27 Jan 2015, 5:34pm
living intentionally personal finance:
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  • George Osborne may help me to live intentionally and spend more

    By his pension changes, that is. Sadly the exact mechanics wont be of much use to young’uns but for for some modestly old gits (45 plus) who have accrued a defined-benefit (DB) pension where you can buy  additional voluntary contributions (AVCs). Since there are a number of readers who work(ed) for The Firm that employed me for many years I’m throwing it out there.

    The philosophy of how difficult it is to qualify living off savings may be of more general interest. It’s heavy on pensions, which seem to be the Cinderella of the PF world, because most PF bloggers are younger than me and Monevator’s Greybeard seems to be off on a cruise. However, hopefully you’ll all get old enough to be interested in pensions one day, and if you can learn from my mortgage screw-up then so be it ;)

    Some pension and early retirement orientation

    One of the big challenges facing early retirees is how to fund the pre 55 early part of their early retirement. The part before 55 has to be something other than pensions because you can’t get hold of pensions before getting to 55. The goto place for this is ISA income and cash savings, though not paying your mortgage off early is a great way to have more cash savings in the pre-55 period, because you can use the pension commencement lump sum to save to pay off your mortgage from pre-tax income.

    don't automatically pay off your mortgage early if you are retiring before 55

    don’t automatically pay off your mortgage early if you are retiring before 55

    I didn’t get the mortgage wheeze right. In threading your way through the myriad paths to early retirement you are always going to get something or other wrong, that was my big mistake. I don’t have housing costs other than council tax and the 1% or so house purchase price depreciation fund, but having the borrowed capital to run down now would be useful. I could then use my AVC fund to pay off the mortgage tax-free at 60. Pretty much any time I go anywhere near anything to do with housing I screw it up royally. Why break the habit, eh?

    Because I drove my spending down to be able to quit early I have been able to string out my savings for twice the amount of time I anticipated. But it’s probably fair to say I haven’t lived large like like mistersquirrel and theFIREstarter ;) I don’t have any complaints – freedom from The Man and being able to pursue my own interests is more than adequate compensation. For much of the first couple of years it was a process of recovery from the experience – and it’s respite that matters, not consumer goods and services. But I am also mindful that time is also ticking away, so if I could smooth my income I could do more in the near future rather than back-loading it. I’ve noticed the birds are starting to sing and maybe they call to me, get out there, travel more.

    I have no income – one of the primary navigational aids of personal finance spins and knows no North

    Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness.

    Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

    Wilkins Micawber

    I never understood how to manage finances without having a number I could allocate on the Annual Income side. Without a figure for income, I could never qualify the Micawber question. It has made me fearful and over-conservative in spending. This has worked out okay for me till now – it is how I got to this point and having the choice to take Osborne up on his alternative offer of getting my AVC out tax-free but earlier. If I had favoured spending I would have drawn my pension short by now.

    or, as da yoof sez, YOLO

    or, as da yoof sez, YOLO

    Some readers will wonder WTF? The income computation is easy. Take current age of Ermine, subtract from 60 which is how long it needs to last till a good alternative, then divide total amount of cash savings by years and you have the income level. Maybe knock off about a year’s savings to cover emergencies then run the calculation.

    Not so fast. If you have no income, you will find it the devil’s own job to borrow money which is a perfectly reasonable way of leveraging your emergency fund. A year’s worth of low-ish running costs as  savings is not enough to hedge some kinds of risks. Lucy Mangan charges us that If you don’t understand how people fall into poverty, you’re probably a sociopath  – probably correctly. I didn’t want that to happen to me, so I have used a much smaller percentage of my non-pension cash savings than that cash÷(60+1-current age) calculation would give. At least half of them are with those NS&I people so they aren’t being killed by inflation, unlike my cash ISA and cash balances. I really, really hate cash as an asset class, and never expect a return on it. At least inflation is surprisingly low given all the QE money that has been  pumped out – it seems to have gone in inflating the stock market and the housing market.

    The logical thing to to with a cash ISA these days is to switch the damn thing into S&S ISA but I can’t bring myself to do that, because of the fears of some of Lucy Mangan’s demons catching up with me, or needing to pay for an operation 1, or something like that. And as a result, the fearful me jams my spending. I err in the opposite way to mistersquirrel and theFIREstarter but error it still is.

    TEA calls this out well in The Pyramid and the Oxygen Mask – to wit

    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.

    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.

    Apply own mask first…
    We owe it to ourselves and our families and friends to start by getting our own shit together.  Think about the airline safety briefing : always apply your own oxygen mask before helping others.  This initially sounds a bit counter-intuitive and even selfish to some people. 

    I have overcome most of that. I changed my life, and I qualified what Enough looked like to me. But I am still on his Level 2.

    These people understand the power of money and have mastered some of their emotional weaknesses re money. Paradoxically, they are seeking to get to a point (see level 1 below) where they think much less about money.

    I am not sure I can do that until Mr Micawber’s compass begins to respond and the questing needle shows which way is North. After a certain level personal finance is much more about the personal than it is about the finance. My fears of Lucy Mangan’s demons are part of the emotional weaknesses re money. Possibly I have some of the elements of her sociopath. I just didn’t want to depend on other people’s grace for dealing with the demons and so I spent less so I could buy my way out of certain kinds of misfortune. But I take TEA’s point. This is a question of balance and I haven’t got that right. A clawed hand remains frozen on the controls set to dead slow because the broken compass shows no signal I feel I can trust. There is still work to do on that intentional living thing.

    It has been five, getting on for six years since that fateful day in February 2009 when a jumped up punk of a manager squeezed an Ermine, intimated TINA and I realised I was all out of options and didn’t want to kiss The Man’s ass, and I locked down spending and took a three-year holiday from the middle class in the name of Freedom. I would do the same again. I have become even more ornery, awkward and unemployable since then. Work is not the point of Life 2. This much I know.

    I would soon have access to a DC pension

    Now if I had a DC pension I would soon be able to draw it. As a brutal simplification that everyone should qualify for their own circumstances, it makes sense to draw a DC pension as soon as possible, all other things being equal. By drawing it early, you stretch out the time over which the money is extracted, and you get a personal allowance for each of the years over which you take it. If you don’t need all the money that year , reinvest it in an ISA in the same sort of thing the pension was invested, and you shift the pension capital from being taxable to being sheltered from tax. If you still have more than 15k left over each year I suggest you need to spend more, unless you are looking to mollycoddle your kids in which case leave it in the pension since they can inherit that at their marginal tax rate it seems. The converse is that if you are so bloody stupid as to take your DC pension out in one lump then you deserve to pay a shitload of tax because such arrant stupidity should be taxed out of existence.

    But I don’t have a DC pension. So I can’t do that. Don’t get me wrong – I am deeply grateful that I started work at a time when there was a better balance between labour and capital and The Firm actually wanted people to work for them so they offered good benefits, the original DB pension being one of them. However, a DB pension is less flexible than a DC about the retirement date – draw it earlier than normal retirement age (60 in my case) and it is reduced by roughly 5% per year drawn short. If you are in decent health you really don’t want to do that. The actuarial reductions usually favour those who follow the norm rather than the early retirees. In itself that’s not a big deal, because I saved a quarter of my DB pension capital 3 in AVCs.

    the original plan – invest the 25% tax-free PCLS in the market in a couple of years time

    The original plan was to run off the SIPP I took out earlier this year when Osborne changed things, after another two years worth of contributions which I can get in by May 2015 (this year and next tax year), and then to draw my main pension a bit early and eat the actuarial reduction. I would then get the AVC tax free, which I would then shovel into ISAs over a few years, getting more ISA income to top up the actuarially reduced pension.

    Note the correct way to have done this job would have been to keep my mortgage at the level of the PCLS and live off the money I paid my mortgage off with until at 60 I take the PCLS tax-free and pay off the mortgage. The general cocked up the tactics there, even before the battle plan made contact with the enemy.

    the new plan – invest the AVC in deferring my main pension

    It appears I can shift the AVC into a SIPP without taking the main pension, as it is considered a DC independent saving. All of a sudden I lose the whole point of the AVC, which is to get 25% of my DB pension capital free of tax. I now only get 25% of 25% or a sixteenth of the capital tax free. However, I have discharged my mortgage and don’t have a particular need for a shedload of cash, other than as investment capital to make up for the actuarial reduction.

    From some time after this April, I can draw down the SIPP tax-free, as long as I stay below the income tax threshold. There is also some hazard of work income over the coming years 4. Indeed, it seems I can contribute to a SIPP up to £10k p.a. while drawing from it, so I can lose any earned income into the SIPP, which is a good way of spreading out earnings to minimise tax – I don’t aim to give up much time to the filthy W word, so 10k will probably do :)

    Each year I live off the AVC fuelled SIPP and the dividend income of my ISA, my deferred DB pension increases by roughly 5%. Effectively I get a return on my AVC funds in terms of that permanently increased DB pension, and at current stock market valuations that looks a higher return and lower risk than I could win from adding to my ISA. Of course that is a return on capital, the return of capital is consumed as income. Normally if you want a return on capital you need to retain the capital and not spend it, this is one of the few exceptions 5. When I get to 60 I will probably stop drawing down the divi from my ISA unless I think of something to spend it on. Running down the AVC + ISA income is roughly equal to the value of the DB pension at NRA, so I smooth my income. I will get two smaller bump-ups, one at 60 when the ISA dividend income becomes superfluous to requirements, and one in the distant time at 67 when and if I get the State pension.

    I get the same general effect as if I hadn’t made a cod’s of the mortgage/PCLS thing, subject to the limitation of being limited to the tax threshold + the income from my ISA each year. I’m easy with that, big spenders may not be.

