Financial Independence Meetup – November 15th in Dublin!

Financial Independence Meetup – Thursday, November 15th from 6pm!

The Ginger Man Pub: Address39-40 Fenian Street, Dublin 2, D02 KD51

All welcome!

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The simple path to wealth – Irish-style!

The simple path to wealth – Irish-style!This post looks at Irish attitudes to investing, and sets out 3 simple steps anyone can take to automate their finances and secure their future that don’t require complex research and analysis, or sacrificing today for tomorrow.

One Sunday recently my Dad dropped by my house to say hello. When he arrived I was just checking through my tax return and preparing feedback for an email to my accountant. I felt very pleased to be able to give my Dad the good news that, for the first time in my working life I had maximised my allowable pension contribution for 2017, at the same time capturing a nice tax refund in the process. I expected his reaction to be at least vaguely positive. If I had to describe his reaction in one word however, it would be…disdainful.

He proceeded to make a comment about one of my siblings to the effect that he “Really makes the most of his time and leads a very full life“. His subsequent comment involved something to the effect of: “It’s important not to sacrifice today for tomorrow”. I was a little surprised, and, I must admit, a little hurt. Surely the fact that I have only been contributing to a pension (investing) for a third of my entire working career to date, and the fact that I am now focused on taking very reasonable steps to boost the pension coffers is a positive (and indeed necessary) step. My Dad proceeded to express regret that investing was necessary and that he felt the state should take care of people in retirement, or they should have a workplace pension. This is consistent with his socialist views to which I also subscribe to the extent that I believe that there is a base line below which no one should be allowed to fall. I made the point that, given the ageing population in Ireland it is questionable whether the state pension will be able to support my generation in our later years. In addition – it is currently € 243 per week, so it seems sensible that people may plan to supplement this.

Is the inference that I should be out there living in the moment, and worrying about the consequences later? Didn’t I life that type of life for far too long already? I do not feel like I am sacrificing today for tomorrow. At least, no more than anyone else who is location-dependent due to work. I feel that in fact I am simply making conscious decisions and choices and following through on these.

Maintaining a hearty disregard for saving and investing seems to be quite common in Ireland, as is living in the moment, and feeling that we should show generosity and spend freely. I can only imagine that it holds people back on many levels. Typical Irish traits would be to want to buy a round of drinks, or to fight to be the one to pay the bill when meeting a friend for lunch. I can even remember hearing about young Irish men who had gone to Britain to work and whose pride would not allow them to return until they could afford to buy a drink for everyone in their village. Being “tight” or “stingy” is considered one of the worst things to be. I had also been infected with this attitude and was privately disdainful of others who did not appear to be spending “generously”.

Needless to say I now hold a very different view on this. Perhaps this line of thinking could have been where my Dad was coming from, or perhaps he just doesn’t agree with my choices, which I must just accept. On the other hand, why would a parent hold up one child as an example in this manner when the second has done nothing but make some mildly sensible choices after many years of financial blindness? I wasn’t looking for a medal, but I could have done without the disdain. Let’s look at some of these points more closely:

The sibling comparison – Single versus couple:

It goes without saying that a technically detailed comparison is not possible without having the full financial picture for both parties, so I will stick with what is known to me.

Mortgages: I got my mortgage on my own while my brother and his wife got theirs together. We both bought our houses around the same time, and both make similar monthly repayments. By this I mean, my monthly repayment is similar to theirs, ie. I have to find the same amount of money every month as they do between them.

Even without bringing any other factors into the equation, this already has a significant impact on our situations. It means that I have ultimately to be more careful in making provision for the unexpected, since I only have myself to rely on. It means I do need to make choices between going on frequent trips and stashing aside some money to cover the unexpected. Prior to getting my current job I was unemployed for 9 months. During this time my savings funded my mortgage and the majority of my expenses. This is the second time I have been without employment in recent years. As such, I have personally experienced the need to rely on my emergency fund on 2 occasions in recent years for a period exceeding 6 months on each occasion.

As such, I feel it is quite natural that I have been focused on building my savings back up again since my return to the workforce. When you are part of a couple, and living together, you can (hopefully) rely on each other – when one of you loses your job, the other hopefully doesn’t. As such, the case for an emergency fund is all the more important for the single person.

The bottom line is that as a single person mortgage and related expenses represent over 50% of all of my expenses. Granted, I have been able to offset some of this expense by renting a room out in my home and splitting my bills with my lodger. Nevertheless, I have found that it is a simply matter of making choices based on priorities. At the moment I personally feel that building some financial security gives me greater peace of mind than shopping, eating out or taking frequent trips would give me. I did all of the latter for quite a long time, with no regard for where I was going in my life. I’m all about conscious living these days!

Sacrificing today for tomorrow?

I think that this statement is worth considering further, from a couple of perspectives:

Over the past 2 years I have been 1) working less 2) eating better than in the past, and  working out 2-3 times every week (which I never did in the past). I have a nice home, a job that I actually enjoy. I still manage to get a couple of trips in every year and treat friends and family, and on top of all that am saving and investing at a rate I never was before. It is hard to see the sacrifice there. My social life could do with being a bit fuller, but that is in fact unrelated to my savings and investing choices.

I think it is more a matter of perspective. My Dad may feel I am depriving myself because he hears me saying things about how I haven’t been clothes shopping in a year, or I bring my lunch to work every day. Perhaps he thinks that I am depriving myself of going out at night or buying lunch or more holidays.

