In a field one summer’s day a Grasshopper was hopping about, chirping and singing to its heart’s content. An Ant passed by, bearing along with great toil an ear of corn he was taking to the nest.
“Why not come and chat with me,” said the Grasshopper, “instead of toiling and moiling in that way?”
“I am helping to lay up food for the winter,” said the Ant, “and recommend you to do the same.”
“Why bother about winter?” said the Grasshopper; we have got plenty of food at present.” But the Ant went on its way and continued its toil.
When the winter came the Grasshopper had no food and found itself dying of hunger, while it saw the ants distributing every day corn and grain from the stores they had collected in the summer. Then the Grasshopper knew: It is best to prepare for the days of necessity.
See Martin Wolf’s re-telling of the Ant and the Grasshopper as a modern fable here.
- Live within your means. The safest way to get rich is to save. How you invest your savings – cash, shares, gold, whatever – is a secondary consideration, unless you are really silly.
- Minimize taxes and charges. Most people can save tax-efficiently through ISAs and pensions, and should do so. Also, don’t be tempted by high-charging funds – they are usually not worth it. And if you hold shares directly, don’t trade much.
- Remember that high prices, on average, mean low expected returns. Don’t jump on bandwagons.
- Remember G.L.S Shackle’s words: “knowledge of the future is a contradiction in terms.” Don’t pretend you can see what’s coming. And don’t pay others in the belief that they can do so. The essential fact about the financial world is risk (and/or uncertainty). The key question is: what risks are you prepared to take, and which aren’t you? This paper by John Cochrane discusses this well.
And I like this investment philosophy from Jim O’Shaughnessy.
Many people will say that they want to take more control over their current spending and future financial security, but often find it difficult to actually achieve this. I’m not a qualified financial adviser, I can’t demonstrate past success at investment decisions, and do not encourage you to blindly follow my advice. All I can offer is a process by which you can gain a better understanding of your personal finances, and something that seems to work for me.
You probably don’t have time to follow these steps now. So find a date a few weeks or months from now and put it in your diary. Don’t shift it. Treat this seriously. Do it when you have time…
Picture yourself at 65, and make it as vivid an image as possible – not so much what you look like, more where you are and what you are doing (for more see Chapter 9 of this book). A large reason why people are careless with their financial situation (and constantly undermine their future happiness), is because we’re conditioned to focus on immediate rewards. But we need to shift perspective and think about what actions your present self needs to take in order to make your future self happy. What resources do you need to deliver to your 65 year old self? Picture your children at 20. What do you want to be able to give them? Don’t adjust your future goals to meet your financial resources. Adjust your present behaviour to hit your targets.
Practice self-control and delayed gratification. If you want to watch a movie, try waiting a few days. Treat it as a reward.
Create your own version of my Personal Finance MOT (download a PDF here).
- Fill in the date at the top left – do this at least once a year.
- Go through your last 6 payslips and use your typical (i.e. not including bonuses) net (i.e. after tax) income. Unless bonuses are a significant part of your regular income treat them as a bonus and save them. This goes in the “In” box (top left). Make sure you include a total.
- Then look at your outgoings. All of the sections in the thin black boxes should be summed together in the box where it says “Out”. There’s probably some categories that I’m missing out, and so use it as a basis. Check your direct debits to make sure there’s nothing that you’re regularly spending money on that isn’t being captured here. There will be lots of expenses that aren’t on this list (e.g. food, clothes, etc), but I find that if you try to be too exhaustive it becomes arbitrary. These are all essentials and are a lower bound of monthly outgoings.
- Use a blue pen to complete it. As you can see for the mortgage entry write there is a row underneath to write down the provider in the left half and the amount in the right.
- If there are any bills that are paid annually fill in the amount in green (and there is space below to add the renewal month). Divide each green number by twelve and sum together in the separate box called “monthly equivalent”.
- Finally, your wealth is captured in “Shake it all About”. These can be estimates but if it takes a long time to find a current balance then perhaps that’s a problem. (Although if you’re checking them more than once a year that may also be a problem. Set it, and forget it). The dotted line signals that the top part is current wealth, and the bottom is the current value of savings that will be accessible to the children when they’re older. For many people most of their wealth is tied up in housing, so you can add the current value of your property less the outstanding mortgage. But I’d keep that separate to the main wealth calculation (it’s hard to shake about).
- The two grey boxes are some metrics:
- Months of imports covered is =(wealth/out). It shows how long you can keep spending money at the same rate if your income dried up.
- Savings as % of income is =[(wealth/in*12)]*100.
- Include your personal and employer’s contribution to your pension. Make sure you max out any matched contribution and have a figure as hugh as you can afford (>25%).
- Total wealth is the sum of “Shake it all About” and house equity.
Some general comments:
- Get a good credit card. Make sure you pay it off each month but make sure you’re getting rewards for spending. An easy way is to link it with Airmiles.
- For advice on what type of pension, life insurance, savings vehicle are appropriate for you consult a professional financial advisor (this is helpful). If you don’t think it’s worth paying a few hundred quid to sort out your financial future then you’re an irresponsible idiot!
- It is really important to start saving early. “Someone who starts saving at the age of 21 and then stops at 30 will end up with a bigger pension pot than a saver who starts at 30 and puts money aside for the next 40 years until retiring at 70“. Also look at the calculators here.
- Have a look at the interest rates you’re paying. Make sure that you pay off your most expensive loans first (you don’t want the “loans” box to outgrow anything in the “shake it all about” box).
- Act as though the Efficient Market Hypothesis is true (see the second half of this page). The best investment strategy is a low cost well diversified index fund. Vanguard are the original and remain the best (and even after the turmoil in Spring 2020, if your goals are long term you shouldn’t even be looking).
- I use the FTSE Global All Cap index
- The ESG Developed World All Cap Equity Index Fund is very similar but reduces emerging market risk (I think)
- The Lifestrategy 100 is more UK based, which reduces exchange rate risk
- I use the FTSE Global All Cap index