14 Dec 2012, 12:40pm
personal finance
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  • The ONS has discovered you get richer as you save

    The Office of National Statistics, bless ‘em, has discovered that there are a load of rich gits in the South East of the country. Puzzles me why they are so surprised; after all the SE contains London which is home to 10% of the population of the country and the population density of the south east of the country is high because everybody wants to work in London, and also Britain is in a cold northern climate and most people don’t want to freeze either.

    snowSee that white stuff on the ground? Makes it a bit parky round these parts, which is one of the reasons Brits all cram down in the southern part of the country ;)

    See that white stuff on the ground? Makes it a bit parky round these parts, which is one of the reasons Brits all cram down in the southern part of the country ;)

    It’s got the Grauniad’s dander up, because the top 10% of these rich gits have 40% of all the wealth. To be honest, what surprised me was that they didn’t have more of it, from the whole we are the 99% crowd I’d have expected 1% to have 99% of all the loot.

    99% t shirt

     

    So how did these rich gits get rich? Looks like it has similarities to how anybody else does – they save. How do I know that? On page 6 Fig 6 there’s a chart

    people get richer as they get older, up to 55

    Well, I’ll be damned. Looks like they are saving money, pretty linearly over time. That’s the funny thing about saving, your total wealth goes up over time. So the Guardian can damn well put away the politics of jealousy for a moment.

    By the way, I’m not in that top 10%. But their existence doesn’t upset me in the way it seems to upset the Grauniad. I am not in the lumpenprole category either, I am somewhere in the amorphous mass of punters who are neither fish nor flesh between the 50% mark and the top 10%.

    It also reminded me the time a quarter of a century ago when I was in the Broadcasting House bar sinking Fullers E.S.B. listening to a bunch of tossers talking about how much the price of their houses had gone up. I was thinking of how I was then going to get on the Tube back to TV Centre, then get on my bike and cycle back to my one-room bedsit with the salt roound the perimeter to stop the black slugs invading. And like the massed hordes at housepricecrash I spent too much of my time thinking it all wasn’t fair. Because I didn’t allow for the fact that I was standing at the beginning of my working life. The young are rich in some ways, but not in money terms, because they haven’t accumulated wealth.

    London was a fantastic place to be twenty-something. It’s a terrible place to build wealth as a twenty-something on a slightly-above-average wage because it’s a damned expensive place and there’s lots of stuff to spend money on. However, some of my colleagues did manage to buy houses in the city, but I was spending too much to be able to do that. There is a truth written in the lines of that graph that very few young-uns want to hear.

    The way to become a rich git is to spend less than you earn. For a very long time – decades, not months…

    Now where’s the fun it that, eh? There are other ways, but most of them are either illegal or some variant on that. It isn’t pre-ordained, because somewhere along the line you neet to get the clue, and you need to avoid some serious mistakes that are too easy to make early in life, in particular having children too early or with the wrong people. Look at the change in that graph for the householders just before retirement – about 35% of 55-64 year olds are in the top 10% wealth decile, compared to the vanishingly small percentage of the age group I was in when I was sinking that E.S.B.

    That’s why the greybeards hold so much of the money. They’ve been putting it away, for years, and taking opportunities to make money using money which also get easier as you get older.

    I am not in the 55-64 age group, but my earning years are now behind me. If you are young, your earning years still lie ahead. I am probably richer than you are at the moment, but I have little potential to increase, where you have a working life ahead of you. I have converted the kinetic energy of my human capital into the potential energy of financial and material capital. You have yet to do that, or you are in the process of doing it. It doesn’t look like that at the start- the young Ermine in the BH bar didn’t see the perspective, and so it looked not fair.

    Unfortunately  the world isn’t fair, we don’t start our working lives with the endowments of the capital we will build up over time. There are compensations – as a young man it was easy for me to look at the situation I was in and decide to leave the city of my birth for better prospects elsewhere. It would be harder for me to move now. The young have more opportunities to look for work even further afield now. I have never worked for an overseas employer, and yet that is not uncommon now, and if I were starting anew this would probably be the way to go for me.

    Hmm, I agree with you in principle, of course, but I’m not sure that graph proves people are saving does it?

    It could be the to-be-rich cohort begin earning vastly much more money as they get older, and saving the same (perhaps modest) percentage of the total greatly increases their wealth.

    The 1%-ers might say it’s because by then they’ve gamed the system sufficiently to begin benefiting.

    Tickles me the ONS discovering saving works, though. Of course in the public sector having a fat unfunded pension works wonders, too! (Caveat: Not sure if this is true of the ONS, but in a grumpy mood this morning.)