It’s hard to understand because I feel that I have greatly improved my quality of life over the past few years since discovering the FI community and living more consciously and planning things out better. Perhaps looking from the outside in it may appear that I am overly focused on investing for the future, and on monitoring expenses, to the detriment of my life now.  Tracking ones expenses is yet another un-Irish activity which may be construed as some kind of extreme action I suppose.

Conclusions:

Priorities, personal circumstances, and taking a sensible approach to personal finance:

It’s all about priorities. While one person may be very happy to continue to work indefinitely, another may wish to give themselves the option to work less, or not at all. My own view would be that, circumstances beyond our control (such as a health related issue) may render us unable to work at any time, so it makes sense to have some kind of contingency. Assuming that you believe you will live beyond age 50, it makes sense to put some money in to a workplace pension, for the tax break alone if for no other reason.

It’s also about personal circumstance. All else being equal, a single person with a mortgage will need to devote a larger percentage of their disposable income to it than a couple who share the same size mortgage. Houses come with all kinds of unexpected expenses. Just last week end, I spent € 240 on plumbers and was additionally made aware of a structural repair to my home which may cost a couple of thousand Euro. Having money saved to cover these very real expenses when they arise is important, and the result is that you don’t experience panic or anxiety when a trades person comes to your house and announces that you can expect this expense at some time in the near future as happened to me just last week end.

The simple path to wealth -3 simple steps you can take today to automate your finances and secure your financial future that do not require sacrificing today for tomorrow:

To take a Jim Collins-like approach to keeping it simple, I appreciate that not everyone wants to spend all of their free time reading blogs about how to make meals for a dollar, or indeed writing such blogs. Not everyone sets themselves the goal of early retirement or financial independence, and indeed, to those outside of the community some of the stories and experiences emanating from within the community seem extreme. Most people (myself included) prefer not to go to extremes, or to sacrifice their today for their tomorrow.

However, assuming that most people do not work for the state and expect a defined benefit pension plan at the a set period of stable employment, the following seem to me to be sensible, moderate actions to take for peace of mind if nothing else:

1. Invest in your workplace pension – My company will pay 5% of my salary into their pension plan, but only if I pay 6%. With tax relief, paying in 6% actually only costs me between 3.6% and 4.8%, depending on which bracket I am in. Effectively, this means that 11% of my salary is invested in various pension funds to grow tax free, and has cost me a maximum of 4.8%. Of course, depending on your age group you can top this up further with tax free contributions up to the following percentage of your salary dependent on your age:

  • under 30: 15%
  • Age 30-39: 20%
  • Age 40-49: 25%
  • Age 50-54: 30%
  • Age 55-59: 35%
  • Age 60 or over: 40%.

I have seen a lot of discussion and analysis on various brokerage funds, which ETFs to invest in, and the tax treatment thereof. In the interest of keeping it simple, I am happy to use the workplace pension as opposed to opening an account with a broker where I need to track my own trades and organise to pay my own taxes. There is no need for any of this with a company pension plan, and remember, if you are in the 40% tax bracket, every € 60 invested will buy you € 100 worth of pension assets. Finally, if your company does not offer a pension plan, you can ask them to set up a PRSA (Personalised Retirement Savings Account). Employers are required to do this by law in Ireland, so make sure to ask for it!

2. Overpay your mortgage – Banks in Ireland are now offering longer mortgage terms in anticipation of later retirement ages in future. I am almost 3 years in to a 29 year mortgage. Overpaying it by a couple of hundred Euro per month (the cost of a couple of nights out in Dublin) wipes 7 years off that mortgage term and reduces the overall interest I need to pay over the life of the mortgage by € 20 000. It has never been easier to get this information thanks to the mortgage overpayment calculators that the banks themselves are making available on their websites. The overpayment I am making can be cancelled at any point in time with no penalty to me. This is a very worthwhile “investment” for anyone with a spare couple of hundred Euro left in the budget, since can save you much more in the long term, and of course get you debt free sooner!

3. Build up an Emergency fund – There have been many blog posts out there on the appropriate amount to keep in an emergency fund. From my own experience to date, I would say 1 years’ worth of expenses is a good rule of thumb. Maybe others feel comfortable with more, or with less. An emergency fund can cover living expenses in the event of a job loss for example, or can simply cover household emergencies as they arise. Just last week end a plumber came to my home and advised me that I can expect to make a structural repair that he expects will cost me € 1,000 – € 1,500. This is exactly the type of thing that an emergency fund is designed to cover in my opinion. My recommendation would be to set up an automated monthly contribution. When you own an apartment in an apartment block in Dublin, typically part of your annual management fee goes into a sinking fund to cover precisely these types of emergencies. When you own your own house (not in a development), it is up to you how you manage this. Enter the emergency fund.

That’s it! 3 simple things that you you can dial up or dial down depending on your circumstances. Automation on these 3 items is preferable. You don’t need to have any particular skill or knowledge to do these 3 things, and you can go a long way towards securing your financial future by putting these things in place, and then simply leaving them in place and getting on with your life!

The title for this post, as well as some of the ideas referenced here were inspired by a book by Jim Collins called this Simple Path to Wealth. The book is written in a straightforward and entertaining way. I have included a link below to the book on Amazon. (In the interest of transparency, please be aware that I will make a commission if you purchase this or other items on Amazon after clicking through this link):