What does this mean for you? Basically, less effort! In order to start spending less, you need to know what you’re spending on and traditionally that meant wading through your paper statements or downloads. Now you can have an app that plugs into your bank and does it for you. And since it’s (mainly) agnostic about which bank, you can easily combine multiple accounts in one app. They all work on a similar principle of asking you to log onto your bank or credit card within the app, which then pulls across any new transactions. Periodically, it will log in (effectively on your behalf) and refresh the data. As a safeguard, it will also ask you to re-authenticate the connection, typically every 90 days. Together with values, it also pulls across where the money is coming from or going to, which then allows the app to auto allocate into categories; either your income from work or spending on petrol, gym subscription, mortgage, etc. This makes it much easier to track your individual transactions, totals by category and your net worth, as well as spending and income trends. If you prefer, you can do it manually, but having done both, I’m in favour of using technology for this task.
You might be nervous about online fraud and the safety of other systems having access to your finances and you should obviously take proper precautions. Having observed the development of better security over the past five years, particularly with multi-factor authentication (MFA, where an additional confirmation via text, email or fingerprint is required for transactions), I’m confident that it’s secure but it’s good practice to be cautious. If anything, paying closer attention to your transactions might allow you to spot any fraud more quickly if you’d not really looked at your bank statements that closely in the past. Although it’s an ever-changing challenge, I believe the bigger risk in terms of fraud is phishing – unwittingly giving over personal information via a call, email or message that allows crooks to replicate your identity, card numbers and validation credentials.
As to which app to use, there are several on the market; most do a similar job and each has its own style or niche. Examples are Emma, Snoop, HyperJar, Moneyhub and Monzo. Some are free or offer a free trial period and then either a subscription or access to additional functionality. Despite my love of ‘free’, just like fees on an investment platform, if you want a good service, it’s not unreasonable to make a contribution. I’ve used three from the list above and settled on Moneyhub as a good all-rounder. It gives me what I need and I like the intuitive interface. However, this is more of a personal preference rather than a recommendation.
Note, however, that despite the slick interface and seamless integration, some data collection is a little clunky. Larger organisations share the base data of transactions cleanly and in full while others use a lower level approach, grabbing the data by virtually logging on and ‘seeing’ the transactions on screen. This works until the bank changes their layout and the screen-scrape technology needs to be recoded. This can lead to some delays or blips in the data but generally the issue is the connectivity with the target financial institution rather than the app. Fortunately, as standards are more widely adopted, this problem is reducing.
These apps are great for budgeting and auto allocating spending to categories, although it’s worth taking some time to review these and not trust auto allocation carte blanche, particularly if you regularly buy from a big retailer across several different categories. You can buy homewares, groceries and garden plants from Tesco or Sainsbury’s, so the allocation of your next £20 spend can be a bit of a lottery. That said, it’s huge reduction in effort to grab all your financial data and the resulting spending/income trends and net worth analysis is invaluable.
Monitoring your data
When you first start tracking your investments, you’re likely to get a shock one day when everything has suddenly dropped in value and you’ll instinctively think you’ve made a mistake or taken a bad decision. Despite the fact that I look at ours every day, it might not be a great idea if you’re prone to knee-jerk reactions. Investments go up and down daily and even though it’s natural to be concerned when you see a drop, it usually isn’t anything to worry about. It’s the long-term trend you should be looking for.
To prove the point, Figure 13 (overleaf) shows our investments over the past 12 months. The solid black line represents the total value of pensions and ISAs, all invested in the stock market, some in managed funds but most in trackers. Some months are better than others and above average while others are not but the trend (dotted line) is still increasing. While we’re investing a little each month into our ISAs, we’re also drawing from Lou’s pension. It took me a while to be comfortable with the drops but that came with looking at the data over a longer period of time and seeing for myself that the market does go up and down.
