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 :)
    28 Aug 2014, 8:43pm
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  • Cash ISAs are king, it appears

    We have not just one but two bearish articles on the stock market now that the hacks have returned from their hols and decided everything looks less fun than on the beach.

    Maybe the teeming masses of our British ISA ‘investors’ are wise after all, as only one in ten of us 1 open a S&S ISA. The Torygraph asserts

    ‘Super Isa’ savers play safe by putting their money overwhelmingly into cash rather than investments in the first month of the new, enhanced tax-free plans

    Blimey, if that’s what they call safety, I’d hate to see what these guys think of a racy high-risk strategy. At least the writer got one thing right – you don’t invest in cash, because it always offends. The one good thing you know about cash is that it’s dying on you. I’ve will have lost about £10k to the depredations of interest-free cash 2 in my AVC fund by the time I get hold of it; fortunately I saved considerably more by not feeding it into the rapacious hands of the taxman so sometimes you have to eat the cost of doing business. In retrospect I should have left some of it in the market, but because I didn’t know when I’d need to draw it I left it in cash. And I’ve seen this safety at work, and t’aint pretty at the moment.

    The advantage of havign termites eat yoru cash is you can see the buggers and you know what the problem is. When the government does it who are you gonna call?

    Termites can also eat your cash, but the government can ruin its value without getting at it. They simply make a lot more of it.

    Not only that but I have a lot of cash outside pensions. That’s the trouble with having a low income – you need to hold a lot of cash 3. If you’re earning a decent wedge then if something goes wrong you slap it on the credit card, roll back your partying for a few months while you pay it off and that’s great. Whereas if you haven’t, you need to hold a lot of cash to cover emergencies. Or do without – Wonga is not an option because it never gets better if you have no income, something that an unfortunately large number of my fellow Britons haven’t jumped to yet.

    I have a cash ISA, from way back, in two halves – 2008/9 and 2009/10, when I thought I had very very few options and was going to be iced from The Firm in months, not three years. I’ve hung on to it because cash does give you some optionality, but I’ve never been tempted to add to it as an ISA, though I did take those nice guys at NS&I up when they were offering inflation-proofed cash. If they did that again to be honest I’d probably draw that cash ISA and whack it into NS&I. But they aren’t.

    Anyway, I’ve held this for five years, over which it’s fallen in value in real terms. Of course the nominal value hasn’t fallen, and indeed inched up, but it’s grim, and it ain’t going to get better. I retain this cash ISA purely for the tax-sheltered value – when I get control of my cash it’s going into my S&S ISA.

    Cash is king but has no earning potential

    Whereas my S&S ISA, which I have been feeding exclusively and to the max has increased by about 20% over the same time, relative to the total cost of purchase as of 2014 – not all of the money has been working for four years. Now there’s a very good argument to say this isn’t because shares are inherently better than cash over four years – over that period all you needed to make money in the stock market was to have a pulse, actually be in it, and not screw up. It’s been getting harder and harder to find much worth buying, and what with the relative strength lack of weakness of the pound, I have looked towards building out – in emerging markets, Asian smaller companies, Russia, and Africa. I could use some of the mayhem in the stock markets trumpeted by the Torygraph to get valuations down from the silly levels, particularly in the US.

    After leaving work and coming to the conclusion that my HYP will soon be able to make up the pension income I lose from leaving early 4 I started to look towards the longer term defence, and while emerging/frontier markets seem on sale this year it is a bit nutty to ignore the largest capitalist economy on earth. Although I couldn’t bring myself to buy the S&P itself at current valuations I managed to hold my nose long enough to diversify a shedload of The Firm’s Sharesave into Vanguard FTSE Developed World ex-U.K. Equity Index Fund which is more than half US. I was going to Bed and ISA that sucker but it’s had the temerity to appreciate by 12%, which puts the kybosh on that idea for this year as I’m capgain maxed. So the Coming Reckoning Of Doom will have a grain of silver lining amongst all the mayhem – it would let me Bed and ISA a whole load of stuff. It’s an ill wind, etc, and of course all the buying opportunities, yay ;)

    Maybe our cash ISA-niks are keeping their powder dry

    Beats the hell out of me what all the punters are doing with their cash ISAs. It’s not even like you can turn that much interest on cash for the tax difference to be worth the candle. Maybe they are mindful of the Torygraph’s second article and waiting for the Case-Shiller to drop back to historical averages. The trouble with that line is that it’s easy to say and hard to do. However, if the massed ranks of cash ISA savers are under the fond impression their money is safe, they need to think again. Knowing that you aren’t safe is better than believing you are, but discovering the power of inflation does destroy your money. You know that compound interest everybody goes on about? Inflation is it’s Mr Hyde – compound interest run by Bad Guys. Tax takes more than one form, and printing cash to devalue the debt takes most financial assets with it, as more and more money chases a finite supply of things of value. Most of the rise in stock market valuations isn’t real either, more money chasing the same or less Stuff. The advantage of the stock market is that the risk is printed on a sign above the door – “here be dragons, volatility and 50% swoons in a couple of days”. Whereas on a cash ISA it’s all marble hallways and apparent solidity, but in the night the termites unleashed by the Bank of England are in there, busily nibbing away and the value of your cash. The tax is the disappearing value, not the small part you pay to HMRC ;)

    There are some ways to greater safety than cash

    If our cash ISAniks really wanted more safety, they could do worse than ponder Harry Browne’s  Permanent Portfolio. (Permanent Portfolio at ERE) It’s one example of diversification across asset classes, wider than the usual trio of equities, bonds, and property/land. And cash has its place there. But you have to accept a lower return, because there are two passive non-income generating components in the mix, cash and gold. They are the sleeping King who will rise up when the Kingdom is in mortal peril – but obviously half your capital base is asleep in times of prosperity, and so far the prosperous times have been a larger proportion of the time than the recessions.

    The advantage of having a few year’s ISA behind me is that the decisions to be made each year form a smaller part of the whole picture. At the beginning, I was desperate for a sustainable income, and I was lucky to start from a bear market and one where income investing was particularly bombed and people could consider swapping income shares for income ITs on a discount. As time goes on preserving what I have becomes more important – and that means building a diversifying shell around the income core. I accept my yield will fall, and yields are generally falling at the moment. But there will come a time when things are different, and there will be a time to buy income again. Hopefully those ITs at a discount – I had only got started with one and was going to buy more but ran out of ISA space in 2009, there is unfinished business there. In the meantime, there is a time for everything – the various sectors fall in and out of favour over time. Buying into the ones in favour (right now US equities, UK residential property) doesn’t work for me. Some people make momentum investing work, but I’m not one of them. Buying sectors that are out of favour works for me, but it’s hard seeing things go down before they come good – I can get a feel for lows but not for market bottoms. Which is why I hate it when markets hit new highs – Mr Market want you to pay so much to get on the dancefloor, I want to sit those ones out :)

    the search for safety leads to danger

    Donald Rumsfeld had a point. It’s the unknown unknowns that are hazardous, but believing you have found safety leads you to have apparent knowns that are really unknowns.

    But one thing I know, from personal experience. A Cash ISA is not safe – over several years, never mind decades. Yes, the cash ISAniks will say – but the stock market can halve its value from one moth to the next. They’re right, but there’s a faintly discernible upward trend over the years, whereas cash has a downward trend that dares not speak its name 5. When I was at university in London many years ago, you could get a pint of beer for under a pound. Slowly and stealthily the value of that pound fell away.

    It doesn’t matter than 9 in 10 cats prefer the cash ISA door. Somebody should make a ‘here be dogs‘ sign for that door.

    Notes:

    1. I know they said ten to one which isn’t exactly the same thing
    2. great when you’re borrowing, sucks when you’re holding
    3. If you are going to retire early, before 55, then for God’s sake don’t pay off your mortgage if interest rates are low. They weren’t as low as now when I did that, so the folly wasn’t as clear.
    4. Once again I’m not claiming to be a fantastic investor with hot hands there – the ask is made a lot easier by the fact that my spend rate was so dramatically lower than projected I have been able to defer for a year, and indeed with Mr Osborne’s shenaigans will be able to defer for another year after that. In general, for civilian Sheep of Wall Street spending less trumps greater investing chops
    5. it’s called inflation, and NS&I were the last people to offer a believable hedge against inflation
    3 Jul 2014, 9:37am
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  • Ralph Borsodi, and a codicil to Two Years on

    One of the features of Mustela erminea is that they are curious. You only have to look at someone trying to walk a ferret (another mustelid M. putorius furo) in a straight line to see that. I think if you are going to retire early you really do want to be curious. I read a lot as a child, and the modern world gives a lot of opportunity to be curious about it. The tools are immeasurably better too, compared to those of 30 or 40 years ago. Starting with Google but extending to the fact that information is much easier to collect, store and marshal. People share ideas more widely, because they can, and humans are a social species.

    The world is full of fascinating stuff – it is good to heave the freedom to get a hold of interesting ideas, run with them for a while, then stick them into the armoury of things that might be applied to different areas. I find it a little bit disturbing how many people imagine that people who have retired get bored, unless they can spend loads of money on entertainments. Jacob’s trifecta of shopping, restaurants and tickets springs to mind here, in supporting evidence I cite this page on MoneySavingExpert. Key headings

    Clothes and Fashion, Food and Drink (generally fast) and Travel and Days Out

    looks much like shopping, restaurants and tickets to me. This is on the otherwise generally awesome Money Saving Expert site where many of the users have got themselves into deep financial doo-doo by buying too much of these items on tick? WTF? The hot tip here, guys, is take the fight to the enemy: do much less of these things. Not only will you enjoy each instance more by dynamic contrast between going for a decent meal set against the norm of not doing that, but then you don’t have to prostitute your personal details to try and get a lousy 5 or 10% off. Just. Do. Less. Do half and that’s a 50% discount – even if you pay full price ;) I don’t muck around with Quidco and the likes of that sort of thing because I don’t spend enough on the sorts of things that Quidco works with to make it worth it. I buy components and raw materials to make stuff, not finished goods, which seems the key to the boredom problem – create more,  consume less.

    from DJing to personal finance…

    That curiosity recently delivered me an insight, combined with some of your comments. The Oak Tree farm party is this weekend, and I largely solved the problem of how to rig a couple of hundred watts of power on an unpowered island site. That’s not rave or Glastonbury level, but enough for a party of about fifty people outdoors (and a few hundred metres away from neighbouring houses – sound fades quickly outside).

    In the past I’ve stuck the tracks on a mp3 CD player and set it to shuffle, which is okay as far as it goes, but I wanted to understand how to do better. Although for some reason I actually like some of the more mainstream EDM despite being one or two generations beyond clubbing and no aptitude for dance, I don’t think our members want too much of that, but I figured a look at how DJs 1 do this sort of thing. Now I don’t want to do all this live, so I want to create the CDs with the right running order (apparently called a mixtape) and then patch in people’s iPods with a DJ mixer I bought at a radio rally for £10. I learned about BPM and mixing in key and a whole load of stuff about music theory I didn’t know, and came across this article about bringing back flow, which introduced me to the difference between insight and analysis.

    a modern-day Mark of the Beast

    Investing by insight rather than analysis

    For the last five years I shifted greatly towards analysis, because insight isn’t easy to do under pressure. There are some classes of problems which are only amenable to analysis, and personal finance has a lot of these. For instance if most people use insight to qualify risk they end up doing the National Lottery and ‘investing’ their money in Cash ISAs (which is indeed what most people do) whereas analysis shows there may be better ways. And the National Lottery is always wrong – though if you want to have the it could be you buzz then do it. Once, and only once. That turns ‘it couldn’t be you’ into ‘it wasn’t you’ for a modest cost. There’s vanishingly little more to be gained by pursuing the ‘it wasn’t you’ any more – analysis is the way to know why.

    However, I have got that analysis/insight balance wrong for the future, and worse still, some of my insight is distorted by outdated forms that have become linked, particularly with the term work but also some wider principles. Unfortunately only insight can connect me with my values as far as I can see; analysis addresses the how I do something but insight is a large part of knowing why. Because it can’t be decomposed into steps it’s easy for insight to be distorted – by advertising, by rotten experiences, by general state of mind.

    Few things really a pair of totally isolated poles, I need to add insight to my analysis to direct things closer to my values, and analysis to my insight to clear out some of the distortions and old forms that bias the compass away from my values – try and use more insight and less instinct.

    The past is a different country. I did things differently there

    One of the things I learned has been that I have shadowboxed the experience of getting out of The Firm for too long. Two years is enough to integrate the experiences.

    I need to shift focus from trying to outrun the past to run towards the future. The shift to a more frugal way of living does seem to have absolved me of the requirement to work, as it was designed to do. In doing so, however, I have linked unhealthy subconscious forces to the concept of work. It is very unlikely that I will apply to work for a company as an employee in future. So I am done with all the Digital Taylorism that is screwing up work at the middle level I was working at. I need to let the toxic waste go – it served me well in bringing enough focus to escape the rat race. It’s as if I had read this by ERE and followed the instructions but retained the anger ;)

    curiosity is not the only way

    There’s a massive variation in what people want to do with their life. For many people the value to be had from shopping, restaurants and tickets is well worth the cost of working, particularly if they can’t imagine any other way.  If it weren’t presumably they’d do something else. As long as they find working agreeable there’s no problem, in which case why not take part in the cornucopia of goods and services a modern industrial economy makes available? Indeed, I need you to consume so some of the companies I own a share of can make money, but more to the point, if you enjoy it, knock yourself out.  Obviously if you design this into your life you may want to consider how stable your work is, because it would be tough to build in so much cost into life and then feel rotten if work dried up. A portfolio career is better in that way; you can lose some strands without it becoming catastrophic.

    Although there’s a hint of bread and circuses in it, there’s nothing fundamentally wrong with hedonism. As long as it isn’t done on borrowed money that is, because you borrow it from your future self and your future self might feel differently about your current self’s inability to wait. There’s an inherent asymmetry between saving and borrowing – when saving you electively choose to live below your means now so that your future self can live above their means for a while. Your future self still has choice – they don’t have to live above their means – they could give it to their(your) kids, or the cats’ home, or burn it in the backyard. Whereas if you spend your future self’s money now they get no choice in the matter though you do – they have to live below their means, or go bankrupt.

    Another perfectly good reason is that you find the shopping, restaurants and tickets worth the aggravation of working. In that case, the game is worth the candle, but again, doing with borrowed money there’s still the issue of your future self not getting a say in the matter.

    For those who come it find working disagreeable in a way exceeding the buzz of shopping, restaurants and tickets, one good option is then to spend less. The sheer variety and range of stuff on offer can easily bamboozle us with its richness, the essential question to ask is how much is more doing for you? You first smartphone is presumably transformational 2 – it means you don’t have to arrange to meet up before hand but can do it on the fly, you can Google the price of alternatives when you are in a store thinking of a bit more retail therapy, and you can ignore the real world a bit more and walk into lamp-posts/other passers-by/the road while being virtually somewhere else, and play Candy Crush Saga to get rid of some of those empty hours. Each to their own. Your second smartphone, and indeed all the upgrades add much less to your life in terms of extra capability than the first one. When you get to this stage

    1407_apple-iphone-5s-queue

    queue of punters waiting to buy an Apple iPhone

    you’ve probably lost the plot and are out of touch with some part of yourself. Or trying to make a few bucks, but getting paid to queue is telling you something about the value of your time ;)

    I needed to get a mobile web browser a while back to test a piece of web work I had and what it looks like on a mobile. I got an iPod, and use WiFi, because it was the cheapest, didn”t come with a mobile contract and did the job. I’ve occasionally used it out and about with BT Wifi in towns and campsites. It works fine for what I want to do. For mobile telephony I have a bog-standard mobile phone with Giffgaff PAYG for when I want to do such things, and a really old hand-me down from Mrs Ermine with a Virgin SIM in it, because that’s free to call her.

    The Ermine mobile phone estate

    The Ermine mobile phone estate. Skanky, n’est’ce pas? All bought and paid for, no contracts, and cheap. But not ‘with it’ at all

    The most useful item is the USB dongle, of course now hacked to break the 3G lock so I can use it on Giffgaff to connect my laptop PC to the Internet if I am on the road. I can afford a smartphone and I’d buy one cash without a contract if I wanted/needed one. But I don’t need the continual contract cost, because I don’t prize the service enough. A typical mobile phone contract seems to be £30/pcm or £720 a year, so while not outrageous, it’s a fair yearly hit. Plus a £300 smartphone seems to be amortised to scrap over one or two years because of upgradeitis or the disgraceful habit of Apple IOS orphaning their older products after three years or so – deliberately.

    The key to early retirement is to look at how you are living and to ask yourself how much of this spending matters. And target your spending on what matters to you, rather than what matters to people you know, or to the companies getting rich off it. Mistersquirrel has a rant on consumerism sparked off by an OU programme that sounds interesting.

    Personal finance works

    Get out of debt and stay out of it 3 and live below your means.

    That’s it. easy to say but hard to do – like living like a celibate monk in a brothel. The ERE theory of living on a lot less than half your take-home really does work, and it works in spades with the 60% boost into pension savings (why 60% and not 40% is explained in the previous post) where the saving is applied to the tax-free lump sum. The pension changes have opened this whole area up. This is also easier for me because it builds upon 30 years of conventional work – the extra push to ice 8 years of work is nothing like the push to get rid of 20. Obviously the 20 year early retiree has 12 more years of freedom and life to enjoy.

