23 Sep 2014, 1:42pm
personal finance:
by

43 comments

  • September 2014
    M T W T F S S
    « Aug   Oct »
    1234567
    891011121314
    15161718192021
    22232425262728
    2930  
  • Archives

  • the trials and tribulations of the rich poor

    Or should that be the poor rich? Anyway, it’s hurting, and particularly would like to make it known that Things Are Not What They Used To Be. It seems to be particularly through their kids that they are hurting, more specifically that, y’know,

    one does everything one can for Tarquin and Jemima, even, good lord, shopping at Aldi, driving a secondhand Fiesta and forgoing the annual holiday to Tuscany. But it’s really, really hard to make the public school fees, yah?

    Shock, horror, even on £370,000 p.a. we can’t afford to pay to send them to private school these days. Whatever is the world coming to?

    I indirectly know a couple who have had to send the SAHM out to work after 10 years at home to pay for the school fees. Obviously they think this is terrible, along with the beastly Government not giving them child tax benefit because he earns more than 60k. Oh yes, the ermine nodded. How terrible. dreadful, indeed, while secretly asking myself how it was that myself along with the other good taxpayers of England were subsidising their lifestyles and how it’s perfectly reasonable to ice child benefit for people paying higher rate tax FFS. He worked harder than me and earns more than I did, which is fine and as it should be, but me, and indeed someone earning 15k a year for that matter, paying for someone on well over the average wage to have kids? Don’t get me wrong, he was perfectly entitled to take it up when it lasted, but I’m not that amazed it was canned, and can’t imagine it made a huge difference to their lives 😉

    Every so often the Ermine thinks back to the guys getting on their bikes to cycle out or get the bus to the old glass factory in Charlton when my Dad once worked, and where you’d see the wives line up outside the factory gates on Friday which was payday to make sure the money didn’t get flushed down the pub when the end of day siren blew 1. And I ask myself how the heck has Britain gotten so damn soft in 45 odd years that the rich need sponsoring like that – I believe CB was originally targeted at the poor though the history of child benefit is so convoluted I don’t really know.

    How do you know you are rich?

    Easy. You look at all the shit in the external world that tells you that you are great because you have it or consume it. The stuff you have, the size of your house, the services you buy like the au pair, the holidays, the cars you drive, how often you change it, the public school for your kids. For the sake of any non-British readers, in the UK if you deem the universal education paid for from general taxation to be beneath your dignity/requirements you pay for private schooling at what is called a public school, as opposed to a State school which is one paid for from taxation.  I believe Americans quite sensibly called State schools public schools and public schools private schools, because they are logical that way. Go figure.

    I look up to him and down to him - seminal comedy skecth on being rich

    I look up to him and down to him – seminal comedy sketch on being rich

    You look down on people that have and spend less, and you look up at people that spend more. You are rich if roughly speaking there are twice as many people below you as above you 2. To save you the embarrassment of doing this publicly you can head over to those guys at the IFS on where do you fit in. There is a hidden implicit assumption at the IFS that you spend everything you earn with that tool, which is of course not a way to doing well financially

    So why are the rich feeling poor, then?

    The problems for the modestly rich is that they also look back along the time axis at their parents. Say you’re a GP on about 100k, the daughter of medics, and your parents sent you to public school. Assuming you’re married to another GP so the combined income is 200 kilosods, you are still short of sending both Tarquin and Jemima to Eton 3

    Fundamentally the problem is too many other people are getting rich. Although your absolute living standard 4 is vastly greater than that of your parents, your comparative status has dropped, and you feel the draught. You feel poor and hard done-by. Your parents simply had the benefit of fewer rich people to compete with them for finite resources. You will live longer, have better food, better houses, better health than them but there are more people above you in the income scale, because this happened. I know it’s US data

    the 1% are falling back - it's the .01% you want to be in

    the 1% are falling back – it’s the .01% you want to be in

    so I am winging it a bit assuming the pattern is followed in the UK. Interestingly if you look at general plot of the S&P500 over the same period you get to see some similarities

    this is price, not total return, of the S&P500 over a similar period

    this is price, not total return, of the S&P500 over a similar period

    So how do the .01% get rich? From the Atlantic

    How’d they all get so rich? It wasn’t the way the rest of us get rich. It wasn’t their wages. It was something else.

