Life’s not fair, even more so when it comes to money. If you are lucky to have money it means you can spend it but from a FIRE point of view, having money means you can make even more. Here’s just a few ways that having money can save you even more.
Ask yourself, how much money could you save if you just had more of it?
We should all know that carrying credit card debt is not a good idea – but car & car loans are just as toxic in GFF’s opinion.
There’s almost 32 million cars in the UK, with 2.37 million sold in 2018. Sure, we can’t afford them but declining sales is seen as a bad thing – it’s good for the economy and if you can’t afford it, there’s always credit!
GFF didn’t own a car for the first few years of his professional career – that along saved me tens of thousands of pounds. But sadly, at one point I needed to get a car and that meant I needed to buy one. Car buying is a difficult process for a tight-ass like me. Cars cost a lot of money to buy, to run, to maintain and when you think of the premium of living somewhere with parking – or even over £100k for just a lock-up garage.
But just to buy the car, if you can’t afford to buy second-hand, you’ll have to buy a nice flashy new brand-new car on PCP or some other scheme. Whilst these deals might look good – come’on you can get a brand new car for less than your rent money; I firmly believe that a brand new car has to cost more than a second hand car – the depreciation outweighs the higher maintenance costs. Also, if you get used to driving a new car every 2 or 3 years, you’re speeding along on the hedonistic fastlane!
Annual payments vs. monthly direct debit
Once you have your car you’ll need to need to get it taxed and insured.
If you can’t afford the annual cost (our VW just set me back £155 and that would have been £13.56 a month for 12 months = £162.75 or an extra £5.75 if I’d gone for that).
Paying monthly means you pay an extra 5% – equivalent to 10% annually. You might think that £5.75 isn’t much, but GFF thinks that these little costs all add up. And this is car tax paid to the government – you car insurance company might charge you 20% APR or even more.
When it comes to buying a home, most people need a mortgage. If you have the money for a deposit you can save money. Below from the Nationwide is what a £190,000 mortgage will cost for a 95% and 75% LTV. That extra 20% deposit reduces the APR by 1.5% – an effective return of 7.5% for the larger deposit. The result is that even just over 2 years the higher LTV loan will cost an extra £140 a month or over £3300 over two years.
If you don’t have that deposit then you might be stuck renting. Now there is nothing wrong with renting – except in the UK. The cost of owning is less than renting meaning, renters pay more and over time that means you can have significantly less money making getting a good mortgage deal. Even worse, having a small deposit might push you towards the Help to
Sell Buy scheme run by housebuilders and the government. Buy new at your peril.
Mortgage debt tends to be the cheapest debt you can get your hands on. Swapping a deposit in exchange for cheap debt and a property that should rise in money and saves you from renting can be a sensible long term wealth strategy.
On the theme of mortgages; GFF years ago had an Interest Only (IO) offset mortgage years ago. An offset mortgage is one where you only have a commitment to repay the mortgage at the end of the (typically) 25 year term and can use savings to “offset” the interest. It’s a good way to get a nice tax-free return on your savings and flexibility.
This ran at BOE Base Rate +2.09% which was 2.59% for the 5 years or so that I held it. I even know someone who had an IO Offset Mortgage at BOE -0.1% for the life of the mortgage. Now you can’t as easily get an offset mortgage but it is possible to and is easier for those with high incomes and low LTVs.
One great thing of the offset mortgage was that gave me a lot of choices of what to do with my money. When money came in I could pay down the mortgage but if I wanted to invest I could draw it down. You can do a bit of carry-trade if you like – borrow cheaply and earn a higher return elsewhere. I did it with Ratesetter and ironically with the mortgage providers regular saver (paying 8%).
I’ve never been in a position to really need a job but then again I’ve not really job hopped much either. But I do know of a few people who either have “supportive” families or a bit of money which means that they can quit the job they don’t like and not have to worry about where tomorrow’s dinner’s coming from. Doing a job you don’t like just because you need the money is akin to debt slavery – you can’t even put a £ figure on how much this costs because you are talking about your dignity.
Worryingly, the rise of student loans and poor employment prospects post-crash has meant that young people are more insecure than even.
Investments instead of debt
Being stuck in a debt cycle means that it may take you years to break even and get rid of your bad debt. The sooner you can stop paying interest and start investing the better – this could mean opting into your workplace pension or investing in a LISA or ISA. Overtime, these should grow in value meaning you get even more money. The sooner you can start investing means more time in the market. Overpaying the mortgage is something I’ve had a rethink about recently – it’s best not to, not only can you not access the money for FIRE purposes, it’s a useful bit of leverage.
Another strategy for investment is to postpone paying off your mortgage until you can access your tax free lump sum of 25% of your pension (usually from 55 at the earliest). Not only is this a tax efficient strategy, it also allows you to benefit from higher investment returns than mortgage costs over many years.
You can’t help how well-off you are born. I happen to believe that those who are born with a silver spoon in their mouths tend to choke on them. But having money is better than not. When you don’t spend it, money can make you more and more money. For GFF, I’ve always been looking at ways to save money. And it’s only by having lots of money and controlling your urges to spend it that means you can break yourself free from the need to earn it.