Cent by Cent

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Investments around the world

How To Start Investing With Vanguard in 2020

By

On November 12, 2020

In Investing, Making Money, Saving Money

What’s Vanguard and Why should you care?

Vanguard is the investment firm I use for my Stocks & Share ISA. They offer low fee trading via a selection of funds owned by the company. This ensures you benefit from the full return of your portfolio. 

Vanguard started trading in the US 45 years ago and reached the UK in 2009. I’ll dive deeper into exactly what they offer within the article. You can invest in most funds via most trading platforms or use Vanguard’s Investor directly. 

The biggest selling point is you don’t need to be an expert to trade with Vanguard. It has many options and a clear explanation for each. By going through their funds you get to pick by risk profile, historical returns, and cost. Whether you are starting your journey with investing or are looking for a new placement. They have something for you.

Why do you recommend Vanguard funds?

I’m a big adept of the Dollar Cost Averaging approach of investing. It isn’t possible to time the market. Studies have shown that by investing consistently or by investing a lump sum at once in-market tracking funds such as VUSA (S&P 500 tracker) you will always outperform the market. 

If you want to understand the math behind DCA, I recommend this article by Investopedia. This theory is what led me to set up a direct debit for the first of each month. On that date, 20% of my salary is automatically invested.

Vanguard has a successful track record with market tracking funds over the last 45 years. Investing a fix-sum into the S&P while not guaranteeing returns makes them very likely in the long-term. If you are in the US the fund is VOO and additionally holds a dividend yield of 1.2%. On the other hand, if you are investing with Vanguard’s platform in the UK you will have access to VUSA. They are both represented in the pictures below.

S&P 500 ETF tracking fund
VUSA (UK)
VOO (USA)
VOO (USA)

As you can see over the last decade both have grown consistently even with hiccups such as the April 2020 Crash. You also have a large array of fixed income funds from Bonds (gits in the UK) to High Dividends. 

Don't worry you have other options

If all of this feels too overwhelming and you would rather have simpler, more straightforward solutions… You are covered with Vanguard’s blended funds. They are my favorite as you will see below. The Lifestrategy funds give you the opportunity based on your risk aversion and targets to decide on the percentage of equity vs bonds you hold. They go from LifeStrategy 20 (20% equity & 80% bonds) to LifeStrategy 100. 

Not only will you be invested in both equity and bonds they will be internationally spread to minimize the impact of local crashes. The way you should pick such funds is based on your age and risk profile. Low equity means low risk at the expense of high profitability. On the other hand, the high equity is “High Risk, High Reward”.

In case you are looking to retire soon, focus on low equity funds. Whereas with long-term goals (10+ years) you can look at higher risks as Dollar Cost Averaging is on your side.

Vanguard Investors different accounts (UK)

If you aren’t from the UK but want to see my portfolio skip this part! And if you are here we go. 

Vanguard offers 4 different types of accounts in the UK:

If you are unfamiliar with ISAs, I go in-depth in “What Is An ISA (Individual Savings Account)?”. The short version is that you can save up to £20’000 p/an in ISAs. Any gain whether from interest, capital, or dividends made on this allowance will be tax-free. Maxing out your ISA should be your priority.

Well, a pension account is straight forward. Your allowance is £40’000 p/a. This money will only be accessible once you reach retirement and will be growing till then. Maxing out your pension allowance should be your priority once you maxed out your ISA.

You should only use General Accounts once both others have been maxed out. As your earnings will be subjected to HMRC’s law. As far as Vanguard is concerned this account functions in the same capacity as any other account. You can freely buy and sell Vanguard funds. If you want to open a General Account I recommend using a third-party app such as Trading 212 as you have access to a higher amount of funds. (Use my referral link and get a free stock valued up to £100/$100).

A junior ISA is just that, an ISA account for Minors. They will not have access to it until they reach 18 and it only holds an allowance of £9,000.

Vanguard’s 3 types of funds

Welcome back to everyone lucky enough not to live in the UK. It’s time to look into vanguard’s 3 types of funds. 

Let’s start with Equity funds. There are 36 of them and are accessible through both Vanguard’s platform or third-party apps such as Trading 212. (follow the link to get 1 free stock worth up to £100/$100). As said earlier they are riskier investments but will have higher returns in the long run. You can find the list here with their tickers available when you click on them. The funds are spread out per category:

  1. European 
  2. Global 
  3. UK
  4. Emerging Markets
  5. Asian Pacific
  6. USA

Each of them with their own characteristics. I personally invest monthly in VUSA as I strongly believe in the S&P 500.

Secondly, you have a Fixed Income. This category regroups all BONDS. Once again you have the choice of your investment platform. These funds typically hold a lower fee and return a coupon quarterly which goes from 0.5% to 5%. Your coupon will depend on your risk profile once more. Government bonds are safer than Corporate but yield lower payments. Holding bonds is a true form of passive income as they will payout until maturity.

Vanguard splits them into the same categories as Equity and they total 24.

Finally, you have blended funds. As explained earlier they are only accessible from Vanguard’s platform. As a blend of equity and bonds, they lead to quick diversification of your portfolio.

What does my portfolio look like?

