost associated to a relationship (car co-payments, car insurance, parking, gas, travelling). My most common mistake: Ignoring fundamental differences, and accepting a change in my spending & lifestyle, due to emotional decisions. Something I’d do differently: I’m not at the level where I can, nor do I want to support someone financially. As arrogant as it sounds, given my lifestyle, I’ll probably have to focus on people with a similar professional trajectory, and income as me. The “Financially married” I can only speak from a limited experience, as I’ve only been at this stage once. I have to admit, it wasn’t bad. Living together is cheaper, sharing utility & groceries bills definitely helps, and travelling together when splitting the tab is real fun! If you have made it to this stage of the relationship, chances are you will be able to solve most cultural differences when it comes to spending. The most sensitive topic at this stage is any asset-splitting, in case the relationship ends. As long as anything has been bought together, you can be sure there will be some argument over who takes what. Can’t add a “most common mistake”, due to the limited statistical sample ūüôā . Something I’d do differently: I’d follow Dave Ramsey’s advice on couple’s budgets, and allow for a large “discretionary spending” category, for the otherwise compulsory shoes, bags, and WiFi light bulbs. I’d set up the budget in an open way, at least at a “spending category” level. Perhaps transaction-level when married.   That’s everything I had in mind, at a high level. I may add a 2nd post on relationships & money, once I have some structure in my thoughts. I hope this helps anyone that is not sure how to approach this topic with their SO when building a relationship.

October 2018 status: A mess

Re-reading this title, it sounds more negative than the actual reality. I’m OK overall, I am healthy, I still have a job, and I still have a plan.

But since the Q1 of this year, I’ve deviated from the plan and the purpose of this blog quite a bit. To put everything in context, and calculations will follow in the next few days, but my current net worth might be negative. And the worse part is that I’m not yet sure how that happened.

Since writing the last post on this blog, I have traveled a lot, including to 8 new countries. This, and a few messed up relationships might have played a big part in building up debt. Lessons learned!

So, a short term plan to get back on track looks like this:

  • I took a consolidation loan, to pay off my credit cards / overdrafts. Overall interest went from 24% to 8%
  • I’m cancelling credit cards, one by one (it seems like I can’t control the temptation of a large credit limit)
  • While I’ve been using Yolt¬†to track spending, it’s useless for budgeting. I’ll switch to something else, likely YNAB. Or good ol’ Excel
  • Apart from visiting family, I am not planning to travel until all debt is fully paid off.

I’m also working on a secondary stream of income from swing trading, but this is a long (12-18 months) term plan, and won’t fix my current problems. More details to follow in the next months.

Investments and savings accounts in the UK: ISA, IFISA, LISA, H2B ISA

I am still debating whether I should write this as a post, or a page, since the content will very likely be relevant for a long time, and to a many of the readers.
The idea of writing this post came recently, as I was talking to a close friend about his income, and investments. I’ve asked him if he has any type of ISA account, and the response was brilliant: “A what account? Should I have one?”.

As this is a person with postgraduate education, earning over ¬£100000 a year, this made me realize that people just don’t have this information available in a simple way, so choose to ignore it.
So, what accounts can an individual open in the United Kingdom?

Cash-based:

  • Current account – this is the equivalent of the US checking account. Usually comes with a debit card. Sometimes offers interest on balances.
  • Cash savings account – this is an account which typically doesn’t come with a debit card, but always pays interest. The highest interest in the UK is 5%, for some monthly-savers accounts
  • Cash ISA – this is an cash savings account which pays interest, but unlike the previous item, the interest is tax free. The contribution across all ISA accounts, in a tax year, is limited (currently to ¬£20000)
  • Help to buy ISA (or H2B ISA): this is a cash savings account which pays interest, and upon withdrawal for the purpose of purchasing your first property, the government adds 25% of the account balance, as a bonus. Tax free. The contributions are limited to¬†¬£200/month.
  • Cash Lifetime ISA (or Cash LISA): a Lifetime ISA account is meant to replace the H2B ISA account, and provides a similar offering: Pay up to¬†¬£4000 every year, and the government adds 25% of what was paid that year, to your account balance. Can be withdrawn for your first property, or upon retirement.
    Only one UK institution offers a cash LISA.
  • Cash Junior ISA: Helps parents save up to¬†¬£4080 in the name of a child. Can be held until 18 years old.