    An annual income, and an answer to the Micawber question

    Obviously there’s the benefit of getting this AVC cash into use rather than depreciating for another six years. More importantly, however, I get an income for the first time in about three years. So I could return to that middle-class sort of spending if I wanted to. They say that it takes a month to break a habit, so six years should be plenty. I can’t unsee the wanton waste I discovered in some of the empty dreams of the middle class cubicle slave I was. I am no longer a cubicle slave, but some of the dreams still seem empty. I found freedom in the open spaces, in the sound of birdsong, in places like this

    1501_wolves_P1000135rather than places like this

    Westfield, London

    Westfield, London

    I am in no hurry to spend more, but I do need to release the dead hand of the fearful non-spender who felt adrift in a pathless land without the compass of Wilkins Micawber to guide the way. Unusually among consumers, possibly I am consuming at too low a rate. I can easily live well on the personal allowance plus £5000 tax-free from my ISA, maybe I will have to consult with good people like mistersquirrel and theFIREstarter as to how to inflate my outgoings on fine living. On the other hand I don’t have to spend all of it every year. My ISA will thank me for continued reinvestment. I now have a high-water-mark for annual spending, which I can exchange for the dead-hand’s ‘as little as possible’. The tide is a long, long, way out.

    the tide is out there somewhere

    the Wash – the tide is out there somewhere

    There’s no rush – one of the arts of pension planning seems to be keep as many options open, and then opportunistically close them off at the eleventh hour in whatever way is most advantageous at the time.

    Ed Miliband could destroy this plan

    …in May. In which case it’s back to plan A. There’s nothing I can do about that, it’s the usual mantra – coffee for the things I can do something about, red wine for what I can’t change. It’s the problem with pension savings all round – government meddling can screw up the best laid plans. In fairness to governments, it is only government meddling that has made this alternative a possibility. It wasn’t a possibility when I left work in 2012.

    of market crashes, and excitement, and foolishness

    All this will take a few years, should there be a market crash I can rethink, draw my DB pension a little earlier, eat some actuarial reduction and seize the opportunity to invest the SIPP. Assuming, that is, I have the cojones to do that – such a market crash could be the trumpet at dawn of the great unwinding. Or maybe I lack the taste for the ride. Finding myself unable to to determine a reasonable spending rate without having an annual income shows that perhaps I am not the Wolf of Wall Street. I should heed the words of Warren Buffett…

    To make the money they didn’t have and they didn’t need, they risked what they did have and did need–that’s foolish, that’s just plain foolish.

    …and at most half-split this if the denouement comes this year. At the moment an increase in DB pension looks lower risk than the known risk of the market 6. It’s taken me a long time to realise that I had this opportunity, because my original plan was built when Osborne’s changes hadn’t happened. However, the job of any chief executive is to adapt to changing circumstances

    no plan survives contact with the enemy

    von Moltke

    Pension planning is a bastard for complexity and counterintuitive wrinkles and changing rules. I’m generally of Monevator’s opinion when it comes to financial advisers, but I wonder if pension planning might not be an exception. Certainly for those working at The Firm, take up the offer of the Wealth at Work seminars, since you don’t pay for the advice and they have knowledge of your specific environment. Just don’t hire W@W to run your investment portfolio, which is what they’d like you to do afterwards ;)

    My pension will eventually be a combination of the DB pension with about 2/3 of the target time accrued, and my ISA to make up the difference, tax-free. But as an early retiree I could have 30 years ahead – possibly more. It would be unwise to ignore the tail risks that affect both types of pension, though differently. The world will change over that sort of timescale. Just to remind ourselves of the scale of those sorts of changes, we were listening to this on the radio 30 years ago

    Only one guy in Britain had a mobile phone, though the first had been demonstrated in 1973 in the US. Those 1970s analogue devices were not cellular like TACS was, so the number of channels was very low and prices were astronomical.

    Motorola's Martin Cooper, April 1973

    Motorola’s Martin Cooper, handset first used in April 1973

    Nobody much had the Internet. I was using a VAX with green-screen text terminal and 9600 baud serial connectors to do circuit simulation. 30 years is one hell of a long time for things to change. It’s plenty of time for tail risks to show up. But it’s also plenty of time for nimbler, younger minds to invent good stuff that people want to pay for. Assuming, of course, that the work of humans is not done here – in which case the spoils will accrue to patrimonial capital as Piketty told us it would.

    Notes:

    1. the NHS does fine with big stuff and with chronic stuff, but elective quality of life interventions it does poorly now the Tories have been at it.
    2. with the obvious rider ‘for me’. If Work is the point of Life for you then knock yourself out
    3. computed by taking the gross paid at NRA and multiplying by 20
    4. there is some research work I want to do. In the end even an ermine can’t outrun the W word forever…
    5. it isn’t a true exception, it is the interaction with life-expectancy figures that gives an appearance of a return on capital.
    6. I am casually interchanging risk and volatility of the short-term price levels which I really shouldn’t do
    15 Jan 2015, 10:56pm
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  • City or country – where you live matters in the budget for early retirement

    Most of the personal finance community I’ve come across in the UK seems to live or work in London. Monevator lives in London. mistersquirrel does too. I don’t – although I was born in London, grew up, went to university and started work there I moved out in my 20s because I couldn’t see any way to being able to buy a house. Stupid house prices relative to earnings are not a new thing in the UK; this was a shade over a quarter of a century ago.

    Where you live is a large part of your running costs. It’s there in terms of the capital tied up in your house or the rent you pay, but it is also in the price of the goods and services you buy. More subtly, it’s there in the goods and services presented to tempt you to buy. It’s one of those strange facts of capitalism – normally increased scale lowers prices of goods and services. 13% of the population of Britain lives in London. Obviously that is going to jack up house prices, but I’d have guessed the cost of supplies and food would be lower, because there’s so much of it shifted. But it doesn’t work that way. London is a damned expensive place to live. The one thing that is notably cheaper as well as better in London is public transport – it’s far better than anywhere else I’ve seen in the UK 1

    But there’s a great buzz to the place, it’s full of things to do, though most of these things involve spending money, as the natural world is not well represented in the city. Even the sparrows got pissed off and left the city in the late 1980s 2.

    gotta get out of this crazy place

    gotta get out of this crazy place

    If you want to move town and particularly country, that’s usually easier when you are young. As you get older you pick up connections, often have kids, and then you just get used to a place. You also gain a lot of ‘domain knowledge’. You know who to ask for how to do various things. You know where to get things from and where is usually cheapest/best. You know how to get places, and which are the rough parts of town. A lot of this you lose if you move, and have to acquire again. It’s possible that I was lucky in that I left London in my twenties, because leaving the city later on seems to be a big wrench.

    Not living in London appears to reduce a lot of my costs, but I didn’t realise by how much until I visited the fair city of Oxford for a conference recently. The place smelled of money, like London does. I live in Ipswich, and the town has money shops, betting shops. closed down shops (nowhere near as many as a couple of years ago) and all the other accoutrements of the ‘cost of living crisis’. In short, compared to Oxford, and many parts of London, it’s a dump. The citizens of Ipswich are clearly not as rich as those in London or Oxford. You can see that on this income heatmap. Oxford average wages are 26k, for Ipswich this is 18k, whereas London has high values all round, nothing is as low as 18k. Even in places like Lewisham and Deptford, which were rough as guts when I left London people are on an average of 25k.

    Services have to be priced to reflect that, from the cost of housing to the council tax. There’s one service that always seems to sum this up as a quick guide for me, and it is this one

    OLYMPUS DIGITAL CAMERAIn Oxford it’s a little bit dearer than I am used to,

    OLYMPUS DIGITAL CAMERA

    but it’s nowhere near the outlandish sorts of prices mistersquirrel is happy to pay in The Smoke. I’m not a cocktail guy, so it may be that I don’t know the prices but I just couldn’t pay £10 for one drink. I just couldn’t do that. I could afford it okay, but paying that much out would bother me so much I wouldn’t be able to enjoy the experience ;)

    Let’s all move somewhere cheaper once we’re financially independent

    Seems obvious, really. Not so damn fast. In addition to the domain knowledge bit, within any one country places with a higher cost of living are often more interesting places to live. Intelligent people go there and start creating wealth, which drives up the cost of living because they can afford to demand higher standards.

    Oxford

    Oxford

    It’s why Oxford is a much nicer town than Ipswich. So is Cambridge. Those places are known for attracting clever people and the blighters apply themselves, creating value and then go around drive up the cost of everything, though they do make it all fancy as well. Hence the beer is a bit more expensive that in Ipswich, though I’d argue that The Fat Cat in Ipswich is a better pub than the Oxford one I was in. But Oxford’s probably got better pubs than the Fat Cat. We settled for a place on the bus route that looked okay.

    More Oxford

    More Oxford

    Your requirements as a retiree also vary if you are in a relationship and if you have children. Philip Greenspun has a fascinating article on choosing a place to live as an early retiree with few attachments, written from a US perspective. You’re not necessarily limited to the country you worked in, of course, and some places can be a hell of a lot cheaper, particularly in Asia 3

    Most of Europe is simply too crowded and expensive to be attractive to the average North American.

    Most of Asia is too strange and far away to appeal to the average North American. Nonetheless, there are a lot of expatriates who’ve found their Buddhist bliss in Thailand, a country with an excellent infrastructure and stable government 4.

    Greenspun on early retirement destinations :)

    In the States people seem to move all over the place all the time, so retirees are happy to move where things are cheaper – this seems to be towards the south, presumably where it’s warmer and the are lower property taxes. Anybody who is retired is usually very sensitive to wealth taxation for several reasons. Their income is normally lower than a typical working person, their wealth is usually higher (because they are skimming their lower income from capital saved from many years of working). 5. In the UK retirees have historically moved towards the seaside. which strikes me as a bizarre thing for the elderly to do, because the cold and wet in the winter will bother their aching joints and make it dearer to heat their homes, but what do I know? Nowadays they seem to gravitate to Dorset, Devon and Cornwall. In the Telegraph’s best places to retire series all the places seem to be in the south of the country 6

    I didn’t apply any intelligence to this choice. I was ejected from London because I was too poor to live there, and I got to like Suffolk which has a fair number of things going for it – it has far lower rainfall than most of the UK, it has a fair amount of natural beauty, it is an easy if expensive train ride to London. On the downside it’s very badly connected by road to the rest of the UK. Every time I want to go to any part of the UK that lies south of Cambridge and west of London I have to drive halfway round the M25.

    At the moment Mrs Ermine has more ties with the area. The decision to move or not isn’t purely a matter of economics or geography however, it is also about your social web of life. Early retirees by definition retire earlier than the norm, so many of the people they know will still have the constraints of work, in free time and in geographic mobility.

    Let’s all move to a cheaper country

    It’s not a bad idea – RIT is on the case with that one.It probably works better if you have some connection with the country or culture, and like everything about retirement it works better if you have more money. Where it really doesn’t work is if you haven’t saved enough money and you are simply looking to reduce costs or try and make a lack of savings work. There are a bunch of subtle tail risks that can get you, associated with the divergence in fortunes of your destination and the place the money that gives you an income is in. And of course you are starting again socially, but you have to pick up the language and the cultural references, or live in some expat enclave.

