Question 1

What is the point of investing?

Accepted Answer

To make your money grow, allowing you to lead a more secure and comfortable life on your terms.

Investing is an efficient way to build wealth. Unlike us, money never sleeps nor does it retire. If invested sensibly it should go on producing capital and creating income long after we put our feet up. Additionally, investing will give you a financial cushion should life throw one of its curveballs at you.

If you leave your money in a bank thinking it’s safe, think again. Inflation will steal it.

Had you left £100 in a current bank account in 2002, by 2016 you’d need £149 to buy the same stuff. Put another way, inflation has reduced the value of your money by a third (33%) and your £100 is now only worth £67.

In contrast, had you invested £100 in the FTSE 250 Total Return Index over the same period, your money would be worth £618 in 2016 (before inflation), and £413 (after inflation) – a return of just over 500%.

Inflation easily confuses, mainly because it can be presented in so many different ways. So, look at it this way: after 14 years of inflation (2002 – 2016) what would you rather have, £67 or £413? That’s a no-brainer. But unless you do something constructive with your money, you’ll end up with the £67.

Inflation is currently floating at less than 1%. But even at this low level – let alone if it rises – it’ll still sting your financial expectations. Most Millennials and many Generation X have become financially aware during a prolonged period of trending low inflation. They (you!) have never experienced its relative cruelty.

At 1% I suspect you will have a tendency to give inflation little thought, let alone consider its impact on your future wealth. Be mindful. Inflation is a killer, and my guess is that it will rear its ugly head again in your lifetimes. Annual average UK inflation in my lifetime stands at 5.3%, and from 1982 to 2015 it averaged 3.6%. Nevertheless, and despite its low current value, its impact on your savings remains pernicious.

The question is: what should you do with your money? Answering that question is the primary purpose of this series of MYFE books.

Please note: This answer was written in 2020 and since then, inflation has risen.

Question 2

How can I start to save?

Accepted Answer

There are many ways to save; here are just a few:

Live within your means. Start by prioritising what’s really important to you, and focus on these priorities while sidestepping the nice-to-have items and impulse purchases.
Learn to budget and manage your income and expenses. Two fabulous, free and downloadable budget planners are available at:

Martin Lewis’s MoneySavingExpert (bit.ly/2IlkDH4)
Pete Matthew’s Meaningful Money (bit.ly/3d9vyPa)

For a simple strategic approach to budgeting try this (bit.ly/34FbceA). Which? magazine has a useful link for 50 ways to save money (bit.ly/2FZudye).
Budgets can be tiresome, so have a look at ‘Dealing with budgets’ on page 36.
 
One of my favourite anonymous sayings is:

The reason some of us can’t save is because of our friends. They’re always buying something we can’t afford.

By trying to keep up with the Joneses, you’re effectively letting someone else determine your life’s priorities. Not only is this unsustainable, it’s not great for your sense of self-worth either.

If you find yourself tempted to emulate the lifestyles of your friends – and who isn’t susceptible to these emotions? – you might like to read The Millionaire Next Door (amzn.to/2GPYy2z). It conveys a powerful message and teaches useful habits.

Learn to acquire the skill of delayed gratification. The famous Stanford marshmallow experiment (bit.ly/3nmB45B) established that people who can delay gratification enjoy significantly better life outcomes.
If you enjoy your day job, give it your best shot. It will improve your chances of promotion and the extra income it brings.
Start a side-business (as long as it doesn’t impact your day job). See the Additional Resources section (page 80) in this book for ideas.
Sell stuff you no longer need.
Use technology to help you save. Money to The Masses quickly reviews a list of potential saving apps here (bit.ly/3oxo9yA).
Read some books on how to save money (see Additional Resources, page 79). Research the internet for ideas; here’s one (bit.ly/3jyzmev).
Watch this video by Jason Butler on How to Get Control of All Your Day to Day Spending (bit.ly/3gsal38), or read this blog from MoneySavingExpert (bit.ly/32ue9fc).
Finally, if you’re new to the world of managing money and don’t know where to start, why not try Damien’s Money MOT (bit.ly/360XNMY). This will help establish your priorities and guide you on your journey. Damien is the author of the Money to The Masses blog.