Securities – based:

  • Standard investment account: Allows access to financial markets. Can trade a wide variety of assets. Income is taxed. Usually meant for long term investments.
  • Stocks & Shares ISA: Allows access to financial markets, for a more limited array of assets. The contribution across all ISA acccounts, in a tax year, is limited (currently to ¬£20000). Capital growth, and dividends, are tax free.
  • Lifetime ISA:¬†Allows access to financial markets, for a more limited array of assets. Similar to the Cash LISA, but holds stocks/funds/ETF investments. The offering is the same:¬†Pay up to¬†¬£4000 every year, and the government adds 25% of what was paid that year, to your account balance. Can be withdrawn for your first property, or upon retirement.
  • Junior ISA: Helps parents save up to¬†¬£4080 in the name of a child. Can be held until 18 years old.

Alternatives:

  • Innovative Finance ISA (or IFISA): Allows tax-free investments in various platform and vehicles. Typically, the types of investments fall under the following categories: property crowdfunding, mortgage crowdfunding, peer to peer loans, business loans, or royalties. More of this, in a following post. The contribution across all ISA accounts, in a tax year, is limited (currently to ¬£20000).
  • Inheritance ISA: This is not a product on its own, but rather an HMRC policy, allowing a surviving spouse inherit the deceased partner’s ISA account, and allowance, tax free, while not affecting their own ISA allowance.
  • CFD trading / Spread betting account: Allows access to financial markets, but to bet on market movements, instead of purchasing of assets. Not available as an ISA, however spread-betting in the UK is exempt from stamp duty and capital gains tax.

Was that too much? Well, a summary:

I am working on a series of posts which will dive deeper into the details behind the different types of accounts, together with my experience with some of these accounts. Bear in mind that I will be talking from my own experience, and not provide financial advice – you should always do your own research before making financial decisions!

New page: Investments & holdings

I have added a new page to this blog: Investments & holdings.¬†I’ve included 3 Google Docs spreadsheets that will show you my current investments, together with the book price and current market price. Yes, you may find out before I do when I become financially independent :).

There are 3 categories of investments on the page:

  • Securities: Stocks/Funds/ETFs
  • Alternatives:¬†Peer to Peer loans, Property Crowdfunding
  • Cryptocurrencies / crypto-assets

One category I have no published here is Cash – as any cash position that I have is short term.

Avoid mistakes when saving & investing

This post will tie very well with a previous one, where I was analyzing a list of failures; and will almost create a mini-series together with the next one, where I will discuss in detail various investment accounts and vehicles available to UK residents/citizens. Below, I will discuss a series of investment-focused mistakes that I’ve made over the years – hoping that you, as a reader, won’t make the same mistake again!

When did I start investing?

To be specific: 2016, July.
Prior to that point, my employer did not allow any investment accounts, to prevent insider trading. As soon as I switched jobs, I’ve opened a¬†Stocks & Shares ISA¬†account.

When did I realize I am doing it wrong?

Roughly when I started following the FIRE community, and reading some blogs on a regular basis. There was something obviously wrong: People had written plans. People had a structure in their investments. People had an asset allocation. I did not have any of those.

What did I do wrong?

Well, a few things:

Asset allocation. Or lack thereof…

No, this is not me

I guess the most obvious mistake was the lack of an asset allocation plan. As Sam from Financial Samurai wrote very well in the beginning of his post, “There is no correct asset allocation by age” – but having one is better than having none.¬†My regular savings were:

  • ¬£200 every month into a cash ISA account, at 4% a year
  • ¬£250 every month into a S&S ISA account, which added ¬£50 into each of 5 funds.

