Looking back at last weeks trading update you can see that I am not making trades every day or even every week. A few trades a month has been the average and backtesting shows the average trade length to be 102 days.
So this week I want to discuss what I am doing in the background to complement my trading in order to help pursue my goal of achieving financial freedom. It also gives me a chance to review where I am in my journey and make sure I am sticking to the right path. This is particularly important as I am in the process of changing jobs, leaving the security of the public sector and a defined benefit pension for hopefully greater career progression but with a defined contribution pension alternative.
A quick review
So what is it that I am hoping to achieve. Well my ultimate goal is financial freedom. This would involve me receiving an income from investments that would cover my outgoings. I am hoping this income will come from my defined benefit pension that I have paid into for the past 9 years, defined contribution pensions going forward, possibly the state pension, private investments in the stock market and investment properties.
My predicament is that my outgoings are currently extremely high predominantly due to childcare costs and I am able to save very little to invest in the stock market and/or investment properties. Interest rates are low and short to medium term stock market expectations are low which is why I am using the long term trend following trading strategy I use to try and achieve an average CAGR of 12% on money I do have spare. I aim to build these savings to a level where substantial investment is possible in these income producing assets.
In the few months I have been posting my trading results, the trades have been few and far between as explained in my previous post. This is normal and I am still well on my way to the returns backtesting shows is likely but it is important to remember this is a long term trading strategy. Whilst I continue to trade and subsequently build upon my savings I am also doing some things in the background to help me achieve my goals.
I won’t delve into this too much as i’ve already banged on about how important budgeting is but in summary I use YNAB to record all of my incomings and outgoings and put every pound I earn to work. This way I don’t overextend myself and manage to ‘pay myself first’ the small amount I can save. It has several advantages and one that was unexpected is that it makes me think before I buy something unnecessary as I know I will feel the guilt inputting it into my budget. Don’t get me wrong it’s still important to have fun and enjoy yourself but it’s also great to know you have budgeted for those extravagances and you are in control.
Cashback credit cards and websites.
A no brainer for me is using my cashback credit card for all purchases. I gain 1.25% cashback on all spending on my AMEX platinum everyday card. In addition for most online purchases I pop to Quidco or Topcashback to see if I can gain a little back for my normal purchases.
This is basically using a/the long term 0% credit card deals out there to build up savings allowing you to earn interest on the borrowed funds. Say you obtained a 0% credit card with a £10,000 credit limit. You could spend all of your expenditures on the credit card up to the allowance and simultaneously build up the funds you would have spent and place these in best place to earn yourself some interest. This could be the top savings accounts or even some in p2p lending platforms depending on your risk outlook. Check out the Money Saving Expert article on stoozing here.
Reduced transport costs
Now I live in London where it is pretty easy to get around by bike. A TFL travelcard to get me to work would cost £126.80 per month so cycling is a cracking saving tool. I appreciate this isn’t possible for everyone but a review of your commuting costs is always worth doing.
Another saving that is probably only relevant to the city goers out there is not owning a car. I don’t and haven’t for the past nine years. There are obviously times when having access to a car makes life much easier and for these times I am a member of a car club so I can hire the car by the hour, or I hire a car from Europcar for a few days at a very reasonable price. I save on insurance, tax, servicing, breakdown and resident parking costs and the biggie, depreciation.
A quick tip if you do hire cars regularly is to take out an annual excess insurance policy (which for me is approximately £30 PA) as the hire companies policies are often very overpriced. This just makes sure are covered for the excess costs (often £1000 on many policies) if the worst was too happen.
Keep your phone and go SIM only
If I do this when my contract runs out in January I will reduce my monthly mobile phone bill from £39 per month to £14 per month with more data. This saving of £300 PA is not to be sniffed at.
Audit your childcare
My wife and I currently use the childcare voucher scheme in order to reduce our childcare costs. In addition my wifes employer offer a small contribution towards childcare which is a fantastic benefit. Make sure you are getting all the assistance available to you and read up on the new government tax free childcare scheme (link here) to see if this could save you more than the childcare voucher scheme.
I’ve already introduced pensions above but as this is the main investment tool that I am regularly paying into right now it deserves some further reference. I understand not all of us are able to do this as you may be self employed but I strongly believe those that can should certainly take advantage of their employers pension scheme.
As I have already mentioned I’ve been in the public sector for the last nine years and have been paying into a generous defined benefit scheme but am now leaving for the private sector and the world of defined contribution pensions. My new employer does offer such pension where they will pay in double what I pay in up to 6% (so 12% for the employer). The starting amount I could pay in is 3% matched by a 6% contribution from my employer. Don’t get me wrong the combined 9% is better than nothing but there will be huge long term benefits in stretching for the 18% combined contribution. Where else will you get another party paying in double what you invest for your future. In addition you don’t pay tax on your contributions so for a basic rate tax payer this is the equivalent of getting 20% extra from the government. The more you can pay in, as early as possible, the magic of compounding will work for you to build up a substantial pot that at retirement age (min age 55) you will have options on what you do with it.
This is obviously very personal to each and every situation but I just want to talk about how we have benefitted from the shared ownership scheme. I think we have been fortunate that we bought four years ago when the London housing market was lower but even still we would have gained over renting.
In 2013 we were living in a tiny one bedroom flat in London and took a chance in applying for the governments shared ownership scheme and subsequently bought a share in a two bedroom flat in zone 2. Our combined mortgage, rent and service charge costs were only slightly higher than the rent were were paying on the one bed but now we were paying a bit off the capital part of our mortgage every month, had an extra bedroom and were increasing our equity. Four years later, if we were to sell, the value of the flat has increased greatly and we have reduced our mortgage debt. Now we only get our share of these capital gains but even so we have quadrupled our initial deposit and are in a much healthier financial position than if we had continued to rent.
I can’t guarantee this would have been successful for everyone as in a different market environment, in a different property with a different housing association it may not have gone so well but so far we have been very fortunate.
Housing schemes often get beaten down in the press but it is definitely worth exploring the various options of shared ownership, help to buy etc to see if there is anything that could assist you if you do want to seek alternatives to renting.
For now these small things are helping to ensure we as a family don’t get into debt and are in a position to grow our savings as and when our costs reduce. Alongside trading returns this setup will hopefully provide a solid foundation for future income producing investments and for achieving financial freedom. I think it’s important to remember that whatever your situation there are things we can do to help ourselves. In addition it is also important to help each other by way of sharing our experiences and offering support.
If there is anything that you do to save/improve your financial situation that you feel would benefit others then please share it in the comments section below.