    And even if it hadn’t lost its Buddhist bliss, while somewhere like Thailand sounds like a great place to visit or even spend months or a year or so, I’m not sure I’d like to grow old and die in a greatly different culture from the one I’d spent most of my life in. Maybe I am particularly unadventurous in that way.

    International Living has a guide to various countries and costs, and the HuffPo likes Portugal, Thailand and Malaysia. Changing country also involves currency risk – if you’re looking at spending 40 years in a different country from the UK you have to take a view on the relative wealth of the two countries and how they would diverge. You’re okay if the UK stays the same or gets richer relative to your destination, but you’re in deep shit if it’s the other way round unless the funds upon which your income is based track the fortunes of your destination. This is a case where a DC pension beats a DB pension hands down because you can target your investment base accordingly. You see some of this thinking in RIT’s portfolio although he is unwinding the Australian bias because that isn’t his preferred destination any more. And just as Jim Slater said elephants don’t gallop, the potential of the UK to get richer more rapidly than a low-cost Asian country is questionable. It’s a tough bet, and as a UK expat you’re on the wrong side of it…

    if you depend on the UK State Pension then be very careful retiring abroad

    I’d go as far as to say if you depend on the UK state pension you can’t afford to retire abroad. You definitely need to know it doesn’t necessarily increase with inflation particularly relevant for Canadian and Antipodean retirees. Canada, Australia and NZ attract UK retirees because they speak English, but it appears this policy comes as a surprise to some of these retirees. Although there’s a lot of bitching about this, this isn’t something that was sprung on people retrospectively. Indeed, I’m amazed people who rely on the UK State pension retire outside of the UK at all because of the currency risk. Fair enough for people rich enough to have their own pension provision, but the UK State pension is not particularly generous compared to other First World countries so depending on it and retiring to another country particularly where you may have to pay for healthcare looks like sticking your neck out to me.

    The power play is obvious. A UK government is influenced by UK voters. If you’re a UK resident pensioner, you are a UK voter. If you’re resident abroad, you aren’t. In a squeeze on pension resources, a UK government will focus resources on people who vote in the UK. If you don’t like that, either don’t retire abroad, or accept the tradeoffs, or make adequate private provision to become FI, and maybe hedge currency effects. The UK Government is quite explicit on the policy

    Essentially, the reason for not uprating retirement pension in these countries is cost and the desire to focus constrained resources on pensioners living in the UK.

    town and country – the city is a spendy place

    it’s easy to spend money in a big city. There are so many expensive places to choose from, the temptations are all around.

    mistersquirrel

    I can get out of Ipswich and do something interesting without spending any money at all – I can bike to somewhere I can poke a telescope at birds, or listen to some. I can reach open fields on foot, though the council is looking at filling some of these with houses. The natural world abounds in things that don’t cost much. Whereas a city abounds in things that are interesting, and often cost something. Not always – f’rinstance in Oxford I went and poked an inquisitive Ermine snout at these oddities for free at the Museum of the History of Science

    copy of John Dee's Enochian tablets

    copy of John Dee’s Enochian tablets. Science wasn’t as nailed down in the past…

    various historical lab glassware

    fabulous historical lab glassware

    cabinet

    cabinet of preparations

    but we paid to see the William Blake exhibition  – as mistersquirrel said, it’s easy to spend money in a city.

    It’s possible that one of the things that made financial independence easier for me was being out of the city. When I look at city boys like theFIREstarter’s £24k hit and mistersquirrel who won’t let on as to the absolute level of spending because the drinking and dining stands head and shoulders above the rest then I think to myself we’ve got some high-rollers here ;) And these are people who have their spending under control from a Micawber point of view, so God knows what this looks like for the rest of the country – no wonder that Britons slapped another £1.25 billion on their credit cards. In TFS and mistersquirrel’s favour, it was an Ermine rather than they who contributed to this statistic, though I used it to avoid crystallising a capital gain as opposed to spending money I didn’t have ;) For what it’s worth my take on spending is back here. I’d probably add another 6k on that of elective spend between us because that was drafted in lockdown to get out mode. However, even now, I don’t spend more on running costs and elective spend than goes into my ISA each year.

    Notes:

    1. Where I do get to try provincial bus services I usually concur with Mrs Thatcher on the subject
    2. they are meant to like being around lots of people, the clue is in the name, house sparrow, and the Latin name Passer domesticus. There were plenty in the garden when I was a child, but they have nearly all gone from London now. Sadly it appears they just lost heart and died out in London, rather than flying somewhere more agreeable. If you think about the use of the canary in mines, this might give Londoners pause for reflection…
    3. an exercise for the reader is, of course, to look in their crystal ball and decide whether that will still hold after 30,40, or in some cases 50 years. 50 years is a very long time and you are asking a hell of a lot of your crystal ball – 50 years ago London was a grimy city of many bomb-sites, few cars, outside bogs and often the water stopped running when there was snow on the ground. Nobody would have guessed it would have loads of people making loads of money all around the world while its residential property becomes the reserve currency of last resort for Russian oligarchs, Greek tax dodgers and the like.
    4. No longer it seems
    5. Britain has very few wealth taxes, the council tax is the only one I can think of. We have capital transfer taxes when wealth is transferred  – from one form to another in capital gains tax. There is a theoretical tax on intergenerational/dynastic wealth in terms of inheritance tax, unless you are a member of the aristocracy/Establishment in which case you hold your dynastic wealth as agricultural land on which there is no inheritance tax because your forebears struck deals with the postwar governments to hide this egregious aberration in the principles of equality of opportunity from the wage-slaves and serfs.
    6. this may be the result of sample bias, if they ranked the places by number, since most people in the UK live in the south of the country
    4 Jan 2015, 1:12pm
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  • Here’s to interesting times in 2015

    Ah, New Year, a time for revolutionary change? Sophie Heawood has some point that January is a bad time to start anything new in, we really should have gone for September. It’s brass monkeys out there and the cruel coldest month of February still awaits. The fire festivals of the shortest day have passed. Heck, after the excesses of Christmas we could at least have advanced the 28 day shortest month to January to give wage-slaves a mini-boost. Mind you, when we look at the results in places with “Doros”, a double salary at Christmas maybe that’s not such a good idea. The WaPo is uncharitable about these things, and Fortune magazine is particularly cutting about giving wage-slaves festive breaks

    The 14th salary works like this: Greek workers get their annual salary in roughly 14 instalments. On top of 12 monthly payments, employees receive double their paychecks in December, right in time for Christmas consumerism. They also receive half of their monthly spending in the spring to shell out on goods for Easter. Then they get another half-salary boost in July, before their traditional summer vacation.

    In the interests of balance, Slobber takes this kind of thing to task, but hey, never let the truth get in the way of good journalism I say ;)

    Glastonbury Tor in the mist

    Glastonbury Tor in the mist

    The Ermine spent a while mulling things over the Winter Solstice in Glastonbury, and read a lot. Reflections and ruminations are not the things for a New Year. It’s about carpe diem, the opportunities on offer, and what with the return of the Eurozone crisis, an election here in the UK and the Russian brouhaha there is the scent of hazard and opportunity in the air. We haven’t had a good rumble in the markets since 2011, and it’s getting harder and harder to turn a decent yield with high valuations.

    It’s a funny old world – the price of oil, for instance, is lower than the marginal cost of new production. UTMT has a nice piece on this. There’s a link to the old boy Tim Morgan, he of ex Tullett Prebon fame and the report “Britain – Armageddon – there’s no way out of here’. Tim’s in a new guise and brings us the pithy summary

    what we are witnessing is not the dawn of an age of cheap energy.

    Low oil costs look like good news but when it’s lower than the cost of new production then it isn’t. Unless we’ve all decided to use a lot less energy, and lest we forget just how hard that is, the humble refrigerator in your kitchen is consuming the rough equivalent of the daily output of two horses.

    after a long glide, it’s time to see if the engine of finance starts again for me…

    This could be the year that I return to having an income. I will have have coasted on savings and investment income for three years since leaving work – that’s 10% of my working life before I draw a DC pension, which is indeed made up of more of those cash savings. One of the bizarre things about financial independence is how everything is set up to qualify someone’s financial probity in terms of their income. With no income I am a financial deadbeat in the eyes of banks. At least I didn’t have trouble switching energy provider, but I struggled to borrow money and probably wouldn’t get a credit card, a mobile phone contract or a loan. Most of what I borrowed has come back to me now and the rest is coming it over time. but as usual you can’t do anything with cash these days…

    The Lorax. He's a fellow who can tell you a thing or two about buying thneeds on your credit card

    The Lorax. He’s a fellow who can tell you a thing or two about buying thneeds on your credit card

    It’s perfectly understandable to banks, apparently, for you to want to spend money before you’ve earned it, particularly for your consumer thneeds – but have assets in the wrong place or tied up in pensions or an ISA and lenders aren’t interested. So I am finally returning to the salaried – or rather the pensioned, maybe, and cease being a financial unperson, when I get my cash savings back from those nice fellows at Hargreaves Lansdown with the Chancellor’s 20% bung on top.

    I was/am a salaryman at heart

    The Ermine is a maverick, but I have to say I was entirely conventional and non-entrepreneurial in that I hate not having an income, even though I had enough savings to cover the intercession. Spreading out previous savings, indeed making one ad a half years savings stretch to three years just doesn’t feel like a stable situation. For starters, how the hell do you qualify the answer to the Micawber question – am I spending less than I earn? I could do this as a logical and arithmetical exercise given the time before I could sensibly draw my pension, but if you have no income then the gut feel is always

    ‘spend as little as possible, this sucker’s going down, play for time’

    It made me over-cautious in spending, particularly in the early days. Unlike the salaryman, there’s no easy way to qualify a good rate of spending with no income. You have to take everything with you once you leave work – and your savings need to address not only your running costs but also the risk of the unknown unknowns. Those risks are much higher at the start of the journey than at the end, so it is rational to minimise spending at the start of any period of living off fossil savings 1. Playing for time sounds okay and sort of fail-safe, but time is also a fossil resource – they ain’t making any more of it.