Suggestion: Have an asset allocation plan. If you don’t know what that is, google it – chances are, following the first result will be better than having nothing.

Picking investments because they sound OK

So, almost half of my assets were in cash, and the other half in 5 funds. And speaking of funds…

Suggestion: Based on your asset allocation plan, look up funds or ETFs that match your requirements. Do not trust any friend, any single blog, or your banker. Oh, and don’t trust me either! Do your own research, and you will always be better off.

Sitting on cash at a low interest rate

Whoever said that people should not listen to their banks, was right. My bank suggested that I open a Cash ISA account, “because it’s tax-free”. Trouble is, there isn’t much interest to tax anyway, as they have initially offered 1.5%/yr. I then transferred it to a 4% account, which dropped to 3.5% after 12 months.

Now I am stuck with this account until it pays the interest (March 2018), then will transfer it into the S&S ISA.

Suggestion: Only have cash savings if you have variable income and have to even out low times.

Investing in P2P at a low interest rate

I became a fan of Peer to Peer lending during the job that did now allow me to invest in any securities – as it was my only option. I have signed up for an account with RateSetter, which promised “up to 6%”. And I have to give them credit – they delivered. My portfolio averaged 6.2% at times.

One long-term advantage of having the money in this account is accessibility – loans can be sold and money withdrawn in 24 hours. Another advantage is that RateSetter (as other providers) has a guarantee that in case a borrower defaults, you’ll get your capital back.

I am still a fan of P2P loans – but now I see this investment in a different (higher) risk profile. Just think about what most of these loans are for: cell phones, new sofa, or that summer holiday to Ibiza. Tough times come, these will be the first type of loans which someone will default on – not their house, not their cars. And the issue doesn’t show when one person default, but when 2008 happens and the lender goes bust. By treating P2P loans in this way, now I allocate less capital to it, and look for higher returns.

Suggestion: Treat P2P loans correctly – unsecured debt. Think that usually there is little more than a promise backing the loan – no house, no car, no company assets.

So, what’s the plan?

This is tough – as until about 1 hour ago, I did not have a written one. I’ve started making my plan by applying retroactive data on it:

  • I have way too much exposure to tech
  • I have way too much exposure to US stocks
  • Asian stocks go well, however I get nothing of that
  • P2P loans are OK, as long as I get compensated appropriately
  • The elephant in the room – crypto currencies. I still see it as speculation and not an investment, but I have and would like to keep the exposure.

After a bit of spreadsheet work, my chart looks like this:

I know this may look overly complicated, but bear in mind that 99% of asset allocations do not include cryptocurrencies, property, private equity, or Peer to Peer loans.

Hope this post helps. How does your allocation chart look like?

Monthly summary: January 2018

As mentioned in the December Monthly summary, I am trying to provide a better separation between an income (and expense) report, and the balance sheet. They are linked but provide a different view on the health of my finances: one shows what comes in and what goes out, and the other shows what is to stay (the net worth).

Before looking at any numbers, I know that January has been a bad month, financially speaking. I’ve had parents over for the winter holidays, I’ve bought a few presents, I’ve had a fairly expensive trip to Paris, and I’ve pre-paid most of my trips for this year. I would not be surprised if my net worth went down after this mishap – but let’s see.

Income

  • Post-tax, stable income: ¬£3997
  • Side hustles:¬†¬£0 (done work, not invoiced yet)

Expenses

To do this, I am currently using an app called Yolt – a mobile-only account-tracking application. Starting with the next month, I will be using my own automated tracker – it’s currently work in progress (more details to come in a different post).

