What is Financial Risk, and why do I care?
Risk is the potential that an action (or inaction) will lead to a loss.
Reward is the potential that an action (or inaction) will lead to a gain.
Everything in life carries risk and rewards. If I slump on the sofa every night, I risk bad health, but I might get to watch some quality TV shows (unlikely, but hey, it’s only an analogy!). When I cross the road, I might get run over, but I might get to the lovely beach on the other side. When I buy a used car, it might have something seriously wrong, or it might run ok for the next 20 years.
From the financial perspective, the higher the risk, the higher the potential reward.
Low risk/low reward: Savings accounts (Santander are doing a pretty good account at the moment), fixed period savings accounts.
Moderate risk/moderate reward: Tracker funds (Vanguard UK Equity Index).
High risk/high reward: Penny stocks, initial offering shares (Facebook shares on day 1 of trading for example!).
So when you are deciding where to put your hard earned employees to work, you have to sit down and do a cost/benefit analysis, by comparing the risks to the rewards.
I know this is pretty basic stuff, but I don’t apologise for reminding you if you already know, or at least making you do some more reading if you haven’t really thought enough about risk before! (more…)
Well, did you know that someone once paid over $1,000,000 for 2 pizzas?
image from siliconangle.com
To be fair, he actually payed 10,000 Bitcoins, which at the time were valued at around $40, and he had ‘mined’ them himself using his computer to generate the money in the first place.
Bitcoins are now becoming an accepted part of a global financial system, being used to pay for pizza, coffee, electronics, illegal drugs, and even houses! One Bitcoin is currently worth around £80, but back in 2010, a new digital currency had just emerged from it’s 50+ year gestation in the womb of the interwebz, and web dwellers were swapping them in huge numbers for every day objects in order to help get the market going. Those 10,000 Bitcoins were worth about half a cent each. If he had held on to them, he would be sitting on a potential $1,200,000+ today.
Is it worth working outside of your day job to earn a bit more cash?
Image by Scott Pollack
This depends on your current income. A quick review of how tax bands work:
Basic tax rate : 20% on your first £32,010
However, don’t forget the Personal Allowance!
Personal Allowance : £9,440
So lets run some example numbers…
An annual salary of £30,000 would be within the 20% tax bracket.
Taxable income is £30,000 – £9,440 = £20,560.
20% tax on £20,560 is £4,112. £20,560 – £4,112 = £16,448.
Invest in diversified passively managed funds. As Alexander says: “Shimples”.
Studies have shown that, on average, actively managed funds cost more, and produce less, than the market index itself. Some are lucky, but in fact even a moggy can do better than a professional investor.
Pick several diversified passive funds, the ones with the lowest management fees, with the least correlation you can get, and then look at them once a month, tops. Every year, rebalance your portfolio by selling the funds that are performing, and buy the ones that aren’t (seriously!). When I first started learning about investing I got all excited about trying to pick the hottest new company, and wasted a lot of money (but gained valuable lessons) hopping around, buying and selling unnecessarily.
Money costs money… obvious, nay?
Unfortunately not! I recently discovered that quite a few people don’t actually understand (not through want of trying, just a lack of financial education), that money does indeed cost money, and how exactly that cost is broken down when it comes to loan repayments (mortgage or otherwise).
Case in point: Borrowing £10k, at 10% APR, for 10 years.
Now, we could do a really rough and basic calculation and say that at the end of the year, the £10k I owe to the bank has increased by 10%, to £11k, so I would have to pay the bank £1,000 over the year, just to pay off the interest! But I also need to pay off the principal (the original £10k) or I would never be able to pay the loan off.
Treehouses aren’t just for Christmas!
I am in a quandary… I look at how much difference even an extra £100 a month can make to my long term savings and Financial Independence plans, and I am considering doing some extra work.
And working at the weekends is a double whammy saving: If you are working, you can’t be spending!
Is it better to overpay your mortgage, or invest the extra savings from your frugal lifestyle?
I have been asked this question quite a few times over the last few weeks… and as always my advice is YES of course you should and NO you need to pay your higher interest debts first! So, run the numbers for your own situation, and make an intelligent assessment of your current expenditure, you can even use my rather rough and ready mortgage overpayment calculator.
The most expensive cup of coffee I ever bought.
I used to buy AT LEAST 1 cup of coffee a day from the little shop at work. It was only £2.95 for a large… bargain! There was even a kettle, sink and fridge about 20 metres from my desk, but it was more social to nip to the coffee shop and chill out there for 10 mins with some of my colleagues. Plus, I was lazy.
I have decided from now on to do all of my saving/investment calculations using 10 and 20 year returns… so:
1 cup of coffee for each working day of the year = £2.95 x 228, which is £689.42 per year. By investing this monthly, I would earn £16.82 interest that first year.
After 10 years of compound interest, I would have £8,671 (£1,794 in interest alone!). The coffees would have cost me £6,726, so I’m better off by £15,397.
After 20 years, it’s £22,796!! (better off by £36,248).
Why the banks should be afraid of peer to peer lending!
I mentioned person to bank to person/business lending in an earlier post, and I have been experimenting with removing the bank from that process, putting my own money where my mouth is and hopefully letting you know about any pitfalls that the lending sites might be keeping quiet about! So, peer to peer / business lenders:
Fundingcircle.com is for peer-business lending.
“Funding Circle is an on-line marketplace to help businesses find low cost loans quickly and investors get better returns. There are no middlemen, no banks, and no lengthy delays. By directly connecting people who want to invest money with vetted, established businesses who want to borrow money, we eliminate the cost and complexity of the banking world”
“Crevice is a dirty word Blackadder”*, as is INCOME TAX.
Every pay slip we open has that dirty word on it as we look at the horribly large percentage of our hard earned Pound Coin Employees that the government take away from us to work in their salt mines and slave pits (where does my tax go?).
There is a nice and simple way to get some of that back: Self Invested Personal Pensions (SIPPs). SIPPs are a government approved pension scheme, that are run by non governmental providers (I use Hargreaves Lansdown). If I were to pay in £80 per month, a few weeks later the government pays in £20**! I’m pretty sure that’s an instant return of 25%… somewhat better than my current account, no? I can then use the money in my SIPP account to buy investments! There is no tax on the income, and no Capital Gains Tax on the growth. This investment wrapper allows you to invest in various stock and funds, just like a Stocks and Shares ISA, except that you get an instant 25% boost to your initial investment!!