Week 8: Investing Part 3 and FIRE Principles
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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. |
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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!
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 but the principles are the same wherever you are in the world.
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.
- 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.
- For New Zealand there's a NZ specific Rebel Finance School Facebook group and have a read of Ruth's Happy Saver blog.
- For other countries, there's bound to be someone in your country that's thought about this before. Look for the Financial Independence groups in your country and if they don't exist yet maybe you can start one and figure it out together.
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.
- 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!
AVOID Wealthify, St James Place, PensionBee and any high fee platforms. Avoid at all costs. You can read my open letter to Wealthify here to find out why we say this. Use Katie's Fees Tool to analyse the fees you have got already compared to Vanagurd.
Your job at this point is to minimise fees.
- 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!
- General accounts. (also referred to as trading 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! No-one likes being taxed at both ends!
The main difference between the accounts is when and how you get taxed. Your job at this point is to minimise tax through use of tax advantaged accounts.
- Fund. This is what you stick in your account, the index fund itself. Vanguard has its own low cost broad based index funds. You can have more than one fund in the same account but you don't need to! Just buy one passive global index fund.
Your job at this point is to pick the simplest broad based index fund like the Vanguard FTSE Global All Cap Index Fund
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.
The only reason we use Halifax is that Vanguard wasn't a platform provider when we started and we couldn't invest directly.
If you're planning on retiring early and want to work out what split you need between your SIPP and ISA, we'll be answering this question and more on a new workshop all about planning out your financial future. It's on Monday 1st August 2022 8pm UK time. If you can't make it live it will be on YouTube for catch up!
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.
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% a year, capped at £375) or as a fixed monetary amount.
- Dealing fee to buy the index fund - Some providers charge you to 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! Vanguard doesn't have any entry fees.
- Ongoing charges figure (OCF) - each fund has a fee that you pay for them to manage it for you. For the Vanguard FTSE Global All Cap fund this is 0.23%.
- Exit fees - some providers charge you to transfer your investment or to withdraw. Vanguard doesn't!
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Curious how much impact the fees have on your investments over the long term? Check out this impact of fees tool Katie made
Your job is to minimise fees as much as you can. Fees are one of the biggest predictors of long term success in investing.
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Vanguard site
When people get to the stage of actually investing and log onto the website it can get so confusing. There are so many accounts and funds to choose from. So many people have got to this stage, stopped and turned into never bothered Ned. Don't let this happen to you! We made a series of three short YouTube videos to help you navigate the Vanguard UK website and to help you get going!
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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 although clearly earning more will mean you can save more! We wrote a article covering 10 ways to increase your income here.
To work out how much you need to retire multiply how much you want to live on a year 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
You might feel overwhelmed by this target. Alan wrote a blog article to reassure you! The insurmountable mountain
It's not F&*£ing binary! Don't use "I'll never get there" as an excuse for not starting. Check out this article Alan wrote about an Italian bin man we met in Ecuador who spends 6 months of the year surfing in Ecuador.
The last article to read is one of the best from the entire FIRE community about the subject and it is from Mr Money Mustache and it is Called the Shockingly Simple Maths behind Early 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 although clearly earning more will mean you can save more! We wrote a article covering 10 ways to increase your income here.
To work out how much you need to retire multiply how much you want to live on a year 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
You might feel overwhelmed by this target. Alan wrote a blog article to reassure you! The insurmountable mountain
It's not F&*£ing binary! Don't use "I'll never get there" as an excuse for not starting. Check out this article Alan wrote about an Italian bin man we met in Ecuador who spends 6 months of the year surfing in Ecuador.
The last article to read is one of the best from the entire FIRE community about the subject and it is from Mr Money Mustache and it is Called the Shockingly Simple Maths behind Early Retirement.
Week 8 homework
This week's homework comes in two parts since we covered two topics. Investing implementation and FIRE principles.
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. Vanguard is great! We suggest using them. We are NOT sponsored by Vanguard or receive any benefit from recommending them. We just believe in their philosophy and mission and love how low their fees are!
2. Open a stocks and shares ISA or SIPP account with the platform/provider you have decided on (Vanguard!).
See above for the order to invest in!
3. Buy a Vanguard global index fund. The Vanguard FTSE Global Index fund is a great choice!
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...
1. Choose a platform/provider. Vanguard is great! We suggest using them. We are NOT sponsored by Vanguard or receive any benefit from recommending them. We just believe in their philosophy and mission and love how low their fees are!
2. Open a stocks and shares ISA or SIPP account with the platform/provider you have decided on (Vanguard!).
See above for the order to invest in!
3. Buy a Vanguard global index fund. The Vanguard FTSE Global Index fund is a great choice!
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. How much do you want to live off in retirement? You might need to go back to what we discussed in week 2 to have an idea of what you're currently spending. Of course your plans for retirement might cost more or less than your current lifestyle.
2. How much do you need invested in order to reach your target? (25x however much of your annual expenses you want to cover)
Optional:
3. Watch the Playing with FIRE documentary
4. Read Quit Like a Millionaire (UK version or USA version)
Coming up in week 9
Week 9 is Planning for your future! You've nearly made it to the end of the course! Two more weeks to go. 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!
Alan and Katie
2. How much do you need invested in order to reach your target? (25x however much of your annual expenses you want to cover)
Optional:
3. Watch the Playing with FIRE documentary
4. Read Quit Like a Millionaire (UK version or USA version)
Coming up in week 9
Week 9 is Planning for your future! You've nearly made it to the end of the course! Two more weeks to go. 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!
Alan and Katie
