The Importance of a Budget

Spend less than you earn and invest the rest.

You can read every book in the world on finances but if you don’t have any spare money at the end of the month, your knowledge is useless.

Since about May 2019 I have put together all my expenses together on a spreadsheet. It can work out how much you spend per year, per month, per week and even per day. This basic spreadsheet was taken from Andrew Craig (How to own the world).

After years of poor money management, my personal finances were all over the place. I ended up with a spreadsheet for expenses, car information, tax information on DUFFY ELECTRICAL, tax information on my rental properties and now DUFF PROPERTIES and a few more thrown in.

What has been a good habit is to check my spreadsheets once a week. It only takes 5 minutes and just means I am on top of my personal finances.

This weekly habit has encouraged me to improve my property management skills as I am fully aware of my legal obligations and key dates like when I need Gas certs or Electrical certs.

Nothing about personal finance is easy and I have found taking the time to sit and work through my budget to be very difficult. Due to a complete lack of focus on my expenses I didn’t really know where my money used to go.

Instead of using some basic intelligence and looking at my expenses further, I carried on regardless and just sort of knew what was going out. This went on for years and I never bothered to work out my budget until mid-2019 as a 36-year old.

What forced me to sit and go through my budget was that I had finally got some much-needed clarity. My goals were massively important to me and I knew that to get my financial house in order, I needed a budget.

With my budget in-place, it allowed me to ensure I was spending less than I earned. Then I was able to put money aside each month in the investments I had been researching.

If you are like me, your goals will be reason enough to sit and go through the arduous task of working through your personal finance budget.

If you do some research, it will help you from a concept point of view to understand your assets and liabilities. You will fully understand your income and expenses.

With knowledge of Assets, Liabilities, Income and Expenses, you will have a clear picture of your financial situation. Now this is clear, you now know what you need to do to get to where you want to be.

This initial budget has now given you the opportunity to do some financial planning. You might have a loan that is preventing you from investing into an ISA or SIPP.

What if you could manage with 1 car and bike to work. By selling the car you don’t need, you could pay off the loan.

Now you have no loan repayments and you are saving on fuel, insurance and car tax. This could mean you are now able to put £300 pcm into an ISA or SIPP.

The following hypothetical example John will use a low-cost index fund and we will call it ‘RETIRE AT 57’. We will assume he manages to average 7% interest per year over the next 27 years. There are no guarantees in the stock market, and I am not a qualified FA.

We are going to imagine that John is a 30-year old who now has an effective budget. He has decided to manage on 1 car and now has £300pcm to invest. He is going to invest every month in the ‘RETIRE AT 57’ low-cost index fund and will invest for 27 years.

Now because of John’s budget, he has been able to invest in a pension fund when previously he had no pension. With a little Financial Literacy, he was also capable of choosing his low-cost index fund.

With all the hard work done, we are going to see what his work does for him. At 57, John has a SIPP that has a value of £268,141. He was on a path towards no pension that would have affected him and his family in his late 50s.

Now all of a sudden, he is happy in his late 50s because of some intelligent investing decisions he made as a 30-year old.

This is just one example of how improving your budget skills can help you. The 27 years might seem like an eternity but from my experience, there are no get rich quick schemes when it comes to personal finance.

 

 

Investing is Personal

With my poor track record of investing in stocks and shares I knew that single shares were not for me. By June 2019, I was fully aware of how emotional I had been over money and this influenced my thinking as I started to look into yet another attempt at stocks and shares.

As I’m too emotional for single shares, my thinking was to go with Index investing.  My preference is a set-and-forget strategy and one of the benefits is that I only check my fund maybe once or twice a year.

Much better for my mental health when compared to single shares. Constantly checking the price of single shares hasn’t done me any favors in the past.

When reading up on finance to improve my financial literacy, I have found that tracking the markets is a method of investing that is most suitable for me. Many experts like Warren Buffet and John Bogle recommend it and I have also learned from experience.

Tracking the markets is about staying calm throughout the inevitable ups and the downs. The main concept of tracking the markets is that you are looking to match the interest achieved by the entire stock market.