    The richer you are, the more likely your riches come from stocks, not salary. For the three groups graphed above—1 percent, 0.1 percent, and 0.01 percent—capital gains account for 22, 33 and 42 percent (respectively) of their average income. […]

    Practically all the growth in average income at the top comes from stocks. Between 1992 and 2007, the average salary of a top-400 tax return doubled, but average capital gains haul increased 13X. Wages are for normal people. The richest get richer from their investments.

    So now you know what to do. Listen to that Monevator fellow and get on the side of Capital, because that’s where all the action is, and it’s slaughtering Income.

    So what’s with all this public school stuff then?

    That’s the problem for our doctors, and indeed our rich poor. Capital is riding into town and eating their lunch, outcompeting them. The public school system has increased, but not by as much as Capital is increasing. These poor rich people’s mental picture of what it means to be rich is formed in their early years from their parents, but their parents weren’t in such a competitive space. So it stands to reason that the merely rich are feeling poor, and they’re pissed off about it.

    Something that struck me, listening to Mr 60k+ and his SAHM about to go out to work after a 10 year break so they can pay for the school fees is that there’s a category error in their assumption. They assume that by sending their kids to public school they will earn more.

    This isn’t the only reason – public schooling buys you influence, connectivity 5. The fact that entry into public school is selection by parental wealth 6 means you of course keep your kids away from chavvy poor people who make up the 93% of Brits that can’t afford it. You aren’t meant to say many of these things, but observation shows me that people become extremely tribal when it comes to their children – if I had them and I had earned enough I am sure I would send my children to public school too. Just whatever you do make sure you can keep doing it till they are 18 because if you suddenly can’t afford it and they are hoicked out of Eton to be sent to the local comp with all the rough sorts and chavs that make up the rest of the 93% of the population then Tarqin and Jemima are going to have a really, really hard time as the rough sorts take the piss. Not only will they get the detriment of a scummy State education like wot I had but their self esteem will take a bit of a hit.

    As a text-book example of why people send their children to public schools I offer Polly Toynbee, who is strongly for State education – but only for other people’s children. As the Independent says

    She is far from being the only prominent liberal journalist whose children are privately educated, but her head seems to be furthest above the parapet.

    Trouble is there is an opportunity cost, and if these kids are entering secondary school (at 11 in the UK I believe) let’s take a butcher’s hook at the costs. Apparently school fees are £14,000 a year, (update – from this comment it appears I screwed up here and the figure is double that – so double all the school figures from here) so that’s seven years at 14k, or 98,000, let’s call it £100k. There’s a lovely infographic on how much it costs to send your kid to public school on Nutmeg. Add onto that another 50k for university, which starts to look like a bargain. Trouble is, these kids are going to enter a world where humans need not apply. I know every parent thinks their little precious is a genius mathematician with great artistic talent and all round at the pinnacle of human existence, but after we’ve done the Lake Wobegon thing they are up against this

    There is an alternative – the money set into this, accumulated over time and assuming you put the same 14k a year into university (£9k fees, £5k maintenance NOTE TO NON-RICH PEOPLE – MASSIVE WEALTH WARNING for God’s sake don’t pay up front for university rather than a loan until you have read and digested this) then this would accumulate

    savings of school + university fees vs age of child

    savings of school + university fees vs age of child

    to £200,000 of capital. Enough to buy them a house outright in many parts of the UK and/or derive an income of about £5k p.a. Clearly they would have to go to school with the lowlifes that make up 93% of British schoolkids, and going to public school can buy you influence and all sorts of good stuff. But it’s certainly worth looking at the road not travelled, particularly if the child is likely to graduate into a world in 10 years time where humans will find it harder and harder to add value unless they are exceptional. MisterSquirrel has an interesting narrative of the last 30 years of the workplace and the direction isn’t good for the averagely talented. Getting on the side of Capital has much to be said for it…

