My Financial Blueprint
Today I'm going to concentrate on one small area of my 'non-normality' and map out what might have shaped my attitude to finance.
I'm not normal. I realise there isn't such a thing, but what I mean is I'm not even close. The way I think about life, and my resultant behaviour and habits diverge considerably from most people. How do I know? Observation partly, but most importantly people tell me. "An outlier" was one friends description. Others are less polite. I take them all as compliments. You can't beat the reliability of independent witnesses.
The question is, why? That's a question I can't answer completely and there are no doubt many contributing factors. Randomness, family, friends, experiences, education, character, the list is long.
Today I'm going to concentrate on one small area of this 'non-normality' and map out what might have shaped my attitude to finance.
I grew up in a family of seven - two adults, five children. Dad worked, Mum looked after us. Dad worked in the building trade and was not particularly well paid. We were poor but only in the sense that there was very little free cash, not poor in the sense of no money for food, clothes or other essentials. The money we did have was well managed. We went on holiday every year to places all over the UK but we didn't get brand new bikes for Christmas. We got clothes to wear that didn't have holes and kept us warm but we didn't have the latest £100 trainers. All food was home cooked including bread and cakes. I started to become aware around secondary school (age 11) that other children had more money spent on them than us. I never had to decide if I wanted to go on the school skiing trip to France, that's for sure. However I also became aware that priorities were different. Friends that had better trainers, but weren't fed as well as us. Friends who got new bikes for Christmas, but whose parents were always working so didn't get taken for family activities at the weekend. Friends that had games consoles, but never went on holiday. We lived a 15 minute car journey from a beach and I had friends that, judging by their reaction when we took them with us one day, almost never visited the beach (a regular occurrence for us).
Around the age of 13-14, friends living in the town where I went to school started to get jobs. Paper rounds, shops, family farms and summer jobs. We lived in a small village with less opportunity. The £1 a week pocket money was not going to buy me the new PC I wanted. Luckily we had a lawn that was my (unpaid) job to cut. My friend had a fancier lawn mower than us and we would cut his lawn just for fun. Another friend managed to acquire a job cutting grass for an elderly couple in our village who had extensive grounds. He earned money for doing the same thing I was doing for free. £3, £4, £5 an afternoon. Five WEEKS of pocket money in an afternoon. Annoying. I would cycle past him hard at work and wish it was me. Eventually he moved on and my opportunity arose. I was a little younger than him but my experience with lawnmowers convinced the customer I was capable. A quick trial and the job was mine.
- Life lesson: payment for work doesn't have to be immediate or financial
A monthly paper round was also acquired. This involved delivering to every house in our village and the neighbouring village four miles away. This was a bigger task than it may sound. The village was maybe 2 or 3 miles in diameter with a good selection of houses at the end of long lanes, but I loved earning my own money far more than the hassle of cycling my bike with a heavy bag over my shoulder. Between these two incomes and over some time, I managed to save £400 into a Post Office savings account. This was enough to buy the PC I wanted. Friends just had to ask their parents for a computer for Christmas. I had to spend months cutting lawns, delivering papers and saving every penny earned. This was the start of my saving habit.
- Life lesson: work hard and save
The Teenage Years
At around 14 our school ran a work experience programme. I got a placement with a company close to my grandparents so included the bonus of living with them for a week. Every morning the paper would get delivered and Grandad would collect it and bring it back to the breakfast table and begin to read. The front few pages would get scanned then he'd turn to the share prices section. I'd heard of shares but my understanding was basic. Share prices would go up and down and newspapers would shout about it. I didn't really understand the finer details. One morning I asked him what a share was, how he bought them and why. The concept of owning a small part of a company was explained. The valuation of the company would change over time affecting the share price and you could sell whenever you wished. However some companies paid you a dividend, effectively some of their profits being paid to you as a share holder. He explained which shares he held and some of their price history. That was my tiny mind blown. To an enthusiastic 14 year old, that sounded like an amazing deal. Getting paid for doing nothing. He smiled and got back to drinking his tea.
- Life lesson: invest in the stock market
As I turned 15, the prospect of being able to drive began to appear on the distant horizon. I couldn't wait. This would open up a whole new world of earning opportunity. Sure enough I managed to secure a supermarket job. Weekend evenings and college holidays were now spent stacking shelves late into the night. Earnings were boosted from standard because of the 'unsociable hours' allowance. After initially borrowing my grandparent's car, I'd managed to save again, this time £800. £400 for the car and £400 for the insurance.
- Life lesson: money can provide freedom and independence
University . . or Not
During college I had to decide what to do on completion. A few friends were heading to university, but I wasn't so sure. A grant would have been available, but this wasn't enough to cover the rent and my living expenses. I didn't really want to get a loan. A job was my favourite option. I luckily stumbled into an apprenticeship with a large company. During my interview one of the questions asked was "would you be interested in studying for a degree?". "Yes" I quickly answered! Fast forward a few years and you could find me sat in University lectures while being paid by my company for both my time and the course cost. The company also had a final salary pension scheme which I joined immediately. I admit there was an element of luck to this situation, but don't overlook the decision making. I could have got a loan and gone to university without looking for a job. The pressure was there from lecturers and friends. That one decision probably saved me £5-£10k of debt (plus resultant interest). It also came with the bonus of 4 years earning money. In that time, I probably earned around £35k. That makes a total difference of £40-£45k (£50-£55k in 2020 money). It also meant four extra years in a final salary pension scheme.