    Once I have an income the answer to Wilkins Micawber is easy – as long as my spending minus my dividend income is less than my pension income then old Wilkins will be happy 2. I had no mental model of living without a steady income because all my adult life I had had one. Unlike most UK personal finance folk, my retirement was an unceremonious scrabble for the exit rather than a carefully planned strategy.

    But it worked in the end – I can see my way to getting access to my savings. It was overly pessimistic to assume I would have zero income across the intercession between finishing work and drawing a pension, although I do appreciate the changes that made it possible to swap savings for an income boost, and hope they aren’t rolled back by the new Government in May. The changes in the workplace that turned what had been an interesting career for the most part into a gamified paint-by-numbers miasma of mockery, metrics and mendacious quarterly ‘evidence’ for the performance management system is also providing new routes to market and ways of microselling niche content that offer occasional opportunities for a more creative Ermine following my interests. I don’t chase work, but I don’t turn down sales if I’ve already done the work ;)

    In the Economist’s The Future of Work series there is an interesting throwaway line about the looming future of work

    The on-demand economy is unlikely to be a happy experience for people who value stability more than flexibility: middle-aged professionals with children to educate and mortgages to pay.

    though it will be great for those who haven’t picked up financial commitments like mortgages, children, dogs, tastes for fine living and debt. Provided they have talent, that is. Indeed the drumbeat of the changing world of work is getting louder, and it favours the opportunist and the unattached/uncommitted. It makes it easier for a retired Ermine to turn recordings into dollars where previously they would have been accumulated as reels of tape, but it seems an increasingly rough ride for many. Which is presumably why we Brits thrashed seven bells out of our credit cards in November. To the tune of £1.25bn. The Ermine has a confession to make – I was part of the problem that month. In my defence I bought productive assets and breathing space with the money, and I have half of it back as cash. No consumer goods were bought with it, but I fear that is not the case for a lot of that £1.25bn.

    So I’m looking for opportunities in 2015. Maybe this is the year that the Euro blows, and those oil prices may offer opportunities for buying oil firms and service companies at lower prices. I can’t see the world living without conventional oil for a good time yet. I’m not doing shale, but although Vlad’s always got a really sourpuss look on his face these days he’s in charge of a lot of real fossil fuels. Dude, you need to lighten up.

    Vlad on the horn, irreverently swiped from UTMT

    Vlad on the horn giving some poor blighter the Third Degree, irreverently swiped from UTMT

    2014 shares review

    Looking back, overall 2014 wasn’t that bad for me, the Ermine annual unit value 3 is up over 15% (the FTSE100 total return is up 0.72% in 2014 despite all the bitching that it lost in SP terms). This is despite clocking up two definite cock-ups in retrospect – following my old mate Warren Buffett into Tesco and jumping the gun on the deeply troubled Vladimir Putin’s operation. However, I am saved by the power of diversification – TSCO can go down the pan and I’d still easily be in positive territory for the year. I am mulling over whether I should short the rouble to the tune of that HRUB holding.

    Before I slap myself on the back too much, any Brit sat on their backside with a decent exposure in GBP to the S&P500 via an index fund would have had a better ride this year at 20%, they would have got the USD forex boost as well. Although I have deliberately avoided the US market (their TR was 29% in 2013 which I thought was outrageous and setting up for a fall) the Americans have served me better outside my ISA when I exchanged a load of The Firm’s shares for a load of Vanguard FTSE Dev World ex UK which is 50% US. They also did better than I did in my ISA this year ;) So you pretty much only needed to have a pulse and be in the market with a bit of US exposure to do okay, indeed the surprise in the case of the ISA is how I survived my anti-American bias. Don’t get me wrong, I’d love to have more exposure to the dynamism of American capitalism. I just don’t want to pay the currently exorbitant prices of getting it!

    Looking back, it was the years when I didn’t do so well that the seeds for better performance was laid. 2011 wasn’t a great performance on my unit price, a 2% fall. But some of what I bought then did the heavy lifting in 2013 and 2014. I’ve also started to see very high levels of volatility – they aren’t proportionally particularly outlandish but the absolute levels of the changes wrought get larger as time goes by, because the capital base is rising. The salaryman measures things against the yardstick of my erstwhile annual salary, and as capital appreciation and a little inflation pushes the capital base the volatility increases to a very significant part of that annual salary. Put it like this, the difference between the high-water mark this year and the low-water mark is a sum that would have seriously pissed me off to lose as a worker bee. That sort of rudeness is just what the stock market does, and it’s why it flames out most private investors (and yes, I could yet be one of them in future – nothing is guaranteed). I have to use the intellect override this  – I didn’t earn or have the high-water mark and the sun will rise again from the low point. Such is the conundrum of investing – you always have to fight some part of yourself in the endless battle between fear and greed. The only imperfect defence against the myriad of cognitive biases is to inform, to understand more, but also to know thyself.

    I’m gradually losing the HYP yield fight as my yield falls as a percentage of the total capital – the annual return is shifting in the direction of capgain rather than dividend income. Some of this is because I am deliberately diversifying away from the UK as the total stake gets larger, which drops my yield (the UK is a relatively high-dividend market), and some of the index funds are accumulation funds so they are total deadweight from a yield point of view.

    But then jolly good downturns are the time to build one’s HYP, whereas frothy markets pumped up with QE are the time to either diversify or sell your own unwrapped shares back to yourself in an ISA wrapper to bloodlet some capital gains allowance. Every dynamic system has its systole and diastole, and it’s better to roll with the cycle of opportunities than fight it.

    Notes:

    1. cash savings are non-renewable, unlike a share portfolio in drawdown over decades, but the stock market is unsuited to hold savings for a non-earning period of two or three years because of its high volatility
    2. There are cases imaginable where this wouldn’t hold, but they probably don’t apply to me
    3. unitisation is a way of tracking your ISA performance that works with the fact that most of us drip money into an ISA year on year,  which terribly complicates other ways of doing that. It is explained in this Motley Fool post. I had to repeat the exercise pretending to only unitise as if I had stayed in cash because I didn’t believe the result at first. The arithmetical result is quite counter-intuitive, compared to simply taking the ISA provider’s total market value divided by book cost after you have run for a few years
    26 Nov 2014, 7:25pm
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  • I read the news today, oh boy…

    red warning lights are once again flashing on the dashboard of the global economy

    David “I wanna get re-elected” Cameron, G20 junket

    I know some wag said a week is a long time in politics so five years is prehistoric, but I do recall that a certain Mr G Brown tried to get re-elected by scaring the shit out of the proletariat five years ago. The problem is that the hurt of the original global financial crisis/credit crunch was bought off. Some of it was fixed in the aftermath, but when the questions got too hard or it was going to bugger up people’s living standards in some obvious way, the solution seems to be create some more money, whistle a dancing tune and look the other way.

    I'll be back...

    I’ll be back…

    The trouble is that some of these problems have got a bit of the Terminator in them. That’s not good.

    The last two years on the stock market have been tedious IMO, there hasn’t been a decent rumble on the markets since the Summer of Rage 2011. It’s all been frothy and up in the air, and generally what are we all doing up here mate. So far I’m made to with selling my own shares back to myself, drifting my unwrapped shares into my ISA.

    I suppose all the QE had to go somewhere, and propping up share prices and house prices is one way to soak some of it up. The trouble is that there’s fire burning underground in some structural parts of the economy. The 3% p.a  growth of the second half of the 20th century seems to have been a positive anomaly, giving way to soggy growth which seems to be the British expression for secular stagnation. Wonder how Robert Peston feels about having another good recession

    I don’t know if Dave was trying to make us all feel better, because the Bank of England has been loading on the gloom, with Mark Carney who has obviously been watching Humans Need Not Apply, and, well, indicated humans need not apply. It’s a bastard that it’s the humans that are the voters, this ain’t gonna end well, do you bet on the immovable object or the irresistible force? Over to you, Mark, hit it:

    “My personal view is that there will be an increase in self-employment and part-time work relative to history, in part driven by the reality of technology. I think in the end, we won’t go back to historic levels, but that’s my personal assessment. There are some structural changes which are driven as much by technology as any particular policy.”

    Carney added that increasing automation in the workplace was increasing the supply of lower-skilled workers and keeping wages down.

    “The automation of a series of formerly white-collar tasks, the growth in computing power, has a consequence in adjusting the shift of types of jobs. If we’re not careful it will mean more people are competing for lower-skilled jobs as opposed to moving up.”

    Bloody hell. I had actually expected this to take more than just five years, so the Ermine is clearly behind the curve on the whole power-shift from Labour to Capital. Fast-moving world eh, I take a couple of weeks of well deserved rest and the lookout at No 10 and the Bank of England call in the Four Horsemen, and there I was thinking it’d be a generation. Or at least a few years.

    That means there are a lot of pissed-off people about, and often the blame gets placed on furreners. Hence the rise of the island mentality and the quite serious likelihood of Brexit, to add to the litany of external woes and boogeymen Cameron invoked.

    So the Ermine extends a furred paw to investigate my ISA, and mulls this possibility over a mug of tea. Not only has it been hard to find anything worth buying in my ISA but some of my calls of late haven’t done well. Now obviously if I am going to chase things that are bombed out I’m going to be travelling third class. The torygraph had a good graphic of stock market valuations by CAPE. Since they half-inched the graphic from Hargreaves Lansdown I’ll run it too :)

    Russia, Greece – good value in some odd places

    If you are going to slap a 10-year moving average on something you will slow your response to real shifts too, but nevertheless CAPE has something to be said for it. So I went and got me some HRUB to go ride with the madcap nutcase Putin. Somewhere you have to try to make sense of the twisted wreckage that lies within that braincase, but on the other hand the index is going for a song. Increasingly so, it seems – I am down 15%. Just as well I managed to miss the 21% fall earlier in the year, eh ;) Still, that’s the advantage of diversification – I can afford the odd dog. To be honest my old mate Vlad isn’t making the sort of terminal hash of things that got me and my buddy Warren into trouble over at Tesco, Vlad’s got a long way to go to plumb those sorts of depths. But I’m sure he’ll explore more. As sub commander he’s the fellow yelling ‘Dive, Dive’.

