Category Archives: Financial Independence

How to give yourself a perpetual pay rise through index investing

Getting a pay rise is the ultimate dream for many workers. How can you get a pay rise without following the usual frustrating processes in the workplace. By taking a different perspective at building and maintaining an investment portfolio it is possible to take the initiative give yourself a pay rise. Even better this can be set up so that it happens perpetually, regardless of what your employer does.

Taking a personal initiative and interest are imperative. This realization came to me as I was sat in a work webinar Q&A session between management and employees.

The general theme was that employees were not happy, and to be honest they are completely powerless about most of the issues raised such as new graduates starting on higher pay than older ones, why pay rises are 2% when profit margins are far larger, who and how one gets a bonus etc.

All this on top of external factors which may affect the company due to the wider economy and a recent corporate takeover of the organisation by a larger competitor which has an unsavoury past. Hence it is important to have control of the situation.

Taking control

The process is not simple as all the traits of pursuing financial independence should be applied, mainly; patience, discipline, frugality and the appreciation that simple arithmetic works.

Like many, I used to wait around to get the bog-standard 2% or so annual pay rise which, at the whim of management, is often distributed with little regard to the employee’s performance. Depending on the industry, some will also get a bonus if they are lucky. This seems to be standard practice for a lot of companies.

At an early stage I realised that this was going to be the likely scenario in the workplace so I decided to take action. Having control over the growth of my net worth meant taking control of my finances, rather than relying on a manager at work using some esoteric means to determine my future.

Taking control meant living within my means, cutting back on unnecessary expenses like motoring, self-educating on business and finance, achieving a 50%+ savings rate and investing in the stock market. Obviously, this approach has not been easy – spending big always seems more attractive than saving.

Dividend growth and investment returns

With the annual growth of Global dividends currently running at 8.5% according to Janus Henderson, it is clear that by holding a sizeable investment portfolio you can grow your income substantially. I would rather have 8.5% than a paltry 2% any day. Coincidentally, this 8.5% growth is not too far off from the long term return of the stock market so we can use it to run a few scenarios:

Suppose you have two workers at the same company who make £40,000 each. Worker A has zero interest in investing or perceives it as “risky” while Worker B is well on their way to financial independence and has been diligently saving and investing for a number of years. Worker A assumes that their pension is secure and someone else’s problem to manage. Their company does not offer bonuses and Worker A is always complaining about how little his pay rises every year therefore feels powerless to do anything about it.

Worker B, however, is not worried at all as his personal financial hacks have unlocked additional income which is unrelated to his employment. Instead of frivolous spending and accumulation of liabilities, Worker B has built a diversified portfolio of stocks and shares, real assets. As an example Worker B has a portfolio of £250,000. Using the typical 8.5% return this means that the portfolio earns an additional £21,250 a year for Worker B, which would be tax-free when invested in an ISA account. As this figure is equivalent to net pay, the worker would need to earn a gross salary of about £26,500 to take home the same amount.

Impact of investment returns on salary

Adding this to their pay we find that Worker B theoretically earns £66,500; substantially more than Worker A and an impressive 66% on top of the standard salary (see above). This would occur at an ever increasing rate every year depending on savings rate. Now that is what I call a pay rise. It is also interesting to note that the investor would easily stealthily grow their income to such a state that they would be better off than other people above their pay grade or other higher paid professions.

These gains would actually be bigger if higher tax rates were considered but that calculation would be a bit complex to do for our example. Gains would vary and may be bigger or smaller depending on yearly market fluctuations but it is important to focus in the long term. When not withdrawn, the gains are unrealized and therefore reinvested to form an ever larger snowball.

Financial Independence – the journey is as important as the goal

This perspective shows that there are multiple benefits to striving for financial independence, even way before the goal is achieved. The greater the savings you have, the more the opportunities which appear to you. It is time to say no to zero or below inflation pay rises. I honestly no longer worry about pay rises or bonuses like I used to when considering the perpetual (and growing) impact an investment portfolio has.

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How to react to a Bear Market and invest wisely

It has been a wild ride for all those heavily invested in stocks and shares. The past few months, culminating in a huge drop on Christmas Eve have been testing the nerve of diligent investors. With no sector industry spared, a lot stocks have dropped by over 20% from their all time peaks.

A Bear Market is defined as a condition where the stock market has fallen at least 20% and there is widespread negative sentiment around it. The past few weeks have definitely felt like this. When heading towards Financial Independence how should one react? Here are some tips on how to best handle a situation like this.

Do nothing

Sometimes the wisest thing to do in certain scenarios is absolutely nothing. This is certainly true in a volatile market situation.

When share prices are swinging up and down or dropping like a stone, the worst thing you can do is to sell your holdings.