- Life lesson: you don't have to do what everyone else does or expects
My friend had settled down a couple of hours drive from me. I'd travel to see him some weekends and we'd play golf, go out for meals and I'd generally enjoy experiencing his more cosmopolitan life. On one particular occasion he had a book lying around, Rich Dad Poor Dad by Robert Kiyosaki. I devoured the whole book in the course of one weekend. My tiny mind was blown again. It opened my eyes to a new way of thinking about money, life, wealth and work. I think what made it so striking is that I could think of people I knew personally, that were (probably unknowingly) implementing the same ideas and it was clearly working. If you haven't read it I highly recommend it. I'm going to re-read it soon. I'm slightly worried that the slightly older more cynical version of me will find it less impressive than the first time around.
- Life lesson: read books
The Early Work Years
Once I was a couple of years in to my apprenticeship, my saving skills meant I had spare cash. In my department was a quiet, wise, bearded sage. He'd spent a large chunk of his career in the navy, where he'd been around the world a few times. Holding a positive but pragmatic view on the world, he was always ready to calmly challenge any irrational work chit-chat. If there was ever a complex problem, he could be relied on for a simple solution. As we got to know each other, it turned out he was also a stock market investor and if the rumours were to be believed, a reasonably successful one. He encouraged me (I didn't need much) to invest in the company's share save scheme. It ran every year and each plan lasted 3 years. A monthly investment would get linked to the company share price at the start of the plan, then at the end of the period you could either take your investments with fixed interest, or buy the shares at the agreed price (e.g. a no-lose opportunity to invest in shares). I invested a 1/3 of the maximum allowance every year to space my allowance over 3 years. I liked this concept a lot, so I also persuaded my sister (who worked for a high-street bank) to invest on my behalf in the bank's identical scheme.
The Sage also introduced me to the concept of funds. At the time (before the internet was so widely used), fund supermarkets would send out brochures with performance charts of all their funds. I scoured these brochures, ignorant of anything other than the past performance. I picked a tasty looking technology fund (you can probably see where this is headed). The sage warned me against putting all my eggs in one basket. I was young and dumb and enthusiastic. Why would I choose a pedestrian looking fund over this rocketing technology fund? The internet was the future right? £1000 was invested as a lump sum into Aberdeen Technology inside a stocks and shares ISA. The value halved over the next year or two as the technology bubble burst. Luckily I could afford it. Still living with my parents, my car and some minimal rent were my only expenses.
- Life lesson: past performance is no indicator of future return
Fellow apprentices were busy discovering the joy and pain of credit cards as I looked on from the sidelines. YSL shirts, Timberland shoes (both achingly cool at the time), cars, motorbikes and games consoles all purchased with carless abandon on the magic piece of plastic. This was followed a few months later by some frantic 're-jigging' as minimum payments had resulted in spiraling balances once eye watering interest payments were added. Consolidation loans were taken out and amazingly the cycle would repeat. It was probably around here that I started to notice that once in a position to easily afford something, the desire to have it would often reduce. Compare that to the credit card using friends attitude of 'another £x won't make much difference'.
I then discovered a method to put me on the other side of this financial equation. Credit card stoozing was becoming popular and the recently formed Money Saving Expert website contained details of all the offers. Having plenty of spare time and some good organisational skills, I got involved. I haven't got the records any more, but I had maybe around £5-7k borrowed from 'super balance transfer' credit cards at 0% interest rate with all proceeds being stashed in the best savings accounts I could find, with interest rates from around 5-7%. Once the 0% period was up, the cash would be repaid in full and the card disposed of before moving on to the next deal. A profitable venture.
A friend introduced me to Smile, I believe the first online only bank in the UK. They ran a stocks and shares ISA and were teaching the benefits of tracker funds. This was probably my first exposure to the benefits of tracker funds. Rather than investing in a lump sum, I 'drip fed' investments in on a monthly basis. This arrangement, although less exciting, started to make money.
- Life lesson: use tracker funds
The Sage also had another tip. "Final salary pensions won't last forever". I listened to the advice and went along to any pension presentations held at work to stay as informed as possible. I started paying into an employer AVC scheme (additional voluntary contributions). In effect this was like running a defined contribution pension alongside a final salary pension, the plan being to build up a 'backup' pension as an insurance policy.
Prior to finishing my apprenticeship, my first experience of redundancies occurred. A few years later my second. Another few and my third. I escaped them all, even the 'mother of all' where double digit percentage of employees were culled. The fear in my colleagues eyes didn't escape the younger, impressionable, naive version of myself. These were people that had built their lives around the expectation of a continuous salary. Dependent. Hooked. Houses, children, partners, holidays, transport, all dependent on the addictive drug of a salary. The lessons in Rich Dad Poor Dad rattled around my head. At this point, I had a couple of years living expenses tucked away and had no dependents. If I got made redundant, I'd use the money to take a year off and would have joined my friend as he made his way around Australia. The comparison between that and the precarity of colleagues situations was forever branded into my consciousness. I didn't want to end up in their situation.