This method gives you diversification (spreading the risk) as your index fund often holds shares in several companies. The companies can be in different parts of the world also (different markets) meaning further diversification. It means you are less exposed if one of the holdings performs poorly.

With over 100 years of data, the entire stock market has gone up an average of 7-8% per year. It might be much lower some years and even negative but if you are looking at it from a historical point of view, it will revert to the mean and over time will average out between 7 and 8%.

If you can let this sink in it will help you look at your investment as a long-term strategy. It will help you avoid common mistakes like buying when the price is high and selling when the price is low.

After doing my research, by mid-2019 I liked the idea of index funds and was also aware of the importance of keeping costs as low as possible.

John Bogle is known as the King of Index funds and he started Vanguard in 1975 and this enabled just about anyone to invest in the stock market.

Vanguard was set up as a low-cost passive fund that is tied to the value of the S+P 500. If the stock market goes up (S+P 500) the fund goes up. If this is reversed and the market goes down, the fund goes down.

What has been drilled into me from what I have read is to avoid the mutual active fund. It is different to a low-cost passive fund in that the fund manager tries to beat the market.

With a mutual active fund, you have to be aware of high transaction costs and taxes. If you do manage to achieve 7% each year but your fund manager is charging you 1.75%, you are down to 5.25%.

You might prefer mutual funds and the chance of getting a higher percentage return on your money. Investing is personal and I am simply going over how I decided to invest in the stock market.

I know that my younger self would have preferred a mutual active fund to make quick money but with a bit of experience I know that the set and forget strategy of passive index funds is more suitable for me.

Deciding where to put your money is a difficult process and the main things to consider are your risk tolerance and your goals. The way I invest my money is specific to me and we all have our own goals that need to be aligned with our investments.

Table 1 will help you to understand different asset classes and how risky they are. If you know you are going to be investing for another 30 years, you can afford to go high-risk high reward when choosing your fund.

Table 1 (Investment risk gauge)

ASSET RISK (ON A SCALE OF 1-8)
EMERGING MARKETS 8 (VERY HIGH RISK)
JAPANESE EQUITIES 7
EUROPEAN EQUITIES 6
US EQUITIES 5
UK EQUITIES 4
PROPERTY 3
CORPORATE BONDS 2
GILTS 1 (VERY LOW RISK)

 

Looking at what fund to go with, I was heavily influenced by my poor investment track record and also by the books I had been reading.

I was happy with my Asset allocation. The fund I was choosing was globally diversified and had a split of 80% shares and 20% bonds. The fund was made up of index assets that tracked the markets (small slice of several companies).

The Vanguard Life strategy 80/20 is the fund I eventually chose. I am 100% not advising you to choose this particular fund. I have to stress that investing is personal, and this fund is what I think is suitable for me and is aligned with my goals.

Once you have decided on your fund, you have to decide what platform to use. I like Vanguard because of the low costs associated with the fund.

I have used Hargreaves and Lansdown and Vanguard platforms so far and there are benefits to both. H+L is more user friendly I would say but Vanguard offer lower costs for the fund I have chosen.

Not only do you need to choose a platform, you also need to choose between an ISA and a SIPP.

Using an ISA and SIPP are both tax efficient, but they have some differences that you should be aware of. For example, you can access your ISA anytime, but you can only currently access your SIPP when you reach 57.

If you love your job and are comfortable working until your late 50s or into your 60s, you might prefer the SIPP option. Then you won’t be tempted to take money out and will massively benefit from compound interest depending on your age.

What I initially decided on was a total of £1000 pcm into my LS 80/20 fund. This was split so that I paid £500 into my SIPP and £500 into my ISA.

My thinking was to build a pot for my 40s with my ISA and build a pot for retirement with my SIPP. Looking at my goals when it comes to money, my main goal is to build a certain amount so that my family would be FI.

I was to give my investment serious thought and ended up deciding to change, as my initial investments didn’t quite match my goals.

If I focused on my SIPP, I could access the money at 57. I decided that increasing my monthly investment in my ISA was more suitable for my ambitious goals.

My new split would be £800 into my ISA and £200 into my SIPP. I have looked further into my LS 80/20 fund with improved understanding and am still happy with the fund. I just needed to adjust my allocation between my SIPP and my ISA.