  • Rent:¬†¬£1450
  • Household bills:¬†¬£525 (utilities, cleaner, cell phone, this and that)
  • Travel:¬†¬£425 (pre-booked about 5 trips for 2018)
  • Transport:¬†¬£282 (this being for myself & parents)
    Something I am unhappy with is that £79 of it is Uber Р10 different trips.
  • Lunch @ work:¬†¬£115 (really happy with this)
  • Groceries:¬†¬£205¬†(which again, accounts for multiple people)
  • Dinners, restaurants:¬†¬£107
  • Entertainment:¬†¬£93 (again, abnormal due to visitors)
  • Shopping:¬†¬£623

I have not included everything from my statements, as some of them are either business expenses, or donations, etc.

Total: £3815 . It hurts, but 100% will get better in February.

Balance sheet

  • Credit card debt:¬†¬£-3595 (down from ¬£-3757)
  • Investments (Cash Savings): ¬£5696 (up 200)
  • Investments (Funds): ¬£6295 (up from 5982)
  • Investments (P2P):¬†¬£1940.35 (down from ¬£1983)
  • Investments: (P2P): ¬£52.41
  • Investments (Property Crowdfunding):¬†¬£49.7 (up from¬†¬£49.5. Ha!)
  • Investments (Cryptocurrencies): $402.3
  • Old pension account:¬†¬£18216 (up from¬†¬£18067)
  • Work pension:¬†¬£929

Total net worth: £33461- £3595 = £29866

Conclusion

My net worth has not gone down, but neither has it seen any major improvements. At least I know the culprits, and how to address then. Feeling positive for February!

Should you invest in cryptocurrencies?

Bitcoin Рthe little big kid on the block. Everyone is talking about it, half of my friends hold some, even my mother wants to buy some.

First – What is Bitcoin (or *Coin)?


I became interested in the whole bitcoin phenomenon back in 2011, when my geeky friends were discussing it as a technical subject, in university. The concept of a “coin” recorded in an immutable ledger was very interesting. The concept of “decentralized currency” was again, something new.

For those who don’t know what the blockchain brings, imagine having the full transaction history of an entire currency, public, and almost impossible to change. The blockchain is not limited to creating currencies, but various other record-keeping and data storage use cases. This concept was invented in 2009 by somebody under the alias of Satoshi Nakamoto.

Why is it useful? Well:

  • We don’t rely on the governance of a single entity (bank). Everyone is a node in the network.
  • The system is transparent to everyone. This answers the question “How much money does X have?”
  • The history of the ledger is transparent as well. That answers the question “Where did this money come from?”

Bitcoin is one asset that was built on top of the blockchain technology (Litecoin, Ethereum and Ripple are others). Each of these coins bring their own pros and cons at the table, and each new coin is trying to fix issues with previous coins.

When I first looked into Bitcoin, MtGox was the largest exchange and platform allowing people to buy and sell bitcoin. As the price was low enough, I remember buying¬†some. And I’m saying¬†some because I did not keep records of what is where. Stupid, I know. I will come back to this point later in the post.

Next, why the huge interest into it?

So far, I can think of two reasons why there’s hype around the blockchain and cryptocurrencies. This is just my interpretation, and I would welcome any feedback or suggestions to it.

First of all, it’s the “only if I’ve invested earlier” mentality. There are a few people who bought bitcoin years ago, and their assets grew by 100/10000 times. And for every such person, there is a crowd of easily impressed people, which would jump with their savings at the opportunity. Everyone is wishing that the growth continues at the same pace, and that they will be able to retire in 3 years.

Second, the herd mentality is getting mixed with large marketing budgets. Every other day, while scrolling on Instagram I am prompted with a new ICO (Initial Coin Offering – some new company developing something on blockchain), and that I should invest before it’s too late. Some people look at these ads, think that their growth potential is the same as Bitcoin’s, and jump in.

Now – do I own any cryptocurrencies?

Yes. I have acquired them in three phrases:

  1. 2011-2012. I have lost all of them, as MtGox went bankrupt with the client holdings in it. I have no record of them, but I believe I had over 10 BTC in that account.
  2. 2013, when Bitcoin started going up. I bought minor amounts Рunder 1BTC. I paid about £100/BTC. That is currently stuck in a wallet, but I have plans to sell them.
  3. 2017, when my mother visited and told me she would like to invest in Bitcoin (!?!?!). After a face-palm and a long explanation that Bitcoin is not an asset, nor investment, I have invested in a basket of cryptocurrencies. I am currently using ICONOMI to diversify my holdings – see this basket as an example.