I certainly had a close family member who was contemplating selling their shares recently and vowing to never invest again. Selling is clearly not the way to go so I tried talking the person out of it. Instead they should hold and do the next step.

Buy more shares

This will always be tricky for me as I always aim to have most of my funds invested in income generating assets such as low cost index funds. Therefore I can only take advantage of low stock prices with my latest income. If you have the funds available; buying shares at depressed prices will provide additional firepower when the market eventually bounces back, which it will.

Maintain a low information diet

Avoiding constantly checking the news is a good idea. Vanguard Investments’s Jack Bogle said you should rarely peek into your portfolio. Once you do after a very long time you will probably need a cardiologist when you find out how much is in there.

There is always something going on in the news, from trade wars, elections, interest rate hikes, military conflict, government debt piles, company profit warnings, taxes etc. You name it and someone always claims that it influenced a stock market move.

I must admit that I haven’t been able to fully commit to this step; instead I enjoy reading about business activities of interesting companies such as Tesla and Apple, along with all the FAANG super technology players. This often leads me to places such as the CNBC site or various business news Apps.

To try and resolve this, I previously deleted all the apps and bookmarks to various sites when prices were falling. However, when prices began shooting app I could not help but reinstall everything so that I could monitor what was going on.

I have not yet found a way around this as the information is easily available on our fingertips 24/7; but I am sure that with long term experience of different market conditions this will become a non issue. Fortunately, I have not had an urge to sell anything but have been eager to buy more.

Enhance your financial education

To best understand how the world economy works and how investor behaviour can be influenced it is useful to read a few books on investing and finance.

Top reads are A Random Walk Down Wall Street, The Millionaire Next Door and The Intelligent Investor. This activity should be able to fill your time by adding value, rather than being swayed by sensationalised headlines from Wall Street and City’s giant marketing machines.

Focus on the amount of units you own

A tip which I have found very useful is to not worry about the share prices or a net worth chart’s gyrations. These metrics, by nature fluctuate heavily particularly when you have a larger portfolio, so they are not a true reflection of where the real value is. Instead, track and focus on the quantity of units of stocks and shares that you own.

Tracking investment fund units

You will realise that you will pick up more units when prices are lower. This has the effect of boosting dividends over the long term. As shown above, there appears to be an exponential increase in the units within my portfolio, despite market swings and a largely similar savings rate.

Stay the course

The final tip is to not be worried and maintain investing according to your plan. This is where an Investment Policy Statement (IPS) would be crucial. When things seem edgy you can always refer to the document to remind you of your overall objectives.

The same strategy works even when investing during a bull market. I have covered how to invest in a rising market here. It is impossible to predict where the market will go; at the the time of writing the markets had been staging an impressive recovery from the December 24th lows when they dipped into Bear territory.

Interesting reading:

Going car free – The real cost of motoring

The real cost of car ownership is one of the trickiest expenses to determine. Unlike predictable expenses such as public transport, renting a place to live or food costs, it is impossible to accurately estimate the true cost of motoring. This can be a problem for financial independence planning because you need to be reasonably certain of what your expenses are. Previously, I tried to ignore this paradigm but the relentless rules of simple arithmetic will always come out on top.

This post is timely as I will be going into a period of being car free. This is involuntary as I had no intention of getting rid of my car until the reality of car ownership hit me with a bang. While driving from work a few weeks ago, I was involved in an incident with another vehicle at a mini-roundabout. This resulted in my car getting written off and getting sent off to the scrap heap for just £100. I was shocked at how quickly things can change; I purchased the car (a 2007 BMW 118d) 6.5 years ago for £9,500 which has virtually gone down the drain in an instant. The car’s value had depreciated substantially since so it would not be worth much anyway.

Options

This situation presents me with several options.

Option A: Normally I would attempt to immediately reinstate my previous position by getting a like for like replacement vehicle. Obviously, this is not as simple as it seems as it would mean acquiring a used 12 year old similar model with over 100,000 miles on the clock. This is very unwise due to the amount of potential problems with such a car. At least I knew what work had been done on my previous car.

Option B: Alternatively, I could follow a similar approach to how I purchased the previous car by looking for a 4 or 5 year old used vehicle. This would have a huge impact on my finances as the cost would be way in excess of my emergency fund. The shortfall could be made by borrowing extra funds which I would not do.  Alternatively, I could dip into my investments or other savings. This is unwise; a classic case of swapping assets (investments) for liabilities (car ownership and purchase), therefore would leave me a lot poorer in the long run.