    It’s possible that I was overly simplistic in this, but I concluded that people got wealthier as they got older because they saved. The key element is the relative proportion of the rich gits increases with age.
    The ONS itself seems to attribute some of the changes to the wealth life-cycle on page 6

    A number of reasons might help
    to explain why household heads living in the wealthiest 10% of households tend to be older than those living in households in the lowest half of the distribution. For instance, income is expected to
    increase as an individual becomes older and more experienced. At a younger age it will be more necessary for individuals to borrow money. Later in life the prospect of higher earnings will enable the paying off of liabilities and the greater opportunity to accumulate wealth.

    I never consciously regarded paying down my mortgage as saving, but I guess it was, in a roundabout way.

    The 1%-ers had actually insinuated into my mind that 1% of the population owned 99% of the wealth. I am chuffed to discover the spread is nowhere near as extreme. I remember feeling as they did in the BH bar, that it wasn’t fair that so few of the people I knew were rich, and it seeemd other people had all the money, but that was partly because we were all young ;)

    Hmm, I think if the 1% owned 99% of the wealth then the Queen would not be a mere constitutional monarch, and you wouldn’t have a pension but rather a patch of carrots to tend and a job cleaning the sewers at the Big House. ;)

    Paying a mortgage is absolutely saving. And at the end of the term you have an *asset*. You’ll believe me one day!

    [...] The ONS discovers saving makes you richer – Simple Living in Suffolk [...]

    15 Dec 2012, 3:09pm
    by BeatTheSeasons


    Presumably the wealth chart includes the value of people’s main residence they own? In which case much of that wealth will have arisen due to older people having bought houses decades ago.

    Houses have increased in value astronomically since then, mainly due to high rates of inflation in the past, which also had the beneficial side effect of eroding mortgage balances quickly.

    Other reasons why houses are so expensive now relative to average earnings include a failure to build enough of them relative to population (especially in the south) and the rise of two income households.

    If I compare the economic situation that my Baby Boomer parents were born into to the opportunities for Generation X & Y, I also note:
    – free university education and grants vs tuition fees and student debt today
    – final salary pension schemes and early retirement ages vs working till you drop now
    – ‘jobs for life’ vs high youth unemployment, scarcity of permanent jobs and widespread redundancies

    And to top it all off I’m now subsidising their free prescriptions, free dental care, free bus travel and state pensions through taxation – but don’t expect any of these benefits will still be available when I retire!

    This is probably starting to sound like a bit of a complainypants rant, and of course I accept that today’s young people have got things far easier in many ways (central heating, cheap consumer goods, and the advantages of the internet spring to mind).

    However, when it comes to wealth it looks to me like anyone born before about 1970 could afford to make a vast number of mistakes and still come out relatively wealthy.

    Whereas anyone reaching adulthood since the global financial crisis is going to see their opportunities for wealth creation a bit more limited.

    @Monevator I was genuinely surprised at the distribution of wealth, because I expected the power of old money to be much larger than it seems it is. Okay 1%/99% may have been a caricature, but perhaps 10%/90%.

    I know debt reduction is theoretically saving, but it sure doesn’t feel like it at the time ;)

    @BeatTheSeasons It does include house prices, but you overestimate the effect of that. My current semi-detached house is roughly worth a shade less than 1.5 times what I paid for my two-up-two-down in ’89 in real terms, so I am not sure that house price inflation is all there is to it.

    I think your situation will turn out to be better than it feels now, but I believe each generation feels different kinds of pain. I graduated in ’82 into the teeth of Thatcher’s first recession. I left London in the late 1980s because house prices were running away from me. Sound familiar? I was then daft enough to to buy a house at a 4.5x income multiple and see half of the value fall away. I’ve paid 14% interest rates and thought 6 to 8% were normal. Some of the high house price valuations now are because people can pay them due to low interest rates.

    You forget some things which are vastly better now

    – lower taxes now. I was paying 30% income tax. In the crummy kitchen porter jobs I did at the start I was earning considerably less than the modern National Minimum Wage – I earner £1.54 p.h which is £4.84 now, I was over 20. I even paid tax and NI on that, though it was a summer vacation job.

    – Fair point regarding free university, but when I went to university only 11% of school leavers became undergraduates, this was screened by A level results. More than half the university applicants in my class at school failed to get in.

    – Other aspects that are better are health care. I recall two weeks drifting in and out of consciousness with measles as a child which doesn’t happen now. Respiratory ailments were much more commonplace among children too.