Last – should you invest?

I should emphasize two things.

One, which is also mentioned in the sidebar of this blog: The content posted on this website represents an opinion, and should not be considered professional advice. Seriously, do your own research before deciding anything with your money.

Second, I see a key difference between “investing” and “speculating”. As Mr Tako explains in this blog post, the difference between investing and speculating is closely related to the difference between “asset” and “commodity”. Bitcoin, in my opinion, is not an asset; it is a value-carrier, such as a gold bar. You can buy a cryptocurrency hoping it will go up, and it may; however, it will never actually generate income (no dividends, no coupons, no interest).

If you are passionate about the blockchain technology, buying bitcoin may not be the best way around it. There are 2 ETFs that I am aware of (BLCN and BLOK), which buy shares in companies which use the blockchain technology. This may be for coins, or for any other use case- but this is the simplest way to bet on the technology itself.

If you believe that bitcoin will go up, and don’t care about any other coin, only invest an amount that you can afford to lose entirely. The bitcoin markets are not regulated, and there is no one to call, e-mail or sue if your coin value goes to 0. If you’d like to go ahead with looking for an exchange, a good starting point is looking on the¬†CoinMarketCap¬†Bitcoin page.

If you believe cryptocurrencies have a decent chance of replacing the fiat currencies, and would like to have diversified exposure to the market, you will need to build a portfolio of multiple coins. Or, you can buy into these on a website such as ICONOMI. Through these portfolios, I currently have exposure to 49 different cryptocurrencies.

To answer the question: if either of the 3 approaches matches your interest, then yes, you should look into it.  Personally, I will maintain part (5-10%) of my portfolio invested in this asset class, at least in the near future.

My Resume of Failures

The initial title for this post was “What’s wrong with my investment portfolio?”, but a recent post chain that caught my eye is expressing the idea of “failure” from a more holistic point of view. The history apparently started from a Princeton professor’s “CV of failures“, following up by Elon Musk, and a few personal finance bloggers #1 #2¬†(possibly others that I’ve missed).

While my age did not allow me to have any catastrophic failures yet, I still have three challenging steps that I have to follow, to write this list:

  1. The Oh, damn, that was bad moment: Identifying what is a failure Рwhat had a long-term bad outcome
  2. The Oh, damn, that was me moment: Accepting the fact that a conscious decision lead to that, and that I am responsible
  3. The Oh, damn, that was stupid moment: Accepting that the failure could have easily been avoided

 

And here’s everything I can think of:

  • 2009 – While building websites, I’ve planned starting up a web hosting business. Bought the equipment, arranged the location, negotiated network contracts, and … nothing happened. It stopped without reason #lazy
  • 2012 – Started an online shop with a friend. Got hung up on the fact that I put up more work than he did, and shut it down. #lazyAgain
  • 2013 – Graduating university with 1 job application. Yes, one. Through dumb luck, that application was successful and I got a job #lazyYetAgain
  • 2013 – Joined the company, went on the “graduate training” trip to New York, spent about ¬£8000 in 2 months on entertainment and expensive food.
  • 2013 – After joining the company, I signed up to a few credit cards. And maxed them out in 2-3 months, relying on the end-of-year bonus to pay them off. That bonus turned out to be less than ¬£1000 for new joiners. That debt lasted for another 12 months.
  • 2016 – Stayed 3 years with the company, with almost no base salary increase (specifically, 3%, 1% and 6%). Took me long to pull the plug and move on.
  • 2016 – Sat on ¬£60.000 in my bank account, gifted by my parents to be used as a deposit towards a mortgage. They were not invested, and I did not buy any property. Lost ¬£10.000 due to Brexit (FX swings), and had to cover that with a loan.
  • 2017 – With an average monthly post-tax income of ¬£4000, I’ve only managed to save an average of ¬£600/mo.
  • 2017 – Did little-to-no study on investment opportunities, so my average return for the year is (roughly) around 4%. While the S&P is up 10%, FTSE 12%, and my favorite global fund, 25%. More on my portfolio mistakes, in another post.
  • 2017 – Made some career mistakes that lead me to a very insecure position within the company. In the last 3 months I’ve been constantly wondering if I will be let go. This is what generated one of my new year resolutions, to re-evaluate my position and consider contracting, in case that reduces my stress level.
  • 2017 – Contracted a $3000 side hustle, which I did not start due to bad time management.
  • 2018 – I own about $2500 in stock from my previous employer, and quite a bit more restricted equity options from my current employer. However, I forgot the details for the brokerage account for the first one (they were on my work e-mail), and if I will leave my current position, I don’t yet have the cash to exercise the vested options (which will otherwise expire).