    The IFS is behind the time with their focus on income

    FWIW the IFS informs me that I am abjectly poor, because it’s all about income. You have to search elsewhere to find out about capital – I got this chart from the government who got it from the IFS. Now unfortunately the IFS often talk about households whereas I always do this calculation as an individual, I believe ELSA is the English Longitudinal Study of Ageing so this assumption should apply to this. I was surprised to learn the the state pension is a capital wealth of 100k and have never factored this into my networth. Let’s just say that my position on this chart is not the same as the one on the where do you fit in site.

    wealth distribution in the UK

    wealth distribution in the UK

    Clearly as a retiree I need to be on the side of capital. But if the rich are feeling poor, then they need to stop spending so much on consumer shit and McMansions and start saving and get their asses on the side of Capital, and particularly if they are going to be realistic about their kids not being poor then it’s time to think outside the public school box. Instinctively they know this, because of the keening noise about inheritance tax and many articles about how to avoid it.

    I personally believe that people featherbedding their kids in the way they want to will lead to huge wealth discrepancies in Britain in a couple of generations particularly as the ability of earn and save capital from income falls for most people. By doing so you will advantage your children which is understandable but the societies they will grow up into will be violent, dog-eat-dog and the English revolution we never had may ensue. But I’m not going to fight that because I don’t have children so I am neither part of the problem nor the solution – I’d expect the revolution in about two generations of IHT being repealed, for which there is strong political pressure. Good luck all those future souls, and I hope the solution is peaceful and equitable.

    It’s worth noting from the school example that the rich poor can give a decent amount to their kids within the tax threshold – even one-year olds have a personal allowance so from a standing start you can give your child 7 £210,000 by the time they are 21, and probably more because of compounding and investment – 21 years is enough to see a good few business cycles. Of course, you also have to bring them up with enough nous not to blow it all as they come of age…

    Notes:

    1. for the record my Mum didn’t need to do this. But I think she did take me to see it as a nipper once when I said I didn’t believe it
    2. this is my guesstimate from observation of people who think they are rich. There is a seminal class sketch that satirises this. In the 1960s being rich didn’t automatically give you class in the UK, but I think it does now.
    3. I may be displaying my chavvy lack of savvy about public schools, because I’m not totally sure Jemima would be allowed into Eton. ‘Cos she’s a girl, bur fear not, we have public schools for girls, so it can be fixed. Whatever…
    4. you know, like how long you live, how warm you are, enough decent food. Humans are odd blighters, because being rich is not about having enough shit to live like a king of days gone by but all about being better than other people
    5. This only really works if you already have connections, so maybe a moot point for Mr 60k+ who doesn’t AFAIK
    6. I’ve never been able to work out if there is an intellectual ability entry standard, or if the smaller class sizes means that they can coach those that used to be called educationally subnormal in my schooldays
    7. It appears you need to take great care to avoid being taxed on the income if the capital comes from you. A junior ISA seems to be the way to go for up to £4k p.a. – I guess if you are saving the full £14k p.a. you can pay for advice in how to do it for greater sums. Laundering the money through grandparents and friends seems the obvious gonzo way to avoid the money coming from the parents but don’t blame me if that doesn’t work – DYOR 🙂
    16 Sep 2014, 11:18am
    living intentionally personal finance reflections:
    by

    21 comments

  • September 2014
    M T W T F S S
    « Aug   Oct »
    1234567
    891011121314
    15161718192021
    22232425262728
    2930  
  • Archives

  • Financial Independence is about more than money

    In Blighty there’s a raging debate about the subject of independence going on – Scottish independence that is. I’m not going to add to the verbiage about Scottish independence because this is a matter for the Scottish people themselves on Thursday, but I am struck by the paucity of the thinking of the No/Better together campaign.

    Independence is about self-determination, not about money. When I chose to shoot for financial independence, the reason for doing it wasn’t financial. In purely financial terms it was a disaster – dropping my income to a prospected 20% of the high-water mark 1

    The No campaign seems to have taken Bill Clinton’s adage that it’s the economy, stupid to the extreme, and focus on the alleged economic Götterdämmerung that will come to pass as a result of independence. Now there are inconsistencies in Salmond’s campaign 2 exactly what the point of independence is if Scotland continues to use the pound and retain the queen as a figurehead is hard for me to understand, but the No campaign seems to have missed the point entirely.