    A decent amount of luck, seizing the day in Spring 2009 and maxed Sharesaves and ESIP helps. And of course there are the known and unknown unknowns. Much can happen over the next 20 or 30 years, though some of the bad stuff cannot be hedged with financial assets. Or at all… Nevertheless, it’s good to do something about the things you can control. Coffee is there to help with things I can change, red wine to help with those I can’t ;)

    It is more important to me to be of independent means than to be retired

    man-with-savingsUntil I integrated some of insights in some of the comments I had not realised a simple fact. It is the powerplay of not being financially independent that I came to detest. I don’t really give a hoot about being retired.  But I really do care about being of independent means – because it is the latter that fixes the powerplay, not the former. You often do retire once you are of independent means,  if you aren’t you have to keep working. To my chagrin, I failed to understand that difference. It doesn’t particularly change what I do, but it does change how I feel.

    MMM cited this cheesy ‘A Man with Savings’, and he can get away with it because he’s American 4. I even used it in 2011 and had got half the story right. A man with savings does not have to be always running.

    I missed the other half. It is the freedom to do things independently of needing to earn money. I liked this account of James Lovelock and the need for non-institutionalised engineers and scientists – I’m not in his league but I can recognise where he’s coming from.

    It’s been two years, and it’s obvious looking back, but I didn’t realise that, until seeing some of it reflected back in some of the comments. As an example I constructed a camera using a Raspberry Pi to see if our newly arrived cows are still there. It needed to happen quickly, because Mrs Ermine was worried the cows might scarper. As it is, although I am still scared of cows (particularly as these are bullocks/steers) and I really don’t like the way they follow you around, I will speak for these guys in that they are fairly placid. Look to pigs if you want to see troublemakers, and a pig is a lot sharper of mind than a cow or steer. I’d watch them rather than the cows, but what the hell do I know, this is not my area of expertise, so if Mrs Ermine thinks there’s a cunning interior to those steers then maybe they are the awkward squad in bovine form.

    Camera is the mess top left of the IBC

    Camera is the bodged mess top left of the IBC. And the plastic bags for the MiFi box to keep the water out…

    It’s a mess, indeed if the IEE get to see it they’d probably revoke my C Eng for unprofessional bodgery of the first order 5. But Mrs Ermine knows that she’s got cows.

    Got Cows.

    I may see if there’s and wider application – I know a guy who is into wildlife and Raspberry Pi, because he is into trailcams and had ideas for a time-lapse Raspberry Pi camera. I have the edge on the engineering, but I want to retain my freedom of action and don’t really want to be into selling or dealing with people I don’t know in connection with money. I might be able to add value to his panoply of devices and services, and if not – well, that is what is precious about being of independent means. There isn’t any of the desperation that bad shit will happen if not.

    now this looks like trouble...

    now this looks like trouble…

    Update – Mrs Ermine has now reallocated the camera to the pigs. You really can’t trust hogs…

    ...whereas though this is huge and a bit scary, it's basically gormless, the lights really aren't on much in that head

    …whereas though this is huge and a bit scary, it’s basically gormless, the lights really aren’t on much in that head

    If I can add value, then naturally I want to make something of it – otherwise my contribution isn’t valued. It becomes the symbolic talisman of the exchange of value, because the money itself wouldn’t change my life. I’m not Russian oligarch rich – I don’t have a million pounds if I liquidated everything I own. Over at RIT and Monevator, intelligent and wise people are generally making the case that a million pounds is not quite enough to retire on; I guess their lifestyles are more expansive and therefore expensive, and they sometimes have requirements like the desire to pay for university for their children which adds up. More money wouldn’t hugely change my life, it is still Time I am short of ;)

    The money is then much more along the lines of Ayn Rand’s exchange of value between free agents 6, who choose to do it (if they do) because of mutual added value. And I know all the theory behind the Ricardian advantage and all that, but it never felt that way as a wage slave, because I felt I had no choice. I should not be bound by old thinking.

    Work is a four-letter word…

    It’s something I did, and for long enough to make my fortune, as they used to say in the fairy tales of old. The last three to five years should not so dominate the first twenty-five, during which The Firm and other companies served me well. I should appreciate that a bit more. I used to read Gretchen Rubin’s The Happiness Project in my last three years at work, and I am sure that somewhere in there I read that it is good to recall some things that one is grateful for.

    In the round, The Firm served me well, particularly in the early days. And if it was going to go bad at least it stayed together until I was able to get enough together to purchase manumission.

    Despite work being a four-letter word it should become a neutral one. I need to stop running from the idea, because that is stupid. The ermine does not need to run from a concept. I like Mr Money Mustache’s take on the end of J.D.Roth’s guest article

     Mr. Money Mustache’s Afterword:

    Part of financial independence is that you don’t have to advertise yourself anymore. So while J.D. didn’t mention all of his other work, I don’t mind sharing it with you…[read more]

    I was always a supplicant in connection with work and finding work, and the concept has been linked to the yoke of wage-slavery. Something about writing that post,  the different perspectives and indeed MMMs angle there helped me shuck the outdated form. I have the FU money, so I am not a supplicant. And for two years after retiring, while I knew this in a theoretical and intellectual way, I hadn’t let go of the old forms so I didn’t feel it.

    I still have no great desire to get into the world of work however ;) It still consumes time, indeed this is the biggest charge I hold against it…

    Living intentionally

    Four years ago, in the About page on here I wrote

    I want to craft a richer life. and to do that I have to master the essentials of personal finance, rather than subsist in employment. My younger self chose his career well, but I now want to cut it short by about fifteen years. I have seen too many days from inside office windows, I want to hear the birds, live more simply and frugally and drink in the days, rather than sleepwalk my way through them.

    I’m not quite sure why I listed that under personal finance, maybe I was confusing the means with the end.

    by buying a camper van. WTF? What’s this outrageous consumerism then?

    So I did something highly unfrugal, and bought a mini camper van, Well, I bought half of one, from Mrs Ermine, I already owned the other  half of it. Because I want to travel slowly, and overland, and hear those birds. Since it was our only vehicle, Mrs Ermine was using it to move all sorts of stuff for the farm, like mash for the pigs and pallets. Although I can only really make great use of it once I am drawing my pension, because I have an income suckout until then, at least that will stop the wear from that, and Mrs Ermine now has a small car which is better suited to that sort of thing. The camper van back overhangs somewhat, which is bad for shifting heavy stuff. You want the wheels pretty much at the corners of the car so that when you sling the heavy stuff in the back it lies within the wheelbase. We already managed to break one spring, though I think the rough roads of northern Scotland had something to do with that, but it’s made me windy of bad loading.

    Great landscape, but hard on the suspension

    Great landscape, Scotland, but hard on the suspension

    I wouldn’t have gone out on the open market and bought this – but that way the proceeds stay in the family. And I can use it in Suffolk in the interim for modest cost – the great thing is I can put a bike in the back without taking the bike to bits. But I’m not badass enough to ride tens of miles on a bike. 7 The combination is great – you see a lot more on a bike, particularly nature but also photographic opportunities and stopping to investigate something is so much easier on a bike. Using both gives me range and local agility. So I’ll get some use of it and hone my craft. Long distance or long time period camping is very different from day tripping – you need decent prep and checklists, because otherwise you end up without something apparently trivial that greatly improves the experience. Like the kettle, or a can opener or the spanner to change the gas cylinder – been there done that on all counts.

    It’s not frugal. But I don’t have to be frugal everywhere – just in enough places. And of course I bought it cash ;) And secondhand, I’d hate to break the habit of a lifetime and buy a vehicle new. I left that kind of thing to Mrs Ermine. Even if I were rich as Croesus the way half the value of  a new vehicle drops off it as soon as you buy it would take the edge off my day.

    In the longer term I want to go on longer tours, maybe a pilgrimage to some ancient sites and places that may or do hold meaning to me, places with history, ancient stones, where people live slower but with more depth. One of the things Philip Greenspun picked out was

    Travel: No to the Beach; Yes to the Organized Tour

    No the the beach is easy for me. I hate heat and have never sunbathed, I have never been on a beach holiday and don’t get it, and this still holds. The second intrigues me, I have never been on an organised tour of anything – the regimented nature never appealed. There is some logic in his position. If it didn’t work out while working I’d be sore of being out half my annual holiday but this reservation doesn’t hold now. So I might try something in that line.

    a codicil on the last post on two years on

    The last post on Two Years on was cathartic, but not an easy one to write. Thank you for the great comments and thank you too to Monevator and mistersquirrel for featuring it   – I got an interesting angle from some of the c0mments there too.

    I am not the only one to exit the workplace earlier than anticipated. Over the years I have had a few people contact me offline about keeping the flame of hope alive in a difficult workplace, I hope that showed it’s possible to get to the other side.

    I don’t want to labour the point, but stress as a mental health issue is very different from what is normally called stress. Some stress is necessary to achieve anything, and if your life has dynamic balance between that and other parts of life then it is not a problem. The NHS has a good summary of what to look for and the typical triggers. It is a very different kettle of fish to having to pull a string of all-nighters and then get hammered at the topping out party when everybody high-fives the results of all that massive effort. I didn’t know that till my late 40s either.

    MMM has a great post on how to avoid falling into the trap. It won’t help many people, however, because he speaks from a position of strength. The drip-drip-drip of a slowly changing situation creeps up on you, and the tipping point is sharp – a few days IMO. Once you have passed the point of no return then the original problems must be alleviated in some way for healing to begin.

    Although different for everyone, recovery is protracted but usually does come – you shouldn’t  lose hope if you aren’t 100% in a few weeks. I spent three years flying into the storm, so two years isn’t unreasonable for the recovery, but in the end it takes as long as it takes. It isn’t a linear improvement day on day, sometimes its three steps forward and two back. I had to be prepared to fall back, and fall back and fall back long enough, and when I was not watching it the faint spark strikes in the darkness and one time it takes hold. Many aspects of self-development have this sort of thing in them where you have to let go to be able to go forward, and otherwise subconscious resistance is induced by the conscious effort to force things; it is in Scott Peck’s The Road Less Traveled, in some of Carl Jung’s work and the mystical concept of the dweller on the threshold.  Camus put it well in a different context in Return to Tipasa

    In the middle of winter I at last discovered that there was in me an invincible summer.

    I learned a lot from writing the post, because to actually write things down clarifies things because they must be lifted into the light of consciousness, and I learned more from the comments, which are a different kind of light in this case. One of the things that is clear is that I addressed the first part of the tagline of this blog, breaking free of the rat race. That is good, it was the most urgent part. But on reflection I can take the living intentionally part further.

    But don’t you get bored now you have more time and less money?

    No. Really. The keys to nailing that aren’t shopping, restaurants and tickets. Be curious, learn something new however trivial each day and create, don’t consume unthinkingly. There is also a subtext in that while my income was much higher when working towards the end my spending was probably lower than now because of the savings rate. I needed to get my taxable pay down to roughly the minimum wage because the taxman’s blood-funnel in my retirement strategy was beginning to really piss me off. I learned something unique and unforgettable when you do that, which is that a lot of my spending didn’t really work for me, and was simply dulling the pain of working 8

    I’d really, really, like to be able to say that this insight is mine alone. But it isn’t. As long ago as 1929 Ralph Borsodi wrote in This Ugly Civilization

    They do not realize that the idea that mankind’s comfort is dependent upon an unending increase in production is a fallacy.

    It is more nearly true to say that happiness is dependent not on producing as much as possible but on producing as little as possible. Comfort and understanding are dependent upon producing only so much as is compatible with the enjoyment of the superior life. Producing more than this involves a waste of mankind’s most precious possessions. It involves a waste of the only two things which man should really conserve–the two things which be should use with real intelligence and only for what really conduces to his comfort. When he destroys these two things, he has destroyed what is for all practical purposes irreplaceable. These two things are the natural resources of the earth and the time which he has to spend in the enjoyment of them.

    When he produces more things than are necessary to good living, he wastes both of them; he wastes time and he wastes material, both of which should be used to make the world a more beautiful place in which to live, and life in it more beautiful than it is today.

    Lest you think Borsodi was some turn-of-last-century Luddite, he opened that chapter with

    ALL civilizations have been ugly. They could not well avoid it.

    But this civilization is unique. Machines make it possible for this one to be beautiful, and yet it is in many respects indescribably uglier than the civilizations that have preceded it.

    For this civilization, instead of using machines to free its finest spirits for the pursuit of beauty, uses machines mainly to produce factories–factories which only the more surely hinder quality-minded individuals in their warfare upon ugliness, discomfort, and misunderstanding.

    Why did nobody introduce me to his work earlier :)  The big problem with work is that it wastes time. Britain’s productivity has apparently fallen since the financial crash. What we need is to match the rest of society (in particular house prices) to that lower productivity. Then people might have the time to raise their children by spending time with them, and pursue outside interests while working, rather than having to stagger to the finish line and then look around.

    Mixer and 12V power supply, for about £20 all-in and a bit of Ermine design and build

    Mixer and 12V power supply, for about £20 all-in and a bit of Ermine design and build

    Today I finished off mastering a compilation CD for someone’s wedding, I was investigating how to make a raspberry PI camera take pictures of our cows every 15 minutes (see above – I started writing this before I made that and got it into service). Then I am looking for a way to make an isolated power supply for the DJ mixer I bought for a tenner at a radio rally on Sunday to be able to use it for our farm party run off a leisure battery 9

    I repaired two electric fence energisers. I determined the range of WiFi on the farm (not enough) and investigated approaches to improve this at low cost, using a directional antenna.

    Then I tried to work out what my policy is for the new ISA limits. They are greater than the capital gains tax limit so I need to contribute some as real cash rather than from gradual sales of my unwrapped holdings. And there’s also the new pension rules making it favourable to have a SIPP. I am getting to the point where I will be prepared to borrow money next year maybe to put into the SIPP, because all these changes mean I have to find about £20,000 extra before I draw my pension, and I don’t want to run down my NS&I cash fund or bend my cash ISA.

    Trust me – there’s too much interesting stuff out there to poke a snout in to get bored. The bits from roughly a week described there has involved very little shopping, no restaurants and no tickets. Borsodi was right. It isn’t that you need nothing, you need the right amount of Stuff, and the way it’s promoted it’s easy to end up with way too much. There really is not shortage of things to think and do, indeed unfortunately the box of half-done parked projects seems to be increasing of late, although the box of stuff made, in service or fixed is increasing too!

    Notes:

    1. DJ seems to mean something very different from the straight scheduler of songs it meant in analogue days, it is a performance in and of itself, particularly with clubs and EDM where the aim is to achieve a seamless sequence that works together. I was warmed up to this by the stupendous amount of DJ gear available in the local Cash Converters when I was in the market for a PA amp
    2. I don’ have one, so I don’t know
    3. mortgage in my case, I didn’t have any other debt
    4. I don’t mean this disrespectfully to Americans – they haven’t got to be the richest nation on earth by being cynical, not being open to new ideas and having a great awareness of irony :) There is notable truth in ‘The Pleasure of Walking Tall’ despite it being gagworthy reading to British eyes
    5. The bodgery is acceptable because this is a proof of concept. There is a waterproof case available for the Raspberry Pi so there wasn’t much point in putting a lot of effort into making a repeatable waterproof case. Electrical tape and a minimum of holes, mainly underneath is good enough. If the project has a longer service life then a rebuild is in order
    6. yeah, I know, dangerous territory and who the hell is John Galt anyway
    7. Even if I were, I am also not leaving many hundreds of pounds worth of photo or sound recording gear on a bike and not shaking the hell out of it on the road – the conversion of a cheap Chinese bike camera to a kit of loose parts after a few hundred miles on a bike was an education in itself as to how bad the vibration is on an unsprung bike frame – I only carry camera gear in a backpack, not in the panniers now.
    8. It’s much easier for me as part of a child-free couple and at the end of my career to live on an income of the minimum wage because I have capital assets (paid-for house, productive farm and firewood). I am not a heartless bastard saying it’s easy to live on the minimum wage – it depends on what stage of life you are and what commitments you have, though I am of the old-fashioned view that one’s financial resources should be considered before taking on some commitments.
    9. the mixer take 9Vac and uses a short Cockroft-Walton stepup in the power supply to make the ±12V split rails. So you can’t just stick 9Vdc into it.
    18 Jun 2014, 9:46pm
    living intentionally personal finance simple living:
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  • Two years in – how’s that early retirement working out

    It’s soon coming up to two years since I checked out of the rat race, a good time to take stock and look at what I’ve learned. This is particularly long. I did think about breaking it over several posts, but what the hell, it is a long story. I’ve collected a few pointers to some things I’ve heard people being interested in over the years as a table of contents

    1. become an opportunist
    2. A lot of early retirement is about reducing living costs
    3. Retirement is a different phase of life. Making it like work without the work is not the only choice you can make
    4. Not having a regular income is scary
    5. what it feels like to live off ‘drawdown’
    6. The extra win a 40% tax payer gets from pension saving is much higher than that for a basic rate taxpayer
    7. Work and all that
    8. The distinction between work and not work is peculiar to the non financially independent
    9. Grow within yourself – or else
    10. The tl;dr summary

    Overview

    First off, I am not using any of my retirement savings – my pension remains deferred along with my linked AVC savings.What I am using now to live off is saved cash, though I also have income from ISA savings but these are reinvested. If I were to draw it now, my pension is notably above my annual running costs.