This is against a backdrop of a fairly weak UK economy but the returns are still positive. Having tracked my finances closely since university, it’s been a similar story – much the same as the examples in the investment chapter showing that generally economies grow over the long term. This is despite some very challenging economic periods in terms of recession, wars, international terrorism, changes of government and, not least, Covid-19.
You don’t need to go into as much detail as I do but, as part of my research, I started tracking our investments against three main indices – the S&P 500, the FTSE UK All-Share and the MCSI World Index. On the first of every month, I take their closing price and plot it alongside the spot valuation of our investments. In Figure 14, you can see that not only do the indices (bars) go up and down every month but they don’t always move in tandem! Our personal investments are shown by the solid and dotted lines. We don’t plan to beat the market – in fact, I don’t think it’s possible – but I’m comfortable that we’re not massively losing against it on a regular basis. Think about it like this: if your investments have gone down 5% in a month but the main markets have lost 8%, you’ve done well. If your investments have gone up by 10%, how have they done against the main markets? I don’t worry if I’ve not beaten all of them but I’m happy if I’ve done better (or ‘lost less’) than at least one of them on a regular basis.
Given the variable data in the graph, there’s a note of caution when reviewing your portfolio or researching a particular investment. It comes back to marketing and noting that any investment fund will try to position their performance in the best possible light. While one might say they’ve performed better than a benchmark of their peers, another might show they’ve beaten a particular index or that their five-year returns are better than average. In other words, it’s difficult to compare funds as their baseline is not a level playing field.
As detailed in Chapter 6, I like to look at fees, yield and the consistency of returns over five years, as well as the cumulative five-year performance. As a benchmark I then compare this with either the S&P 500 or World Index.
If you do talk to an advisor or someone proposing a particular investment, I suggest using the following two questions (loosely based on Warren Buffett’s mindset) to help determine whether it’s something to invest in:
How has the fund performed against the S&P 500 over the past five and ten years?
Do you believe the fund will outperform the S&P 500 over the next five years?
There’s another common issue that stems from this regular volatility and arises when you transfer to a new provider. If you invest £50 a month over a number of years, you don’t notice this volatility as much, partly due to the effects of pound cost averaging but also because you’re actively increasing the amount invested. However, when you transfer a larger sum from one provider to another, if you hit one of those market falls, you see a quick loss in value. I often read posts on forums saying ‘I’ve just transferred my pension over to ABC and it’s dropped 12% in two months – should I ditch them?’ My hunch would be no, as hopefully the market risk would have been explained before the transfer but mainly because I believe you really should give this sort of investment at least a year before making any rash decisions. It also depends on the fee structure of that transfer, and how (when) it is applied, but ultimately comes back to time in the market rather than trying to time the market. It underlines that selecting a platform or provider is important and you get the balance of fees and advice you’re comfortable with.
Once you have an investment of a reasonable size, those fluctuations matter less. In other words, the bigger the investment pot, the less the impact. I look at our net worth figure daily (in part because it’s on the front dashboard of Moneyhub) and it can go up or down by as much as £10,000 in a week but it doesn’t worry me, as we’re only withdrawing a tiny fraction of it every month and there are years of investment growth still to come. So provided it stays within a fairly broad range, there’s no need to panic.
Therefore, building a larger investment pot protects you from market volatility. You don’t need to be a maths wizard to do this – what you need is a basic understanding of finance and to follow the principles of regular investing in low-cost investments. The gist of this chapter is to show you how to manage your plan and feel comfortable with how it’s progressing. There are no hard and fast rules for doing this other than finding a process that works for you and you can follow frequently and simply. When I was at Amazon, every team or project had weekly, monthly and quarterly business reviews (formally known as WBR, MBR and QBR) supported by a report or data, a discussion of the prior period and plans for the next. You don’t have to be quite this structured other than scheduling a regular time to review your plan. Based on our eureka moment, Lou and I jokingly refer to our monthly chat as an MBR – our Monthly Bath Review.
