Sunday, 23 June 2013

Frugal Investments for the Future

Penny Penguin, Phil the Pig and Cash Cow.

Penny Penguin
All this frugal living has to be leading somewhere, but we need to remember that we are all at different stages in our frugal journeys and, despite travelling by many different routes, our final destinations are all the same. So, I am going to recap on the origins of this challenge for the benefits of those who have joined us along the way and speculate on its eventual end.
 
Way back in the eighties, many of us faced financial difficulties when we had sunk all our income into what we thought was a sure thing - a secure roof over our heads.
 
Thanks to such easy access to credit along with the readily available interest only mortgages, associated tax benefits through MIRAS (Mortgage Interest Relief At Source), domestic rates and those fairly inexpensive endowment policies that we had all been tempted into buying as soon as we hit 16, many of us leapt at the chance of taking control of our own destinations as home owners. But then all the rules changed! Drip feeding Penny the Penguin wasn't going to pay for all those mistakes we'd unwittingly made!
 
Not in any particular order, but here's a few of those shocking changes that none of us predicted, mainly because we didn't pay attention to the importance of politics, global finances or world affairs.
  1. Domestic rates ended and we were subjected to the Poll Tax / Community Charge / Council Tax which, for those of us in small starter homes, took us from £120 per year to several times that, almost overnight!
  2. MIRAS got abolished, which affected the income.
  3. Interest rates soared to an unprecedented 15% Yes, that's right, I said 15%, as in 30x the current base rate. (Imagine in your mortgage repayment costs doubled or even trebled over the next year - could you cope?)
  4. Eventually, endowment policies began maturing without there being anywhere near enough in the pot to cover the cost of the mortgaged property at the end of the term.
Phil the Pig
There were many other events along the way but by then many of us were in over our heads. Rules can change at the drop of a hat. Banks can crash! Stock markets can crash! We needed to watch for the signs and take action as soon as possible, but didn't. Tangible assets seemed like the only way to safeguard your own futures, that's about all we could hope for - but many couldn't. The pig needed filling, but many could no longer afford to 'Phil the Pig' in time.
 
Cash Cow
Many have had to learn the hard way that juggling a budget is one of the most serious and most important aspects of keeping control of your own future security. Over the years we can easily turn a blind eye to what is going on around us, especially if it has no direct affect on our own lives, but then one day, we are sharply reminded that we are not immune to disaster. That is why we are all in search of the elusive 'Cash Cow'.

Have you found (or created) your 'Cash Cow'? Have you even started looking?

Frugal living may be the answer.

Bulk buying bargains that you need, will use and can safely store long term, making the most of offers when available, reducing your costs by walking or cycling rather than driving, investing in some inexpensive hobbies that can be made pay for themselves along the way, running your home like a business and catering to the needs of the family on a seasonal basis rather than following the trends of the day and overspending on non-essentials... these are all good starters. The less you spend, the more you can afford. If you need to pay off debts and maintain the very roof over your own head then so be it, but make it fun while you do so.

It took me many years to reprioritise my own finances. I enjoyed my luxuries and thought nothing of robbing Peter to pay Paul, even although Paul needed every penny he had. A new balance had to be struck and it came about slowly. I gave up spending completely to set everything out in columns of numbers - what I owed, how much cash I had coming in, every penny that went out and how much all the non-essential spends were costing. It didn't take long to see that the spending on 'extras' amounted to more over the space of a year than I actually paid out in debts, and by debts I mean money owed on credit - I didn't include the mortgage and was fortunate in that I hadn't any serious debts that involved collection agencies or county court judgements. But the warnings were there to be seen.