Option C: This is really hard to take personally; car ownership is often associated with status and a sense of freedom, but going car free has to be a consideration. A few weeks ago this option was unimaginable but after doing an in-depth analysis of what it entirely cost me to run my previous car this is not such a crazy option. I had to ask myself of what my real needs of transport are and unreluctantly concluded that for me, car ownership had been a nice to have, a very costly one at that. Here is why.

The true cost of car ownership

Over this 6 year period, owning and running the car cost me a total of nearly £30,000 (US$40,000), which is around £4,500 (US$5,900) a year or £370 (US$480) monthly. Costs equated to 44 pence per mile over an average of 10,000 miles a year which could be used to calculate a reasonable estimate of a journey’s true cost. This is an astonishing amount as I had considered the car, from an era when diesels where still being promoted by the government, to be well made, fuel efficient and cheap to tax.

I listed all the line items of everything I remember spending on the car to reveal the harsh reality. Here is the result:

BMW 118d: Total Cost (£) Of Ownership 2012-2018

ProportionItem6.5 YearsYearlyMonthly
33.87%Purchase+supagard(depreciation)9,7501,500125
32.75%Fuel. 10k/y, 42mpg, 52L, 134p/L1,450121
10.16%Insurance45038
0.68%Road tax303
1.02%Breakdown cover454
1.13%MOT test504
2.26%Brakes – £300 / 30,000 miles1008
2.64%Tyres – £350 / 30,000 miles11710
0.90%Brake fluid service – £80 / 2 yrs403
2.26%Oil service & filters1008
6.95%Timing chain (N47) & clutch repair2,00030826
1.39%Oil filter housing  – after oil leak400625
0.69%Parking brake snap repair200313
2.26%Parking & tickets & tolls1008
1.04%Audio: head unit+tweeters300464
Overall Cost incl. depreciation28,7834,428369
Running costs (cash flow)19,0332,928244

*The above list seems very long but it is the truth of the minimum spend on the vehicle. The figures would be higher or lower for other vehicles and usage. If I had bought it new, costs would have been north of £500 a month which could easily be more than rental/ mortgage costs.

What next

Such figures don’t lie and I would ignore them at my own peril. Another possible option is to purchase an electric vehicle (EV) which has substantially lower running costs due to a simple design (electric motors have less than 20 moving parts) and does not emit harmful emissions.

However, EV  purchase costs are still high, even on the used market. Despite the high initial purchase cost, I have calculated that there would be huge savings over the same 6 year period by purchasing an electric one. For example, an EV bought for £14,000 would cost a total of £20,000 to run over 6 years compared to nearly £30,000 for a petrol or diesel car purchased for £10,000.

For now I will go car free for a while as I actually do not need one. Commuting to work would be by a 20 minute train ride plus less than half an hour’s walk. Other trips would be by train, tram, taxi, coach or bus. This is not a problem in London. For inaccessible locations or other uses I will use rental cars or vans when needed. I estimate that these alternatives combined will cost me a quarter when compared to car ownership and the proceeds will be invested or put towards an EV.

I expect that this will also boost my savings rate by over 6%, alleviate the stress of having a metal box sat on the driveway, avoid aimless trips, parking, roundabouts, traffic lights, schools, fines, endless maintenance, break ins, road rage, scratches and prevent me from sitting in or battling rush hour traffic while risking a crash.

I have already saved an unexpected initial £50 by cancelling my breakdown cover; this will be promptly invested into Vanguard index funds. The benefits are substantial as I have not even gone into the impact of opportunity cost, where the above costs would be invested wisely. If car travel is really needed I will consider going electric in future.

It is incredible how such the seemingly innocuous decision of whether to drive or not can have far reaching consequences on your personal finances and possibly on when (potentially years) or if you will achieve financial independence.

*The AA has a useful guide about car running costs here.

What do you think? Are these costs realistic for you? What are the pros and cons of owning a car?

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BMW i3 120Ah – Why it could be the best car for the financially independent

There is no getting around it – electric vehicles are the future. Here I will review and detail how the latest version of BMW’s i3, the 2019 120Ah or 44 kWh version, is possibly the ideal car for the frugally minded or the financially independent in the near future. Main reasons for this are the minimal running costs due to the vehicle’s requirement for minimal maintenance, having few moving parts and use of electric power. This review will be from a financial perspective.

What is the BMW i3 120Ah

Like many drivers I used to be extremely reluctant to the idea of owning an electric vehicle. I felt that the reasons for this including range anxiety (fear of running out of battery), poor performance and lack of charging points were valid. However, with wider adoption of the technology and advances in battery production, things are changing very quickly which has allayed most of these fears. This is perfectly showcased by the progression of the i3.