Okay, I appreciate the above ideas aren’t easy, or even an option for everyone. Nevertheless, for many Millennials and Generation X there are opportunities to save on expenses. Remember, just because you can afford something doesn’t mean you should buy it.

Question 3

What if I can't save?

Accepted Answer

Understood. In these circumstances, don’t try to save.

Many of us, and for completely genuine reasons, are faced with simply trying to make financial ends meet. The uncertainty of tomorrow’s income is too precarious to have the luxury of squirrelling away any savings into pensions or ISAs.

Make the time to visit your local benefits office and make sure you’re receiving all the support to which you’re properly entitled. When a company I worked for suddenly went bankrupt I was surprised at the financial support I was offered. Even if you think you know the outcome, go anyway; you may be told about a specific benefit to which you will be entitled in the future, especially if your circumstances change.

If you find yourself with spare time, try to make the best use of it. For example, acquire new skills. Assuming you have a computer (if not visit the local library), the government has recently launched a new website at nationalcareers.service.gov.uk that may support your efforts in learning new skills, as well as identifying many free online courses.

Going into an office on a Monday morning to be told I was being made redundant with immediate effect was an eye-opener. I even had to wait three months before I got my last month’s pay. I was 24 years old at the time.

I was lucky, I was able to move back to the family home to live. But the experience did teach me one crucial skill: how to clamp down on expenses and live frugally.

My point is that, doubtless, you too will have learned to live frugally. That is a powerful skill and a major personal strength. Use it. When, hopefully, your situation improves and your income grows and becomes more regular, don’t squander your skill of frugality, use it to save more while you can. I know, it’s easier said than done, but it’s worth it nonetheless.

My experience of redundancy gave me an unexpected professional edge. Having experienced the distress and fear of sudden redundancy, I vowed never to be in that situation again. As soon as I was able, I planned my emergency fund not on the basis of six months’ unemployment, but 24. I didn’t realise how much unconscious strength this gave me. At work I was always able to speak my mind honestly, knowing if management didn’t like it, I was protected by my emergency fund, and besides, I’d faced down redundancy before. The reality was unexpected: I was promoted up the corporate ladder faster than many, and earned a reputation for straight talking and reliability (it’s easy to be reliable, and deliver what you promise, if you’re honest in the first place).

Minimise your risks; if your income is dependent on a specific piece of kit, e.g. bike/car, mobile or computer, make sure it’s insured so you can afford to replace it. That’s an investment you have to make, your livelihood depends on it.

There are two vlogs I would encourage you to watch. The first, How to stop living paycheque to paycheque, is by Marko of Whiteboard Finance and is available here (bit.ly/3k5CzCu). Marko’s vlog gives you an action plan for escaping the paycheque to paycheque trap. The second vlog is by Pete Matthew and entitled The Ultimate Guide to Paying Off Debt (bit.ly/3mVMlsL). As the title suggests, if debt is keeping you from saving, Pete’s vlog will help. You may also wish to read the section in this book, Debt and your priorities on page 23.

Living hand to mouth is tough, dispiriting and stressful. There is no magic wand, and too often it feels there’s no light at the end of the tunnel. But sometimes there are new opportunities and life skills to acquire. My only advice – and I’m well aware it’s inadequate – is to make the most of them when and where you can.

A Word About Emergency Funds:
Most advisers recommend an emergency fund of between three to six months living expenses. However, everyone’s situation is different. The best advice I can offer you is to consider how long it will take you to find another job, and plan to fund that period with your rainy-day fund. You might also apply for a part-time job during the interim. The reality is that any amount you can put aside for an emergency is worthwhile, no matter how small.

In my case I was able to find part-time work proofing newsletters, sales brochures and books. Even when I found a new job I carried on with my part-time work which I could do in my own time. Later I lived off my basic salary and saved any commissions/bonuses I received.

Question 4

I've got savings, isn't that enough?