Debt clearing became second nature but also became like an addiction. I nicknamed it financial OCD owing to the fact that 'untidy' sums screamed out to be rounded down to the next whole number, no matter what. For example, if the balance showed as owing £3,927.52 then that extra 2p HAD to be paid no matter what, but that led to HAVING to pay the 50p to round it down to the next whole pound. Pretty soon, you get into this compulsive habit of seeking 'tidy' sums, so that £3,927.50 would NEED to be paid down to £3,925.00 because '5' was a much tidier number. The saga continued until the debts were eventually cleared. Yes, it can take years, but it is worth it, even if the financial (or numerical, if you prefer) OCD prevails. It works equally well when it comes the time to start rounding up the numbers in the savings pot!

Having made a challenge of clearing off every penny I owed and vowing never to pay another penny in interest on debt again, the challenge of frugal living really began and that meant affording to live while also earning enough to be able to save. As there had been several of us all doing similar, we then set up the challenges online, eventually moving them onto the Moneysavingexpert.com forums in late 2007.

We have pursued many trains of thought along the lines of both money-saving and money-making, the biggest challenge being to save and buy a house outright - without a mortgage. This was eventually achieved in 2011 after a total of twelve house moves and many other very expensive life events that can affect anyone at any time. Along the way, I have had to start again and again with savings as major life events come along in the family. Likewise, I have had to start the gardens over and over again, owing to having had to move house so often. So it is fair to say that I have had quite a bit of practise at budgeting, growing fruit and veg, salvaging firewood, preserving, making do and mending, not to mention all the extra cash-generating challenges along the way. These have included credit card shuffles, free bets & bingo, paid searches, affiliate marketing, surveys, investing in stocks and shares, buying Premium Bonds, setting up micro businesses, running online stores, using cash-back sites and any number of other small money-making schemes that I could possibly entertain.

Every penny does count and each of those pennies leads you to the next pound in the savings stakes.

Now, I live mortgage and debt free in a rural location in a run down house with a decent sized back garden. There are no buses and I no longer have no car. There are no supermarkets for buying all those wonderful cheap products that so many people take for granted, nor do I live within a delivery area of any. We pay premium prices for almost everything, yet it is still possible to live on a relatively small budget without feeling impoverished. I remain self-employed and continue to pay National Insurance premiums but have fallen beneath the threshold for income tax - but there's no way I will NEED £9,440 to afford to live when I have been living on less than half of that during all the years of these challenges. In fact, if I continue to follow my plan of living on £4,000 per year, I could afford to save over £100 PER WEEK if I earned the lower threshold limit, as set out by HMRC. If their National Minimum wage is anything to go by, I need only 12.5 hours of employment to afford to live. (Puls whatever number of hours it took to cover the costs of having that job, of course.)

Sadly, the above is what many do NOT want promoted to the general public and that's mainly because if everyone lived like this, we would bring the country to its knees through our lack of spending. Those of us who do live like this are penalised for saving in banks by way of little or no interest being paid, so we need a fair contingency plan before any more rules get changed. Even tiny things can make huge differences over the long term. One perfect example of this is seeds! How many of you have planted seeds from shop-bought tomatoes, peppers, apples or even grown your own from dried beans and peas? I know I have! Now we see modified, sterile produce that will no longer reproduce in this way. It won't be long before we will have to buy all our seeds and then there's the possibility that we won't be allowed to trade off our surplus without incurring financial costs. And so the saga continues...

Self sufficiency is no more. We need real cash to lead 'normal' lives. The time has come to begin a new challenge - one to safeguard a future that could stretch into retirement while knowing full well that, at any time, the Government could change everything and leave us without a State Pension.

Ludicrous as the above may sound, it is not beyond the realms of possibility. National Insurance premiums alone cannot possibly amount to how much a pension costs nowadays, especially with many people living well into their 90s. But if we cannot afford to save enough while working to pay our keep when not working, where will that lead?

My question, after a long-winded post that spans 30 years, is this - how do we get in at an affordable level and generate some income from the next 'big thing'? Finding the answer to this question is another challenge! It's also the dream of many! Frugal entrepreneurs aspire to many things but we cannot overlook the fact that frugal living needs cash whether we are able to work at it or not. If you are young enough to find employment with a safe and guaranteed pension provision, so be it. If not - what would you do if the State Pension all but disappeared?