    It’s about more than money. It’s about time, and about self-determination

    Independence is about freedom of action and of self-determination. I was prepared to eat a 80% fall in income to win my freedom – to choose how I use my days. We often get too hung up on the how of financial independence because it is a big, challenging ask. Don’t get me wrong – if you want to get there, you need to understand the how, and some of the UK bloggers are doing a great job in doing what ERE did for the US scene with his book. Mistersquirrel has written an excellent condensed summary of how to achieve financial independence with his ebook, Monevator will set you right on the hows and whys of investing.

    The reason financial independence(FI) is a hard sell is because of the No campaign thinking – the focus is all on what you can’t do.The focus is clear and sharp, because money is measurable. The hours and years of your life aren’t so quantifiable, because unlike the Cyclops you don’t have a clear measure of the end-date. But as Gretchen Rubin highlighted 3, the days are long but the years are short.

    The Escape Artist does a good job of summarising the issues

    The flipside of this is that once you have met your reasonable financial needs, you owe it to yourself and to others to raise your sights and stop just focussing on money. In my time in the City, I used to meet plenty of people that (I’m guessing) had a net worth of £2m+, who were good at their jobs but would have been happier being a writer, tree surgeon or a school teacher. Why behave as if this one life we get is just a dress rehearsal? If you are one of those people and you carry on working in your all consuming City or Corporate job, then you are wasting your life.

    Now I didn’t work in his field, my networth is far less than £2m+, but I do have other advantages – not living in London, being a bit older for instance. So relatively I am in a similar position. And I didn’t get that wasting your life bit  – I assumed I’d carry on working to 60 (the normal retirement age at The Firm) because  er, well somewhere along the way between starting my first job and getting to my late 40s the clutch must have slipped in the why am I doing all this department. Now to be honest my job wasn’t all consuming for a long time and gave some intellectual challenge, it served me well up until the early 2000s, But then it started to go wrong, and demand too much for too little, in particular micromanagement and Digital Taylorism started to creep in and the erstwhile research facility was driven down the value chain into a jobbing shop.

    And although it took me far too long to jump to it, in the end I came to the conclusion I didn’t want to live like this, and I wanted out. That is the time when the how of financial independence matters, and I took the resources available to me and focused them with extreme prejudice on getting out. The Escape Artist was exactly right

    […and you carry on working…, then you are wasting your life.] This is more frequent than you might think. The most common motivation for this behaviour is fear – fear of change, (irrational) fear of poverty, fear of loss of status, fear of their spouse’s reaction etc. Its not enough just to make a life-changing amount of money, you still have to change your life. Don’t just load the gun, pull the trigger.

    It’s easy to get lost in the money side and paralysed by fear. It’s where the No campaign is going wrong, IMO. Independence is about more than money. Yes, having enough money is necessary, but sufficient. There are cultural differences in Scotland that have not been answered, and there is more of a feeling for the collective good. Because I personally am somewhere to the right of the Scots 4 I think they will be sorely disappointed in the promises of milk and honey offered by Salmond, but I have enough faith in their savvy that they probably suspect this too. The nation of Scotland has achieved far too much for far too long to be made up of people universally daft enough to believe him.

    It’s a perfectly reasonable call to accept some degree of economic poverty for greater freedom of action. In the big picture, it isn’t all the economy, stupid. Money is crystallised power, it is a claim on future human work or resources that displace the same. It is an enabling component of a life well lived, in the same way as your car needs four wheels to run, three won’t do. But five, six or three hundred aren’t needed. When success starts to look to you like a yacht then it may be worth asking yourself if you haven’t strayed onto the motorway to consumerism hell. In general, if success starts to look to you like Things and Wants then you may want to consider that Maslow’s hierarchy of needs has at its pinnacle

    “morality, creativity, spontaneity, problem-solving, lack of prejudice, acceptance of facts”

    Not so much Stuff in there, eh? I don’t know about morality and lack of prejudice, but I would go along with that getting better at being myself, expressing myself, and individuation are the primary wins of early retirement, and the main enabler is that I own my own time. It really doesn’t matter how rich your are or how many of your yachts are in the harbour if you are still owned by The Man and have to be somewhere and do something for a lot of your day to keep things that way. Obviously if you are truly of independent means then more is better, but there is a long sliding scale between the amount of your life that you give to The Man and the amount of wealth that you accumulate.