    As for wealth creation, I didn’t accumulate wealth until I was about 45 – up to then my net worth was negative. There’s hope – and as for early retirement, things like MMM and early retirement extreme were unheard of. Take a look at Retirement Investment Today for someone UK based who is both younger than I am and who makes me look like a slacker for early retirement.

    In some way the opportunities might be better for those coming of age now – those of my acquaintance are far less materialistic that I was and seem to have a mastery over spending less that I missed for decades.

    Starting a company is also much easier – the first one I was involved with in the mid 1980s we struggled to even get the word out, no Internet, and hideously expensive print advertising. The opportunities for working abroad are far easier, too

    So it feels rotten now, but I think if you stay the course it will improve with time, as the ONS indicate. All the way up to my late 30s I thought I would never get over being beaten up by the volatility of the UK housing market. I didn’t appreciate the value of keeping on putting one foot in front of the other. That first 25-year mortgage would have been due in February 2014. I lost more on that first house than it would cost to go to university for three years now, but my mortgage career was still shortened by 5 years despite the sucker punch.

    Keep the faith. Building wealth is the matter of thousands of small steps.

    > Whereas anyone reaching adulthood since the global financial crisis is going to see their opportunities for wealth creation a bit more limited.

    Substitute Thatcher recession and (though I didn’t know the terminology) Lawson housing boom and that could have been me talking, in the Broadcasting House bar. Reality turned out better than that…

    15 Dec 2012, 6:29pm
    by BeatTheSeasons


    Thanks for the encouragement :)

    I’d be interested to know how you calculate the value of your house “in real terms” – is that compared to average wages or average prices?

    My favourite example of how the two can be very different is a 4 bedroom detached house bought for £44,000 in 1983, and a Ferguson Video Recorder acquired at around the same time for £600.

    About 25 years later the house was worth 10 times as much, and you could pick up an end of the line VCR for less than £60, i.e. one tenth of the earlier price.

    To put it another way, the ratio of VCR prices to 4 bed detached house prices had increased one thousand-fold, from 73 to 7,333.

    Although this is an extreme case, this is the kind of example that makes me believe it’s very difficult to come up with reliable “real terms” comparisons between prices from different eras.

    15 Dec 2012, 7:19pm
    by BeatTheSeasons


    PS – obviously that should read one hundred fold, not one thousand fold – feel free to correct my previous post and delete this one!

    @BeatTheSeasons I used the Bank of England inflation calulator

    Technology is a terrible comparator, because not only does your modern PVR work a lot better in terms of sound and image clarity, it’s also a lot cheaper in absolute and real terms ;) That’s the result of accumulated experience and human ingenuity building upon the work that’s gone before. Your iPad’s a lot better than the Atari 800XL I wrote my MSc thesis on and I probably paid more in nominal and much more in real terms for mine.

    I’d venture the best comparisons are things we all needed and still need, clothing, food and fuel (accomodation is the variable you are trying to qualify so I’ll leave it out for the moment). There’s a lot of grousing about energy prices these days, and yet I remember them being much higher as a proportion of my pay when I started work. This UK Parliament research paper shows we have enjoyed a long suckout in energy prices in real terms. However, in real terms I use a lot less energy now, because British houses of the 1980s were draughty where they are a lot better now. Food is also cheaper – look at the chart in this Defra publication – food is cheaper now than when I graduated, and this squares with my recollection of how much I spent on food. In addition there is a quality plus, not as dramatic as your VCR but notable nevertheless. British cooking wasn’t anything to write home about then, a tendency towards overcooked veg and meat, compared to now, with one exception, I’d say fast food is more disgusting though in a vaguely moreish way now than it was then, but I’m probably become more discriminating ;)

    We spend less of our incomes on food, fuel and clothing and probably the same or a little more on accommodation than in the late 1980s. I’m happy with the results of the calculator for my experience of life in Britain – I was surprised because of all the stories you hear that the Government fixes this but it isn’t wildly out.

    As suporting evidence the two-up-two down a friend bought a couple of years ago was about the same price I paid in 1989 once I scaled the purchase price by the BoE calculator. Okay, I overpaid, so it supports a little bit your tenet that prices have gone up – average now is overpaying then, but it isn’t anything like double!

    What you talk about happened earlier. My Dad bought his house in 1960 for £500, which that BoE calculator tells me is worth about £10,000 now. However, he had to put on a suit and be interviewed about his work prospects, whether he was going to have more kids and so on by the building society manager. Far fewer people in those days owned houses, because it was far harder to raise capital. I had a rant about interest only mortgages and the damage they have done to the UK housing market. One of the reasons prices are higher than they used to be in the 1960s is that lenders recently lent to any damn fool, and as houses are sold by auction having more fools bids the prices up, to the detriment of their own interests and that of other market participants. Most of that happened before the mid 1980s, probably as a result of the 1970s stagflation and the 26% inflation of 1979.