Frugaldom (in philosophical mode).

16 comments:

  1. I have no private pension (lost during an acrimonious divorce) I don't have a full state pension, long story part of the reason I'm divorced. We have 9 years left on the mortgage, can't pay it off early as we don't earn enough. I'm 62, should be retiring in July, but hoping not to though I may be forced out of my job as I am ging blind. Hubby works full time but in a low paid job, when I stop work we will be eligible for around £6 per week in tax credits. My plans include exam invigilating, & dog sitting and anything else I can find.

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    1. Hi Hester, nice to see you here. :) This retirement business is a scary thought, especially in the event that we get to a stage of being unfit to do any sort of paid work. The moving of the goal posts on retirement ages and minimum years contributions makes it harder to calculate but I am hoping to at least qualify for full state pension in my own right. Like you, I faced pension 'hiccups', shall we say, through divorce, but that also eventually forced sale of the house, so no mortgage debt to carry forward from then. It's the working out the safest way to save for the future that's got me stumped. Nothing seems to be fool proof. Hope your plans can be realised and that everything works out for the best.

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  2. A really good post and one which lots of folk really NEED to read.

    No future is as safe and secure as we would like financially or otherwise. But I think the main thing is we have all pulled our heads firmly out of the sand and are peering into the distance making and altering plans all the time to keep us on hopefully the best track we can find.

    It's the ones who are determined to carry on 'robbing Peter to pay Paul' and spending now with no care or thought for tomorrow that will really have to worry.

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    1. Yes, it is worrying seeing how many do that in such a big way, looking no further than our own Government, I suspect. I worked out that if I paid 50 years of Class 2 National Insurance contributions through self employment, it would still only amount to about 18 months worth of pension after I reach 67 or whatever, so somewhere along the line the benefits system is robing someone else to pay me my State Pension for every week I live after the age of about 69. If the State Pension system had to collapse, we would have no income other than what could be provided by our own means. Must do another pension check via HMRC website when filing my tax return.

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  3. Brilliant post! And I agree with Sue, this should be read by a lot of folks.

    I too have no private pension thanks to giving financial control to my now ex husband. But very soon I should be in the luxurious position of having a smaller mortgage free home and will be starting a new lifestyle built on the frugal foundations I'm laying now. And very much influenced by people like you and Sue and all the other lovely bloggers out there who have inspired me to lead a richer life on less money :-)

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    1. Good luck with everything - it must be very exciting looking ahead to your mortgage free life and all the fun that goes with frugal living. Seeing even just a few pounds extra at the end of each week/month/year is always rewarding and it's absolutely amazing how much you can do with a small budget once the worry of debt and how to pay the rent/mortgage has gone.

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  4. We would have to fully return to World War II rations. It saved us many years ago. My DB has his pension which was difficult for us to live on but we managed. Now he also has a state pension and that has made a huge difference. We have to wait another 7-8 years before my state pension kicks in as well.

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    1. I sometime wonder if folks think we have nothing more than WW11 rations. LOL A little research shows that the rations, although sparse, were actually sufficient. Perhaps I should take another look and see what it would cost us today to buy a week's rations? Any ideas? (Heads off to get distracted online doing paid searches for WW2 food rations.)

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  5. As ever very wise words in another well thought out post. I was brought up by my parents to save and am now teaching the same lesson to my son. I hope in that way by instilling financial sense [not guaranteed of course but you can only try] that he will be well prepared for anything life throws at him.
    Arilx

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    1. Thanks, Aril. I am hoping my two learned some financial sense before leaving home, even if they haven't quite mastered the needs versus wants thing while keeping an eye on the future 'what if' scenarios. Like you say, we can only try.
      PS - your name sprang to mind today when I was out cycling and spotted a very interesting garden ornament, I even took a photo of it for you! I'll post it into the forum soon. :)

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  6. Great post NYK - you've hit the nail on the head - how to plan for the future. Is it just luck? Not a good way to live out your old age, depending on the mood of the government/banks/pension companies/ex-spouses...I never wanted to be as poor as my poor old Mum and Dad - they lived in work rented accomodaton and couldn't even choose the colour of their front door. I won't be rich but at least I have no mortgage or rent.