    I am poorer, but I have far more self-determination than when I was working

    Let me take an example. The Ermine household was out in Wales this last week – Mrs Ermine was attending a community-supported agriculture shindig, and I went along for the ride to go look at things like this

    prehistoric site in Wales

    easy to get to prehistoric site in Wales

    as well as searching for less easy to find sites, going round in circles because Cadw are poor at signage and rights of way are also poorly maintained in Wales I am a  crap hiker because I only do it to get to interesting stuff, rather than the the whole personal challenge/because it’s there thing. Cadw are erratic at signage and I did find one place where some toe-rag had extended his front lawn over the erstwhile footpath and removed all signage to the stone stile, but it’s still no excuse for wandering aimlessly on a rocky outcrop, and I could learn to get that right, and have learned that blaming others for stuff I could fix isn’t a way to long-term success. I am a unreconstructed map and handheld GPS 5 when it comes to hiking, but it struck me that what I want is a GPS that shows a moving OS map. It’s been a long time coming because of the technical challenges and ridiculous Gollum-esque licensing restrictions of the Ordnance Survey, but I can go out and buy such a thing now.

    Oy vey – £350. Now when I was working I would have dropped the £350 on this just like that. Because this was going to change my life and make it easier to find things in the open.

    Err, no. For starters, all but five weeks of my time was sold to The Man, and much interesting stuff like this is left lying around in places far away from people. It takes time and effort to get to. I now take some time in places, to look and to listen, be it some urban nexus or a prehistoric site or something else.

    A colleague at work did me a great favour in highlighting the contradictions and lack of intentional living of those expensive, fast and furious holidays while working. It was when he told me that his wife got on the internet as soon as they came back from their summer holiday to book the next year’s one. And I thought to myself  “I do not want to live in the future like that, flushing away 50 weeks of my time like that for two weeks of respite”

    I stopped going on holidays then, for three years, so that I could maximise my savings rate. Yes, I was living in the future for those three years. But my future is now. And I have far more freedom of action. If I wanted to I could spend more time looking at prehistoric stones, indeed I considered a period as a peripatetic photographer. You can never travel with anybody else if you want to make money take decent pictures outdoors, because you need to be out at the times of day when most people are eating or sleeping because the light is better then, rather than the harsh light of the middle of the day. It’s just too antisocial. I can consider that – because I own my own time, so it wouldn’t be robbed from our collective couple of weeks of freedom. Three or four weeks a year just wouldn’t cut it. But then I wouldn’t want to try and be creative or make the money because The Man would be paying to own the remaining time, and time away from The Man is more about recovery than about creativity, spontaneity, problem-solving 6.

    Consumerism attacks you at the third and fourth levels particularly

    In particular the need for respect… It’s all the buy this to make yourself look better, set you above the Jones, etc. The Joneses don’t give a shit about what you have, they are bothered about what they don’t have. They don’t respect the people that have what they don’t, indeed they hardly think about the people, it’s the stuff – it is the feeling of the missing eyes from their own peacock tail that exercises them. I know because I’ve been there – consumerism gets you to project part of your self image on stuff and lifestyles – can you even remember much about the beautiful people who were the clothes-horses for the lifestyle in the ads?

    If you want out of this rat race then refuse to run with rats. Focus on what you think about your stuff, not what other people do. If your stuff displeases you, then change it. If it serves you okay but isn’t the latest smartphone/gizmo/whatever then so what?