    Russia has bad form

    In general, an index doesn’t go bust. But as the WSJ sez anybody with money in the St Petersburg stock exchange would have received diddly squat, even if they lasted the 70 years for the Phoenix-like rise of the MCSI Russia Capped Index

    U.S. Fracking: the Largest Red Herring in the History of Oil

    HRUB is all about oil and gas. Now everybody knows that fracking is going to make oil too cheap to meter, destroying old-skool oil. The West can bring back its military from the troubled Middle East and mind our own business, revelling in the glorious self-sufficient future. Well, the US can, and since they are the only people spending on their military unlike the cheese-eating Europeans so that’s all good.

    Fracked wells seem to run for 2 years and it also seems to be the devil’s own job to make money out of fracking – you can get enough oil out of the ground but turning a profit seems to be a git. Jeremy Grantham of GMO (hat tip to Monevator) has a level-headed summary of the oil issue here, and I pinched the subhead from him. It goes much wider, but fracking is more like tapping short-term storage than finding a new Ghawar field. So I don’t think Russia will have to wait for ever for the oil price to be favourable to them… The main problem with Russia seems to be that all the decent shrinks are in New York, and Vlad is in deep need of expert assistance to let the primal scream or deep historical upset within his mind out in a controlled way that doesn’t involved unnecessary force. Compared to that the other economic problems are probably tractable. But hey, a low CAPE needs a reason.

    Now you can have a low CAPE without the vodka, as Mebane Faber indicated

    You might end up “riding a country down as well as up,” says Cambria Chief Investment Officer Mebane Faber, whose firm this month launched the Cambria Global Value ETF, which invests in countries based on value measures such as long-term P/Es.

    Well, yeah. If you want a smoother ride get a more diversified index fund like VGLS. That’s the trouble with bottom-feeding. It’s bumpy down there.

    Of risks and known unknowns like Brexit

    Anyway, I observe that I still have about £4k to toss into my ISA for this year, but it’s hard to drum up any enthusiasm even VWRL and VGLS are 50% US, and while I’d love to be holding more of the US at the moment I don’t want to be buying it at current valuations. None of the price alerts on real shares I want to get into are near tripping. Apart from TSCO and I got enough of that ;) However, standing back and looking at the big picture:

    1. some blighter keeps on putting money into my ISA as dividends
    2. TD direct are a Canadian/Dutch operation, so at the moment the Dutch equivalent of FSCS covers some of this
    3. As a result of 1, I have drifted way, way over the FSCS compensation limit in capital value

    Those divi payments come in as itty-bitty lumps – though the invisible hand has contributed a decent whack, with capital growth more, indeed, than I contributed my first full year. I almost have some sympathy for TD direct’s low rent operation, when I look at the transactions in my order list with TD for the last 12 months, there are 59 line items for dividends and 9 purchases, so they are dealing with an awful lot of ratty transactions, for which they benefited about £110 mainly in sales commission. I observe that TD Direct’s FSCS status compensation is a serious mess – to wit

    Compensation Arrangements (see also Appendix E of our Terms of Service)

    Stock held electronically with us is placed in safe custody with a nominee company that has been established for this purpose in accordance with FCA rules. Stock held within the customer’s brokerage account is covered by the FSCS. This means that if we are unable or likely to be unable to pay claims against us, customers can apply to the FSCS for compensation.Cash held within TD Direct Investing is protected as client money and are segregated from firms money. In the event of failure of TDDI then the funds should remain segregated and should be repaid to the client in full. Should any shortfall arise due to discrepancies on distribution then each client will be entitled to make a claim under the FSCS.

    Any claim against the stock and cash will be limited to £50,000 per individual. Further information is available on the FSCS website at www.fscs.org.uk.

    TD Bank NV

    Your eligible deposits with TD Bank N.V. are protected up to a total of 100,000 euro by the Dutch Deposit Protection Scheme and are not protected by the UK Financial Services Compensation Scheme. Any deposits you hold above the 100,000 euro limit are not covered. Further information is available on the De Nederlandsche Bank website at www.dnb.nl/en.

    and heading over to Appendix E

    1411_tdterms

    So that’s all as clear as mud. For my ISA I am covered by the FSCS even for cash, but for the trading account cash balances I am with the Dutch scheme. So I need to ice that TD trading account in the next tax year.

    And I definitely need to open a S&S ISA with someone else next year, and possibly move the excess with TD, possibly to a third operation. Sadly a Brexit is one of those things where it all going titsup at once is something that could be expected. It will also be a time of opportunity, of course. I will make sure that these new ISA platforms are a) not related from a FSCS point of view, and b) are British, since in a Brexit I suspect the EU financial guarantee won’t be worth a huge amount.

    Platform charges

    You have to use a platform to have an ISA 1, and platforms either charge flat-fee or as a percentage of stock value. Over at Monevator they have delved into this, and the crossover point comes at roughly 25-40k. In theory I’d be looking for a couple of flat-fee brokers. However, I am a shares/ETF guy. That gives me some option to reduce costs, because I don’t aim to sell – my transactions per year have already slowed greatly, and many percentage fee platforms charge on fund holdings. TD is one of them – I paid them a platform fee of  £6.86 over the last 12 months despite being well over the crossover point. So I want out of funds, that means for indexing VWRL not VGLS 2. By thinning out funds and favouring ETFs I may not suffer too badly from the RDR platform fee increases.

    Looks like a rough ride ahead

    I’m with Cameron in one way, there may be trouble ahead. That’s not bad for a net buyer :) On behalf of the British people and his voters, however, I really do think that he could steady on with the own goal mini-disasters. There’s enough trouble and fight in the world as it is. And God knows what the political solution to Humans Need Not Apply is going to be. At the moment it seems to be footnotes, but it’s something to be thinking about. If you have a child today, it’s quite possible that they will never find enough work as an adult to buy a house or get control of their life financially unless some of these political challenges are faced. We have had decent growth for a long time that was distributed widely. Carney seems to be of the view that this not going to be the case in the part-time self-employed future. That looks like Squeeze 2.0 ahoy.

    Notes:

    1. one containing more than one line of stock
    2. as a bonus to that it looks like VWRL is a better match to balance a UK-heavy HYP than the UK flavour of VGLS which is UK-biased
    11 Nov 2014, 11:46pm
    personal finance
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  • Sometimes you should not be allowed to do what you want to do

    Over at the Torygraph they are fulminating gently about the hidden costs of capping payday loan charges. To most of us the action on Wonga et al seems pretty clear-cut – the cap means that they are limited to a 100% interest rate – ie they can’t charge you more than twice the original loan amount.

    A Money Shop

    This is a Money Shop. It is what a problem looks like, not what a solution looks like

    Judging by the number of money shops and assembled crap joints in the High Street, there’s a lot of demand. The apologist for wanting to make a profit out of lending money to people that shouldn’t be borrowing money is this mouthpiece for the Institute of Economic Affairs Steve Davies, on Radio 4

    Payday loan companies will no longer be willing to lend to those judged to be at a fairly high risk of defaulting. Previously, these people could arrange a short term loan from legitimate businesses. As has been the experience in other countries, we can now expect more of them to turn to often vicious loan sharks that operate entirely outside the law.

    Mark Littlewood of the Institute for Economic Affairs

    The Torygraph cited the IEAs Director-General Mark Littlewood for the gem, but it sums up what Steve said on Radio 4. And hell, if you’re the DG then I guess the buck stops there

    Now if you look at the IEA’s website you can see that these guys are basically right-wing-nut-jobs. You know the search for John Galt is strong in the hallowed halls of the IEA from the topics. Now there’s nothing wrong in having right-wing nut-jobs, humanity needs a range of views. There’s no doubt a school of thought that considers an Ermine in that category with intemperate snarls like this.

    Nevertheless there are some wickets it’s really hard to bat on. Like giving matches to two-year-olds, ‘cos it’s an affront to their yuman rites of freedom to stop them discovering fire. It being A Good Thing that uniquely among European nations ordinary UK citizens will receive their mains powered goods with three exposed wires and will have to source and fit their own mains plugs 1 with a one in three chance of a lethal outcome 2, and other things like that.

    So let’s translate what IEA DG Mark is saying here

    We at the IEA think it is a jolly good thing to lend money to people who don’t have any. It’s a decent, honest source of profit and there are a few edge cases where it’s the right answer. Obviously there’s a risk of collateral damage and totally screwing up some punters’ lives, but in the end you gotta ask yourself

    What would John Galt 3 do?

    And then do the right thing by John, natch.

    Err, yes. There are about ten good ways of using payday loans and about a hundred wrong ways of using them. Guess which ones most people use, which is why we’re having the discussion. The IEA’s bod was on t’other side to the Bishop of Stepney. The fundamental beef the IEA has is simply summed up on their website

    Regulating payday lenders will shrink the supply of credit

    Well yes, that’s the ‘king point you wunch of bankers! I am just old enough to remember a time when Britain had credit controls, before Thatcher iced them. That was a terrible time, believe me.  Ordinary people could manage to buy houses, because they weren’t allowed to borrow stupid amounts of money to pay stupid prices for a collection of stones. If you couldn’t afford to buy a TV you bought your consumer shit on hire purchase. You ended up paying a hell of a lot more, but if you couldn’t afford the repayments then all that happened is a bunch of guys with thick necks came into your house and grabbed their telly back without paying you a bean.

    Stumbling and Mumbling sums up the results of Thatcher’s easement of credit controls as a successful failure pretty well.

    her relaxation of credit controls in the early 80s had a bigger economic impact than she intended. She envisaged these as a step towards economic freedom. But they were more than that. They permitted a consumer-driven society and economy. This was not her intention. […] her vision of Britain was of a property-owning democracy of savers with moral restraint. She got indebted spendthrifts. She wanted the British people to be like her father, but they turned out more like her son.

    In short, the IEA need to get the idea that sometimes the puer aeturnus in us all needs some roadblocks to getting his own way. What happened with the expansion of credit was that after three decades the property owning democracy got hard for ordinary grunts because it tempted them to put too much of their lifetime earnings into the purchase cost of a house, aided and abetted by the suppliers of that credit. That trickled down to the poor, who in the past were saved from revolving credit card debt by the fact that they couldn’t get any. I recall the first Access card I got in 1979 as part of the student banking deal at Imperial College with Nat West. It scared the shit out of me because I had the voices of previous generations ringing in my ears

    Don’t spend more than you earn, son

    and yet to use a credit card at all you have to spend more than you have at the instance of the purchase. It’s the whole point of a credit card – to increase your instantaneous spending capacity.