    Three things contributed to this –

    getting the mortgage monkey off my back

    Paying off my mortgage eliminated much of the static drain of housing from my finances.It was a long job paying down the debt over twenty years. It’s not always a wise thing to do for an early retiree – anybody who is retiring before they can access their pension savings may want to consider keeping their mortgage and saving into pension savings with the aim of paying off their mortgage with the pension commencement lump sum. I didn’t do that because I was reactive and fearful. It’s a mistake that’s fail-safe – I live off less at the moment but will have more later on. It so happens that I was able to save the maximum worth saving into my pension savings and pay down the mortgage, after which I tossed what would have gone into the mortgage into ISA savings because I also saved money by

    shooting the consumerism monkey

    Breaking the cycle of mindless consumerism has helped me no end. Initially I did it because I was desperate to win freedom from The Man and needed to save every pound I could. I’m not going to bullshit, the first six months are hard. I never borrowed to buy consumer crap, but I wasn’t above buying Stuff because I thought it would make me happy. Only after about a year did I come to the awful realisation that

    Stuff very rarely makes me happy

    Now the validity of this varies across one’s life-cycle. When starting out, and you have very little, of course Stuff makes you happy, from you first iPad/kettle/car/bed/chair whatever. It’s later on, particularly in the upgrade cycle where the wheels come off the whole spending money on Stuff thing. People started to realise this, so there are some classes of Stuff that are deliberately engineered to become worthless or hard to use over time – the way Apple manages IOS to depreciate their historic gear is a classic example. Other examples are cloud services. I am using a 10-year old copy of Quicken because it does what I want it to – the rental versions introduced after 2004 have become worthless in the meantime.

    I say very rarely because some Stuff does make me happy. The key to achieving a decent balance with consumerism is to know why you are buying something, and to evaluate its likely impact on your life without the spurious trappings of advertising. One of the simple rules to help with that is to wait 7 days before buying it – the initial sugar rush of ‘this will change my life’ decays over a couple of days, leaving me with a clearer head.

    Mr Money Mustache has an entertaining read on this topic, titled recovering from the Pack Rat years. I came to a very similar conclusion to him independently – all the way down to no longer having a broadcast-TV capable viewing system. The only area I disagree is that I have no smartphone, because a smartphone is an absolutely shit digital camera and equally crap audio recorder 1, and it seems I am more demanding of these functions than usual. However, all my camera and recording gear was bought before 2007 – I am still the limitation there. In the event that my skills and creativity become honed to get better results out of better gear and I can turn that into profit I will consider it.

    savouring the moment

    It took a long time to realise this, and it wasn’t the result of any conscious decision. Perhaps it’s the result of having more time – when I was working I was always chasing after being somewhere else, in space or in time. I don’t know why, maybe it’s the ‘anywhere but here’ of a drone, I spent too much life energy wanting what I didn’t have rather than wanting what I did have. I need time to appreciate what I do have, and maybe it was time I didn’t have before I retired.

    There’s a corollary to this, which is

    become an opportunist as a retiree. It’s cheaper, and more fun

    Many of the costs associated with life are to do with controlling your world. As a wage-slave you must control your world to fit in with the strictures of your job. You have to make sure you are somewhere for specific times. Even if you are a freelancer you have to work a certain amount of the time unless you are financially independent. You have to arrange a lot of things to be just so, you have to take your holidays within so many days, often people have to match their availability with the requirements of other people’s jobs and childcare etc.

    All of this takes optionality out of your life so you need to control your non-work life to fit in, and control costs money. If you have to be at work you have to pay someone to look after your children in the day. You have to pay commuting costs. And so on.

    It takes a long time to realise that there are other ways of living, that are far less structured if you let go of the inner control freak that had to fit in with work. Roll with opportunities.

    A lot of early retirement is about reducing living costs

    As we go through the many decades of a working life, we tend to see some lifestyle creep. We are social animals, we spend money on things that other people do because no man is an island, entire of itself. Others may spend money on things that really matter to them, and often we end up apeing these or hankering after stuff because, well, if it’s valued by others it must be good.

    In the first couple of decades of working this social pressure is stronger – as time goes by there are more differences in the way people live their lives and this pressure is less. In my twenties most of my peers lived similar lives, often flatsharing or in digs. As time went on they paired up, then many had kids. The differences in living styles diverged more, and these divergences add up, reducing the social pressure. I should add that being childfree means I don’t know about child-related social pressure, though I suspect this is high. The way people work themselves up about schools indicates this child-related peer pressure is of a quite stupendous nature!

    The key to early retirement is to look at how you are living and to ask yourself how much of this spending matters to me or people dear to me, how much does it enhance my quality of life? Then stick with that, and start to eliminate the rest, and simplify things. Complexity begets cost and dependencies. And take a wider systems approach to your living – how far you are living from work, how big a house you have.

    For instance I took the shaft from housing early on, so I am in a lower grade of housing than most of my ex-colleagues. There is an indirect upside to that – my house is smaller than theirs, easier to heat, less to decorate and furnish, and less council tax to pay. Year on year on year, and that adds up over time. Some of this shows in the result – I discharged my mortgage in 20 years despite buying at a stupid time, taking a hit on a relationship breakup and buying with an endowment. My ex-colleagues often still had big mortgages on their big houses as they entered their 50s. Obviously I don’t get to spread myself out over such a wide area. Unlike them, housing is not the largest capital ‘asset’ I have.

    A lot of consumer complexity I seem to have avoided by a combination of luck and the fact there were fewer temptations in my formative years. ERE has a nice wiki article on this for people who want to design their lifestyle by intent rather than by happenstance. Like starting to save for retirement, ideally you try and design your life consciously by the end of your twenties, because a lot of big lifestyle costs start to get baked in to your life after that.

    You can reduce living costs further by ignoring differences that don’t really matter to you. MMM has a great rant on Cure Yourself of Tiny details Exaggeration Syndrome which saves me the bother of explaining that. It often staggers me, when talking to people who in theory would like to retire early how much they cling to things like being able to run new cars every three years and regular high-cost things like the fast and furious skiing holidays of the cubicle slave. As for golf – it seems designed to be the nemesis of economy, with high course fees, club fees and equipment costs plus the depredations of the 19th hole.

    Now if they have sat back and asked themselves does this really matter to them and the answer is yes, then of course that’s intentional living and to be saluted. But often if you scratch a little harder it is because they fear the loss of status. The obvious question is who are they living for, because the Joneses don’t really give a shit. But to ask it would be unkind – people can only shift their world-view at a certain speed, and it’s always better if that shift comes from within.

    Retirement is a different phase of life. Making it like work without the work is not the only choice you can make.

    Retirement is a different phase of life. The tradeoffs are dramatically different. If you want your retired life to look exactly like your working life but without the work, then fine, you gotta do what you gotta do, generally working to 65. You will be able to broadly maintain the same spending, provided you have paid down your house. But you owe it to yourself to at least challenge the assumption and examine alternatives. Many people at The Firm have this pathology – they’ve been there so long they struggle to imagine anything other than the same life they have, but without the work. Some indeed fear that subtracting work will subtract meaning from their lives. These types of people should never stop work – because Nature abhors a vacuum. It goes along with the general thread that flexibility and openness to new ways of doing things is important to retiring early successfully.

    Not having a regular income is scary

    Two years ago I went from being a wage-slave with a steady income to being some odd combination of drawdown retiree and investor, I’m not even an honest pensioner because I’m not drawing a pension. I am doing what any early (pre-55) retiree has to do for some of the time. It’s impossible to overstate how different that feels to having a regular income. People who have been self-employed or otherwise handle a variable income will find that transition easier, but I find it scary.

    The problem is that the job of squaring the financial circle is easy to define to a wage-slave. Keep at it, don’t do anything to lose your job without lining up another, and don’t spend more than you earn, with some notable exceptions (housing and education).  Summed up pithily by the distillation of my parents’ wisdom

    Don’t spend more than you earn, son

    The definition is easy, though the implementation isn’t. What you earn in a year is a number, written on your P60, and what you spend is a number too, in my case available from Quicken. Take one from the other, and Wilkins Micawber is your man

    Tools of a typical office-based trade

    checking in the tools of a typical office-based trade

    So the Ermine checks in his computer, phone and staff card and all of a sudden the inflow stops. Now I got a year’s salary as redundancy, so the intuitive answer to ‘how long to go before I have to draw my pension’ is one year, but all of a sudden everything gets more complex.

    For starters I had to toss a significant part of the redundancy into my pension AVCs to avoid paying tax on it. I also want to fill an ISA’s worth every year, so doing that for a couple of years means all of a sudden I am left with less than the minimum full-time wage for a couple of years. And at the moment I don’t use any of the income on my savings; the reason for that is that at the moment I cannot turn a useful return on cash savings so it makes sense to run my cash reserves down and reinvest the dividends from the ISA.

    Many aspects of finances are easier for a wage slave, with their steady flow of income. For instance I have to hold much higher cash reserves against the unexpected – fortunately this is held with NS&I so at least it doesn’t particularly depreciate over time. If you have a regular income you don’t need to do that, so simply need enough slack in the system to be able to cut back if something untoward happens like the roof leaking. You simply cut down your partying until you’ve paid the unexpected bills down. I have to hold the cash to address these hits up front.

    But the hardest part of having no annual income is that it’s hard to qualify what a sustainable annual spend would be. If  you ask Wilkins Micawber he’ll shoot back

    expenditure > income, result misery, wrong way, do not enter, turn back now, don’t go there bud

    I don’t have any of my retirement capital available to me, as I am deferring my pension to raise its annual value once paid. So my AVC savings are also quarantined by that. In one limiting case I am okay now – if I drew my pension now my spending is lower than the net amount, and that also excludes any value from my AVCs or existing share portfolio. The job of bridging this gap has also been made harder by some of the opportunities that the Chancellor has made – the greater flexibility of taking a DC pension pretty much mandates saving about a personal allowance-worth of DC pension because HMRC toss a fifth of it in the pot and the new increased ISA allowance needs filling up.

    Fortunately I have a shedload of The Firm’s shares purchased under Sharesave and Share Incentive Programme, all unwrapped. These can get sold over time and the proceeds bulk up the ISA. Once I get hold of the pension the I will have the AVC funds to shove into ISA savings over a few years. In the long run my ISA savings will be about half the capital value behind my pension which is RPI linked to a point. The ISAs  job is to fight inflation in the medium to long term.

    what it feels like to live off ‘drawdown’

    So I’m easy with the long term strategy. But obviously, I am running down the cash at the moment. And that’s not a good feeling. I fought against the depreciation of my net worth intially after I retired, before coming to the conclusion that wasn’t possible. At the moment it turns out that it was possible – this is a zero based networth chart, excluding the value of my house and any pension associated savings.

    Ermine instantaneous networth excl house and pension

    Ermine instantaneous networth excl house and pension

    It looks okay, but I’d also have to deflate this by inflation, two years of inflation roughly knocks 10% off the real value. I don’t have an excel version of this so I used the shear function in Photoshop to drop the right hand side by about 10% 2.

    inflation-adjusted version

    inflation-adjusted version – the original baseline is shown by the dates

    What is, however, happening is that the balance is shifting from cash to equities, which looks in Quicken like a madcap 20-something’s asset allocation. Although the equity allocation is getting on for three-quarters equities, this also explains the strange image of networth increasing while drawing down some of the capital. I need to remember the good men in white coats (hat tip to Monevator) who rock up just in the nick of time with their ‘this too will pass’ ring and remind me that this is illusory.

    Observe the increase, and increasing volatility with time. That, my friend, is what the stock market does to you. In exchange for a little bit of real return, it gives you a hellaciously rough ride with a massive noise signal to bamboozle any attempt at rational thought. Remember there isn’t any income in here 3, there is some spending, and the equity ratio is increasing. And stock markets have been on a tear for the last few years, only last year people were asking ‘I don’t know what the ‘king hell we’re doing up here mate‘. Twice

    Three-quarters of my current asset allocation is in equities, and in a bad year, equities can fall by 50%. In a different world it could look like this

    the retired in 2007-ish version

    the retired in 2007-ish version. Okay, falls happen more sharply than rises so it isn’t that realistic. There’s only so much you can do with Photoshop ;)

    This sort of roller-coaster ride is what awaits anyone with a DC pension who does not annuitise any part of their capital on retirement or shift to some safer asset class. In particular, the good people who the Pensions Minister exhorted to enter drawdown rather than go buy a Lamborghini are going to be facing this. Yes, they don’t end up getting a fixed crap income of 5% of their capital, non RPI linked. But they have to accept that bronco ride. And every time an IFA asks Joe Public about his risk profile the answer comes back that he hates risk. I am in the stratospheric nutcase end of the risk tolerance (because my risk tolerance is balanced by the bond-like nature of a final salary pension)

    An Ermine's risk profile

    An Ermine’s risk profile

    And I don’t like it. Am I drawing down at a sustainable rate? The 4% SWR is an article of faith, and that faith is easy to come by at the moment, as the good doc said. It was probably harder to find in 2009. If it mattered greatly, I’d have to ‘fess up that I have no idea to that sustainable question. However, since I have a pension that is greater than my rate of spend waiting, plus an AVC fund that is in cash and larger than my ISA I will probably get away with it.

    The takeaway is that living off a large equity based capital allocation feels like a very rough ride indeed, and let’s face it, I’ve only have the upside of that ride. For someone who has drawn a steady salary for 30 years, that is not a peaceful feeling. I have other options, and perhaps I am more fearful than others, but it would totally creep me out to rely on that 4. I don’t know what the answer to that is, but I am happy to say I don’t need to find out, because I will get some of that steady income back.

    I am probably underspending

    It’s not a common observation in the PF universe, but I am probably running below my financial capacity. I had expected to reach the zero cash line between a year and a year and a half out (that would have been end of 2013), and to be drawing my pension already or imminently. I am six months into extra time. The reason for the underspending is because I extrapolated from spending at work, and it was also cluttered a little bit by spending on establishing a business.

    Now if you’re going to err in retirement, err on the underspending side. However, da yoof is not totally wrong with YOLO and at some stage I need to review this. Even after two years, I am still in the recovery phase from a pretty rough experience of the last couple of years of work. So this spending pattern fits my needs at the moment.

    The extra win a 40% tax payer gets from pension saving is counterintuitively high, compared with the BRT win.

    We all know the pack drill. When you save £100, you put it somewhere and you can’t spend that £100. Easy – that’s pretty much how your ISA works, and almost all non-pension saving. The deal with pensions and taxation is different – you save some amount x and you don’t earn £100 net. The net effect is the same – you have £100 a month less to spend on beer/chocolate/paying off your mortgage.

    It’s very counterintuitive, but forego £100 of net income and you get to save £166 in a pension. That’s because the £100 has been taxed at 40%, ie your net £100 is 60% of the gross amount, so the taxman gives you back 40/60 ie 2/3 of the amount you have foregone. Everybody thinks oh it’s only 40%, but in truth of the amount you can forego it is 66% – for every £100 net you don’t earn, you save £166 in your pension, a 66% bump up compared to if you earn it and bung it in an ISA.

    Compare that with the basic rate taxpayer – they forego £100 and it’s made up to £125. Okay, it’s still a 25% boost but it’s nowhere near the boost the HR taxpayer gets. It was a little bit better at The Firm because they used salary sacrifice, so the BRT payer gets 32% (20% tax and 12% NI) so for every £100 he doesn’t earn he gets £47 added, which is nearly twice as much.

    I hit this hard, and I started investing in a Global:FTSE100 50:50 fund from March 2009 on, so I got a 20% uplift in my AVCs from the stock market and the depreciation of the pound. But even so, I look back at my AVC savings and wonder how the bloody hell did I manage to save a year and a half gross salary in pension AVCs in three years. And fill my ISA each year and save a third of a year’s gross from net savings into NS&I ILSCs. I still don’t really understand it, but that tax relief did a lot of the heavy lifting, and the stock market played its part too, in that lift from March 2009.

    This is why old gits at the end of their working lives can karate-chop the much vaunted magic of compound interest and bust its ass. They’re more likely to be higher rate taxpayers, they have more chance of having paid down their mortgage and they are a hell of a lot closer to getting the win so they are much more motivated because of the effect of hyperbolic discounting – loads of wedge in five years is a damn sight more interesting than loads of wedge in four decades. I saved a quarter of the total value of my work pension in the last three years, which is roughly an eighth of my time there.

    Work

    I retired early because I was stressed and became increasingly out of sync with the way work was being run. I am still recovering from that. It is only recently that I can reliably hear what is good in music, and there’s still a while to go before I will have recovered this to what I once had. In a myriad of small ways I am still reminded that I pushed my luck flying into the storm for three years, and indeed to carry on after I had been off sick. To a large extent the emotional centre shut down, and what was left was fearful; I retained most analytical capacity. Emotion gets a lot of flack in the PF world, and people draft long lists of ways it leads us astray. And yet it relates us to others of our kind, it gives us the hope to carry on against adversity.