Accepted Answer

No, probably not. Although it does depend on what you mean by ‘savings’.

Savings per se are not investments. Savings are invariably cash, and you need to invest your cash in assets that grow faster than inflation. A bank account will not grow faster than inflation.

To make your savings grow you need to invest them.

Question 5

Can I invest in my own business?

Accepted Answer

You most certainly can. That said, it’s very risky; nearly three out of five businesses fail within the first five years. It isn’t that they’re bad businesses, many simply just run out of cash (even successful businesses go bankrupt when they expand too quickly without adequate cash resources).

If you start your own business you will work harder than you ever have and endure more anxiety than you thought possible. The upside to managing your own business is that you will be controlling your own destiny and working at your own pace, while feeling a sense of achievement and pride. It clearly isn’t an easy path, and it definitely isn’t for everyone. For those who succeed it can provide an above average income, especially if, and when, you decide to sell it.

A word of advice: before rushing into setting up your own business, take time to work in your chosen field at an established company to learn the strategic and technical knowledge required to succeed. The experiences will help you establish your own company’s unique selling proposition relative to the competition.

Two further advantages of working for another company include:

It will help you develop your people skills, probably the most important and rewarding skillset any manager needs.
All managers and entrepreneurs need to be able to prioritise. It’s not something they teach you at business school. Working for others may give you an insight into this vital skill.

The Rebel Business School (bit.ly/3j2v2pp) may be one free resource to get you going with your own business idea. Due to Coronavirus, events are currently being held online.

Question 6

Can't I just get a fair return?

Accepted Answer

No, not unless you’re willing to make an effort to learn the basics of investing.

As a friend of mine once said, in this context:

A fair reward for doing nothing is at best… nothing.

And in case you’re wondering, no, constantly switching bank accounts seeking the latest ‘loss-leader’ interest rate is not a viable long-term strategy. Managing your financial expectations requires making an effort. I’m afraid there’s no escaping it.

Question 7

Isn't investing just a fools game?

Accepted Answer

No, it isn’t. Granted, the investment markets are full of con artists, hucksters and traps for the unwary. Nevertheless, by following a few simple rules, you can make a decent return if you invest over a long enough period and start now. And it will only take half-an-hour of your time once a year.

Question 8

Why don't I just get a financial advisor to do it for me?

Accepted Answer

You could, but it’s expensive. UK financial advisers charge around £150 to £250/hr, and most will not conduct a personal investment appraisal for less than £1,500. Furthermore, they may then charge you 1% of your investments every year. On top of that, most financial advisers will not be interested in helping you if you don’t have sufficient funds to invest, say, £60,000 or more.

In late 2020 the Financial Conduct Authority (FCA) published a review including an update on how the cost of financial advice has changed following the commission ban at the end of 2012. As expected, it shows financial advisers are generally charging more.

Under the commission system advisers typically earned 3% upfront followed by 0.5% a year. The FCA says the average adviser charge is now 2.4% upfront, i.e. initial assessment and advice, followed by 0.8% a year, with little evidence of reductions for larger portfolios. Whilst a small reduction in initial costs, these will quickly be offset by the significant increase in annual charges.

Many advisers have adopted 1% annual fees, effectively doubling their earnings from the commission days. It is no coincidence another recent survey suggested the average financial adviser now earns around £90,000 a year, compared to £52,000 back in 2012, an increase of 73% (inflation over the same period was 21%).

Tip: if an adviser won’t tell you their fees over the telephone, just go elsewhere. ‘How To Find a Financial adviser’ try Which? (bit.ly/31Gye24). To learn more about the costs of financial advice visit Which? (bit.ly/3mp0n5I).

Question 9

Isn't my home my pension?

Accepted Answer

If you own enough equity in your home, then yes, it can be. Simply defined, equity is the difference between the market value of your property and the amount you owe on it.

Provided you own enough equity in your home you can borrow against it. Just remember, taking out an equity release loan or a home reversion policy can be expensive. There are many types of home equity release plans available, all with different terms and conditions, so be sure to get professional advice on which one is right for you.