Key takeaways
Choose what you want to monitor – either a single metric, a pure value or a selection.
Set yourself some targets and a timeline, together with a mechanism to track them that you’re comfortable with.
Find time to review your progress regularly. It doesn’t have to be weekly, possibly not monthly when you start, but I’d suggest a minimum of quarterly.
Don’t worry if your metric goes the wrong way or your investments fall in value in a single month. What you’re looking for is a long-term trend and being mindful of what the wider market is doing. The time to be concerned is when you’re consistently trending against the major indices.
"In a nutshell, what are you saying?"
Chapter 9
Conclusions
I wrote this book in response to the many friends and colleagues who were intrigued as to how we were able to give up work at an age most would consider early for traditional retirement and how we were confident that our finances would support us. Working through how we’d actually achieved this, a close friend nailed it with the phrase ‘spend less than you earn and invest the rest wisely’.
We then started looking at each of those three elements to understand how our approach might have been different from our peers’. Any references to products are purely based on our experiences and how they support the ethos of our financial lifestyle. We haven’t been paid for any insertion in this book and you should be aware that there are often several alternative products available.
Spending less
In terms of spending, there were three parts. The first was the true cost of borrowing money and the principle of not being in debt, or clearing it as a number one priority. The second was that we didn’t buy into the idea that many premium brands were great value for money; instead we made buying decisions on functionality rather than image. Third, we made things last, either through fixing them rather than replacing them, or simply not replacing them until they’d worn out.
If you have one, a mortgage will likely be your biggest loan and it’s not just the headline interest rate you need to understand. How the balance is repaid is critical to ensure you minimise the amount of interest you pay. We believed in the idea of paying off your biggest debt as early as possible and this was our focus. We’ve had other loans and credit card debts and these were equally prioritised over any other spending after food and utilities.
Historically, some brands were, or felt like, a premium option and this was primarily driven by their low volume and therefore exclusivity, not to mention higher prices than mass-market options. Advances in technology, manufacturing and global supply chains have allowed many regular brands to now be of equal quality. The original Czechoslovakian Škoda was the butt of many jokes in my childhood due to cheap materials, inconsistent manufacture and poor quality, yet now it’s a respected, high-quality brand. Indeed, when I chose mine as a company car, it was midway on this journey; I took a lot of flak but it was a very good, economical and reliable car. Similarly, the South Korean Kia currently offers the longest warranty of seven years and 100,000 miles, yet it’s not yet thought of as a quality choice despite offering a better warranty than premium, more expensive brands.
The technical specification and features of products are often underused and therefore a waste of money when compared to the functionality you actually use. Take the compact digital camera; many have settings for different exposures, shutter speeds, filters, macro or night shooting, yet the default is the ‘auto’ mode, which most people stick to. We’re living in an ever more commercialised world, driven in part by technological development. Marketing fuels this, enticing us to upgrade to a new version as soon as possible, or immediately our finance deal ends. If you can break out of this cycle, even by a few years, you can save money. It’s also better environmentally.
Earning more
Again, this can be broken down into three parts: your career, your pension and what you can do alongside to earn something on top. Taking a proactive approach to your career will help you increase your earnings, with your skills, experience and attitude all areas open for consideration on how you might improve them. Whether you’re employed full time, self-employed, contracting or part time, making yourself ‘employable’ will help you earn more or, more simplistically, offer something that someone else wants and is willing to pay you to provide.
Alongside employment, pensions deserve a special mention due to tax breaks and essentially ‘free money’. Regular investments in your pension, however small, are your number two priority after paying down your debts.
There are several options to earn additional income, from selling unwanted items or leveraging cashback and loyalty programmes. Be wary of oversimplified media posts that claim to be a ‘quick win’, as I don’t buy the idea of a shortcut for a reliable and guaranteed return. Property can be a profitable option for rental income but it’s not open to all as there are high costs in buying property and the added risk from servicing the mortgage debt.