    Another thing that helps you with consumerism is that when you own your own time you can work out what you want of your stuff and how to use it right. F’rinstance, I discovered  that I could use the existing iPod I have with a CoPilot bluetooth GPS I got from ebay ages ago for a project, and then make it work with Viewranger which can download individual tiles of OS maps for a price. Smartphone aficionados will of course say they can do all this but one thing the last week did teach me is that mobile data coverage is non-existent in the parts of the UK where interesting stuff is often to be found – I had thought it would be a useful fallback data network for researching but it’s useless – run and gun WiFi is far more reliable because at least you know where to find it  at centre of habitation. With a bit of experimentation I can find out if a GPS showing OS maps is useful to me for about £20 using gear I already have. If it is I may consider the Garmin product – but I will do so knowing what questions to ask and how I use this in the field, rather than having to sport the £350 up-front just to find out if it works for me and take the risk of there being some subtle gotcha or yet another gadget that promises much but fails to deliver on the essentials – let’s hear it for the smart watch with less than 24 hours of battery life and which doesn’t tell the time at a glance as a case in point of getting the 20% gimmickry right and losing the 80% essentials.

    The Scottish referendum highlights that it isn’t all about the money, and it’s the same with financial independence.

    To paraphrase Bill Clinton, It’s the freedom, stupid. Financial independence isn’t a notch on the bedpost, it has no meaning in and of itself. Even in the midst of trying to find a way out, I understood this, because I was driven by wanting options, to win a way out from having other people be able to tell me what to do with my time. It’s important to first answer the question why, before addressing the how.

    Savings. Yes, there’s a lot to be said for them. Most people save in order to buy something. That’s good, particularly is the alternative is to use credit. Though the most common reason for saving, it isn’t the only one.

    I save to buy power and freedom – the freedom to walk tall […] – modern ads for savings accounts emphasise saving up for something like a house, or the advantageous interest rate. I have never seen a modern ad advocating saving to buy yourself independence of thought and action. Wage slavery is too ingrained in our culture, and we have surrendered to Illich’s modernized poverty.

    What’s your reason for wanting to be financially independent? After all, many, many people in Britain live happy and fulfilling lives enjoying the fruits of consumerism and living paycheque to paycheque, and good for them. I have no quarrel either with the YOLO set who ram themselves up the eyeballs in debt, as long as they don’t then turn round and demand I pay to bail them out without getting a slice of the YOLO fun 😉 There are choices to be made in life, in general you can do anything you want 7 if you want it hard enough, but not everything you want.

    So it is for Scotland on Thursday. It is freedom to live in the way they want, albeit in probably straitened circumstances 8. It’s not about the money. It’s about freedom and self-determination. These are things that it’s sometime worth making sacrifices for.

    Notes:

    1. There are many, many distorting factors that make this a lowball estimate and it being less of a hit than the headline fall, but 80% was the drop I was prepared to eat
    2. Alex Salmond worked as an economist in MAFF in the late 1970s – I presume he is fully aware of the consequences of being in a currency area with a bunch of guys who are carrying on in a way so opposed to the way your area wants to live that you want to get shot of them, but if he has forgotten that, the Euro area is a good object lesson in why you don’t want to be the 60lb gorilla next to the 600lb one in a currency union
    3. warning – extremely cheesy child-centric crap, but says a truth all the same. You may or may not need a sick bucket and/or end up in hyperglycaemia shock due to the saccharine schmaltziness
    4. more from the point of view that “if you aren’t a socialist when you are young you have no heart and if you are when you are older you have no head” rather than a deep Ayn-Randian philosophy or being a dedicated follower of Hayek’s Austrian school
    5. with a mechanical compass to back it up, but I don’t normally use this
    6. Not everyone working for The Man needs the recovery time – I know a few people who choose to work some jobs that pay modestly but aren’t particularly consuming precisely to have a better lifestyle. They do enjoy their time off much better, and it’s a perfectly reasonable alternative the the financial independence/retire early approach, albeit with the inherent risks of depending on the availability of that type of job, which seems to be falling over time, or at least paying less well
    7. bearing in mind you are in a rich first-world economy, assuming you are of above average aptitude in something that can enhance the lives of your fellow men and that you are capable of understanding that your actions have consequences
    8. I don’t believe the milk and honey promises, though I don’t believe the hell on earth the No campaign are selling. And I find it more admirable when someone chooses freedom over the chimera of economic comfort through slavery anyway, it’s what this blog is about 🙂
     
  • Recent Posts

  • Subscribe to Simple Living In Suffolk via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.