Currently, companies typically limit the amount of cash they will advance to 40% of the value of your equity in the property. The current interest rate of this ‘advance’ is between 4% to 6%, and at that rate of interest the effects of compounding – and thus your costs – quickly add up. In other words, equity release can be more expensive than obtaining a regular mortgage or loan. Be careful. A helpful explanation can be found at MoneytotheMasses (bit.ly/3hsCkRX).

Two things about equity release:

If you are in receipt of welfare benefits, acquiring a lump sum through equity release may reduce the benefits to which you’re entitled.
It’s probably a good idea to discuss it with your family before you do it.

Of course, you do have alternatives to equity release or home reversion plans. Here are just five:

Downsize. You may have to move to something much smaller in order to release enough cash for, say, your retirement needs. Alternatively, you may have to move miles away from family and friends to find something suitable. Not great. Either way, it’s best to do this while you have your health and energy. Moving homes is stressful and hard work. 
Sell-up and move in with the kids. Good luck with that one.
Rent your rooms. You can rent rooms in your house up to £7,500 per year tax- free. This option is fine if you’ve got the space and the temperament.
Rent a car parking space if you have one. Income from parking spaces is tax-free up to £1,000 per year. Websites exist to help you rent your parking space, try Just Park (bit.ly/3UWesfL).
Move into something smaller and rent your entire house. But be aware, this will expose you to some of the issues identified in the next FAQ.

None of the above options strike me as a dream come true.

Of course, you could sell the family home while you’re still working, but after the kids leave. Be sure to time it right. In the experience of my wife and me, our kids initially kept coming back home – often to our amusement, but always to our delight.

A helpful article on downsizing and the questions to ask yourself can be found at Boring Money (bit.ly/2J2rFky). Boring Money is a great website. It’s owned and managed by Holly Mackay who does a fabulous job of turning complex questions into clear answers.

Finally, owning your own home is no reason to ignore the investment markets. If you can afford it, invest in both.

Question 10

Isn't investing in buy-to-let property the way to go?

Accepted Answer

Once again, it can be. Successful BTL requires plenty of homework and hard work. It also has its limitations and risks:

For BTL landlords the political winds are against you.
Property is an illiquid asset – you can’t sell it quickly.
The property markets, like the investment markets, suffer from price volatility.
The tax environment for BTL landlords is becoming increasingly less favourable.

Yes, you can form a company and subsume your property into it, thereby converting the BTL mortgage interest into a deductible expense. However, there are two issues to consider:

The process takes time and will incur annual audit fees (this approach is probably therefore more viable for BTL landlords with multiple properties); and
Who knows for how long regulations will continue to allow BTL landlords to use this structure to avoid tax on mortgage interest payments?

Stamp Duty has made the cost of BTL higher and returns lower.
It is difficult to place your BTL property into a tax wrapper.
If the property has only ever been rented the BTL landlord will have to pay Capital Gains Tax (CGT) on the difference between the original purchase price and the sale price, the gain (assuming it is sold for more than it was bought). For basic rate taxpayers CGT is 18%, and for higher and additional rate taxpayers the CGT rate is 28%.
Managing BTL properties is time consuming. It is important to recognise if you invest in the BTL market you are additionally entering a service industry; tenants are entitled to swift and responsive maintenance and repair requests.
There are numerous costly compliance regulations you will have to meet.
Finding the right tenants can be expensive; you will have to arrange advertising and credit checks, as well as time consuming (chasing and validating genuine references and interviewing prospective tenants).
Tenants can become tiresome, to say nothing of troublesome.
You will have to be prepared to cashflow void periods.
Many BTL landlords fail to account for all their true costs, e.g. increasing compliance regulations, specialist insurance policies and even CGT, thus giving rise to false income and profitability estimates.
If you let your BTL property through an agent who is responsible for collecting rents, as well as maintenance and repairs, it is a good policy to speak to your tenants personally at least every six months to assess any problems with the agent’s service levels (unhappy tenants are more likely to cause problems).