The BMW i3 was launched in 2013, as part of the BMW i sub-brand which manufactures plug-in electric vehicles. A high riding hatchback which seats 4 adults in comfort, the i3 is relatively compact, making it easy to manoeuvre in urban environments. Styling on the outside is futuristic so can appear controversial to some but I think the interior is very minimal, elegant and practical.

BMW i3 Interior

BMW i3 Interior

The i3 is rear wheel driven by a single-speed 170 hp electric motor and has a Lithium Ion battery pack located on the underfloor. Construction is with CFRP (Carbon-Fiber Reinforced Plastic) which makes it ultra light weight at 1195kg.

At launch the i3 came with a 60Ah (22 kWh) battery which offered a range of only 80 to 100 miles. This was then bumped up to 120 miles with the introduction of a 94Ah (27.2 kWh) battery in 2017. The improvement did not catch my eye but the latest upgrade has; from late 2018 the i3 has been upgraded to a 120Ah (44 kWh) power pack which offers up to 190 miles range. Versions with range extending petrol engines are available but I will not consider these due to them being phased out by the 120Ah.

I consider the 120Ah’s range quite useable as it covers the vast majority of typical trips I undertake in a year. A single charge would be enough for a whole week’s commuting to work or a typical weekend trip to the coast or countryside. For longer trips, it is feasible to find charging stations at Motorway services.

As typical with most electric vehicles, the i3’s performance is good, with a 0 to 60 time of 6.8 seconds for the sportier version the i3s. This is faster than most cars on the road as the electric motor provides the 250Nm peak torque instantly. The i3s also has a wider track, stiffer springs and is lowered compared to the standard version so is worth considering. Top speed is limited to 99 mph.

Running costs comparison – Electric vs ICE

Being frugally minded, I purchased my current ICE (Internal Combustion Engine) diesel car, a 2007 BMW 118d hatchback in 2012. This was a great deal as I managed to acquire the car for 40% of its market value. Buying it approved from BMW insured that any gremlins would have been ironed out and it came with a 1 year warranty. The model was awarded green car of the year 2008.

Despite a number of faults over the years the car has performed well and requires servicing after relatively long periods. As I wrote about before,  I have started doing most of the servicing and maintenance on my car which has saved me a lot of cash, improved my hands-on skills and gives me confidence that the work has been done correctly with the best components. With 112,000 miles on the clock, the car is running perfectly.

The following are my estimate running costs for my personal car over the last 6 years.

ItemCost/ yearNotes
Fuel1,20010,000 miles a year diesel.
Servicing100DIY service, with oil changes typically every 18 months.
Repairs460Includes timing chain (1,600), clutch (600), handbrake (150), oil leak (400).
Tyres & brakes270Total cost of 1,600 in 6 years.
Road tax30118g of CO2 per kilometre.
Total2,180

This seems high but includes total running costs. In comparison, for the same usage, an electric vehicle is expected to have much lower running costs as shown here:

ItemCost/ yearNotes
Electricity300Assumes 3p per mile.
Servicing50No oil changes. Brake fluid and fewer filters need changing.
RepairsUnknown but expected to be minimal.
Tyres & brakes270
Road tax0No  polluting emissions. Also exempt from congestion charges.
Total620

If these estimates are correct, I would avoid spending the difference (£1,560) a year just by switching to an electric vehicle. This is very compelling and makes me seriously consider purchasing the BMW i3 when the time comes to get a new car. I would not do it immediately but there will come a time when it is not justifiable to spend more on a huge repair which costs more than the car and the electric charging infrastructure is improved.

Good advice would be to buy a used car which is 3 to 4 years old and has taken the greatest hit on depreciation or using government subsidises if buying new. For me it would be ideal to aim for the 2018 i3 120Ah in 2021.

Of course, competition in the electric vehicle space is hotting up with models such as the long range Mercedes EQC, Audi E-tron,  Porsche Taycan, Tesla Model 3 coming up along with more affordable Hyundai Kona and Renault Zoe, there should be plenty of viable choices by 2020. With Dieselgate and rapid progression in green technologies, petrol and diesel cars will soon look like they are from the stone age.

Although initial purchase cost may be high, such low running costs make electric cars an ideal choice for the financially independent or those aspiring to be due to the greatly reduced impact on running costs and the added environmental benefits.

BMW i3 120Ah Key Specs

  • 0-62mph: 7.3 seconds
  • Top speed: 93mph
  • Range: 193 miles
  • CO2: 0g/km
  • Engine: Single-speed electric motor
  • Power/Torque: 168bhp/250Nm
  • Transmission: Single-speed automatic, rear-wheel drive
  • Boot space: 260 litres/ 1200 litres with rear seats folded
  • Fastest charge time: 45mins with 50kW DC rapid charging

Latest info on development can be found at INSIDEEVs.

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