    Emotion is the chief source of all becoming-conscious. There can be no transforming of darkness into light and of apathy into movement without emotion.

    Carl Jung Psychological Aspects of the Mother Archetype (1938)

    The old boy had a point, try living with that function shattered – you attempt to strike lights and they sputter and flare out, never overcoming the steely greyness of undifferentiated days. The analytical capacity did refine my investing behaviour and this was easier with a spanner jammed into the works of some of the biases. But it’s no fun, because I would see how to do things but not why. Motivating yourself when you know how but not why is sheer effort of will, not inspiration.

     

    It’s also interesting that ERE observed

    On an anecdotal note, I vastly prefer less stress to the low level stress that is present in most modern life. The stress I feel now is the “original” stress of a boat about to crash. Not the continuous stress of not being able to meet deadline after deadline.

    Because the world of work changed slowly, I did not realise the low-level stress increasing at work with the gamification of the workplace. That sort of continuous stress is bad because the response of increased heart rate and adrenaline has nowhere to go, it doesn’t help. Whereas when some stupid twat got pissed up at lunchtime last year and came round a corner fishtailing on my side of the road then yes, that is stressful when you see a dark Jag incoming at 12 o’clock. But it did some good, because it did the time-dilation thing and I was able to see what was happening, brake and pull way into the side, turning a head-on crash into a glancing blow. That is one of the correct uses of stress, because it did some good in improving clarity of thought and reactions for a short while where it matters.

    ERE is much younger and fitter than I am, so if he noticed that it took a while to adapt  then it isn’t surprising that the results of the work stress is still washing out of my system. I crossed the finish line exhausted and no reserve capacity. I didn’t expect to be still recovering two years on and to still have significantly impaired capabilities but it is better to roll with it than fight it. It’s also a warning call for all those ‘one more year to comfort‘ merchants. You will almost always be financially better off working for another year. But you may be running out of other resources that occasionally matter more. And everybody is running out of time, 24 hours in every day.

    The two years since retiring has given me some space to see where the working world and I drifted apart. The obvious reason is a combination of the 2008/9 financial crisis and changes in the way The Firm was being run. The obvious reason is not always the whole reason.

    I’ve avoided the vexatious issue of making money myself, largely because I don’t want to enter the world of wage-slavery and I have no desire to fill in an income tax return for lousy itty-bitty amounts. However I haven’t avoided directed action of the sort that sometimes goes under the title of work, I’ve taken these to add value to other people’s projects. And I look at them, and I realise that there was one big thing that I missed where I was diverging from the world of work at The Firm.

    I am a generalist, and worse than that the sort that Firestarter identifies as both Renaissance Man and dilettante :) This runs terribly against the way work is going, which is specialising, knowing more and more about less and less. This applies particularly to IT, which was the way The Firm was going.

    As they drove their way down the value chain they became much more prescriptive in structures and methodology. As a research facility it was a very wide-ranging operation for much of my career but as this was moved to become an outsourcing jobbing shop it narrowed. Specialisation is an aspect of the IT contract world too, it would be unfair to blame The Firm purely for this. For illustration, as a generalist since retiring I have programmed in assembler, JAL, Python, Perl, PHP, C and VB. I code in whatever suits the application and the platform. Raspberry Pi? That’ll be Python then. Arduino – C, Pic microcontrollers? MPASM or JAL. The Firm was trying to make everybody code in Java, and only Java. I am dilettante in seven languages and not master of one ;) In my last project for the London 2012 project I also didn’t focus in IT – CATV was from legacy electronics and system design. Indeed, at work the one thing I didn’t do much of was Java, that policy was instigated just before I got onto the 2012 Olympics project…

    When I retired I had thought that if I were to sell time or skills for money it would be in the field of engineering. But it isn’t likely, because I am running against the tide with that generalisation.

    After leaving work I built wooden shelters and fixed tractors, I’ve designed an irrigation system (the design part is being able to operate through winter, it’s not just going down to B&Q and buying up a load of hozelock connectors). I’ve produced and edited video. I have electronics design facilities, but this is at a fairly modest level. I have produced some IoT environmental sensors and the like. But only as part of a system design to do something else. This may point the way in future - don’t do stuff, do capabilities and services. I’m not going to be hidebound about it – a lot of the problem with Stuff is regulation; small fry can get away with a lot and if you get bigger you can afford the overhead. No small business became a big one by following all the rules…

    Where I’ve actually made money, is photography and sound recording.  I’ve managed to work a little bit harder than my ISA, though these guys will pay me in dollars so I have to wait until the exchange rate is better. Unfortunately this is impaired because the stress nearly wiped out any creativity I had.

    But without this playing with fantasy no creative work has ever yet come to birth (Carl Jung, the psychology of individuation)

    I actually see some of the recovery in the improved popularity and profitability of the photos I take…

    The fact that I can tell the agency to pay me when I’m good and ready means I am safe from the Internet Retirement Police – I haven’t done that for the money and it forms no part of my financial planning. But even as a cold-turkey retiree I haven’t totally avoided the four-letter w word. But I didn’t seek it out, indeed the problem I have with work is the whole bad power play of it. Perhaps I will have to reconsider this and view that I have achieved manumission through financial independence as opposed to retiring. It’s not really catchy though, is it?

    The thing that runs through these things is that there isn’t any single thread running through them, and if there is something running through them then it was only incidentally engineering, indeed much of it wasn’t even left-brain stuff.

    Google will save serious office space when they get to this stage

    Google will save serious office space when they get to this stage, though they’ll need to improve connectivity

    I am probably unemployable now because of this hopeless sprawling generalisation, it’s just not what the modern workplace wants. The reason for this is the concentration of power to capital and the improved communications. Companies can concentrate the work to hyper-specialists, the distribute the results to the proletariat virtually cost-free. Look at the setup at Google. These will eventually become brains in a jar with multiple redundant high capacity optical fibre data connections. You ain’t seen nothin’ yet with Google Glass. Google employees can’t cook for themselves or do their own washing, which is why Mama Google sees to it to fix their household requirements. Free food, free laundry, free haircuts. free cars. If you want to see where white collar work is going, look at the leading edge – it’ll be most places in 10-20 years. Hyper specialisation has a dark side. I am nowhere near bright enough to work for Google. Nor are many of my fellow Britons. Specialisation is where it’s at, but it will need fewer and fewer people and require more and more of those it does need.

    Generalists work well in a small scale – there are often opportunities to use knowledge across unrelated fields in small-company operations. They are more flexible, there isn’t a structure of existing practice to adapt, and they can get away with short-term fixes for temporary requirements as long as they trust their generalists of they have seen enough track record. But I have no desire to work full-time as a general fixer. The 21st century technical workplace is no place for a generalist Ermine, because of this culture shift towards specialisation and narrow but deep skillsets. But then that’s the whole point of becoming financially independent. I don’t have to give a damn.

    The distinction between work and not work is peculiar to the financially dependent

    because you’re financially dependent (usually on a job). So you have to do what The Man tells you, and that division is clear-cut and non-negotiable. Contractors and the self-employed soften this distinction a bit. It seems to easily end up with work taking over their life, however, because work is still not elective, it is when they work that is more elective than someone working for The Man. Not that they work.

    Philip Greenspun posted an interesting article on early retirement way back in 2006. I used to read his site as photo.net just before the the turn of the Millennium, the empty dreams of a cubicle slave dreaming of making shitloads of money on the stock market from the dotcom boom and then making pin money shooting picture and travelling, those heady days when Momentum was King.  And that’s when I really enjoyed work. Anyway, I came across his article, and the comments as he was seeking feedback on the article. Although I’m normally of the opinion comparisons are vexatious, part of the insight from the article does come from the differences and the similarities between two different journeys.

    I’m nowhere near as rich as Greenspun and I earned less. There’s at least one order of magnitude in it, probably two, possibly more. This is not something that particularly bothers me, I don’t have the desire for flying. However, I can see it gives you more options in the US, where distances are much greater and people disperse over a wider area; Greenspuns college pals are more important to him (Even for couples/people with kids they get a little more important to people after most have gone through the baby/children tunnel of 30s to early 50s)

    He is/was single and is about 10 years younger than me. He had to take special measures to address the social life issues that I just don’t have – he’s clearly given it some thought and does it well. He’s more outgoing that I am. In particular his angle on that being single has a very strong effect on where you choose to retire to have a decent chance of stimulating human interaction is quite an eye-opener. I didn’t appreciate there was this difference, but what he says makes sense. A single early retiree (~40) probably does need more money than someone who has a partner. However, since the single fellow probably doesn’t have kids he probably does have more money, so there’s some auto-compensation.

    Time management (pinched directly from Greenspun)

    How much work does the average college student get done? Almost none. Yet the same person, injected into a corporate bureaucracy, becomes a reasonably effective worker. Why? Most people have terrible time management skills. This limitation is of no consequence in public school. The school tells you where to sit and what to do and when, at least for six hours per day. This limitation is of no consequence at most jobs. The employer tells the workers where to sit and what to do and when, at least for eight hours per day.

    If you’re retired, however, nobody tells you how to organize your life. If you have goals that you’d like to accomplish and your time management skills are poor, you might end up disappointed in yourself.

    Now an ermine isn’t an enormous fan of the self-help industry, though I’m happy to accept it helps a lot of people and occasionally indulge. There’s a very heavy thread of self-discipline and virtual Calvinism in the personal-finance world, but it is nothing to the apotheosis achieved by some of the American writers – Steve Pavlina is over 1000 times more effective than I could ever be, and it’s not like I disagree with the efficacy of what he says. But to me seems me as a joyless way of living – life needs dynamic contrast and empty spaces for reflection and understanding. I didn’t stop work to reproduce the problem again in a different place. Each to their own.

    However, Greenspun has a point. I found it helpful to take the time out in the morning to centre and actually write down what I wanted to achieve that day. The idea is roughly pinched from a book The Artist’s Way at Work, which I bought way back as a cubicle slave looking for a way out. It didn’t work for me, I produced trash because I was trying to make money which shuts down the playful creative side. Presumably people who work in the creative arts don’t have this problem, or the fact they start off with a damn sight more talent makes up for it. It was in the box of to get rid of books until I read How to get Unstuck, and figured I should reread it from a point other than desperation.

    That rough orientation is generally enough for me. though I have used the basic tools of project management for longer projects, such as the open source Gantt Project, and of course Excel has its place in the finance area. It’s not mandatory to leave all the useful tools untouched when you stop work.

    Work, cold turkey, rentierism, aristocracy and the Ermine

    I went cold turkey, or so I thought, because the word work became associated with a traumatic experience. This made the transition easier. And unwittingly, I overlooked some of the positive aspects of making stuff happen in the world for pecuniary reward, because it was associated with having to suck up to stupid crap. The two aren’t inherently linked, provided you don’t need the money. The money has some value – it is an estimation and recognition of exchanged worth.

    And I’m left with a load of inconsistencies and conflicting attitudes because I have simply buried this subject and left it, so it is still linked with outdated psychological forms. To live intentionally I need to dig this out, untangle the knots and live my values.

    The trouble is I have spent 30 years being motivated to work for money because Bad Shit would happen if I didn’t. That’s a terrible way to motivate anybody – it’s the Bad Shit that puts the slave into cubicle slave 5.

    for a man is rich in proportion to the number of things which he can afford to let alone

    Thoreau, Walden, delivering a message for the 1% that they will not hear

    And now, curiously, I have the edge on a significant part of the 1% – who all earn far more than I did. But they spend more, whereas I am within spitting distance of becoming a rentier. Much of the secret, as Thoreau observed above, is to reduce spending. If that works for you, of course!

    So the whole reason I worked for money has gone. The empty space still speaks – I cannot relate to some of the ways the retired ‘work’. I don’t volunteer. I don’t understand it, and at some level I find the concept demeaning, of working for nothing . Maybe I am just a bad person, maybe I will chill on that in time, though I doubt it. There’s still the echo of work being a four-letter word, and ending up in a situation where other people tell me what to do still reminds me of that fateful February day in 2009 in a one to one where I realised that the Ermine was out of luck, out of time and out of options but needed to suck it up for long enough to buy freedom.  I have added value to other people’s projects without being paid, because of this

    Still, it’s hard to suddenly turn off an educated brain.

    Gail Buckner, Fox Business

    What I really want to avoid is an ongoing commitment. It’s far more satisfying to start in the morning, get some tools together and wrangle something into a more useful form and then get out.

    irrigation system under construction

    irrigation system under construction

    That favours Stuff and kind of runs counter to the Don’t. Do. Stuff  argument, but most of the objections are lifted when other people have the problem of buying the Stuff and storing it, and all I have to do is show up sometime and turn it into a working system.

    So there are loads of inconsistencies and conundrums in my approach to work. None of them are urgent, though resolving and drawing the sting from the psychological hangups is probably worth the investment of time. I want to live intentionally, and not shadowboxing the psychic wreckage of past injuries is part of that goal.

    Grow – or begin to die within

    You have more opportunity for self-development and individuation when you own your time, but you have to engage and work at it. Many people really hate that – they feel they are adults and have it all sorted, that was the whole point of the first 20 or 30 years of their life. Individuation involves being more reflective, writing about what you feel or even things like the Artist’s way journaling. There’s often not enough time to fit that sort of thing into a busy working life, so it easily gets put on hold. It takes time to unstick that.

    Your vision will become clear only when you look into your heart … Who looks outside, dreams. Who looks inside, awakens.

    Carl Jung

    I’d really like to say I had done well there, but progress is slower than I had expected. I have started, and of course the process of individuation does not have an explicit end target. Journey, not a destination etc. There’s no point in wasting too much time trying to describe this because it’s very different for different people. Just remember that

    the day you stop growing is the day you start to die.

    William S Burroughs, Junky

    Observation shows that one of the big ways people go wrong when they retire is they stop growing, because most of their challenge was at work. Too much TV and too little curiosity kills the cat…

    Luck plays a big part in the story

    More than I had realised, and while it’s easy to point at the things that went wrong far more went right. I had rotten luck in two big areas at the beginning and at the end of my career – I bought a house at a terrible time, and I lost the last eight years of earnings by retiring early. I’ve had good luck in other areas – joining a final salary pension and getting nearly 24 years out of the design 30 in it is a large stroke of luck as is never losing a job since getting my first one 6. And if I was going to bail out 8 years early, then being a higher-rate taxpayer and recognising the open goal of the stock market next to me and taking the opportunity was another piece of luck – if I started now my ISA and my AVC savings would both be a lot lower after five years, assuming we aren’t about to enter the mother of all bull markets ;)

    The tl;dr version

    Looking back after two years I have spent about half of what I expected, and largely got away with retiring early. I am still not drawing on my retirement savings. I have a decent measure of what running costs are in retirement, I am probably underspending and have space to adjust upwards. Cutting costs helps greatly – it helped me save more when working and reduces the drawdown when retired.

    I have learned that being a generalist is also very bad for the way work is going, particularly in big firms. And the recovery from getting knocked out of the workplace by stress has progressed but by no means finished – even after two years.

    Retiring early is good  -I can allow the generalised interests that were becoming toxic in the workplace free rein, and they help me live cheaper than would otherwise be the case because of the various reasons skecthed out by ERE

    Flexibility and openness to new ways of doing things seems key to retiring early successfully.

    Notes:

    1. a smartphone has no optical zoom, and is preset for a good first-person shot of a human-sized object about 2-5m away. Which is what most people want and makes great Facebook posts. Audio recording seems to be stuck in mono and doesn’t take external microphones. Again, great for facebook video. To make a smartphone into a good camera or audio recorder, you end up with a great big smartphone which is stupid as a smartphone
    2. which is obviously a linear interpolation of an exponential function, but it’s okay with such a short period and relatively modest inflation
    3. this isn’t strictly true, as the HYP ISA pays a shade under 5% dividend and there is some unknown amount of capital appreciation too. But I don’t spend this
    4. This is a peculiarity of the short timescale of my DC savings of less than a business cycle. If my savings were the result of a typical DC pension this concern would be softened because I would have entered the market over many decades, the 4-5% SWR would have greater validity because I would have a better idea of what the true value of my savings really was after saving across many business cycles
    5. I use the Americanism cubicle slave because it is common shorthand in the personal finance world. However, the enslavement is just as much for anyone who has to sell their time or skills for money to keep Bad Shit from happening in their life – whether they’re a office worker, a CEO, a coal miner or a Big Issue seller
    6. there is a year’s hole when I took time out to do an MSc but I was sharp and did that in an economic boom so it was easy to get a job afterwards
    30 May 2014, 3:18pm
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  • Why Compound Interest won’t help you retire early

    I’m always the bad guy when it comes to the compound interest myth, but really, it’s not powerful enough to help you retire early. I’ve picked up the challenge, but the tl;dr reasons why are

    1. the real-inflation adjusted return on equities is too low and
    2. you don’t live long enough and
    3. you don’t work long enough (sort of related to #2)

    None of these are within your control.

    Wealth warning – nothing in this should be construed as saying that you don’t need to save into a pension in your 20s. All I am saying is one of the common stories about early pension savings is overrated to mythical extremes. Saving enough money to stop working is a tough job and takes the whole of your working life. The sooner you start, the sooner you can check out, provided you balance pension savings with the rest of the calls on your finances.