The secret of profitable BTL investing is, of course, leverage (sometimes called gearing). Even with leverage, however, putting all your money and future financial commitments into one asset class is far from prudent.

Notwithstanding the above comments, during times of high inflation it is considered wise to acquire so-called ‘hard’ assets. Property is a hard asset.

For a clear, more comprehensive and helpful article on BTL go here (bit.ly/32s2vS9) at Woodruff Financial Planning.

Question 11

Does buying property to flip work?

Accepted Answer

It’s worth considering. In this context ‘buying property to flip’ is the act of buying somewhere with the intention of selling it quickly, frequently after carrying out refurbishments (sometimes called a ‘fixer-upper’). Before rushing into such an activity consider the following:

When undertaking a refurbishment, it is more profitable if you have the skills and time to do much of the work yourself. The higher sale price will justifiably reflect the hard labour you’ve personally invested, aka ‘sweat equity,’ and will give you a better return.
The property market may turn against you while you undertake the refurbishment.
It’s best if you can declare the property as your main residence and thereby avoid Capital Gains Tax on the sale. While there is no official amount of time you have to live somewhere for it to be treated as your home, it is generally considered wise to be there for at least six months to persuade Her Majesty’s Revenue & Customs (HMRC) that it is actually your home. It also helps to register to vote at the property and have your post redirected to it. Do not fake your move, HMRC will not be amused.
Living in a property during refurbishment can put a strain on relationships. After all, not many people want to live in constant chaos. I have a couple of friends who are DIY specialists in their everyday jobs. Ironically it is these very same friends who take forever to complete the refurbishment, and thereby miss profitable sales opportunities. I can only assume by the end of the working week they’ve had enough DIY. Needless to say, their partners aren’t overly impressed.

Please do not misunderstand, I am not saying investing in residential property is a bad idea. It simply isn’t a straightforward one. My concern is that I have seen and heard of too many people coming a cropper when they envisage property as a sure-fire way of making money. They assume it’s easy and risk-free. It’s neither.

My primary focus is to help you make solid long term saving and investment decisions. When reviewing your best options, i.e. those with the highest probability of success and least hassle in terms of meeting your financial expectations, investment markets over time more than meet these criteria.

Those of you interested in the relative performance of property versus other investment asset classes should grab a copy of MYFE Book 2. Book 2 analyses the markets vs BTL, and includes the comparative performance of a hybrid portfolio of BTL investments compared to stock markets.

Question 12

Won't I get ripped-off if I invest in the markets?

Accepted Answer

You might, which is why you need to spend a little time arming yourself with investment know-how.

Question 13

Aren't investments risky?

Accepted Answer

They can be. And yet, just a few simple guidelines will help you avoid foolish and unnecessary risks.

Ultimately, you face two core issues:

An overarching risk, which is not realising your financial expectations.
A diminishing opportunity, which is time.

The MYFE series of books will help you overcome both.

By the way, don’t let anyone fool you into thinking investment volatility and risk are the same thing. They are not. Volatility is constant and normal; risk is largely a matter of choice.

Question 14

What do smart investors get right?

Accepted Answer

A number of things:

They have a plan. It may not be written down or even conscious, but instinctively they know saving and investing is a smart move, so they get on with it.

They diversify their investments.
They manage the costs of their investments.
They appreciate the magic of compounding.
They use tax wrappers whenever they can.
They don’t panic and sell their investments when markets tumble.
They don’t try to be too clever.
They have a habit of saving and investing their monthly salary before they spend any of it. This approach is frequently referred to as ‘pay yourself first’. The really smart investors do this by setting up monthly automatic direct debits into their saving/ investment accounts. Essentially they adhere to the mantra:

Do not save what is left after spending. Instead spend what is left after saving.

If you want to explore the ideas behind ‘pay yourself first’ listen to this podcast featuring Andy Webb of Be Clever with Your Cash and Pete Matthew of Meaningful Academy. It’s available here (bit.ly/33yLR3E).