    We need higher interest rates to bring down prices. This will happen, sometime, but it is a lottery as to whether you hit the housing market at the right time. I didn’t, people in 2007 didn’t. It feels dreadful, because you see other people a few years before you bought okay, why can’t you? People in the office warned me about the Lawson boom and the removal of MIRAS forcing a peak, but I wanted to buy a house so badly and I wasn’t experienced in the way of the markets so I bought anyway – they couldn’t put an old head on young shoulders ;) It was the single biggest personal finance mistake of my life – it dwarfed what I lost in the dotcom bust.

    But viewed in terms of a 20-year house owning career it was a speed bump – I still discharged my mortgage about seven years early. The key is the small steps of spending less than you earn, each and every year. That adds up over 20 years, and once you shake the drag of debt the adding up gathers speed in a rush towards the end, particularly if you can save tax-free (in AVCs in my case, in a SIPP or equivalent in yours).

    There’s hope, but it makes a faint sound carried on the drip-drip-drip of accumulation over many years. I didn’t realise that until I was a grizzled old git coming up to retirement. Perhaps it is inherent in the human condition – we’re just not that well set to perceive changes that happen over decades rather than months.

    Well, I’ve now clicked over into the 55-64 group and I appear to be in the top 10%, but that’s mainly because I managed to stay in London, having gone through three property transactions since the 1980s which, financially, may be labelled in succession good – bad – good. Had I timed my transactions differently, they might have been bad – good – bad, with a resulting debt overhang much larger than actually is the case.

    I have some sympathy with the “Pinched” generation, but in reality money is flowing back to the young from the Bank of Mum and Dad for house deposits etc., where this baby boomer wealth actually exists. Where it doesn’t (often the case), the wealth divide reveals itself, as usual, in non-generational form, i.e., the stark and ancient divide of haves and have-nots.

    Hi Ermine,

    Nice to hear from you again, back to your old self.

    Here’s a link that you might enjoy as you like statistics.

    http://www.ukpublicspending.co.uk/

    Are we all in trouble? I don’t know, but things will get better for some and worse for others. Nothing new it is just life, life is and as never as been fair, you just have to make the best of your opportunities.

    I am one of those nasty baby boomers, I never knew just how much I am being carried by the under 30’s? Then again I do get free prescriptions and bus passes, not to mention heating allowance. But I still pay taxes on my Company Pension and my State Pension. The only perk is I don’t pay NI contributions and only pay tax at 20%.

    Then again, I did not go to University, but I did get a Degree in Electrical Engineering, via the OU, which I paid for myself.

    Jobs for life, and Company Pension, Yes I got that, but I was lucky? I paid 6% of my £17.03 per week wage and then 6% of my earnings for some 40 years, my Company paid 12%. Into the same pot, so I was able to retire on 50% of my final salary.

    In my 40 years, with the Company, I spent 12 years of 40 overseas. Which was very informative has well as well paid, it also gave me the time to do my OU Degree. Which in turn helped me to progress with my career with the Company.

    I am not saying things are not tough now, but I have lived thru several recessions, MLR% rates at 14%. House price rises and crashes with negative equity. Indeed a new word entered the vocabulary, “Stagflation,” negative growth, with inflation at 20% and employment at 10%+

    But I digress, a sentence for me sums it up, “ I become less anti establishment the more established I become.” I don’t want to come across as a cranky old so & so.

    The link to a lecture by James D. Wolfenson of the World Bank, he sums up, how we got here, were we are now and his views of the outcome for the west, better then I can some it up, well worth a watch.

    http://www.youtube.com/watch?v=O6OLG9m0-qA

    Here also is a link to Tullet Prebon you might find interesting.

    http://www.tullettprebon.com/strategyinsights/index.aspx

    Still Ermine enjoy your retirement, one thing you can do when retired is to make most of cheap holidays escaping the cold British Winter, I’ve just come back from Malta and next year we are going to Cyprus. I don’t know if your wife works, if not, think about some time away together while you still have your health and Strength. You can’t take your wealth with you and you can guarantee that HM Gov have their eyes on your wealth.

    I remember a tale told by a Bishop on Financial Planning, you should try to plan your spending so that your final cheque covers your funeral expenses, and it bounces.

    I’ll close now, All the best to you and your family for Christmas and have a happy and contented New Year.

    Lupulco

     

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