Week 8: Investing Part 3 and FIRE Principles
We carried on talking about the "sexy" stuff.... investing! In week 6 we covered the theory behind investing, then last week (week 7) we had JL Collins on to dive into detail on his index fund investing philosophy. This week we rounded off investing with how to actually implement this and buy your first assets. Then we discussed the FIRE (Financial Independence/Retire Early) principles and how to know when you can retire.
Disclaimer
We are NOT financial advisers. The content of this course, the articles on Alan's blog and these summaries are NOT financial advice. This is our opinion and we are just sharing what we are doing. DO YOUR OWN HOMEWORK
That being said, onto the Week 8 recap!
Week 8 recap
Learning about investing is like learning a whole new language. There are going to be terms and phrases you don't understand. Stay calm, look up what it means, ask us!
Disclaimer
We are NOT financial advisers. The content of this course, the articles on Alan's blog and these summaries are NOT financial advice. This is our opinion and we are just sharing what we are doing. DO YOUR OWN HOMEWORK
That being said, onto the Week 8 recap!
Week 8 recap
Learning about investing is like learning a whole new language. There are going to be terms and phrases you don't understand. Stay calm, look up what it means, ask us!
Investing Part 3: Implementation!
These specifics are for people in the UK. There is a TON of information out there for those of you in the USA... we suggest JL Collins' blog and book The Simple Path to Wealth as a good place to start. For Canada check out Kristy and Bryce at Millennial Revolution.
We've been banging on about Vanguard index funds. How do you actually buy them?
Well first you need to understand the different levels of thinking when buying index funds.
These specifics are for people in the UK. There is a TON of information out there for those of you in the USA... we suggest JL Collins' blog and book The Simple Path to Wealth as a good place to start. For Canada check out Kristy and Bryce at Millennial Revolution.
We've been banging on about Vanguard index funds. How do you actually buy them?
Well first you need to understand the different levels of thinking when buying index funds.
- Account type. The government incentivises us to save by allowing us to open these things called tax-advantaged accounts. In the UK we have ISAs (Individual Savings Account) and pensions/SIPPs (self-invested personal pensions).
- ISAs you put money in that you've already paid income tax on and then the investments grow tax free and you can withdraw money from your account without paying any tax. There is no age restriction on when you can access these.
- Pensions or SIPPs. You buy assets in these accounts with money that hasn't been taxed. The investments grow tax free but when you come to withdraw from the account in retirement you have to pay tax on the money you withdraw. These are age-restricted. You cannot get to these until you are at least 55!
- Trading accounts. (also referred to as general accounts or taxable accounts). These have NO tax advantages. You invest in them with money you've already paid income tax on and you have to pay tax on the money you withdraw. In the UK we have very generous annual allowances for ISAs and pensions/SIPPs so these should be used as a last resort! Noone likes being taxed at both ends!
- Platform or provider. This is the company through which you buy the index funds. Vanguard has its own platform. There's lots of different providers/platform and they all charge different fees!
- Fund manager or fund. This is the index fund itself. There are lots of different fund managers that have index funds. Vanguard is one of them. Vanguard has lots of different index funds. You can more than one fund in the same account.
IMPORTANT! Vanguard is both a platform/provider and it is also a fund manager. So when you're talking about Vanguard are you talking about the provider (the website through which you buy the funds) or are you talking about the funds themselves? You can buy Vanguard funds with lots of different providers. For example we have an ISA account with Halifax in which we have Vanguard funds. We also have a SIPP account with Halifax in which we have Vanguard funds. You can also have an ISA account with Vanguard (provider) and have Vanguard funds.
What's this about fees? What do I have to pay? How does it work?
There are various different fees involved as well as the cost of buying the index fund itself.
- Platform fees - The provider/platform charges you for the privilege of having the account. This is either charged as a percentage of the money that you have in your accounts (Vanguard is 0.15%, capped at £375) or as a fixed monetary amount.
- Dealing fee to buy the index fund - Some providers charge you buy the fund. (Vanguard doesn't charge)
- Entry fees - Some platforms cream off up to 5% of everything you put in. FIVE PERCENT! This is before you've even invested anything!
- Buy the index itself - This is the cost of the fund itself so isn't really a fee but included here for a complete list of everything you'll be spending! Side note: when you buy index funds, you buy what's called "units" of the fund. You don't have to buy whole numbers of units. For example, the unit might cost £200 but you only have £100 to invest. Never fear! You can buy half a unit!
- AMC (annual management charge) - ongoing fees to manage the fund on your behalf
- Exit fees - some providers charge you to transfer your investment or to withdraw
What's this about fees? What do I have to pay? How does it work?
There are 3 different fees involved as well as the cost of buying the index fund itself. Continuing the supermarket analogy....
- Platform fees - you have to pay to enter the supermarket
- Dealing fee to buy the index fund - some supermarkets charge you to use their bags (Vanguard doesn't charge)
- Buy the index itself - the cost of the bread itself
- AMC (annual management charge) are ongoing fees to manage the fund on your behalf - paying the baker to look after the bread for you to make sure it's tasty!
FIRE principles
We've been teasing you about FIRE principles for some weeks now but we had to lay the foundations first. Now that we've done that, this week we talked about FIRE and how to get to retirement.