With my Funds now aligned with my goals, I still wasn’t quite there. Although I do like the Hargreaves and Lansdown Fund platform, I had to re-visit the charges. That was pretty much the first thing I learned when researching investing.

Although it was in the forefront of my mind, I had made a mistake when using HL for my funds. Initially, I chose Vanguard funds via HL and although I was looking at the fees, I didn’t compare them to going direct to Vanguard. This is the cheaper option and I have now moved my ISA to Vanguard to save on costs.

Let’s compare the fees for both platforms. Vanguard fees are just 0.15% on the first £250,000. HL are 0.45% a year for the first £250,000. In addition to this, both funds charge an annual ongoing charge (ocf): 0.15% for Vanguard; 0.26% for HL. This means the all-in costs are as follows: 0.29% for Vanguard; 0.71% for HL. This 0.42% does not seem a lot but over a lifetime of investing could make a massive difference to your pot.

Here is a little summary of what led me to investing in the Vanguard LS 80/20 Fund:

  • Track the markets and aim for 7-8% (this doesn’t take inflation into account)
  • Look for a fund that is diversified across several companies in different markets
  • Make sure your chosen fund (if you decide to invest in a fund) is aligned with your goals – I am confident mine is aligned
  • Do your own research and my own research led me towards John Bogle and Vanguard
  • Read the smallprint and be aware of the costs involved
  • Be tax efficient and understand whether ISA or SIPP is most suitable

As always, I hope someone somewhere can learn from my mistakes. Do your own research and don’t settle for <1% interest from a high street savings account.

 

 

Buy, Exchange and Store Bitcoin

Before investing in cryptoassets, you really need a basic understanding of the technology. There are many books that you can buy and the 1st book I read on the subject was ‘Bitcoin for Dummies.’ Here is a brief summary of what you will learn:

  • Exactly how it is used
  • How to securely store your bitcoin
  • What you need to know about encrypting
  • Information on trading and crowdfunding
  • How its regulated
  • Where its banned
  • Services that help you with taxes
  • Bitcoin pros and cons
  • Ten ways to use it

Now we have a basic understanding, we can move on and buy, exchange and store crypto. To start with, look to invest a small amount of money into Bitcoin (BTC) or any crypto you fancy. As you get more confident with the technology, you can increase your investments.

My disclaimer is that I am not an expert on Crypto (or any other asset class) and am not advising you to buy a particular asset like BTC. The intention here is to offer a basic step-by-step guide to help you buy and safely store digital assets.

With QE reducing the value of physical money, I believe that digital assets will become more and more popular over the next few years. Again this is not an expert opinion, it’s just my opinion.

If you feel digital assets are here to stay like me, it is surely worth understanding the technology and learning how to use it.

Introducing Tap

I am assuming that you have read ‘Bitcoin for Dummies’ and know the basics like where to store crypto and how you can use exchanges to hold and transfer assets. You are also aware of hardware wallets like Trezor and that this is a safe way to store BTC and other assets.

TAP is a trading app that also offers a contactless, TAP prepaid mastercard. Before selling the benefits of TAP further, I have to be honest and tell you that I have made a small investment in TAP and it’s in my interests to spread the word.

That being said, I can honestly say that TAP is very easy to use and comes with many benefits. It allows you to trade crypto and fiat currencies on your app and also allows you to spend your crypto assets with one tap of your card.

For new investors it is simple and transparent. It allows you to fund your account with a bank transfer or debit card. Then you are away and can start trading with the app.

The main features of TAP:

  • TAP Mastercard
  • Cash wallets in Euro, US Dollar and Pounds Sterling
  • Crypto Wallets in BTC, Ethereum, Litecoin and TAP

 

How I have used TAP

So far, I have just been having a play with a small amount of BTC.

