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Looking out of my window I can see a neighbour’s pear tree in their front garden, heavily laden with fruit.
It’s a fine tree, and along with Macs observing how much better his graden investment has been doing compared to his ISA it seems a good time to think more widely about investment.
Money is a claim on future work, and when we think of savings, or indeed retiring, we think in terms of setting aside a certain amount of money to enable us to do later what we fund today from earnings.
I just can’t do what Monevator is saying there – to replace my salary from investment income, assuming a 4-5% return isn’t possible for me. Think about what it means for a moment. At a 4% return, you need a capital stake of 25 times your annual income. That means if I saved my entire gross income and lived on fresh air, I’d need to save the next 25 years worth of salary. It ain’t going to happen. It isn’t quite that bad as I have significant pension accrued and of course you can lob some of the proceeds of earlier investments into the pot, but I’d still need a long time!
Needing to replace your salary is a simplistic notion, however, which we can easily fall into. The fact that as employees we fund our lives from money we earn blinkers us, so we think in those terms post retirement. We need so much money to be able to retire and live comfortably. That money buys us our heating and food, and hopefully our leisure trips to the Mediterranean, or perhaps to the Moon for the more sci-fi dreamers.
It’s not the only way to have enough to live on. The problem with saying “I need £X to live on in retirement” is that there is a hidden assumption there – that the only way to service your life is by exchanging cash for goods and services.
You can divide your spending into wants and needs. Needs are typically non-negotiable, for instance you don’t normally have much choice about paying for food, or heating, or rent/mortgage. Stop servicing those and the result is ill-health or death. Wants are elective, such as whether to buy a Kindle or an iPhone, or if you are going to holiday in the Seychelles or stay home and read a library book instead. In general, you have to use money for wants, there is no real alternative. You can’t make an iPhone in your garage, or grow a round the world cruise or even a decent restaurant experience in your backyard. However, a surprising number of your needs are amenable to enlightened self-provision. Not necessarily in terms of hard-core survivalist off-gridding, but you can replace some of your needs with home-grown produce and fuel wood.
That means the money you’d otherwise spend out on needs becomes available for wants. For instance, I am a fair-weather cyclist. I save more money on petrol in the summer than in the winter, but it still reduces my annual getting-to-work costs.
It was Mrs Ermine who first articulated to me the concept that any time you can squeeze out of the money economy is valuable. It gives you resilience, and more money to spend on wants or to invest. She learned this since leaving university, because she has a passion for horticulture, and you spend a lot of money on food.
Reduce your dependence on the money economy for needs
In her case, growing vegetables on an allotment was her first introduction to getting away from the money economy. It costs £30 a year to rent an allotment in the UK, which is 1/16th of an acre, which a skilled gardener could feed a family of four on. Now if I tried it I would have a glut of tomatoes in Summer and then a load of stinging nettles, but fortunately Mrs Ermine has the skill and inclination. Only she has upscaled this big-time.
So as long as you grow more than £30 worth of food on your allotment and recover the cost of inputs, you are in the money. As an incidental benefit your veg will taste far better than the same thing would from Tesco, and be better for you as the vitamins won’t have degraded from storage/transit. Field to fork in 24 hours just isn’t possible from a supermarket.
Food is a need, and for every £1000 you don’t spend on food, you can let your cash income fall by £1300, since you neither need to earn that money and nor do you need to pay tax on it.
This extends to other things. For instance, Gumtree tells me that if I want to rent a house like mine in the area I live in, that will be £700 per month. That’s £8400 a year I don’t have to find because I own my house outright, and that means my gross income could drop by £11000 compared to if I didn’t have it because I don’t have to fund that. Remember that 30% of that is the tax I don’t need to pay on what I don’t need to earn.
My 12-year old pushbike saves me a little bit – it is fuel I don’t have to pay for. Other ways to get out of the money economy include a wood-burning stove, we grow biomass willow on a flooded allotment site and also have some firewood from our land elsewhere. That’s again getting out of the money economy – this is money that doesn’t need to be earned to be paid to EDF for gas. In our case it reduces the heating bill.
All these are non-financial investments. Not all non-finanncial investments are Stuff – some are skills. A zone valve on my central heating system failed. We troubleshooted the fault and I replaced this myself, for a cost of £8. To have a heating engineer come in would have cost about £100, and they would probably have taken the opportunity to shoot for a change of my 15 year old boiler. This again is money I don’t have to spend or to earn, but having earned it I will put it to work in financial investments.