    What is compound interest?

    There’s a much more positive account of it not written by a cynical old git available here, but the definition is easy:

    Paddington Bear takes his money to the bank, and deposits a nice five pound note. A year later he gets £5.10. That’s because he gets paid interest on his money, of 2%p.a. Next year he gets 2% on £5.10. And so on until he is rich beyond his wildest dreams, apparently. The mathematically astute will observe that the future value of his investment is basically

    Present value × (1.02) ^years in the bank

    where ^ means raised to the power of. Now I’m going to cheat and raise Paddington’s interest rate to 5% for reasons that’ll be clearer later on.

     

    The Magic of Compound Interest

    The Magic of Compound Interest – 45x gains after 40 years, Whoopee-do

    And show you this chart. You will observe that if Paddington puts in £1 in 1974 and becomes a Retired Bear this year then he’ll get 45 times as much out. Fantastic. People use that sort of thing to give you bullshit like “when saving for 10 years is better than saving for 40” along with the obligatory wacky picture of Einstein, who is supposed to have said compounding is the eighth wonder of the world

    Fabulous story. But it’s fiction. I’m not contesting the maths – after 30 years as an engineer I’ve learned you don’t fight the laws of maths or physics. It’s incontrovertible that if Paddington got a real interest rate of 10% every year, his first year’s saving will punch 45 times the weight of his last year’s saving. Note this graph shows only what happens to the value of his first £1, not the cumulative value of his pension!

    That’s the story, but the devil is in the detail

    Detail #1: Whoa, boy, you said 5%!

    The sharp-eyed will, of course, spot that I said 5% at the start, in which case lower your gaze from the lofty value of 45 to the pedestrian boost of 7 times.

    That’s the first problem. As I described in an earlier rant on this topic, Warren Buffett, the most successful investor the world has ever known , has managed 13% annual return in real terms. So he’s doing better than 10%.

    You aren’t going to do that. You’ll get about 5% provided you can avoid screwing up, which is challenge enough in itself. Follow these ideas on passive investing and you stand a decent chance.

    That’s the trouble – to make the compound interest story interesting you have to sex it up with unrealistic values of return. And it’s gotta be the real rate of return, ie subtract the long-run rate of inflation from your nominal investment return as well as any fees. The FCA regulator doesn’t even allow people to use 10% for their optimistic projection rates for equity based pension investments. Repeat after me – you are not Warren Buffet.

    Detail #2: Most people earn more as they get older

    at least compared to the start. If they save as a percentage of salary they will save more as they get older. I deliberately selected a chart that made a dramatic entrance, because it’s all about that first £1. You save to a pension across your entire working life. A lot of the UK PF community seem to work in finance, where this may not hold because burnout is rife in that industry; it’s a young man’s game. But most people pick up some knowledge, skills and contacts so they can command a higher salary in their 30s and 40s than in their 20s. It’s much harder to save 10% of your salary when it’s £25,000 than when it’s £50,000, because the fixed costs of living are a larger proportion of your income. There are other pressures on people in their 20s that I didn’t have in my 20s, so it’s even harder, but even I found the cost of rent, house deposits and all that stuff hard in my 20s and early 30s

    Cumulative chart of all years contributions to total, zero real value career progression

    Cumulative chart of all years contributions to total, zero real value career progression

     

    cumulative total, 3 times career progression

    cumulative total, 3 times career progression

    These charts show you the total as a sum of all the contributions, growing. You can track how each of the contributions grew if you have the patience and clarity of eyesight. In the top one there is no career progression at all, in the second one over 40 years  the Ermine achieves a 3× real times value career progression (this happened to me over 30 years, which would make the later contributions even more equal with the early ones :) In the first chart £1 is contributed each and every year, and compounds at 5%. In the second chart I start off contributing £1 and then each year  it is increased by linearly interpolating to a final salary of 3× initial salary (ie adding £3)

    You can see in the first example the early contributions punch way over their weight, but in the second this effect is deflated by the increase in salary. The favouring of later contributions is in fact much heavier due to tax breaks  benefiting the better off more because –

    Detail #2a: It’s easier for the rich to save and they get more bang for their buck in a pension

    because they are saving 40% tax instead of 20% tax. So to save £100 in his pension a rich saver only needs to go without £60, whereas a basic rate taxpayer needs to reduce his post-tax income by £80. The fixed costs of living are usually still a lower proportion of income, so they get a win from that too

    Detail #3: Can you stick working for 40 years?

    Look around your office. How many 60-65-year olds are there?  If people start in your company at 25 then one in 8 should be old gits between 60 and 65. If there aren’t that many it says something about the likelihood of you working there that long. Now generalise that to your industry. Note how all the compound interest action happens at the end of the chart… 1

    I’m perfectly capable of engineering, still. It was the stupid gamification of the workplace and nutty management that I tired of and made me want out. Yes, maybe I was more mentally unstable or weaker than the average Brit. I don’t think it’s that huge – in my last year at work I had to rugby tackle one dude in the office who had just hurled a laptop computer at the wall, over a few colleagues’ heads because he was pissed off by something it was or wasn’t doing.

    I took his car keys, drove him home, stuck him in a chair and told him to get on the horn to his doctor. ASAP. The official story was that he tripped and dropped his laptop on the stairs. Mental health wasn’t good at The Firm. There are a few cracked paving slabs under some of the stairwells. You can’t open the windows in those stairwells any more…

    And it’s not good in a lot of places. We have people talking cock like this

    You need Emotional Resilience.

    For many people the workplace is becoming a worse experience. Some of the problems are fundamental. There is a power-shift from labour to capital which is particularly noticeable in developed economies because globalisation and improved communications dramatically increases the global workforce that can be brought to bear on solving business needs.

    So about that 40 years you need to work for compound interest to give you a leg-up, well, it’s time to roll out Clint again

    I didn’t bloody well make it to the modest normal retirement age of The Firm at 60. Will you? And I was lucky – after I got a job I never lost it 2  until I took voluntary redundancy at the end of my working life.

    Detail #4: if your workplace is no place for old men, compound interest ain’t going to help you much

    ‘Cos early retirees are drawing down their savings earlier, and so they have less time in pure accumulation mode

    Compound interest is oversold

    I’m not saying compound interest does diddly-squat for you – in that previous rant I came to the conclusion that it would give you about a 50%-100% uplift on what you pay in over a typical working life, less if you experienced career progression and saved more towards the end, more if you very given a pension at birth by your parents. But don’t get the impression it’s going to do a lot for you, and the Telegraph article was absolute bollocks – the 10 year saving beating out 40 years only applies at unrealistic rates of return.

    You can test this out yourself on Monevator’s Compound Interest calculator. An Ermine saving £100 a year for ten years at 5%p.a. gets £1500 at the end of that 10 years. The lazy tyke then sits back for the next 30, ending up with £6500 after 30 years of 5%. The Johnny-come-lately variant steadily saves £100 a year for 30 years and ends up with £7000. Who knows – the Johnny-come-lately variant might have put the £100 a year for ten years into a house deposit or starting a business, in which case it would benefit his finances in other ways. In my case the Johnny-come lately fellow earned twice to three times in real terms as the young pup, so he probably ended up with £14,000. The old boy was a 40% taxpayer too, so each £100 saved cost him £60 rather than £80. It’s just not a fair fight.

    become a long-lived vampire to get the magic of compound interest working for you

    become a long-lived vampire to get the magic of compound interest working for you

    You ain’t gonna get the rates of return that the Telegraph used, and unless you’re a vampire you ain’t getting to live long enough to have compound interest do the heavy lifting for you. If you get an employer match in your 20s that will probably do as much for your early contributions than compound interest will. The Telegraph had you working for 50 years FFS – life is much too short to donate 50 years of it the The Man. Life is not all about work. My earnings, for what it’s worth, although respectable and well above the UK average were low compared to what I’d estimate to be the majority of the UK PF community – I never earned anywhere near £100,000

    There’s a converse part of the story. If you are an old git in your late 40s and you suddenly find all four engines flame out in the second half of your career for some reason then compound interest does not mean you are doomed automatically. I saved a quarter of the HMRC nominal capital of my final salary pension in the last three years of working and filled ISAs and saved cash with NS&I. I was lucky enough to be standing next to an open goal in the form of the stock market when I started. And I was fortunate enough to have enough mental capacity left to seize the day.

    Compound interest will do something for you. But it won’t be earth-shattering, and it’s not worth flogging yourself into the ground in your 20s for. Try and take the employer match, because it’s rude to leave part of your salary behind. But before you believe the stories about the 25-35 making more difference than the 35-65 years do the maths. With realistic, not fictional values for the rate of return.

    Compound interest is particularly not going to help early retirees. I am a normal early retiree (less than 10 years to normal retirement age for my company). Very early retirement (40s) or extreme early retirement (30s) means your money only has 10-20 years to grow. Compound interest at 5% just ain’t gonna cut it, you’re own your own, which is why ERE’s logic ignores it totally.

     

    Notes:

    1. this is in fact a property of any autoscaled charts of that sort plotted on linear scales. If I were to extend it to a thousand years all the action would look like it happened at the end
    2. I did switch jobs a few times. But without gaps – when I left the BBC in London on Friday I came to Suffolk and started at The Firm on Monday
    27 May 2014, 5:35pm
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  • Hello Mr Putin, fancy meeting you here?

    It’s not an experience you get that much in the UK with its short distances, but when air travel was dearer, in the 1970s, it was worth travelling by train in Europe. You’d get off the boat at Ostende, and after some interminable shuffling, end up at the railway station, where you had trains that went to different countries, which looked really exciting to a young ermine. Sometimes the train would have a destination of two countries, depending on which end of the train you boarded.

    Unlike air travel, the train stops at many places, and different people would embark and disembark at the waystations. As you approached your destination you’d get a sense of the place you were going to by your fellow-travellers.

    1505_putin

    So in my ISA I found myself waking up next to this fellow with hard gimlet eyes. You get the feeling he’s not a chap who is unused to seeing a dead body that was alive not so long ago. It’s not a friendly face, eh? And you get the feeling the old boy’s known some troubled times. Here’s a fantastic album of Vlad doing all sorts of derring-do –  not bad pecs for a geezer who’s getting on a bit.

    Vlad, a word in your shell-like. If you don't like what's on TV you can switch the darn thing off. Chill, bro'.

    Vlad, a word in your shell-like. If you don’t like what’s on TV you can switch the darn thing off, particularly if you’re Prez, they ain’t gonna stop you. Chill, bro’.

    Exactly why he’s so bothered by the existence of Conchita Wurst is presumably something that’s between Vlad and his shrink, if they indulge is such effete decadence in between all the huntin’ and fishin’.

    However, it’s not so much Vlad himself but Russia in general I’m interested in.

    A lot of people have lost a shitload of money in Russia. It’s a different country – they do things differently there. The term ‘ownership’ and the general rule of law has a more fluid meaning, as the odd oligarch has found out to their cost. Smarter people than me indeed have had Russia cost them dear – the rocket scientists of Long Term Capital Management who believe that risk could be abstractly quanitified discovered to their cost that

    In times of stress, the correlations rise. People in a panic sell stocks — all stocks. Lenders who are under pressure tighten credit to all

    Crikey. No shit, Sherlock? That’s the trouble with being a rocket scientist, you haven’t spent enough time with people to realise that scared humans (or dogs, or wildebeeste, or pretty much any living thing) do not scatter preserving their individual independent calm assessment of the situation. They run like hell. Mostly in the same direction as everyone else. Dunno what the maths of that are, but it buggers up your kurtosis and fattens your tails. And drains your wallet.

    So why do I want some of this? Well, I’m not going to go stockpicking in Russia. But I’ve been toying with the idea of getting some exposure to Vlad’s country despite his sabre-rattling and raising the uncomfortable topic formerly known as ‘living space’ in a previous context. After all, that nice man Tony Blair wasn’t averse to making other people live as he wanted them to live, though it’s still not an attractive characteristic in a world leader. Like it or not, Europe is going to have to cut deals with Russian companies, unless a large part of Europe would like to freeze its rocks off this coming winter. Even if they do, the Chinese might like some too.

    Unlike the traditional view of investing for retirement, where you liquidate on retirement to buy an annuity, I will use the income from my ISA over the coming years, and that terminal horizon is still several decades off possibly. I expect the financial and political power of the West to decline relative to other regions of the world for a range of macro reasons, as well as the Spenglerian thesis that cultures grow old and tired as they become more distant from the shared values that invigorated them. That isn’t to say that I believe Russia will stand towering above the early/mid 21st century like a Colossus. This long-range section of my ISA is small, and it includes a bit of  Asia, a little bit of Africa and now a little bit of Vlad’s domain in the form of HRUB 1 . I can take a long time over buying these areas, because the aim is to hold these for many years. So I try and pay as little as possible. The pound is relatively high at the moment, so it’s probably a year for looking for foreign assets, and Vlad’s been pissing a lot of people off which also seems to scare the horses a bit. The index is a funny old thing, too, being the MCSI Capped Russia index – basically Russia is about Gazprom, energy, oil, Sberbank, energy, more oil, mobile, commodities. And the chart looks fantastic – full of absolutely everything you don’t want in a stock chart – nose-dive-tastic, if this was an aircraft and you’d lost 30% heading for the ground hail Marys wouldn’t really be enough to give you hope.

    Crashing nosedive - all-time low. Time to buy?

    Crashing nosedive – all-time low. Time to buy?

    So I couldn’t resist – a P/E of about 5 and a yield of of a gnat’s under 3% I figured I’d have some of what my old mate Vlad is having. It was the devil’s own job to get data on HRUB – I had to sneak in to HSBC and pretend I was a professional and then look for HRUD and switch currency to GBP. I favoured it over the db-x trackers flavour of the same thing (XMRC) which seems much more popular (or heavily advertised) because that is a derivative with Deutsche Bank as counterparty, whereas HSBC was physical replication.  Physical replication isn’t all it says on the tin, though, because they still lend stuff out, turning physical into synthetic-lite.

    But to be honest, if you’re going to invest in Russia then you’re not of the most nervous disposition, and you gotta be prepared to let it all go. This isn’t a huge part of my ISA ;)

    Actually buying it on TD was no fun either. They swore blind they didn’t have any of it, I have to look up HSBC, page through pages of cruft, click on the HRUB link, upon which they still said they still didn’t do it, but a crafty Ermine observed that they could run a realtime quote 2 and were actually prepared to sell me some. Which they did.

    TD. We don't do this, but since you're a crafty bastard we do.

    TD. We don’t do this, but since you’re a crafty bastard we do.

    Now if a company was on a P/E of 5 and a yield of 3% I’d pass. but most of Russia’s stock market is companies doing real stuff with Real Men digging crap out of the ground. OTOH my mate Vlad could say he owns the lot and the Ermine is unlikely to launch ICBMs to get my stuff back. It’s gonna be a case of back away quietly from the hard man, eyes to the ground and then beat it ASAP. Indexes don’t usually go bust but the Russian stock market does have form on that, I hear 1917  was a pretty rough year on the St Petersburg stock exchange…

    But in the meantime, the Ermine will ride with Vlad, though still looking nervously at those gimlet eyes…

    Notes:

    1. HRUB is the GBP denominated version of HRUD, but it’s easier to find charts for HRUD (dollar flavour) so I’ve used HRUD, so there’s a forex shift
    2. when the market was open, it wasn’t when I went back to get a screenshot of the crappiness of their interface
    23 May 2014, 12:43pm
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  • The subtle way Hargreaves Lansdown make their money

    One of the things I rather admire about Hargreaves Lansdown is the slickness of their operation. It’s a full-service shop, and the Ermine is nowhere near rich enough to fly First Class, use valet parking, or invest with Hargreaves Lansdown.

    Managing your income is an excellent way to stop feeding the Beast of HMRC – as a PAYE grunt paying the mortgage there were only limited ways I could do this, basically pension AVCs and employee Share Incentive Programmes though the latter were only good for sheltering about £1.5k from tax a year. However, it means an Ermine is now sitting in First Class of the investing platform world albeit with a cattle class ticket, and I get to see how HL works.

    One of the things you notice about First Class 1 is that paper is king. Ditto with HL, so the Ermine has this lot on the dining table –

    A single mailing from HL

    A single mailing from HL

    I recently read this article in the Grauiniad, which chimed in with the book Authenticity: what consumers really want I read from the library a while back, that we are increasingly being sold lifestyles rather than specific products. I’m still not sure whether the Grauniad article is really insightful or absolute bollocks, but anything that makes me think has been time well used IMO. A great quote is

    This is how capitalism, at the level of consumption, has integrated the legacy of 1968, the critique of alienated consumption: authentic experience matters.

    And I thought of that when I looked at this wodge of HL stuff. Clearly HL targets their advertising a people of a certain age, preferably people who have more money than I have and therefore can afford to not look a the price ticket too much :) One of the things that struck me is that it’s all about funds. For historical reasons I’ve never been that much about funds and the way the whole market is going I am going to get out of funds all together, because they induce platform fees whereas so far you can avoid platform fees on things like shares and ETFs. Not only that, but funds seem to offer the opportunity for all sorts of indirection and fees upon fees. This is clearly how HL operate. Their fundamental platform fee is 0.45% 2  – bearing in mind the long-term return form stocks is typically estimated at ~5% you’re paying a 10% income tax right off the bat, just for being there. The reason I have left my money there as cash is that this fee doesn’t exist for cash, though obviously you are paying the government about 3% inflation tax to manage the money supply for the benefit of mortgaged homeowners to depreciate the currency ;) However, since they are giving me back a load of tax I paid in previous years I can eat that.