The key here is that SAVINGS RATE is the determining factor of how long it will take you to get to retirement NOT how much you earn.
To work out how much you need to retire multiply how much you want to live on in retirement by 25. The inverse of this is 4% (1/25 = 4%). Alan has written a blog article all about the 4% rule and a follow up article answering questions about the 4% rule
Week 8 homework
This week's homework comes in two parts since we covered two topics. Investing implementation and FIRE principles.
Investing implementation homework
IF AND ONLY IF you are ready to invest (you have an emergency fund, no expensive debt and you have 3-6 months of living expenses in cash)...
1. Choose a platform/provider.
Is Vanguard always the best platform?
Vanguard is very cheap but it's not always the cheapest depending on what assets you already have. Platforms that charge a percentage of what you have invested (like Vanguard) are good for investors that are just starting out or who have assets that are likely to remain below £25,000 (in an ISA) or £100,000 (in a SIPP and depending on the mix of assets) for some time to come. If you already have some investments do your own research. This article from monevator is useful for this!
2. Open a stocks and shares ISA or SIPP account with the platform/provider you have decided on.
But how do I chooooooooooooooose?! We will cover the factors to consider in answering this question next week. So hang fire for next week if you need help on this!
3. Decide which Vanguard fund to buy
We covered this in detail in a set of blog articles we wrote for you about how to invest in index funds.
4. Set up a regular monthly investment to buy the fund you've chosen
And if you can automate it so much the better! Have it come out automatically so you don't have to think about it and it is all done for you! GENIUS!
And here's the homework for the FIRE principles we talked about...
FIRE principles homework
1. Set your target. Full FI? Partial FI? “On time” retirement?
2. How much do you need invested in order to reach your target? (25x however much of your expenses you want to cover)
Optional:
3. Watch the Playing with FIRE documentary
4. Read Quit Like a Millionaire (UK version or USA version)
5. Have a play with the Playing with Fire retirement calculator
Coming up next week
Course finale! You've nearly made it to the end of the course! We're going to cover how to plan for the future and how to figure out how long it will take to get to the target that you've set. Katie's going to crack out the spreadsheets. She is SUPER excited!
Ask for help
Remember to reach out in the Facebook group with any questions you have or if you get stuck. Don't let confusion be an excuse for not progressing with this stuff. We are here to support you!
If you have emailed Alan asking for help and we haven't replied, we're not ignoring you! He has been inundated with emails asking for help. To save Alan and his inbox, the wonderful Cliff who attended the course last summer has pulled together a google form where you can ask your questions. We are going to pull together an FAQ based on your questions. Please be patient with us! Here's the link to the form: http://bit.ly/rfsquestion
Alan and Katie
The key here is that SAVINGS RATE is the determining factor of how long it will take you to get to retirement NOT how much you earn.
To work out how much you need to retire multiply how much you want to live on in retirement by 25. The inverse of this is 4% (1/25 = 4%). Alan has written a blog article all about the 4% rule and a follow up article answering questions about the 4% rule
Week 8 homework
This week's homework comes in two parts since we covered two topics. Investing implementation and FIRE principles.
Investing implementation homework
IF AND ONLY IF you are ready to invest (you have an emergency fund, no expensive debt and you have 3-6 months of living expenses in cash)...
1. Choose a platform/provider.
Is Vanguard always the best platform?
Vanguard is very cheap but it's not always the cheapest depending on what assets you already have. Platforms that charge a percentage of what you have invested (like Vanguard) are good for investors that are just starting out or who have assets that are likely to remain below £25,000 (in an ISA) or £100,000 (in a SIPP and depending on the mix of assets) for some time to come. If you already have some investments do your own research. This article from monevator is useful for this!
2. Open a stocks and shares ISA or SIPP account with the platform/provider you have decided on.
But how do I chooooooooooooooose?! We will cover the factors to consider in answering this question next week. So hang fire for next week if you need help on this!
3. Decide which Vanguard fund to buy
We covered this in detail in a set of blog articles we wrote for you about how to invest in index funds.
4. Set up a regular monthly investment to buy the fund you've chosen
And if you can automate it so much the better! Have it come out automatically so you don't have to think about it and it is all done for you! GENIUS!
And here's the homework for the FIRE principles we talked about...
FIRE principles homework
1. Set your target. Full FI? Partial FI? “On time” retirement?
2. How much do you need invested in order to reach your target? (25x however much of your expenses you want to cover)
Optional:
3. Watch the Playing with FIRE documentary
4. Read Quit Like a Millionaire (UK version or USA version)
5. Have a play with the Playing with Fire retirement calculator
Coming up next week
Course finale! You've nearly made it to the end of the course! We're going to cover how to plan for the future and how to figure out how long it will take to get to the target that you've set. Katie's going to crack out the spreadsheets. She is SUPER excited!
Ask for help
Remember to reach out in the Facebook group with any questions you have or if you get stuck. Don't let confusion be an excuse for not progressing with this stuff. We are here to support you!
If you have emailed Alan asking for help and we haven't replied, we're not ignoring you! He has been inundated with emails asking for help. To save Alan and his inbox, the wonderful Cliff who attended the course last summer has pulled together a google form where you can ask your questions. We are going to pull together an FAQ based on your questions. Please be patient with us! Here's the link to the form: http://bit.ly/rfsquestion
Alan and Katie