- Life lesson: build a financial buffer.
House prices had been rising steadily through the early 2000's. As with any particular time in history, noisy commentators on both sides were busy telling anyone that would listen how they would continue to rise for years/crash tomorrow (delete as applicable). This was 2006/2007. I wasn't willing to put all my savings down as a deposit and sign up for 35 years of repayments on a mortgage (as friends were doing). I began to research my options. Due to first time buyers being forced out of the housing market, 'affordable housing' was starting to be made available. This was a government supported scheme that was, in most cases, run by councils and meant you bought a certain percentage of a house (this percentage varied depending on the arrangement) and then paid rent on the remaining percentage. A friend starting a family signed up. My calculations showed that this didn't make a house much more affordable, rather more accessible. The difference in outgoings between taking a mortgage out on the whole property or buying part and renting part was not huge, and it had some downsides.
During one particular internet research session however, I discovered a housing association that was offering part ownership but without the rental arrangement. The remaining part belonged to the housing association although you could buy all, or part of the remaining percentage at any time. Not only that, but they had plans to build houses in the town I most favoured to live. It seemed too good to be true, so I proceeded with caution, but applied and was selected. We went along to a meeting to discuss how the scheme worked and quiz the association running it. They seemed genuine and as far as we could tell it was legitimate. This enabled me to purchase a flat in a location that was within cycling distance of work and not sign myself up to a lifetime of mortgage payments. Another lucky coincidence, or another decision born out of a stubborn refusal to conform? I still live in that flat today.
Curtains For The Final Salary Pension
A year or two later, the company I worked for announced they were 'restructuring', which would result in our business unit being put up for sale. Although this proved a positive turning point for the business, it wasn't so positive for the final salary pension. It continued for a couple of years until we were sold again, at which point we had to join the 'defined contribution' pension world. By this time however, a solid base of final salary pension had been built. Every year since, the statement arrives in the post and how little was paid in vs how much it's going to pay out amazes me. The years of paying into the AVC's also meant I had a head start to the new scheme.
The Wonderful World of MMM (and others)
I can't remember exactly how. It may have been a link from Monevator, but around 2012/2013 I discovered a blog post by Mr Money Mustache. I think it was his article on bike ownership that started it all. If any of what I've written so far resonates with you and you haven't already, get over there and start reading.
I was fascinated and read almost all of his blog over the next few months. In summary it's about living a life of meaning and enjoyment while avoiding rampant waste and inefficiency. The result is 'financial independence'. Not being dependent on any external source of income. Weaving together many familiar concepts along with some ideas that were new to me into a complete life philosophy really helped with the completion of the jigsaw of ideas, concepts and habits already floating around in my mind. This wasn't some blue sky dream. He'd actually lived it and proved it, achieving 'financial independence' at 30. Part of the genius for me was the way you'd read something with component parts that were already familiar, but with an angle you had never fully appreciated together with a genius writing style. Take the article above. I already cycled to work every day because I enjoyed it along with the side benefits of keeping fit and saving money. I hadn't stopped to think about the foolishness of the 'hard working families', reporting financial hardship, but still so insistent on driving everywhere in expensive, unnecessary and increasingly large vehicles (along with many other sub-optimal habits). His irreverence and gentle mocking of the First Worlds irrational, wasteful, lazy and sometimes just pure crazy lifestyles is highly entertaining.
Discovering MMM prompted me to develop a more definitive plan. Up until that point I was saving and investing, but with no target. My spreadsheet got a metaphorical polish and my savings rate increased. My entire financial life got summarised on one chart. I'm not a slave to this process. I've updated it four times this year for example. It's really just to give me a warm feeling that my plan is working.
- Life lesson: what gets measured gets managed
I'd definitely advise reading blogs. The amount of information and motivation they contain should not be underestimated. There are numerous examples and I'll be writing an article listing my favourites at some point, but Monevator and The Escape Artist are good solid starting points.
Since the plan was produced, financial life has been boring. Every payday cash gets moved into the relevant places. Index funds have been tracking the markets with minimal expenses. My robust attitude to risk has meant instead of quivering in fear during stock market pull-backs (I'm looking at you, March 2020), I merrily convert any spare cash into shares to take advantage. Thoughts occasionally turn to what I might actually do, when I cross the magic line on that chart. Will I swan in like a whirlwind, make a paper airplane out of my resignation letter and throw it at my boss? Keep working, suffering from 'one more year' syndrome? Go part time? Change jobs to something less well paid and more enjoyable? Take a year off? Two years? Start my own business? Who knows. Exciting hey? Stick around and find out.
One thing I do know is that as life progresses the more obvious it becomes that any preparation you can make for uncertainty and change is a wise strategy. The list of friends, colleagues and acquaintances that experience life's curveballs increase with every year.
“We have two lives, and the second begins when we realize we only have one.” Confucious.