    However, riffling through the HL paperwork, this is clearly a fund shop, and the fee loadings on the funds are usually over 0.5% so you’re looking at fees of over 1% just to be in the market. Annually. The Ermine is just not used to the concept of being rushed each and every year just to exist. But the words are warm, in the typical vapid style when talking about the unknowable future. Everything is good, and if it isn’t, it’s suffered a temporary setback and is an excellent buying opportunity. There was one chart that made me sit up and go WTF, which was the chart of the UK stock market by CAPE

    The UK stock market - good value right now

    The UK stock market – good value right now

    Now I look at that and think bloody hell, the reason I haven’t yet sorted out what I am doing this year is that the market looks on the upper side of the good value line to me. Better people have suggested that it isn’t so much the headline FTSE100 price level but that earnings are improving, but nevertheless I’ve still got some feeling for the WTF are we doing up here mate fellow, though it’s not as bad as it was maybe. That’s why I am looking at emerging markets, and Russia still draws me, with their PE of 5 nowadays, but I still can’t get my head round what exactly the meaning of the word ‘ownership’ is in a Russian context ;)

    Anyway, the UK stock market – good value by historical CAPE? There are three things wrong with that. The first is look at that great big spike from the mid-Nineties up. That, my friends, was called the dotcom boom. Everybody was charging around like blue-arsed flies buying anything with internet in it. Then anything with www. then any company with an e in the name. Seriously, it was a real case of the madness of crowds. Everybody’s brains fell out on the floor and some people are still looking for theirs fifteen years later. I was there. It really was that mad. I made about quarter of my gross salary in the run-up. And lost half in the bust ;) The training was excellent value, because I learned not to buy into momentum. You will run out of greater fools, because in general you are one of them.

    Just like Mark Twain said about the unique learning you get from carrying a cat by it’s tail 3there are some things you have to do to learn things in a way you can’t learn any other way.

    A man who carries a cat by the tail learns something he can learn in no other way

    Same with the madness of crowds, You gotta be in it to know it. The trick to success is to retain that knowledge  for future use. It’s always a fight…

    If we lop out that piece of irrational exuberance, the chart doesn’t look quite so wild, and there’s also a general downtrend, possibly because the power-shift from the West means the market may be prepared to pay less for any given earnings because it suspects that profitability is falling. After all, with the level of debt both personal and national, where’s the money going to come from to buy your stuff 10,20 years down the line? We can’t all keep borrowing from the Chinese ;)

    Standard Deviation? On Stock prices? Mr Gauss would not approve, m’lud

    The second thing wrong with this is that the trouble with using things like standard deviation on stock prices is that stock markets do not obey the central limit theorem. Mr Market is not a collection of independent random variables, and every so often everybody decides “Holy shit, the world is going to end”. On the flipside, we all sometimes decide that it’s all different now and we have reached a plateau of permanently increased productivity, which leads to irrational exuberance about stock prices. In priciple a government can row back against that by increasing interest rates, but on the other hand they can promise all sorts of Good Stuff to the electorate to get re-elected. Any resemblance to Help To Buy is of course purely coincidental. As a result, the distribution is fat-tailed and is not typical of a normal distribution, so using standard deviation of a normal distribution is iffy. Companies got into hot water with their value at risk calculations because they were seeing events that typically you’d only expect to see in longer than the age of the universe – in about ten years. It actually staggers me, that, in trying to substantiate this paragraph, I discovered people really did use the normal distribution as the model for financial markets.

    I am sure that once upon a time, the level of general and scientific knowledge in the West was widespread enough that it would have been obvious what was wrong with doing that to people in a professional organisation. We seem to search more and more for stupid metrics and valueless numbers rather than seeking knowledge. The world is complex, it’s messy, and one size rarely fits all. The abuse of the scientific heritage of the West that this represents is shocking. This is not new stuff – Carl Gauss died in 1855. Mind you, to my shame I only scored a lousy 5 on the Grauniad’s science quiz so clearly the rot is spreading. But I’m not in charge of shedloads of other people’s money.

    Have you ever seen what happens in a mass of humans when somebody yells Fire? They all lock into each other and start running the same way. That is not a canonical example of a set of mutually independent variables acting individually, so the central limit theorem breaks down. In crises – at the very time when you need your model to work to qualify the severity of the problem. Maths doesn’t help you in dealing with human emotion.

    The third thing wrong with that chart is the data source: internal, with the data set from Jan 1974 giving a veneer of respectability to something that, basically, HL could have made up entirely. And since they benefit from shifting your cash into their funds there’s always the temptation. You can’t validate that data against anything. HL might well have said “trust me, I’m a salesman”.

    I have nothing but admiration for HL

    HL did serve we well when the Chancellor decided to improve the usefulness of DC pension savings no end - just before the end of the tax year! So I needed a place to stash £2880 with a pension firm, pronto, and HL were the only people who managed to open an account and take the money, within a week. TD, my current ISA provider, demanded proof of identity through the post, because their system isn’t joined up presumably, and Cavendish were also after that.

    Now the ermine is not a million years away from getting my hands on that money back, and in a rare turn-up for the books, I can claim back 20% of the tax I paid on earning that money – by simply leaving it with HL and HMRC will add £720 to my £2880. That’s an effective interest rate on cash of about 12% (it’s amortised over two and a bit years) and I can do the same next year and the year after that, for an interest rate of about 20%. I don’t know about you, but I sure as hell don’t know anywhere you can turn that sort of interest rate on cash. Okay, so it is only the money stolen from historical pay packets being returned to me, but it’s worth shifting an Ermine paw and banking with the might of SIPP rather than the Nationwide. I stand to win about £2000 back from HMRC. The trick, of course, is to manage one’s income and make sure I don’t have any when I hook this cash back out – it’s about £10800 which is currently above the personal allowance, but you can get 25% of it tax-free. By living on this for a year I get to defer my main pension, too, which goes up by ~5% each year I defer. Although actually 4% since HMRC will be tapping me for tax- I’m tempted to save my taxable part of the pension into a SIPP to reduce the tax on my pension to 15% since I can manage the cash-flow. The main challenge is having enough cash reserves to keep loading my ISA allowance each year, which has suddenly got a bit harder with the increased allowance. I may consider taking out an cash loan for the last year, if anybody will lend me some money, simply to fill up that ISA allowance. 4

    The Ermine has been freeloading on the money that fund investors have been putting in for years when it comes to the costs of running a platform. I don’t need the lifestyle stuff, but I’m happy for it to pay for my seat on the boat. Most of HL’s customers have a lot more money than I have, so every so often they may see the flash of white fur and a small black tip to the tail scurrying about, but in the end it’s the rake of their wealth that is keeping this ship afloat and in good condition. I salute my well-heeled fellow passengers and raise a glass of proscetto to their choice of lifestyle, if not their quest for value for money. Perhaps the Guardian article was right. When you have enough, you don’t need to seek value for money. The quality of the ride may matter more. HL is selling an experience – giving you the warm feeling

    “You are a wealthy sort of chap, probably a chap, probably 50+. You are knowledgeable in the ways of the world, so here is a shitload of complexity and a teeny bit of salami-slicing of fees. Needless to say, an experienced individual of your calibre has the savvy to make shitloads of money from these fine opportunities despite the fees, so take it away from here. For those of you into shares, we now offer real time live share prices, so you can ride the markets like a pro. Come on in”

    And they do – HL is apparently one of the biggest retail investment platforms in the UK.It’s a slick operation, and probably a nice ride. just not the cheapest. Except for their okay 0% rate on cash, which will do me fine. I live in hope that the new NISA integrated accounts will actually pay you a return on cash, but it’ll never approach the HMRC rate on a SIPP.

    Notes:

    1. I’ve never flown First Class, though I flew Business class enough for work, and you got a lot more bumph there too compared to cattle. But it’s a long time since I have boarded an aircraft – not because I can’t afford it but the experience is so horrible and I get to hate my fellow humans so much for their screaming brats and inability to follow written instructions holding up the queues. So I really try not to do that to myself, or them.
    2. capped at £200, corresponding to an account value of £45k. Now my ISA is more than that, but I don’t currently pay £200 to TD to hold it. I checked last year’s statement and my platform fee was £2.31, so HL are 8600% dearer. In fairness, I made 9 purchases and zero disposals, and HL are 65p cheaper on share purchases, so the difference of £5.85 should be added to TD. So HL is only 2450% dearer than TD, a much more manageable difference for some chrome trim and a slicker operation, no?
    3. I suspect he didn’t say that directly, it is a paraphrase of  Tom Sawyer’sa person that started in to carry a cat home by the tail was getting knowledge that was always going to be useful to him, and warn’t ever going to grow dim or doubtful” but I’m damned if I’m going to surrender the thought picture on the altar of technical accuracy.
    4. You should never, ever, borrow money to invest in the stock market. However, I have a large AVC fund that is in cash and can come out when my main pension commences. So I am not borrowing money I don’t have, I am borrowing money that I can’t access yet. If you want to borrow money to invest then you may as well go into spread-betting.
    11 May 2014, 10:58am
    personal finance:
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  • The Scotland problem

    Something’s afoot later this year, and I can’t really get my head round the finance implications. Two things are afoot, indeed, and they are loosely related from an Ermine’s viewpoint.

    One is the increased ISA allowance to 15k, and so far I’ve chosen to ignore Under the Money Tree’s sage advice and get my capital in there ASAP. Unlike UTMT I have no income and need to be more cautious at this particular stage, but more to the point I am well over the FSCS limit in my existing ISA, because unlike my Cash ISA, which is busy going nowhere, and indeed backwards in real terms, S&S ISAs tend to grow a bit over the years, which whopping heart-rending retrenchments every few years. I was fortunate enough to start just after one of those.

    And there’s an event on the horizon that might make FSCS protection more important. It’s the threat (from my point of view) of Scottish independence.

    Tomnaverie stone circle in Aberdeenshire

    Tomnaverie stone circle in Aberdeenshire

    Fantastic place, Scotland – wide open spaces, loads and loads of marvellous megalithic sites, people with a great engineering tradition and wide open spaces. Okay, so it gets brass monkeys in winter and don’t even think about going near water in July ‘cos the midges will eat you alive.

    It’s all about to get a lot better, ‘cos that nice Mr Salmond has invited the Fairness Fairy to sprinkle a bit of magic pixie dust, and he’s written it all down in Scotland’s future – Your Guide to an Independent Scotland. Here are some of the things he will bring to the good citizens of that fair country

    • Scotland will continue to use the pound,
    • guarantee that the minimum wage rises – at the very least – in line with inflation
    • a commitment to increase the personal tax allowance, benefits and tax credits in line with inflation
    • single-tier State pension at the rate of £160 per week in 2016

    More spending and less tax, what on earth is his secret? I’m not quite sure what sort of crack he’s smoking, but he clearly has a good dealer. Now I am all for the Scottish people having the right to self-determination, and there are some obvious cultural differences with England that stretch beyond football. The country is much more left-wing than the UK as a whole. There’s nothing wrong with that and indeed we might all live a little happier if we cared a little bit less about money and more about people. I can see that it sticks in the craw to have a largely Tory government when Scotland returns no Tory MPs. If people in Scotland are that pissed off with being part of the UK then they will vote accordingly.

    Now independence comes with rights but also responsibilities, and I’m buggered if I understand the sort of independence that uses another country’s currency, never mind your ex’s currency. Managing the money supply to broadly track the amount of goods and services in your economy , your appetite for national debt and foreign goods is all something you can do when you run your own currency. It’s possible that the Calvinist roots of Scotland will mean it powers ahead of the rest of the UK despite the tendency of the Fairness Fairy to run out of other people’s money, in which case with the Pound Scotland will be Germany to the rUK equivalent of  Club Med. But without the power of Germany. In that case the spendthrift English will borrow against the hardworking Scots and spend all their money until they a) access the EU and b) join the Euro in which case the Germans will save them. Until the Germany runs out of young people in about 20 years time.

    Alternatively the Fairness Fairy might start to run out of other people’s money and the Bank of England will seek to cut the supply off. That will cause plenty pain for rUK because it probably means higher interest rates, but given the relative numbers it will cause ten times more pain for Scotland. So have some self-respect, guys, and create a currency (Salmond?) ASAP and start managing your own financial affairs. What part of independence do you not understand, exactly? It’s not like we are still under Bretton Woods and Scotland can do like Australia did in ’65 and switch to the AU$ and £1=2AU$ until the 1970s. Yes, the pound is convertible and available on the open market. But like all those Hungarians and Cypriots who took mortgages denominated in the Swissie and found out how that can turn into a world of hurt the fact that you can do something doesn’t mean you should. The whole point of being independent means that you want to run things differently from the UK. Lockstepping the currency for any longer than you have to is a strange way of going about that.

    Scottish independence and the Ermine

    My problem with Scottish independence isn’t about independence as such, but the damage and turmoil that could do the the economy of the rest of the UK. What the bloody hell are we going to call the rUK then – the disunited kingdom? The Shattered State? At the moment the pound is relatively high (compared to the last few years) and that makes a case for buying foreign assets, given my ISA has a heavy home bias. It’s what I have been doing of late, to lean against that – a bit of emerging markets, a bit of Africa. I’m almost tempted by some Russia, but only a small amount. It’s hard to work out what the meaning of ‘ownership’ is there…

    However, I don’t want to open an ISA until I can open a NISA because I need to use a different company that TD. Obviously I will make sure it’s not one domiciled in Scotland, in the end if I want to open an offshore account 1 then I’d want to choose somewhere in a country that is far away from the UK and not going through birth pangs as well.

    The Ermine is not a funds sort of person, which is nice because an awful lot of funds are run by Aberdeen Asset management, and I will look at the policy of some of my investment trusts too. And I don’t really fancy having a lot of money tied up in a company in a new-born state trying to work out a monetary policy. Capital controls can go along with that. I don’t like Alex Salmond, I think he will say anything to get his own way, and I bloody well don’t want to have any money exposed to him or his world view. After the dust settles, Scotland may well be a good place to  invest – the Scottish people will be able to straighten themselves out and get to work building a country that expresses their world-view. At least with Russia you know that buying a small stake in Mr Putin and that the rule of law is tenuous; this is what the risk premium is all about. With Scotland because of the policy vacuum it’s all about unqualified risk for anybody in the rUK because we get to eat the downside with no exposure to the upside of all that Free Stuff from the Fairness Fairy.

    On the plus side, it is at points of turmoil that opportunities show themselves. So having an ISA open by August with the higher available is an exciting opportunity – sort of like the summer of 2011 but hopefully without the rioting. Scottish independence, should it happen, should be a happy event for Scotland.

    Of course it may all be a damp squib or other events like the clanking of Russian armour rolling into Kiev may cause more widespread issues. But I’m surprised the prospective breakup of the UK is met with such equanimity in the(r) UK PF scene.

     

     

     

    Notes:

    1. I know there aren’t any offshore ISAs :)
    11 Apr 2014, 4:36pm
    housing
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  • Mortgage income multiples and affordability

    One of the ways people are finding to pay more for houses is to switch from the historical use of income multiples to the new measure of ‘affordability’. The former gives the wrong answer, but the latter is great. Progress is good, but it’s worth understanding. When I bought my first house in 1989 mortgage providers would qualify a prospective mortgagee by asking how much did they want to borrow as a proportion of their gross salary 1. You’d typically get a mortgage of 3.5 times a single salary or 2.5 times joint salaries in the case of a couple.

    These sound low today. To the extent of being unworkable at current house prices for most people. It made sense 30 years ago, because Britain had just come off a run of double digit interest rates, personal taxation was much higher (the personal allowance nowadays is over a third of the median salary of £26,000, it was lower relative to salaries in the past). It is instructive to observe the relative proportions of mortgage interest and capital repayments over the typical 25 year period at 10% interest rates and the current ~2% rates.

    You spend much more time repaying capital at 2% APR

    You spend much more time repaying capital at 2% APR

    Compared to, say, my mortgage career at higher interest rates

    you pais a higher absolute amount relative ot the price of the house, and you pay interest for longer in the old days

    you paid a higher absolute amount relative to the price of the house, and you pay interest for longer in 1980s/1990s

    Which is much more like the canonical sudden rush of repayment towards the end that we used to know and love. When you tot up the total amount repaid, the 2% fellow pays 3*gross or 4* net salary, the 10% guy pays 7*gross or 9* net salary 2

    There’s clearly some case to be made for increasing the income multiple – provided that interest rates stay the same. After all, if we say I was paying the long-run British average of about 6% interest rates over my working life, then had I been earning the average wage, I’d have sunk 6*net/5* gross wages into my house 3. If it’s all different now, and low interest rates are here to stay, then it’s perfectly justified to sink twice as much into a house. In the end it’s what you pay over your working life that matters, and at lower interest rates the total amount paid is less.