    Regarding WWII recipes etc, you could try 'The 1940's Experiment' run by Carolyn (some may remember her from her site A Country Living before she went off to Canada). She is in the process of moving - literally as we wpeak - back to UK but she as some excellent tasty and low budget recipes, all based on WWII rationing. She's on Facebook.

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    1. I am so glad that I'm not the only one thinking (some may say obsessing) about the future "what if" scenarios. Many thanks for posting this, I have now found/liked the 1940's Experiment page on Facebook and shall have a good look at that. I do feel quite confident in the food stakes after completing my '£1 per person per day' challenge, as this also included toiletries, cleaning and laundry products, so that side of things doesn't worry me too much. Even if that doubles, it's still under £750 a year. Trouble starts when you ask how many years' worth of food have you saved for by the time you retire, IF the State pension disappears!

      I do tend to have some strange thoughts, don't I? :)

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  7. You said what has been rattling around my head all week. I too got wiped out financially - took advice from the wrong Bank Manager and lost over £400K. But I have saved our house and am fighting the good fight by a combination of frugal living and being a "Jack of all Trades" - I know that should I be able to clear my mortgage I could live happily on a State Pension ................ I'm just not convinced there will be one when I retire so I keep on making my alternate provision.

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    1. Welcome to the pains of Frugaldom fantasy land, Elaine. My mind wanders and wonders constantly about such things, so I did one of those HMRC pension checks while submitting my self assessment tax return yesterday. Apparently, they are forecasting my full state pension at £110 per week at today's rates, which means I'd be fairly well off if living rent, mortgage and debt free. Add to that all the added benefits that come with being a pensioner and life suddenly becomes rather more interesting if we are fortunate enough to live long enough to see retirement and the State still hands out pensions. I'd thought about just saving whatever I could as cash in a shoe box but the down side to that is the Government cracking their whip and bringing about a compulsory change in our cash (like Decimalisation) whereby we would NEED to hand it all over and exchange it, probably for something worth much less. They have us little frugalers at every turn - our pittance in savings can no longer ne invested in small shares because dealer fees wipe out any profits, interest rates have bombed so low that it's pointless having an ISA when no longer earning enough to pay income tax etc, etc, etc... that's why we need to find an affordable way into the next big thing... and then my trail of thought comes to a crashing halt and I'm back to putting spare change into the pot and hoping something spectacular happens to it. LOL

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  8. Excellent post! I share your concerns about the financial future of British people.

    Nothing convinces me that the global economy and UK economy will "recover". Western lifestyle is unsustainable and emerging economies are aspiring to Western lifestyles.

    In UK all I can foresee is the cost of living continuing to rise and the incomes of the majority falling.

    Frugal living is the way to go.

    Despite divorce and single parenthood for 15 years I'm lucky to have achieved a mortgage free home and no debt 2 years ago. Still have a van but it may have to go one day.

    Tried all sorts to earn extra but every year my income seems to get less while the cost of living rises. Still supporting my two young people one at uni and one on modern apprenticeship.

    It's young people I feel sorry for. What kind of world will they be living in?

    I think the pension age will continue to rise. Currently 66 for me...11 years away. Like you say though, anything can happen.

    The only answer for me and many others is to get better at frugal living.

    Love your blog. Very inspiring indeed.

    Kind Regards
    Helen

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    1. Thanks, Helen. I keep searching the deepest, darkest depth of my 'confuddled' brain trying to work out what could be the next big thing, but then the volatility of the stock market makes it a dangerous place for small investors.

      Playing with a few daft notions and about to start looking at trends before formulating my master plan. I'll blog it as soon as I've crunched the numbers and counted how many more times I hear the phrase, "Yer aff yer heid, wummin!" directed my way. LOL

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