1st of all I wanted to transfer some BTC from my Bittrex account to my TAP account:

  1. Open the app and select BTC within Crypto Wallets
  2. Select Options and select receive – this gives me a unique wallet address (again refer to ‘Bitcoin for dummies’)
  3. Copy the address
  4. Go to Bittrex and select Holdings and open BTC
  5. Select Transfer and then withdraw
  6. Now paste the unique wallet address that was copied in step 3
  7. Select how much BTC to withdraw and select withdraw BTC
  8. The BTC will be transferred to the TAP account and takes 30-40 minutes

To safely store my BTC, I can then transfer it from my TAP account to my Trezor Wallet:

  1. Go to your Trezor Wallet – go to receive to get your BTC address for your Trezor
  2. Go to TAP and select BTC within Crypto Wallets
  3. Select Send
  4. You now need to select + Beneficiary
  5. Create a name for your Trezor wallet e.g. PD BTC
  6. At this point you can copy and paste the Trezor BTC address or use the QR scanner to scan in your BTC address
  7. Still in TAP choose the amount of BTC to send and press send
  8. The BTC lands in the Trezor wallet instantaneously

This step-by-step guide assumes you know the basics of crypto. It also assumes you are comfortable with transferring money using balance transfer and you are familiar with QR codes.

To be able to do the above you need the following:

  • A basic understanding of crypto
  • An exchange account like BITTREX
  • A trading app like TAP
  • A secure hardware (or cold) wallet like a Trezor wallet
  • And a small amount of money to buy BTC with

The last thing I am going to do is recommend you buy BTC as an investment or any other crypto. My knowledge and track record are just not up to it.

All I am saying is be open minded and look into the effects of QE. We are in the digital/information age and things are changing and fast. Getting up to speed with digital assets will help you to move with the times.

 

 

 

Energy Efficiency Measures

Back to legislation and I am going to focus my attention on Energy Performance Certificates (EPC). Since April 2018, rental properties in England and Wales have had to meet a minimum energy efficiency standard (MEES).

The 2018 rule that was introduced only applied for new tenancies. As of April 2020, this new rule applies to all new tenancies.

Going forward, all rented households must have a minimum EPC rating of E. According to ‘Which’ magazine landlords that have rentals with a rating of F or G face fines of up to £5000.

Up until recently, I had no idea about needing to have a minimum EPC rating of E. I sort of knew what an EPC was but not really. To me, it was a colourful piece of paper that was included when you bought a house.

Now I am paying more attention to my existing rentals, I have made sure that my rentals have an EPC and am aware that my new colourful bits of paper are valid for 10 years.

I even went as far as reading each EPC when the company sent me the certs. To get a rating of E (the minimum standard) you have to get a score of 39-54 and this covers things like windows and insulation.

My results were ok as the rentals score ranged from high 60s to early 70s. 2 of my rentals only got 1 star for insulation and 1 of my rentals got 2 stars for windows.

So I am now on top of all my legislation and I can potentially make improvements to help my tenants. The reason it is potentially and not definitely is because I have spent £4500 on x3 new boilers within the last year so I don’t want to be spending anymore if I don’t have to.

This brings me to the energy efficiency measures that the Government are about to introduce.

As a way to get the economy moving in the right direction, the Government plan to give homeowners in England money to spend on home improvements. Anything that improves the house in terms of energy efficiency will be applicable. So it will be things like boilers, windows and insulation.

This will create thousands of jobs, will reduce the bills for tenants and will also reduce our carbon footprint. The bonus for landlords is that it will reduce maintenance costs over the next few years.

According to Martin Lewis (Money Saving Expert), the grant will cover at least two thirds of the cost, up to £5,000.

Rishi Sunak has gone a step further for those on low income, “For low income households, we will go even further with vouchers covering the full cost up to £10,000.”

This will be fully rolled out in September and will be issued in the form of vouchers.

So make sure you get your EPC booked in for each of your rentals and make sure that all your other legislation is up to date.

Don’t be that landlord who just collects the rent like I was. The landlord tenant relationship can be a good one but as the landlord you have to put some effort in. Making sure that you fulfil your legal obligations is a bare minimum.

You can guarantee that someone somewhere with little or no legislation will suffer financially. Imagine if the shit hit the fan a few years ago and number 19 (one of my 4 rentals) had fire damage or the kitchen was flooded whilst I had no insurance. I was anxious over money at the time anyway and this would have only added to my financial misery.

As mentioned above, getting your rentals (or even your own home) energy efficient by using Government vouchers has many benefits. Fingers crossed it has the desired effect and gets thousands back into work.