    So bring it on, let’s run at twice the income multiples that were lent to people 25 years ago. That’s 7* single income and 5* double incomes. Now 7* median single income will buy you my house I believe, so the residual 10% gives you room to may the parasitic costs of moving and all the hangers-on.

    This isn’t recommendation or otherwise. Housing still rates as the greatest finance screw-up of my life, so what do I know ;)

    Thing is, it’s all different now are the most dangerous words in finance. Secular changes takes years to take effect. QE can’t last for ever. If you’re looking to buy a house as a first time buyer, you may not like Buy-to-Letters who are essentially front-running your heart’s desire. But say what you like about them, they’ve probably got a fair awareness of the mortgage market.It’s the oldest law of the jungle – when the big beasts start looking nervous it’s worth knowing why…

    Some of the BTL guys are running scared and fixing

    And it appears some of them are running scared and remortgaging now. Had I bought just three years later, the Ermine would probably be a buy-to-letter with a deep belief in the value of housing rather than still feeling it was a Weapon of Mass Wealth destruction – one’s early experiences with an asset class tend to be formative. However, I have recently seen younger BTLers come a cropper with the usual problems, underestimating the effect of voids, and underestimating the chavviness and lack of character of some tenants. As a tenant years ago I only saw the lack of character of landlords, but it seems to cut all ways. The residential housing market seems to bring out a particularly nasty streak in the British psyche – buying and selling houses is pretty horrible experience too. BTL landlords seem to need significant capital resources, and preferably a number of BTL properties to average these lumpy setbacks.

    It probably is a bit different now…

    But not as much as to justify a doubling of price to earnings. 4 or 5 time single, maybe. The double salary premium might go up a little bit more – mothers return to work quicker now than they used to. Let us postulate that it’s all different now. Mortgages are given on an income multiple of 7 times single salary, but it is required that you have a 10% deposit (ie 90% of the purchase price is advanced to you). Sounds fair enough?

    Let’s take a look at what your monthly repayments would be like, assuming you’re on a standard variable rate, ranging from the 1% it’s around now to the 14-16% at the high-water mark of what I saw in my mortgage career.

    your mortgage payments as a function of annual interest rates

    your mortgage payments as a function of annual interest rates

    at 15% you’re paying out more than 90% of your net pay in mortgage. Nothing left to pay bills, council tax and you had better become a breatharian or start scavenging food from bins like Top Cat. Note that you don’t have to see sustained rates like this for several years. Just a couple of years of that can slaughter you unless you have significant savings behind you. It all boils down to the usual question.

    I’ve been there – well less than that, but I’ve spent more than half my net pay on the mortgage.

    If you’re going to start down that track then at least know what the enemy looks like. This has nothing to do with negative equity, it’s straight interest rates. You need to either have savings, live more frugally, or get a payment holiday. Those savings need to be about two years of running costs. Then it’s a fair gamble, because after two years of 15% interest rates Britain will look very different. The general misery would be such that some government would probably have to do whatever it takes to reduce them, or start dropping money from helicopters 4.

    an old idea from 1969

    an old idea from 1969

    Your aim as that homeowner is to be still standing when all the people around you have been repossessed.

    It can be done. But it’s rough being the house between two evicted properties. You do start to wonder when it’ll be your turn. It’s no fun at all…

    Frugality is the solution there; by definition. If you were earning more then your earnings multiple would be lower. It’s not something that sits easily with expectations now. And God help you if you have any other debt.

    Income multiples will matter again if interest rates rise to historical norms of ~6%. Mr putative 7 times net  income multiple will be paying ~50% of his income on the mortgage.

    Methodology

    This spreadsheet. I calibrated it against this calculator and derived the formula from Francis Webb’s Mortgage interest calculator template. 5

    I’m done with property now. Even after 25 years the thought of residential property as an asset class brings me out in hives ;) Good luck all and be careful out there.

     

    Notes:

    1. The rationale for gross salary was Mortgage Interest Relief At Source(MIRAS) allowed you to pay the interest from pre-tax salary. Barmy, I know, though notably the United States still has mortgage interest on residential property as tax-deductible I believe
    2. I have assumed the 3.5 times multiple applies to net salary since you don’t get MIRAS any more
    3. I earned more than the median wage for nearly a lot of my working life, so this isn’t that bad. However, I am looking for the scale factor, the old mortgage income multiples were workable, many people have paid off their mortgages from then
    4. Milton Friedman, 1969 The Optimum Quantity of Money And Other Essays
    5. I regret to say that I didn’t bother trying to understand the function, simply copied it and tested it against Monevator’s calculator. It was too nice a day to wrangle that sort of detail, so as long as there isn’t s systematic error across both sources it should be right :)
    6 Apr 2014, 10:40pm
    economy housing personal finance:
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  • The Ghost of Negative Equity will stalk the land again – a cautionary mortgage tale from 25 years ago

    What was the dumbest thing an Ermine has ever done in personal finance?

    I bought a house in 1989. With an endowment mortgage, a 20% deposit and a 10% interest-free loan from a credit card, which I paid back. The how isn’t the mistake, though it had errors. It’s the when. 1989, and early in my working life.

    You can’t go wrong with property. everybody needs somewhere to live. Safe as houses

    Bollocks, says the Ermine, with feeling

    This is a story from a distant front line for first-time buyers in the first half of their working lives. No prediction about house prices is made or implied, because the market can stay irrational for longer than you can stay solvent.  Most of us will only get three quarter-centuries in our lifetimes, and the first 25 years is wasted on learning how to drive the world, from the mewling and puking stage to young adult, ‘cos humans are slow learners with grand ambitions.

    Of all the financial asset classes out there, residential property is exceptionally evil, because we buy the asset class in the first half of our working lives, with borrowed money. For the simple reason that we want the byproduct – it gives us somewhere to live.

    If you’re over 35 and think Buy To Let when you hear “house” don’t bother reading this. You are much better capitalised than a FTB, you have more experience, you can make your own risk assessment, and quite frankly if it all goes titsup you have only yourself to blame.

    The Ermine is the Ancient Mariner

    The Rime of the Ancient Mariner

    In Coleridge’s The Rime of the Ancient Mariner the Wedding Guest hears, but does not understand. I was once that Wedding-Guest, in 1989 – people did suggest to me that it might be an unwise time to buy, what with all the frenzy of MIRAS 1. But that’s the trouble with housing, you WANT IT, WANT IT, WANT IT so bad. RENT IS THROWING MONEY AWAY, MUST MUST MUST get on the HOUSING LADDER. So you lose your mind. If this tale is a warning for you, you will not heed it, such is the way. But like the Ancient Mariner, I’ll tell it anyway.

    1404_hamsterwheel

    what the housing ladder seems to look like

    I’ve told it before in February when my original 25 year mortgage would have been due, but this one has added analysis to show just how badly it could have gone wrong. Imagine, for a moment, some starry-eyed young pup in the pub talking to his mates

    I’m going to borrow a shitload of money – five times my gross salary, if you please, and I am going to stick it on the stock market, in a FTSE100 tracker.

    Hopefully they’d wrestle him to the ground, or at least ask “are you crazy, man?

    Same pub, same bunch of mates, and he goes “I’m going to borrow five times my salary, and I’m going to buy a house

    And everybody around the table goes “hey that’s fantastic, congratulations you’re getting on the housing ladder, woot” and high fives him.

    Jenn Ashworth

    Jenn Ashworth

    The Grauniad’s personable Jenn Ashworth tells us that by 31 she’s had 14 addresses. And she’s sick of it. Sorry, dahlink, it’s not that unusual. For an ermine that was

    1. parents (SE london)
    2. Southside (Sth Kensington halls of residence, now demolished)
    3. Earl’s Court shared room three storeys up, gas appliances defective – you lit the oven throwing lighted matches into it
    4. Knightsbridge bedsit sublet from someone who did a runner with three month’s rent. The ermine learns that people steal money
    5. Different and crummier part of Earl’s Court
    6. short stay with parents – 1 hour commute to work, then when I moved to the BBC a 3 hour commute to work. enough to get me out ASAP into
    7. Acton Town house shared with four other guys, deposit stolen by landlord, shower powered off lighting circuit so I had to isolate before getting killed/burnt down.
    8. Southampton student accommodation (I took time out to do an MSc)
    9. Alperton shared with 2
    10. Ealing 2 bedsit infested with black slugs. One month’s rent stolen by landlord
    11. Ipswich digs 1
    12. Ipswich digs 2
    13. first Ipswich house this article is about. This is only the second time I had my own toilet and bathroom ;)

    I was in my late 20s then. Having lots of addresses goes with the patch of being young ;)

    How did buying a house all go wrong for me?

    Thatcher and Nigel Lawson

    Thatcher and Nigel Lawson

    Let’s cast our mind back to what the world looked like in 1989. Nigel Lawson hadn’t discovered climate change or that money was to be had in denying it but he had discovered money, he was Chancellor. There had been a boom going on ever since the end of Thatcher’s first recession (1980-82), the young Ermine had switched jobs a few times as you do in your twenties and discovered that while London was a fantastic place to be young in I was never going to be able to buy a house unless I got a better job than design engineer for the BBC.

    So I left to come to Suffolk and work for The Firm, at the time a premier research facility for a FTSE100 company. Fantastic place to work, the pay was better and houses were cheaper less expensive than in London.

    Young ermine to world – what is this Boom and Bust you speak of? I have no experience of that, so it doesn’t happen…

    You know how kids are absolutely convinced you can’t see them if they can’t see you? Well, that sort of thought error doesn’t always stop at 11. I graduated in 1982 into Thatcher’s first recession. All I had seen over my working life was an improving economy. I started in the pits of six months of unemployment as the economy slowly crawled from the wreckage, then getting the first real job, all around the gradual upswing was the backdrop of what I expected of the economy. So I rock up in 1989, and house prices are rising, the economy is booming, everybody is feeling chipper.

    25 years of high living has taken its toll on our Nige. presumably the Domestic Goddess got her looks from her mother :)

    25 years of high living has taken its toll on our Nige. Presumably the Domestic Goddess got her looks from her mother :)

    That Lawson bloke says he’s going to stop couples getting mortgage interest relief at source. At the time the Ermine was not wise in the ways of the world, so I didn’t join up the fact that this would give everyone Torschlußpanik thus increasing demand for a short time, leading to a ramp in price 2.

    That sounds incredibly dumb, now. In fairness to my new colleagues, several of them did even highlight that possibly there might be distorting effects due to this policy which might be something to think about. However, in one’s late 20s you’re so flushed with the grand victory of having spent your first 25 years successfully getting a handle on how the world works. And you haven’t had the stuffing knocked out of you by discovering that your map of how the world works has holes, and by itself doesn’t track changes in the world. So you are smarter that everyone else and invincible. The good news for me was I made that class of mistake at the wheel of personal finance, rather than at the wheel of a car…

    So I bought that house. With an endowment mortgage, if you please. Single man, no dependants, so the life insurance aspect of the endowment was worth sod all to me, and The Firm’s pension offered death lump sum anyway. A dead young Ermine would have been worth a lot of money to someone.

    My parents, bless ‘em, had done their bit for my financial enlightenment – although it seems that these days parents don’t bother to share the hows and whys of personal finance mine did.  I knew how mortgages worked and what the difference between and endowment mortgage and a repayment mortgage was. Hell, I even knew what the NAV of an investment trust was and how it could be at a premium or a discount, though I wasn’t to use that knowledge for 20 years. And had been educated in no uncertain terms that an endowment mortgage was a dipstick sort of move. But hey, the LAUTRO saleswoman had pretty green eyes and how can you turn down the promise of a 3x lift on the expected endowment outcome 3? It sounded good to me! That’s the trouble, you can know something but not understand it. You can teach knowledge, but you can’t teach wisdom, because wisdom is integrated knowledge. I had always seen things getting better throughout my working life, so I knew that house prices were always going to be rising relative to wages, and I feared getting left out.

    1404_2ITNow some of that knowledge was correct, but not for the reasons I understood. House prices were rising relative to wages because of the increasing entry of women into the workforce since the 1980s. Prior to that, a household typically used the man’s wages to pay the mortgage from, but all of a sudden households had more resources available to them, with two incomes coming into the household. What they did with that is throw it down the toilet of inflating house prices, so houses got dearer relative to wages, and everybody moans how hard it is to have children and afford a house these days, because more of the combined household capacity to do work is focused on paid work outside the home. Don’t shoot the messenger – Elizabeth Warren’s book first highlighted to me exactly why I struggled so hard to raise the cash to buy a house. I was a single man, at a decent job, with a 20% deposit and in interest-free loan of 10%. I was fighting couples with two incomes, and that’s not a fair fight, hence the difficulty.

    So I purchased the house, settled in, had all the usual shocking costs you have when you buy your first house because you have no furniture (I bought mine secondhand), you have no tools, you have precious little physical capital. I was paying 6.5% on the low start (ARM) loan 4, and paid back my interest free credit card loan in one year, as required. What I didn’t pick up was that there was a shitstorm. Incoming. Take a look at this

    the total costs and savings associated with buying a house. £ on the lHS, % on the RHS

    the total costs and savings associated with buying a house. 2012 rebased £ on the LHS, % on the RHS. It also explains why the greybeards have all the money…

     

    It covers a period of a little over twenty years, and shows the inflation-adjusted to 2012 prices equity, payments and imputed rent of an ermine’s first house 5

    Now every bugger tells you you can’t lose on houses. Take a look at the equity blue line, which shows the difference between the house price tracking the index for that year and what the purchase cost was. For ten long years that line is negative. You can’t lose on houses. Until you do, and then you lose big-time.

    In negative equity you cannot move, must not lose your job, and must keep paying the mortgage

    Because if you don’t, you get evicted from ‘your’ home, and to add insult to injury, they flog it at a knockdown price, and unlike in the States, they still come after you for the difference. It happened to my neighbours and a few other places in the street. The mortgage company comes along, sticks a notice on your window that this property will be foreclosed on such and such a date, and you’re out on your ear. Oh yeah, and you still have a mahoosive debt that follows you around like a lost dog.

    What do all those coloured bars mean?

    Although everybody talks about houses as if they were a financial investment and part of your free cash flow, only BTL landlords buy houses as a straight financial investment. The rest of us buy them to avoid paying rent, and give us a place to put all our stuff, watch TV, make love, raise children, all that sort of thing. You can do all that in a rented place too, but since you ‘own’ a house you don’t have to pay rent on the house. Instead you get to pay rent on the money you bought it with. So instead of throwing it away paying it to a landlord you throw it away paying it to a bank.

    The red bars represent all the cumulative money I saved through not paying rent to some shyster landlord, estimated at about 4% of the Nationwide adjusted house price and then scaled to 2012 prices by inflation. It is possible these should be adjusted to interest rates, in which case I understate the cumulative benefit of the rent I didn’t pay.

    The blue bars represent the cumulative excess that I paid over and above the cumulative amount I would have paid in rent to a landlord 6, because I am paying it in rent to a bank. This is also adjusted to 2012 pounds, like the rent. I am buying a great big wodge of Stuff, so obviously it’s gonna cost me more than if I just rented the usage of it for 25 years. You can see that even after 24 years I’ve actually still paid out more than I would have done if I just rented. This conundrum is basically why you rent when you are poor. It’s cheaper, and that was particularly the case at a time of very high interest rates, of which more later.

    The lime green bars are the equity in the house, the same as the blue line, but tossed on the debit or credit side of the ledger as appropriate.  The value of the rent is the value delivered by the asset, and looking at the blue lines which are the excess paid over the value gotten as rent I would estimate break-even in about 25 years. However, since this is an asset that increases in value and is bought with borrowed money I actually broke even in 2001, when the increasing value of the house added to the accumulated rent I hadn’t paid beat out all the money I had paid to the mortgage company. Note in 2001 I don’t own the house as of yet, it’s just that I could theoretically sell up and breathe a sigh of relief that I hadn’t paid more than if I had rented.

    Why was that such a big mistake?

    I stayed put for 10 years. Now imagine all the shit that can go on in a life.

    • You can lose your job. There was a hell of a recession on in the early 1990s. Look at what would have happened in 1993 – I would have been foreclosed, would have lost £20,000 in 2012 money, would be bankrupt and without a roof over my head. No fun at all.
    • If you buy the house in your early 30s the pitter-patter of tiny feet tends to happen in the next decade. Tragically unromantic, but the years after the first child are high risk years for relationship breakdown. If your house is in negative equity you’re going to take a big hit at a rough time
    • You have to move for work. Now you get to rent your house out and rent another. There are parasitic costs and voids associated with renting a house out

    I was single when I bought that house so I avoided 2 but the other two scared me. For a long time. This graph simplifies things so I assume I have a 100% mortgage. I was dumb, but not that dumb. I had a deposit and an interest-free loan from MBNA, to the tune of 30%, but even so I was in negative equity till about 1995. Negative equity kills you fast and kills you good, because of the leveraged way we buy houses.

    Was it just an ermine that got this wrong? No, apparently a million other dumbasses had such an awful sense of timing as I did – but this newspaper article is from 1992, so still in radio silence on the Internet, because the WWW started in 1994.