There has been much media coverage of late asking why the rich keep getting richer. One answer – though yes, I appreciate there are many other factors at play – is that they follow the aforementioned rules.

Question 15

What do bad investors do wrong?

Accepted Answer

Several things:

They start too late.
They don’t bother to acquire basic investment knowledge.
They pay too much for the management of their investments.
They take unnecessary risks in an attempt to make up for lost time.
They are easily swayed by the financial media and chase the latest investment fads.
They panic and sell their shares when markets head south, thus permanently locking in their losses (rather than waiting for the markets to rebound).

Question 16

How much do I have to invest?

Accepted Answer

Many advisers recommend 10 to 15% of your net salary if you wish to maintain the same lifestyle upon retirement. That said, and as usual, opinions differ. Fidelity Fund Management has a helpful article here (bit.ly/3fNrB8j), which also links to various informative online retirement tools.

But don’t be discouraged by that percentage, save as much as you can as soon as you can, even if it’s only a small amount. Government pension top-ups, employer pension contributions together with time and compounding will do much of the heavy lifting for you.

Here's a great vlog by Ken Okoroafor (bit.ly/3o9mIoO) explaining your choices and their consequences when choosing how much you should invest.

It's important to recognise that your rate of saving is more important than your rate of investment returns, especially in the early years.

Question 17

Can I retire early and be financially secure?

Accepted Answer

It’s possible. But you may have to work like a Trojan and live like a Spartan to get there.

The FIRE movement (Financial Independence, Retire Early) has gathered momentum in the UK. Its basic philosophy is to earn as much as you can and live as frugally as possible while investing the surplus.

It’s an extreme form of lifestyle, but as many followers will tell you, like most habits, such hardships become tolerable, if not easy, over time.

The best-known proponent of FIRE is Mr Money Mustache (bit.ly/3eH0PtJ). You may also wish to read the section, A note about FIRE, on page 22.

Even if you don’t adhere to the FIRE philosophy, with the prospect of many people having to work longer to meet their retirement needs, it’s possible to adopt some of the concepts of FIRE to accelerate your saving and investment rate, while simultaneously taking the pressure off having to work so long in retirement. In other words, one notion of the FIRE movement is the idea that you might ‘buy’ more free time at the end of your working life.

Question 18

Where should I invest?

Accepted Answer

Start with a pre-packaged diversified fund of index trackers on an inexpensive platform.

If that sounds complicated, don’t worry, it’s not. Book 2 in the MYFE series, How Investment Markets Perform, explains what a diversified fund of index trackers is, and why they’re a smart investment choice. Book 3, Implementing Your Investment Plan, advises you on the how and where to find good funds of index trackers and which platforms to consider. Books 2 & 3 are also available as a free download at MYFE.guide.

Question 19

How fast will my money grow?

Accepted Answer

Historically the markets have delivered an annual long-term return of between 3.5% to 4.5% after inflation and costs.

The good news is that compounding will help your investments grow faster than this level of return instinctively implies.

However, it’s important to recognise, and be emotionally prepared for, the fact that annual returns fluctuate, as Figure 8 illustrates (please note these returns are before inflation and costs).

Despite the ups and downs of the FTSE 100, had you invested your savings in the FTSE 100 in 2009 and reinvested the dividends, by 2019 it would have grown 160%. In other words, £100 invested at the end of 2009 would have been worth £260 at the end of 2019 or just over 2½ times your initial investment before inflation and costs.

For a more detailed, yet short, review of your expected returns visit Occam Investment (bit.ly/2XEtfwD). While this report sensibly discusses ‘real returns’, i.e. after inflation, it does not include investment fees and charges.

Question 20

What's the most difficult part of investing?

Accepted Answer

Finding the savings to invest in the first place.

Question 21

What's the one secret of investing?

Accepted Answer

Time. The sooner you start investing, the more your money will grow.

For those of you from Generation X, it may give you some comfort to know I didn’t start saving until my forties. Life would have been less trying had I started earlier. What motivated me to get going was an old Chinese proverb:

The best time to plant a tree was 20 years ago. The second best time is now.

In support of