 

There it is! This took a while to write, but I can see why people may want to write this. It feels almost therapeutic, and it sets a benchmark for future failures :).

Monthly summary: December 2017

And time has come to post my 2nd monthly update. If you’ve missed the first one, it’s available a few posts down the line. Apologies for posting it a full week after the end of December.

In order to make this kind of content more genuine, I have not prepared any notes before writing this post. I will go section by section, check my accounts, and add the amounts to the article.

The bad news: Debts

Since the last update, I have been more aware of my debts, and what a burden they are! Psychologically, and financially. I have been paying at least £500/mo towards debt reduction, so looking forward, once they are gone, this money will be available for something else.

Earlier this year, I’ve managed to pay off a long-term debt. Aside from that, I have debt on two credit cards. As planned in the last monthly update,¬† one of them has been paid off as well, and the other one decreased.

  • Credit card : ¬£3757.45 (down from ¬£4383)

Fortunately, it’s Christmas/winter holiday time. Unfortunately, this means I could not allocate as much as I’d like to debt reduction.

The good news: Savings & investments

  • Investments (Cash Savings): 5496.59 (up 200)
  • Investments (Funds): ¬£5982.66 (up from 2652, but not due to my brilliance)
  • Investments (P2P): ¬£1983 (down from 3342)
  • Investments (P2P): ¬£10 (need to close this guy down)
  • Investments (Property Crowdfunding): ¬£49.5 (up from ¬£49)
  • Old pension account: ¬£18067.26 (up from ¬£17841)
  • Work pension: ¬£900 (rough¬†approximation, since the pension provider’s website is down. Again)

Total: £32489 (again, rough approximation. Will get better, I promise!)

The overall picture for December

December was not a brilliant month, for a number of reasons. Having my parents over has definitely put a dent in my finances. I don’t yet have a precise way to track this, but I’m almost sure I’ve used some of my savings to pay for my expenses. Another reason was taking a NYE weekend trip to France – I estimate the overall cost of this to come to ¬£1000.

However, the bright side is that my parents gifted me some money to add to my investments. As per my mother’s words: I’ve finally started trusting you with money.

Only took me 27 years to achieve this!

Should I change this post’s format?

I’m reading a lot (116) different blogs around financial independence, early retirement, debt reduction, and I notice something I like every day.

What has already changed in this post’s format, from the last one, are the tables. I’ve tried the TablePress plugin for WordPress, but we are not friends. I am debating between using bullet points, and trying our Google Spreadsheets – will probably end up using a mix of them, depending on whether the content is static (monthly updates) or dynamic (live portfolio tracker).

Speaking of ideas from different blogs, one particular format change that I’m thinking about is separating the income statement post from the balance sheet post. The first one would track my discipline (income, spending, savings ratios), while the second would track asset growth, and the progress towards FIRE.

To give credit where it’s due, I’ve sourced this idea from Planting our Pennies (sample IS post, sample BS post).

I’m curious to get any suggestion or idea on the changes described from people who know better – so please feel free to drop them in the comments!