    With roughly ten million mortgage holders, that means that more than one in ten people with mortgages are trapped by debt. They are unable to sell till prices go up. They can’t sell and are stuck. [UBS Phillips & Drew]research analyses house price falls and the number of first time buyers, the group most likely to be in trouble because at least 50% of them took out mortgages of more than 95% of the value of their home.

    Rachel Kelly,  “A million first-time buyers caught in mortgage debt trap.” Times 24 Apr. 1992: 4. The Times Digital Archive

    I had a 30% deposit (ie a 70% LTV). That wouldn’t have helped me in the suckout, though it did shorten the period of negative equity relative to that shown on the chart, by shifting the line up a bit.

    So how does that affect Mr Wannabe 2014 house buyer? Houses always go up. Everybody says my house is my pension.

    To be honest, I don’t know why everybody says my house is my pension, though RIT has a good take on that subject. It would scare me shitless if I had housing as a large part of a pension, because you need several houses in different areas to get sector diversity, the baby boomers are going to die off in the next 20 years so their houses will be sold and it’s hardly like I’ve seen property as a great wealth store. Everybody else has it as a religion and who am I to criticise other Britons’ religion as long as they leave me be. Fill your boots guys.

    If they’d bought a house worth of the FTSE100 on the same leveraged basis and paid their rent with the dividends they would probably be saying the FTSE100 is my pension. It’s buying a long term appreciating asset with leverage and not trading the bugger come what may and not getting marked to market in suckouts that makes houses a good investment – if you stay the course and don’t take those hits in the early days. Look at that chart and note that buying on a high meant I was exposed to the risk of having to sell up and having the house marked to market at a loss for a third of my working life. Safe as houses, guv, safe as houses.

    The cyclical rises and falls of the house prices are slower than those of the stock market. Just because it’s a quarter of a century from the last turn of the cycle doesn’t mean it’s all different now, like the mills of God this one grinds exceedingly fine and exceedingly slow… 25 years ago jobs were more stable for the average employee, waiting to pass through the meshing gears of the mill until they turned you out the other side was a realistic option. But look at that 10 year suckout. It’s one of those questions you gotta ask yourself, really…

     

    So what is different this time? It’s not about price, it’s about affordability!

    Monevator observes that the house price to earnings ratio is creeping up. Some of the ideas about increasing ratio of two-earner households resonate with Elizabeth Warren’s book about the US situation. So obviously the whole price to earnings metric is hard to make fit these days. The new in word around town is affordability. Don’t worry about the amount of money you are borrowing, that’s just a number, it doesn’t mean anything. Can you afford to pay the mortgage okay?

    Now if someone waltzed into a shop selling LED TVs with a credit card and said that, it would be viewed as a personal finance faux pas. Do that for a purchase three orders of magnitude bigger and suddenly we all go hey, that’s cool, don’t look at the price, can you make the repayments?

    There is a case that the 3 x single, 2.5 x double income multiples that were the maximum lenders would advance in the past are too conservative now. 25 years ago we were coming off long runs of double-digit interest rates from ’78 onwards. That sort of thing limits the amount of mortgage you can pay off in a 30 or 40 year working life; 1991 was the last time interest rates were in double figures, so for 20 years they have been lower. But the average is closer to 5% than the 0.5% they are now.

    I kind of feel the need for Clint again. Take a look at the yellow line, interest rates. Now just like the young ermine didn’t catch on with this whole boom-bust kerfuffle, because he hadn’t seen it, there are no doubt people who are thinking

    what are these double-digit interest rates you speak of? I know nothing of such fiscal brutality

    Look at the chart. Most of the time it spent at the long-run value of British interest rates of 5 or 6 %. That has a direct bearing on your affordability. The young ermine, though foolish in many ways, had the sense to ask of the mortgage company what would repayments be if interest rates doubles. It’s actually quite easy with an interest-only mortgage which is running alongside an endowment. If the interest rates double, you pay twice as much per month ;) I figured I could managed that, just. I didn’t expect to be doing that, the very next year. I froze in that place. I didn’t go out much. Then the high interest rates started to depress house prices, and it began to dawn on me that I had made the most stupendous personal finance mistake of my whole life.

    It dwarfs the second biggest PF cockup I made, which was a rash two years of major momentum-chasing and trading muppetry in the dotcom boom and bust. I only used ISAs and wasn’t rich enough to fill the first one. I probably destroyed about £7000 worshipping at the altar of Buying High and Selling Low, with a side order of Excessive Churn. I blew about £10,000 in 2012 pounds, but I got something of value in return. Education – it made me ready to learn how to go about things better. There was no bias or scamming in the training course that Mr Market dished out, and more to the point I threw away the money as I earned it. I didn’t borrow it from a mortgage company, and once it was gone it was gone, but I didn’t owe it to anyone.

    The stock market has been a lot kinder to me than the housing market, and in a much shorter time, too. True, it delivers a jolly good kicking every so often, there aren’t the slow languorous cycles of the housing market. Perhaps the background radiation of this epic fail remains in my personal finances, because unlike the case for most Britons in my age and ex-income group, my house is not the dominant part of my net-worth, excluding pensions, if I were irrational enough to compute it as part of my financial assets ;)

    Interest rates are at historic lows, that’s a good thing, surely?

    On interest rates we’re a little off the right-hand side, but interest rates haven’t budged since then. They’re at historic lows. They can’t go any lower, because otherwise the Bank of England would be paying us to borrow money from it. So when you are making the switch from price to earnings (3 x single or 2.5 * double ISTR) you are making a nasty little pact with Mephistopheles.

    you shouldn't be strinking deals with this bad boy. He tends to turn up and the most inopportune times

    you shouldn’t be striking deals with this bad boy. He tends to turn up and the most inopportune times to call in his dues

    You are making a bet that things really are different this time, and that for reasons you can’t explain, unlike over the last 25 years interest rates are going to remain at historic lows of a tenth of their long run average for at least the first 3/4 of your mortgage (19 years of a 25-year mortgage). You can afford for ‘em to let rip a bit after that, because inflation will have reduced the value of your debt by about half then anyway, plus in an ideal world you’d have paid off some of the capital too.

    You’re also making some other assumptions. That your pay will keep up with inflation, which given the power shift from labour to capital may be unwise. That nothing untoward will befall your employment, or if so, then you will be able to find another job at similar or better pay without moving. Unless you live in London, that may also be unwise. If you do live in London you can’t afford to buy a house if you are a prole, or even one of the 99%. Then there’s the risk of the more personal crap that can get in the way of things – divorce, children dropping the second salary for a while and upping your costs. But hey, it’s affordable…for now

    You can see what an interest rate hike did for me. Obviously the heave-ho from 7.5 to 14% raised the payment, but it also made the aggregate payments much higher for a while. Look how fast the cumulative overpayments relative to renting ramped up (the blue bars). They only start to yield to the cumulative imputed rent in 2000 over half-way through my working life, and it is probably only about now that the total amount paid in mortgage costs is less than the total amount I would have paid if I had rented. Of course, I now have a fully paid-up house that has a future income stream associated with it – the rent I don’t have to pay.

    The risk of being hit by negative equity is highest at the beginning, when you are young, for the simple reason that you haven’t paid off any of the house yet. The amount of total money sucked out relative to renting is highest in one’s 40s. It’s not a personal finance trajectory that is for the poor, and not one that fits well with the costs of having children in one’s 30s.

    I can’t yet work out whether this cost peak is an artifact of having eaten that fall in house prices and the high interest rates early on. The fall in house prices is not reflected in the running cumulative costs, however, except as an effect on imputed rent 7

    what do interest rates do to house prices?

    George Soros - this bad boy did for the Ermine in '92

    George Soros – this bad boy did for the Ermine in ’92 by ejecting the UK from the ERM. Lamont skyrocketed interest rates to try and stay in

    They make them fall in real terms or at least reduce the rate of increase relative to inflation. Particularly in the Brave New World of gauging how much you will pay according to affordability, rather than a price/earning ratio. Affordability is inversely proportional to interest rates, so as interest rates go up, prices have to fall to stay affordable. You can see that in the negative equity that I suffered at the start, though this may be correlation with the long drawn out 1990s recession. The interest rate spike was cause by Britain being ejected from the ERM – interest rates were raised to try and stop the pound falling, but the Bank of England lost the fight. That is the trouble with economic variables – they are hard to separate and qualify individually.

    Why do governments push home-ownership so hard?

    Not all governments do. Not even all British governments did until 1980. When I was at school it was perfectly normal for middle managers to live in a council house. Then Thatcher got in, and it’s been a world of hurt from 1980 onwards. When I look at this I can’t help feeling that it is a rum way to run an economy and seems to do a lot of hurt to a lot of people trying to catch up with the shibboleth that you must own your own home. The huge exposure to risk when you are young, the massive suckout of money in one’s 40s to buy the house compared to the rental option. Is this really worth all the pain? At the moment it is because the rental option is really horrible – there is no useful security of tenure in the UK and the army of amateur landlords seem to be patchers and bodgers when it comes to maintenance. It seems the solution to complaints about the state of the place is to get a less discriminating tenant – it is a landlord’s market.

    If the government were interested in the maximum quality of life for the most people, it would stop fiddling about in the housing market and fix the alternative, renting. Most of the house-building in the post-war period was done by councils building council housing

    post-war housebuilding

    post-war housebuilding (BBC)

    and this carried on at a notable rate until it was shut down by Thatcher’s Right To Buy – there was no point in building houses with ratepayers money to flog them off cheap to somebody who was in the right place at the right time. Private enterprise clearly hasn’t picked up the slack, because presumably there is a profit incentive to maximise house prices for new-builds by controlling supply ;) Or some other reason, but it’s clearly not happening.

    Renting in the private sector is miserable. If you favour the tenants too much you get misery for the landlords and then misery for the tenants who don’t have a place, though joy for those who do. If you favour the landlords, as is the general case now, you get misery for the tenants, and drive people towards owner-occupation who perhaps aren’t ready for the financial hit. Owner occupation is much more expensive for the first ten or fifteen years. Calculators like this make me laugh because they are simplistic, assuming a constant interest rate, and constant house price inflation and they also take the equity in the house on the plus side. The only time you get to see the increasing equity in your house is if you downsize. The next time is when your kids sell the house after they’ve come back from the crematorium. Even after 25 years I’m not sure I’m up on the deal yet as far as money spent on buying relative to what I’d have spent on renting is. I do have an expensive asset and I’m done paying rent and mortgage for the foreseeable future, so I’m better off overall. But it was an expensive ride and I took outrageous shedloads of risk. After all, nobody sat me down when quoting for a mortgage and went

    Now Mr Ermine, how do you feel about the possibility of losing 33% of the value of this house should you be SOL and lose your job in the first ten years?

    Saying yes to that sort of risk that puts you into Highly Adventurous nutcase levels with shares, and yet people become gibbering wrecks if it’s intimated to them that the stock market can do that to you :) Safe as houses, they say, safe as houses… What the hell did the stock market do to get all the bad rap? A financial adviser won’t let you sit down and open your mouth without you taking an attitude to risk test, and yet you can blithely sign up for a mortgage and the only warning you get is

    Your home may be repossessed if you do not keep up repayments on your mortgage.

    No shit, Sherlock. No mention of the risk, eh?

    You are about to take the sort of risk that put a million buyers at risk in within living memory – the Bank of England interest rate is at historic lows and could increase tenfold without drifting out of the long run average. Have you thought about what that would do to your repayments, and have you had a word with Clint about it?

    Nary a word that this might happen

    Lindsay Cook Money Editor. "Coming to grips with negative equity." Times  24 Oct. 1992: 25

    Lindsay Cook Money Editor. “Coming to grips with negative equity.” Times 24 Oct. 1992: 25

    Housing is, however, not just about money. The excess cost of buying is probably worth it to get rid of AST tenancies, horrible landlords, one month eviction periods, shitty house maintenance and all the other hurt that often comes with amateur BTL landlords. Fixing the rental market probably means building decent social housing, enough to compete down rental prices and set standards, and relieve the pressure on the owner-occupier market. Owner-occupation is much less suitable for a world of shorter-duration or less secure jobs. I don’t know if Thatcher was right in her time but that world is long gone now.

    Of timescale-blindness

    We are scale-blind to extremely short timescales. That much is clear when you try and swat a fly, or watch a sparrow land on a blackthorn bush without impaling itself, as it makes micro-adjustments to its flight path to avoid the might spines. Listen to this whitethroat at normal speed – it sounds pretty scratchy and nasty to me

    Now listen to what that presumably sounds like to a real whitethroat, which can hear finer temporal detail than us. All I have done is slowed it by 8 times

    That’s still coarse on the sort of timescale that high-frequency trading works. You can’t stay on top of that. The effect happens at long time scales too, we just don’t see things that change over decades as much as we see them if they change day to day, which means that we become increasingly blind to groundswells in finance that have a longer period than a working life. Hence this article, it is a distant report from a receding event horizon. It happened, and it’ll happen again. What makes this worse is that the WWW started in 1994, so for the Internet generation this history is not accessible. I used my local Library’s newspaper search facility to research some of this, and it is uncanny how the themes from 1988/9 seem to be repeating themselves now, and how certain pathologies associated with mortgages seems to be evergreen. Such as stupid berks taking money out of their home equity in the good times to pump up their lifestyle only to come over all surprised when it all goes titsup in crashes. Life has rainy days in it. Save up for them.

    Should I not buy then?

    Markets can remain irrational longer than you can remain solvent

    John Maynard Keynes

    Search me guv. London, for a start, is a different place. I’m not in that league. I left London 25 years ago because I was too poor to live there. You’re competing against foreign money treating London real estate as a reserve currency, and there’s a lot more of the rest of the world’s 1% than there are Londoners. It’s not a fair fight. I could earn enough as a single man to fight the DINKY couples but the 1% are way out there, sometimes you gotta know when to hold ‘em and know when to fold ‘em. For most people London falls into the latter category.

    Elsewhere, you buy a specific house in a specific part of the UK, subject to local conditions. I personally wouldn’t buy right now, but then I haven’t lived with AST tenacies and scummy BTL landlords 8 for a long time. I can see how that makes people prepared to pay over the odds. Maybe it really is different this time.

    I learned something writing this and analysing the costs – in particular that when you buy a house with a mortgage you commit to ongoing higher outgoings for over twenty years – that’s real money you have to earn and pay out. It’s true that the break-even point was 10 years in my case, but my spending was still higher than it would have been renting to 20 years. The break-even point is brought forward by the nominal value of the house, which is only realised when you die or partially on downsizing.

    I didn’t have any idea when I started down the mortgage track that this was the case. I earned enough and was lucky enough to dodge the negative equity bullet to get away with it, but it could easily have gone a different way, and then the ermine would not have been retired. Safe as houses – think of those million people in negative equity in the early 1990s. I was started down this track of thinking by Paul Claireaux’s blog post on House Prices Now – he has some other charts of interest there, and a far better grounding in the financial technicalities, where I’ve just lived it. His summary?

    What I conclude – is that  (in broad terms) UK house prices have gone into outer space!

    There is a general message that when buying investments one should take valuation into account. That is doubly the case if you are going to buy it leveraged – and a house is one of the few assets Joe Public buys on margin. Negative Equity is what happens when you get that wrong, and being foreclosed, going bankrupt and having the debt chase you is what happens when you get that wrong and lose the ability to pay the mortgage. Only you can say if getting away from those crappy landlords is worth the risk.

    Notes:

    1. MIRAS is a historical piece of Government fiddling in the housing market being changed where they didn’t tax you on the interest paid on a mortgage. Interest rates and tax rates were much higher in the 1980s than they are now
    2. short-term Government interference leading to a pulse in demand just before an election. Any connection with Help to Buy is of course specious scuttlebutt and should be ignored. Of course.
    3. in those days money halved in value every ten years. So that 3 x lift was pretty much breakeven after 25 years with free investment risk chucked in, but optimism and being a smartass is one of the privilege of the youthful, eh. Boy was I taken for a ride ;)
    4. I used the low start loan so I’d have a chance to pay back that interest free credit card. It was the correct use fo an ARM loan – the young ermine got the details right, it was the big picture that I made a hash of
    5. To track the house value I used the Nationwide house price index for old properties, East Anglia section. The house was a two-up two-down built in 1840, the Nationwide are pretty accurate because scaling the price I bought at forward to 2012 gives pretty much the value Zoopla gives for a similar joint in a similar area. To track inflation I used the January of the year figures from this Guardian spreadsheet. For the Bank rate I took figures from the Bank of England and did the manual calculation to get the yearly interest rates, and assumed a mortgage was 1% more. I estimated rental prices as 4% of the yearly house price, which would fit for now. I moved around the middle of the period, so the second half of this is a simulation.
    6. I had to subtract what was already indicated otherwise the overall picture would be wrong. When the blue bars disappear, it will have finally been cheaper in terms of money paid out to have bought, not rented
    7. Update 22 April – a house just like mine has gone up for rent across the way, so I looked up how much it would cost to rent. The imputed rent assumption is pretty damn close, it’s nice to get a real-life confirmation of the cost-modelling.
    8. I’m sure there are some decent landlords. It’s just that I never ran into them and from what I hear most tenants don’t either. OTOH I’ve heard from some landlords about some seriously chavvy tenants. Shame that so much money changes hands and both parties seem to be pissed off with the deal