    Wonga is out there bottom-feeding in this market. The IEA is missing the point deliberately when they assert regulating payday lenders will shrink the supply of credit

    Shrinking the supply of credit to people who shouldn’t have it because they can’t pay it back is the whole bloody point

    Earth to IEA right-wing nut-jobs

    The FCA is fighting the fire that was started by the loosening of credit controls – those indebted spendthrifts epitomising Thatcher’s legacy  by spending money they don’t have because they can. The IEA then tried to play the bleeding heart about where will the poor get their utilities from? Well, way back when I had an electricity meter with a slot for 50ps guess what happened when I didn’t have any 50ps?

    I lived without electricity until I had the money

    People did it for hundreds of years, y’know.You get cold. You get hungry. You go to bed early in the winter. There are better electricity solutions than a Wonga loan. It’s called a prepayment meter. Yes, the cost per unit is higher. But that’s just the way the world works – poor people pay more for a lot of things because of credit control, buying in small lumps and it being increasingly hard to tell the thrifty poor from the spendthrift poor, hence the Sam Vimes Boots model.

    Let’s face it, if you can’t afford the ‘leccy bill you aren’t going to get any sustainable electricity supply using Wonga, are you? The kind of situation that Wonga can help with are people who have assets, but can’t  access them for the moment. Those assets can be the value of your future work, or next year’s un-CGT-embargoed share sales . But this is a very small set of Wonga’s client base, because usually when you have enough income to generally cover your spending you are financially literate and don’t get yourself into such financial shit in the first place. Most of Wonga’s customer base are people who are on the wrong side of the Micawber principle. Their spending is too much for their income. The guys need to Spend Less or Do Without. In theory they could Earn More but that’s not working out in this economy, leastways at the bottom end.

    Wonga and the guys that the IEA are batting for basically lend money to people who they know can’t pay. They take the risk because they holler loud enough in people’s ears and garnish their credit card accounts such that the non-payment gets shifted to some other unlucky creditor – like the utility supplier or the credit card firm.

    The next line the IEA took is that all this will do is push people into the arms of loan sharks ;) The answer to this is to crack down on loan sharks, seize their assets and if you can’t actually break their legs then at least do a Taylor Swift on their Beemers and Mercs

    Now in my view the Bishop of Stepney has an error in his thinking too, but it isn’t dangerous. He believes credit unions are the solution. They aren’t, because unlike banks, credit unions can’t lend money they don’t have. 4 So they need to persuade rich people to save with them at low returns to lend to poor people who are bad risks. Rich people don’t get rich by taking on bad risks at low returns. It’s just not how you get or stay rich.

    If he wants rich people to give money to poor people he needs to do that through the political arena, and that’s a different question. Shrinking the supply of credit to people who can’t pay it back is a start in plugging the hole. Every time you buy something on credit, you are choosing to buy it at a higher price, because you pay interest, and you are choosing to impoverish your future self.

    Thatcher apparently believed people had morals when it comes to money. History has proved her wrong

    I had the bad luck to look for a job in the aftermath of Thatcher’s first recession, so I’m probably not a balanced critic, but it appears that Thatcher believed that people had principles, even when it comes to money. Bless. I’m not sure I buy this interpretation, but let’s run with it

    Presumably she didn’t foresee her property owning democracy ending in a BTL property owning oligarchy, and giving the market power over lending meaning that lending would be advanced  to NINJAs in times of plenty leaving seven lean years and counting that ruin whole generations. In the end asking for any politician to have a crystal ball that shows true across thirty years is a big ask, and even if she did set a wrong course the ghost of Thatcher past could reasonably challenge the weak hands afterwards of failing to steer the ship of State away from the sandbanks.  There are some people who have principles when it comes to making money, but not enough. Somehow you have to regulate an ever increasingly complex system that is global, not national in scope and staffed by the finest minds money can buy, while your regulators are the civil servants of nation states.

    Wonga et al are obviously parasitic enough that regulation isn’t hard, though I’m sure Wonga will find some way round the rules and their customers are desperate enough not to face up to their problems that they’ll comply. But for now the cat is ahead of the mouse. Anything that pisses the IEA off is probably good for the country as a whole.

    The trouble is that it isn’t just the poor who are drunk on credit The middle classes are drunk on it and passed out on the kerbside with the bottle in their hands. Those high house prices are still there. One way of regulating credit is increasing interest rates, but there’s no taste for that because of the massive keening noise that would ensue ;)  Now that we’ve cracked down on poor people spending more than they earn with Wonga, it’s time to move on to the overstretched middle classes in their zombie households. Their pay is falling behind inflation. Somebody should step up to the plate and stop them borrowing money to spend more than four times their salary on a house. And demand that they have a convincing answer for the question “how are you going to pay off the capital before you retire“?

    No doubt the IEA will come over all John Galt on me and say well, it’s a free market, why shouldn’t these numbskulls borrow loadsamoney to buy a house with? To which the answer is that they jack up the price of commodities like houses until every bugger has to borrow loadsamoney. Even if they don’t want to buy, their rent goes up to service the capital. It’s not a victimless crime.

    I’ve accepted most of the fault in overpaying for a house early on, But some of it was because I was competing as a single man with couples desperate to get their MIRAS double tax relief before the door closed on that. We’re not all independent actors on the stage when a shitload of easy credit is dropped from helicopters, precisely because it is a market. Thatcher can perhaps be forgiven for the stupidity of thinking she’d get savers rather than spendthrifts, the experiment hadn’t been tried. But we have thirty years of research that shows give a Brit easy credit and s/he will chuck it into housing which will go up in price to soak up the credit. Where it festers – if they had to spend it on meals out at least restaurateurs would get some of the money and it would enter the economy. As it is the money just goes to make the land and bricks dearer, and no, the answer isn’t a land value tax it’s to stop feeding the Beast  in the first place. Credit isn’t just bad for poor people. It’s bad for homebuyers too.

    Sometimes you should not be allowed to do what you want to do. For your own good and that of the people around you. Reining in Wonga is the hors d’oeuvre. It’d be nice if the mortgage market were the main course one day.

    Notes:

    1. this was the situation in Britain before February 1995 when commonsense prevailed in the  face of resistance from manufacturers. There’s a bunch of old fossils reminiscing about the lost art of UK mains plug wiring which tickled the vintage geek in me.
    2. there are six ways of wiring a plug, assuming one wire to one pin and nothing left out. If you wire the green and yellow earth wire to the live and it’s a Class I device like a kettle, then if you plug it in and grab hold of the tap and the metal case it will piss you off deeply if you are lucky, and kill you if you aren’t lucky
    3. John Galt was the protagonist in Ayn Rand’s Atlas Shrugged, with the motto “I am not my brother’s keeper”
    4. That in itself is no safeguard – the branch manager of the Ipswich credit union looted £100,000 of savers’ money. Although it’s claimed this didn’t have any effect on the ISCU, I note it is no longer in existence
    29 Oct 2014, 11:01am
    housing personal finance
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  • Financial Foolhardiness is Forgivable in the young, not old Fogeys

    It’s perfectly understandable at 12 to want to have your cake and eat it, but unseemly after middle age. Taking an interest-only mortgage when you’re 30 is naive, but having one when you’re 60 is wilfully ignorant. The Torygraph seems to be metamorphosing from the journal of retired generals to cheerleader for those growing old disgracefully and a representative for their greedy children. So they fulminate on behalf of the wilfully ignorant

    Take your mortgage to the grave, older borrowers told

    Around 130,00 interest-only mortgages are due to expire every year until 2020, with half facing a shortfall of £71,000 on average, according to the City watchdog. One in 10 borrowers have no repayment plan in place at all.

    It was in the mid 1990s that warnings of endowment shortfalls started going out. I know because I got one of these. So I got on the case of the endowment firm and eventually pursued a claim against them for selling a single fellow a life insurance product. But I was a dumbass, and realised this so I started to overpay the sucker! The eventual result was that this contract I had so foolishly entered to in 1989 which was due to come to the end of its term in February 2014 was discharged early. There’s a case to be made that this is a vaguely stupid thing 1 to do for an early retiree with no income for a while wanting to defer his pension, but fair enough.

    Now there isn’t anything fundamentally wrong in taking out an interest-only mortgage in your 30s as you are buying for the first time, if you expect to earn more as time goes by, or indeed spend less. From a high-level tragedy of the commons viewpoint it is a stupid thing for us to do collectively; if Help to Buy, interest-only, shared ownership and all the other methods of paying more than you can afford for a house were disallowed, or we had decent credit controls, then the market would settle at a level that most buyers could actually afford. But that’s a different story.

    So the latest that somebody could take out an interest-only mortgage without being aware that this is the purest form of renting money from a bank is probably 2000, and these are presumably people whose parents look like this

    A terribly disturbing reflection to see in the bathroom mirror for 15 years, no?

    A terribly disturbing reflection to see in the bathroom mirror for 15 years, no?

    if they haven’t jumped to the fact that they have a serious problem when more than halfway through the terms of their mortgages. If they haven’t paid off any of their capital, then they are living beyond their means, and we all know from the old boy Mr Micawber what happens then

    Result misery

    Now it is true that you get a bit more hidebound as you get older, and you become  more reluctant to up sticks and move. The human animal is a wondrous marvel of evolution/chance/creation, something, anyway. You really owe it to your forebears to honour all the work and the chances they took to create a rich, First-World country where you have many things that people used to sweat for handed you on a plate to make use of that to at least try and become wiser as you get older.

    So if you want to stay in the house you raised your children in, rattling around the empty spaces full of memories then damn well pay off your mortgage, because ownership of an asset gives you control. If you don’t want to do that, then FFS downsize, if only because that house you raised children in could be used by people of your children’s generation to raise their kids in, and you will find it more and more expensive to heat, clean and maintain unless you are rich enough to pay over the odds for your consumption.

    Speaking on behalf of the greedy children, the Telegraph asks

    Would you agree to die in debt?

    What’s actually wrong with that? Why the bloody hell not – it isn’t like the debt would be a claim upon the assets of your heirs. Obviously they don’t get to inherit anything, but there isn’t anything that terrible about this, from the deceased’s point of view. What’s wrong with it is the wider picture. If you’re of working age, no money and live in a house you don’t own  that’s too big for you then people will give you a hard time until you move or  become rich enough to afford the privilege. Get past that, even if you rent your house from a bank and not a landlord, then you are home and dry.