Non-financial investments save you more than just money
They give you independence and resilience, because you are doing more for yourself. The Ermines’ nest is less susceptible to the price of veg, because we don’t buy it. However, we are still exposed to food prices for non-veg items, so we have reduced out exposure to food price inflation, not eliminated it. We are a lot less exposed to higher fuel costs, because we have reduced our gas bill with the wood burner. If the Russians turn off the gas to Europe this winter we will still have some heating. I will even still have light, because of a solar-powered LED light project, which has enough capacity to run over the short days.
Non-financial investments are very different from financial investments.
They are illiquid, and hard to analyse. You mustn’t use the same criteria to evaluate them as you would for a stock market investment or a savings account. If you buy a stock, you know how to evaluate its performance – either the total return compared to your outlay, or the income you get from it, depending on whether you target net worth or income.
Most stocks have some residual value after you’ve bought them, whereas most non-financial investments are almost depreciated to zero or negative once you have bought them. So they must be evaluated differently. The clearest case of this was when I was evaluating whether to buy solar PV panels. I could use the money for that, or invest in the stock market. The subsidies are such that you have a break-even point of 8 years hence. However, the equipment has virtually no secondhand value, and would be labour-intensive to recover. So it’s not the same as buying a stock with a 12.5% yield, as this is often presented. There is no return of capital, merely a return on capital. I passed on the solar panels, I’d rather take a return of 4-5% in my ISA and a good chance of a return of capital, or even a long term appreciation.
Likewise a wood-burning stove – the installation as about £5k, only £1000 of which is the stove itself. If I move I don’t think the stove would add £5k to the value of the house. I could take it with me, I suppose, but then I’d have to pay 80% of the cost again to have it installed and the chimney lined in the new house.
Non-financial investments reduce your cost base, save taxes but you need a fairly stable life
As the wood-burning stove and the farmland show, this sort of investment ties you down somewhat. It’s a old man’s game, not a young man’s game. I most likely won’t need to up sticks and chase work all over the country, and if I did some of these investments would be either not useful to me, or a positive liability. Look at the number of accidental amateur landlords Britain has, when redundancy meant a family had to move for work but they couldn’t sell their house.
Non-financial investments often tie you down, so you probably want to avoid them till you are in your 40s. Until then the stock market is probably a better friend if you want to escape the rat race. ERE Jacob is probably the canonical example of how to make financial investments work for you and quit young. On the other hand, he lives in a van, and I live in a house. That’s an advantage for him, because he likes change, but it would hack me off no end. But I’m not moving counties, never mind countries, any time soon. Which would hack him off. On the other hand, I get to dig my plants into the ground, whereas Jacob has to futz about with containers.
At the moment I am reflecting on my asset allocation, and marshalling resources for stock market investment. At the same time, however, I am also looking at wider diversification. Trees, for instance – you plant trees in the early winter, when the sap is down, at least if you want to get them cheaply as bare-rooted stock. So the time for ordering is soon. Like other non-financial investments, trees are depreciated to worthless as soon as you get them, and they also do nothing for you for the first three years. But after that you get fruit, and again, fruit that tastes of something rather than the bland visually perfect simulacrum the supermarkets sell us. There’s no substitute for fruit that has ripened on the tree in the summer. But you have to eat it sooner that the typical supermarket fare.
One of the other things that non-financial investments do is hold their value outside of the stability of money. Land and property do not depend on the currency for their value. Curiously enough, nor do shares, as opposed to bonds, though at first glance shares seem to be the quintessential financial investment. This enabled the courageous investor to survive the German hyperinflation with some value intact.Whether nominee accounts would have the same staying power as real share certificates is a different matter. And it’s not to say that the value of shares won’t change – the sort of social and financial maelstrom that would accompany a disorderly currency collapse could well do for many firms. However, the price printed on a share certificate only has meaning at the initial IPO – after that it is the number of shares as a proportion of the total capitalisation of the company that determines the value, even if we are using the gold New Deutschmark to value Tesco in rather than the now worthless old Great British Pounds
The stock market isn’t the first place I’d go for a tin hat if I felt there were a currency annihilation brewing, however…