    We flog ourselves to tie up such a large part of our lifetime earnings in a mute capital asset largely because we haven’t worked out a better way of manage the physical assets of the world for the transitory existence of humans 2. In the UK, the renting a house option is so heavily loaded it’s a ghastly alternative to renting the money. An interest-only mortgage is a good way of getting better security of tenure, because paradoxically the 25 year terms on renting money from a bank seem to be a hell of a lot better than the six months AST terms on renting a house from a landlord. In which case why not rent the money, but the 25 year term still comes to an end one day.

    The Torygraph is wrong:

    Experts said lenders were compromising by creating lifetime mortgages which allowed older couples to stay in their homes if they promised the keys would go to the lender, rather than a family member, on death.

    However, borrowers should see the new mortgages as a “last resort”, the experts said.

    They think this is terrible because the kids don’t get to own a family asset that was never in the family in the first place. There’s nothing wrong in penalising foolhardiness in the old. Folly should have consequences. If you want to featherbed your kids and not have to move from the family home/ancestral seat of residence then FFS go on fewer cruises and pay off your mortgage, it’s not hard to understand!

    Notes:

    1. There seems to be no limit to ways a Ermine can screw up anything that involves property but I don’t regard it as a calamity and I’m prepared to pay for my folly by paying 5% on the money I borrow for a few months rather than 2% on a mortgage
    2. The luxury watch brand Patek Philippe had an ad running  “You never actually own a PP. You merely look after it for the next generation.”  The ad is absolute poppycock targeted to aspirational wannabes but could be applied to houses, or the world – anything of value that lasts longer than a lifetime. Houses in the UK can last four or five human lifetimes before they become slum clearance, so having to own the whole thing is inefficient in some ways
    16 Oct 2014, 11:32am
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  • The difficulty of managing money in silos

    Pensions, ISAs, NS&I - they all break your capital down into silos isolated from each other  Image: dsearles/Flickr

    Pensions, ISAs, NS&I – they all break your capital down into silos isolated from each other Image: dsearles/Flickr

    Silos are bad for organising a lot of things where the contents should all be pulling in the same direction, singing from the same hymnsheet and other associated buzzword bingo 1. All through my working life companies have moaned about ‘silo mentality‘  – well WTF do they think is going to happen when you reward people for individual results using S.M.A.R.T. metrics, the stupid berks? Knowledge is power, and you don’t want to be an interchangeable outsourceable meatspace unit x – you want to be the irreplaceable kingpin…

    The same intractable problem is easily introduced into our personal finances – some of it by foibles such as mental accounting, but a lot of it is by government action – if you want to take advantage of certain tax breaks you are pretty much forced to split your money into different silos. Pensions are the obvious example, a one-way silo that you can draw on after 55 2, and ISAs, which only have tax protection inside the silo.

    The whole reason humans invented money was to create a divisible and fungible token of wealth – later on that became a fragile store of wealth 3 too. That’s all very well, but in practice we don’t really seem to like operating in a miasma of undefined cash or debt swilling around, so we often break it all up into itty bits and tackle each one of these on their own. In doing so we often lose the big picture – the classic case is somebody carrying credit card consumer debt who has savings, or even worse, has money in the stock market. There is no point in having savings if you have debt that is at a higher interest rate than the net return on those savings unless you have a specific reason for it. If you are carrying chargeable consumer credit you have no business being in the stock market – fight the nearest fire that is burning faster before worrying about the flames on the horizon.

    The Silos of Tax-advantaged Savings

    The biggest and most complex of these taxation silos is the pension. It has the greatest restrictiveness, and is therefore the hardest to manage. It’s also usually at a high-water-mark in your 50s.

    As you get closer to the magic 55 the problem of silos gets a lot more acute, and doubly so if you are an early (pre 55) retiree. For an early retiree with a defined contribution pension the decision is clear – draw the pension from the age of 55, because you have no other earnings income (that’s what retiring is) so you get more of your money back paying less tax by choosing the longest time period to draw it. That favours drawing from 55, all other things being equal. If you’re still working that’s nuts, but if you aren’t, knock yourself out.

    However, just before 55, you have pension silo that is a dead hand that demands maximum feeding at the expense of the ISA silo, or indeed your general free cash flow, because it is the most lucrative. For instance, the Ermine specifically took out a DC pension when Osborne’s pension reforms were mooted, because, well, it’s rude to turn down a guaranteed roughly 10% p.a.  uplift on about £7000 in cash, tax-free if you swing it right. The fact that this allows me to defer my main pension increasing it by 5% is an added bonus.

    Trouble is, you have to design your savings plan and glide path while you are still working, and I predicated mine on an ISA allowance of £9,000 p.a. and being able to ignore pensions, because I didn’t want to have to take out an annuity at 55 or wait until I was old enough for it to be worth it.

    I’ve only been retired for two years, and in the meantime they’ve mucked around with the silos so much that the original plan is in tatters. My original aims were simply to fill my ISA each year, basically by selling unwrapped holdings up to the CGT limit and tossing them into the ISA and topping it up a bit from savings. The increase in ISA allowance means I want to top it up a lot – there’s another £5000 p.a. to find. And then Osborne changed pensions so that it’s worth tossing £9000 into one to win £2000 of tax that I paid years ago back – even if you’ve never paid tax the deal is on offer, though it’s only really favourable for people close to being able to draw the prceeds in a couple of years.

    Fortunately I overestimated my spend rate; I expected to have to draw the pension after a year and a half, so the start of this year. When I do draw it I get hold of my 25% pension commencement lump sum which is a shitload of cash saved up for this, and then have to push that into ISAs for a few years. It is this which makes me keen to max my ISA allowance across the intercession between stopping work and getting hold of the AVCs.

    Then I needed to find about £10k for an opportunity that has come up, and so I am now up against the end of my free cash flow. I still have deep strategic cash savings in NS&I and a Cash ISA, which would easily cover that but I am loath to break into them, because God knows when I will be able to save and preserve cash in real terms with NSA&I again, and I don’t want to lose the ISA capacity. So heck, it’s time for the Ermine to borrow money!

    Lenders are all computers these days, and all lending is predicated on income

    The last time I borrowed money from a bank as a loan was in the mid 1980s. At that time there was this quaint custom of going into the bank where you would talk to someone about what you want the money for and what your income was etc, so I went into my bank in South Kensington and showed the fellow the payslips and how much I wanted to borrow for a car. Arguably what the bank manager should have said was don’t be such a damn fool you young whippersnapper, a car is a wasting asset that will depreciate faster than you will pay down the loan, but for some reason he didn’t, I had another £2k in my account and everything was fine. They got their repayments on time every time and that was that. It was a damn fool thing to have done, don’t ever borrow money to buy a car, particularly as cars as much cheaper now in relative terms. But I got away with it.

    It so happens that I am still with the same bank, branch and account because I can’t be bothered to fiddle about with this, I never go overdrawn so many of the so-called benefits of switching aren’t of value to me. So I spark up their website and inquire of a personal loan for £8k, using the non-credit referenced query. Income – 0 (I suppose I should have put in my ISA income, but what the hell). Now bearing in mind this is my own bank and they should damn well know that my Cash ISA has more than enough money to cover the £8k, but the answer is basically

    Computer say no, fuhgeddaboutit m8.

    There’s apparently a hidden assumption that has crept into lending money these days, and that is that you are a good li’l consumer trying to buy more consumer shit than you can afford at the moment, but your income is enough to service the debt. There seems to be no concept that a member of the consuming proletariat may have the money but because of the silo structure it is in the wrong place and he may lack liquidity. Let’s face it, who would you rather lend money to – some kid wanting to buy an iPhone or somebody with financial assets of many times your loan but ensiloed in a pension AVC or shares that can’t be sold till the next tax year? There’s no question – go for the iPhone toting kid any time ;)

    Now in the 1980s, I would have gone to see Mr Bank Manager, I would explain that I have these CGT embargoed shares to cover it, and if that isn’t enough that in two years I would have my AVC of way, way more than the loan amount and I am being sensible in deferring my pension so this loan is in fact there to use my capital to make more money. It isn’t for a wasting asset like an iPhone or a car, and he would look back over 20 years of running that account, figure £8k isn’t quite enough to do a runner to Rio and advance the cash. But we aren’t.

    Computer says no

    Now unlike many people I never go on the assumption that I have the right to have people lend me money, so that’s just the way the cookie crumbles, more loss Mr Nat West, because compared to most people they advance personal loans an Ermine is probably a good bet.

    Where can a skint Ermine borrow from – aha – Wonga and Credit Cards :)

    My main problem comes around the turn of the next tax year – I need enough liquidity to max the rest of this year’s ISA, and to max my SIPP this tax year. There’s no point in drawing money out of a Cash ISA to fill a S&S ISA – it’s the old Silo problem again, that money is already in the ISA silo so there’s no point taking it out the bottom and chucking it back in at the top. That silo needs new money.

    As soon as the tax year is done, however, I get a new CGT allowance, so I can sell some unwrapped shares and pay off the loan 4. For a short period I even considered Wonga or The Money Shop, despite taking the piss something rotten a while ago. A two-week period over the 6th April would actually be the correct use of a payday loan, but the thought of being spammed shitless for the next 10 years by their ilk wasn’t really an attractive proposition. This from Moneysavingexpert is pretty much all I need to know.

    1402__wrong_way_signage

    Yup, got that. Wonga is probably more crafty than I am clever…

    Mrs Ermine didn’t really approve, either. So let’s take a step back. Now it so happens that every month Barclaycard entreat me to borrow money from them. I don’t use the card, but I have it because I figured that after leaving work nobody will give me another credit card until I become a pensioner, so I may as well hang on to the ones I have got. Presumably Barclaycard still think I am working for The Firm, because I told them truthfully that I was when I took it out and they haven’t asked me since. So like clockwork, every month they send me something like this

    1410_bcard

    Now I don’t know how ‘king stupid Barclaycard think their customers are, but a 0% interest cash loan with a x% fee is not 0%. At first sight this is a loan for 9 months at 1.9%, ie a loan at an APR of 12÷9×1.9%=2.6%. It’s actually a little bit worse than that because you have to repay a credit card loan at quite a high rate, about 3% of the loan outstanding per month, so you don’t get to use all of the cash for all of the time. The car loan was so long ago I can’t remember if you have to repay a bank loan every month. Here in practice you either get not to use the full loan amount or you effectively borrow a smaller amount at a higher interest rate, say about 5%. And you must must must ensure you repay the minimum amount every month, I’ve always taken card firms up on the Direct Debit pay minimum amount off each month, so the first thing you have to go on getting the loan is chuck some of it into the debited account ready to pay the loan down.

    I actually prepaid the 1.9% fee – ie paid too much into the card account before taking the loan so the fee is taken from the existing credit balance and not the loan, because I suspect they would charge monthly card interest on the fee, which they can’t it it’s not carried :)

    Then I repeated the operation with MBNA, who offered me a year and a half loan for 5%. They also offer this every month or so. I still have a soft spot for MBNA – 25 years ago they lent me £15,000 interest free which was a significant part of the deposit on my first house. And I really didn’t pay any interest on it – in those days 0% interest really meant 0%, no fees involved. The fact that it was a tremendously stupid time to buy a house, very much like the present time, indeed, can’t really be blamed on them.

    That will take me into the time when I can draw my DC pension, and all of a sudden I am rolling in liquidity, particularly as the impending stock-market rumble means I can probably liquidate more unwrapped holdings CGT free as they fall to par. Which is dead good, as stock market rumbles are exciting and opportunities to get stuck in and pick up value. I love the smell of fear in the markets in the morning. And it so happens that I have a fair amount of uncommitted cash in my ISA. Maybe I can stop writing articles like this and write more like this. If I can have just one word in Mr Market’s shell-like, if he could just delay the denouement a teeny bit, so say Q4 of next year, I’d be in a better position to use it. If he has to throw a benny earlier, I may have to switch some of my AVC fund that is currently in cash into say a FTSE100 index. The trouble is my AVC fund is currently already exactly 25% of my pension capital by design, so I can’t really use any increase that much…

    Oh yeah, about that classic bad case of somebody carrying credit card debt but with savings, indeed who has the temerity to be in the stock market to. Well, that’s me. What the hell, do as I say, don’t do as I do ;)

     

    Notes:

    1. you can take the Ermine out of The Firm, but not yet the biz lingo out of the Ermine, it was drummed in over 20 years
    2. corrected 20 Oct from earlier version “only fill until you are 55″ which wasn’t what I meant
    3. money in terms of cash is a fragile store of wealth because it tends to depreciate over time as it is created at a higher rate than the value accumulating in the economy
    4. I was dead chuffed when IDJV that I hold unwrapped fell to the price I paid for it in the current market loathing for all things European. That means there’s no CGT to pay, so I sold them and that will give me some extra liquidity at the turn of the tax year – or I can simply to an internal transfer of the cash into my ISA this tax year, leaving only 2k to find this year. It’s an ill wind…
    10 Oct 2014, 12:42pm
    personal finance shares:
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  • The incredible lure of day-trading

    Ah, day trading, the ultimate signal of feel-good in the markets 1. It’s the harbinger of doom, because it is a signal of irrational exuberance. A bunch of day-traders were on the telly a few days ago, hat-tip to Under The Money Tree who flagged up Traders – Millions by the Minute as an object-lesson in what not to do.

    There are two fundamental approaches to trying to make money out of the stock market. One is to regard it a way of purchasing a selection of productive assets, and then becoming a rentier, sitting back and taking a slice of those productive assets without having to do any work. Don’t knock it -that’s the way the super-rich are getting richer. They’re not saving from income, that’s soooo 20th century, dahlink. You need to have inherited wealth or stupendous good luck. The latter is how Russian oligarchs get rich, the former is how Paris Hilton and the Ecclestone daughters got rich. You don’t get to have a pad at the Odeon Tower Monaco if you’re on the side of income no matter how clever you are or how good a footballer.

    Capital, not income will get you here

    Capital, not income will get you here

    Half a billion is doable as income, but you need a turbo-charge from the stock market to keep you there. CEOs and the like have managed to get into this area by getting on the side of the stock market, but they don’t day-trade.

    The second is to regard the stock market as a casino, and to attempt to pick a smidgen of signal from the noise the market throws off. In Traders-Millions by the Minute the punters were taking this line, using spread-betting. The Ermine has indeed had dealings with spread-betting. I’m a fan of it in dealing with sharesave, because you can lock-in profits.  Though I lost money on that side of the trade I achieved my goals. Every year I get on the wrong side of the trade with my house insurance too, and lose money. I am cool with that.

    WTF? The Ermine is a fan of trading and spread-betting?

    Sometimes you have to hold shares for a particular period. Sharesave and Employee Share Incentive Plans are a classic case, particularly the latter. You have to be a special kind of mug to lose money on Sharesave, but on ESIP you can, because you purchase the shares from pre-tax income but have to hold the shares for five years from purchase, else you get to pay the tax and NI you didn’t pay to buy the shares.

    So say you buy 100 shares of Megacorp at £1 a share using £60 of your hard-earned cash post-tax. The £100 only costs you £60 because the taxman doesn’t thieve £40 from your income in this instance. But you have to hold those shares for 5 years. If they go down to 60p at the end of those 5 years you break even, less five years of inflation.

    If you short the number of shares you buy, then you will cancel out any gain or loss on the shares, though it will cost you something to do that. But you do get the benefit of the 66% tax bung. Why 66%? Because you forgo £60, but you get £100. Thus a profit of 40/60 or 2/3 = 66%/ Less three years of inflation, say about £10, so you come down to 50% up.

    I used this towards the end of my time at work with ESIP and Sharesave – to protect myself against significant falls in The Firm’s share price. As it was The Firm’s SP went up, and I got to pay IG about £1000. I was easy with that – it was worth paying to insure myself against losing a lot of what I had gained already.

    Social Trading and Trading Superstars, a new development in the trading universe

    Apparently you can now track some other trader’s trades if you can’t be bothered to do the legwork yourself. It really puzzles me whyit’s not obvious what’s wrong with this. The long-term rise in the stock market is roughly 5% p.a. real 2 , though you have to be invested for long periods of time (about 20 years) for things to settle out like this. It’s one of the reasons why I believe index-investing’s studious ignorance of high CAPE/valuations is am issue. But that’s something for another day. So traders, every day, are exposed to  1/7300th of their stake on average in real stock appreciation if they go long, less the cost of the spread on every turn which applies going long or short.

    Now trading tends to be a short-term activity – that daily gain from the stock market going long isn’t going to speak for much there at 0.01% per day. So you profits as a trader have got to come from somewhere, and it comes from either the punters or the casino your spreadbetting firm. Seen any spreadbetting firms go bust recently? Nope. So it’s coming from the punters. In theory it could come from the markets, because the SB firm presumably hedges any major shifts building up over time, but the programme seemed to indicate most of the profits were from the spreads on the trading, which stays within the system.

    And therein lies the rub. If all the punters start getting ahead, the odds will lengthen. Particularly in spreadbetting, where you are running on a model of the real thing, not the underlying market.

    The trick with day-trading is to quit when you’re ahead

    Over a dreary telephone conference at work way back in 2010/11 an Ermine extracted £400 from IG index on gold, trading per tick, and gave up £350 of it by the end of the meeting. It was sheer luck. Some while later I dabbled in forex trading, using a VAR spreadsheet to control risk. After a few months 3 I looked at the results, observed how much risk it was necessary to pay the fees. I experimented with IG’s automated trading system, where you try and craft a black-box strategy based on the previous charts price history, and back-test it on historical data without using real money.

    I could find no strategy that permitted risk to stay bounded as time passed – everything seemed to trend towards a martingale situation where you can always win – if you have infinite wealth and infinite time. If you have infinite reserves of wealth you don’t need to piss about with spreadbetting, cos you don’t have infinite time. I was never tempted by the breathless folks offering courses and training to learn how to trade xyz because of the natural suspicion – if you can make me rich then why the hell aren’t you in some darkened room making yourself rich, dude? Cut out the middleman. I guess it’s the gonzo version of the active fund charges.

    I was Frankie, although I derived the result in a different way from The Escape Artist, by observation and hypothetical experimentation. So I took my £800 gains plus the £1000 stake, and stopped doing that, because it was the logical thing to do. MMM has a nice post on get rich with science. It’s harsh, but when you see the statistics tell you that this is more luck than judgement you can either ignore the results or take the insight offered. If I want to make money out of a spread-betting firm, I will buy their shares. I did learn from this, however, and applied the knowledge to my investing. Trading costs you money. So I stopped selling, and made it a priority to sit on my backside and take the dividends.

    That, fundamentally, is the trouble with day-trading. In the end you are part of generating the wall of noise – for you to gain, somebody else must lose. This does not necessarily hold with the stock market over the years – because in aggregate returns accrue to capital. But those returns accrue very slowly. To actually get rich from a 5% p.a. real return you need to live frugally and ideally you need to take a multi-generational view. If you have talent and/or cunning, you are much better off leveraging your capital with a business and then selling it.

    How do the rich get rich?

    Take a look at the top 10 of the  Forbes Rich List There are more Mark Zuckerbergs,  Bill Gates et al than there are Warren Buffets. If you look through the top 10, the sources of wealth are typically from running or selling a business, followed by ancestral wealth of some sort. Four are self-made, and six are inherited wealth. Forbes trumpets this as saying the American Dream is hale and hearty. I’m not quite sure I want to imagine what it looks like when it’s poorly – holders of old money outweighing new in the top 10 shows maybe the rags to riches isn’t quite as easy as it’s made out. But it can be done. Something else of note is: no actors/actresses. No musicians. No sportspeople. None of the ways teenagers hope to get rich. Something else of note is that most of these are no spring chickens – it’s the greybeards who have all the money. And they’re not a pretty bunch, eh, indeed some of them probably can’t have intact mirrors in their homes.

    Of those ten, only one  ‘made it on the stock market’. And curiously few in the top 25  ‘made it day-trading’ ;) Mind you, Sheldon Adelson comes in at #12 from running casinos. There’s nothing wrong with casinos as a way of making money. It’s just that most people go the wrong way about it! Don’t walk through the casino  doors. Own them.

     

    Notes:

    1. I wrote the first draft at the end of September. The feel-good doesn’t quite ring true now – exciting times ahead?
    2. this comes from the BarCap Equity study
    3. I had a similar temperament to the timid trader in the programme, if in doubt I did n’owt. This is apparently not the route to success in this field
    23 Sep 2014, 1:42pm
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  • 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:
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  • 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 :)
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