I started investing with Vanguard at the start of the Financial Year. And so far I have seen a rate of return of 16.6%. With 4.5% coming in the last 3 months. I invest 20% of my income by direct debit monthly. It ensures a stable growth of my portfolio whilst practicing DCA.

Vanguard offers a clear insight tab which makes it easy to see in which markets you are invested and how your portfolio is structured. Mine looks like this:

Vanguard portfolio fund

As you can see I am heavily invested in the European and American markets. I tend to invest most of my direct debit directly into the LifeStrategy 80% which has seen the highest returns so far. The rest is split between VUSA and UK/American government bonds. This ensures I receive a 2.5% coupon quarterly on these investments.

As far as funds and Sectors themselves my portfolio looks like this:

Vanguard Funds breakdown

With a high amount of diversification, I am mostly covered by the tides of the market. With this screen, I’m also able to quickly review if I am satisfied with where my money is allocated. I then make modifications ahead of next month’s investments.

Final thoughts

As far as investors go Vanguard is a safe option. With a proven track record, a straight-forward website, and a high diversity it is difficult not to recommend. Whether you are a starter or an experienced trader Vanguard will have something for you. 

I will say their website is quite dated especially on mobile and if you do not want to be pigeonholed into 1 investor. I recommend using a third-party trader.

In addition to Vanguard, I use Trading 212 which has no fees and the benefit of giving both of us a free share if you sign up with this link. It is quite straightforward and will allow you to open positions with other traders. I will do an in-depth review of it in a future article. 

Please share your thoughts on investments and how you prefer to do it below in the comments.

Disclaimer: The links for Trading 212 are affiliate links. I am not paid for my opinion and all opinions shared are my own.

How To Build An Emergency Fund in 2021

By

On November 6, 2020

In Financial Thinking, Saving Money

You need an Emergency Fund. Whether you like it or not. It’s easy to feel safe and comfortable in our job. If 2020 taught me anything it’s that nothing is as it seems.  Preparing for the worst is the only way to protect yourself.

 Whether, it’s a solid job, parents, or social security nothing is ever guaranteed. Before COVID-19, I felt unstoppable my job was going great. I used to think “I work in hospitality and people would never stop traveling.”

All of a sudden, the unimaginable happened everyone was stuck at home and on furlough I went. 6 months… Not knowing if I would do my job again. Thankfully, I had prepared myself for it. 4 months of expenses saved up spared me from liquidating my investments.

It’s easy to get excited about potential investments and forget about covering our rear. One thing has become apparent the true priority is to have a financial safety net. 

illustration of trolley with gold as part of fund

Pros & Cons of an Emergency Fund

You’re probably thinking is there any negative? And also “we get it you are safer with it.” Stick with me you won’t regret it I promise. There is a reason why an Emergency Fund is the first step in “5 Ways to Stop Living Paycheck to Paycheck“.

PROS

Peace of Mind

Living on the edge always sounds like more fun than it’s worth. I started off wanting every penny I made to have a purpose. That could only be putting it to work right? Right… An emergency fund is not only purposeful, but it’s also vital. Knowing you are financially secure will make taking risks all the more enjoyable.

A Back-Up Plan

Whatever happens, you can always get out of a pinch. Of course, this fund should only be used for emergencies. I’ll plead guilty here. I’ve used it to pay a deposit on a flat in the past as I was running low on cash. In this case, you should always make it a priority to replenish the fund. Hopefully, you learned from GME that GameStop options aren’t an emergency.

Debt-Free

 With an emergency fund, you’re protected from Credit Card (CC) debt. Although, CCs can be a great tool. Who doesn’t like a few miles?

They also come with extremely predatory interest rates between 14% and 35% APR. They might seem like a good solution to solve problems in the short-term. Yet,  you soon end up in a vicious circle. With a few months of expenses set aside, you always have a safe solution.

CON

You might be wondering, how can there be any CONs? Well, there is just one – it’s a bit of a first-world problem though.

Inflation

Your emergency fund can be too big. What does that even mean?

Well once you have 6 months of expenses set aside the extra cash will lay prey to inflation. If you were to transfer additional savings to a high-interest saving account the money would be growing (Although less than 1 percent). You could also look into investing in market tracking funds like Vanguard’s VUSA which tracks the S&P 500. The market has seen a growth of 7% annually on average over 100 years.

Additionally investing your extra cash is a great opportunity to make use of your ISA allowance.

How much do you need?

There isn’t a one size fits all answer. How much you need in your Emergency Fund will depend on your circumstances.

 

Let’s say you are working in an at-risk job and live abroad. In that case, you will want to save 6 months worth of expenses. Whereas if you still live with your parents and have a job within a stable industry 3 months probably will be enough. 

 

Furthermore, the country you live in will impact the amount you need to save. I live in the UK therefore I benefit from free healthcare. Whereas if you are based in the US, you’ll need to get closer to 6 months saved as a medical emergency could hit you hard. 

 

When you are establishing your total sum. You should focus on the following expenses.

  1. Rent
  2. Utilities (WIFI, mobile phone, energy)
  3. Food (Groceries only)
  4. Transport

Everything necessary to survive. You shouldn’t include outings to the movies, your gym membership, or a shopping spree in it. Focus on what your essentials cost you.

 

Once you’ve answered the questions above you should have your number. Keep in mind that it isn’t fixed. As you move house, country, or have a family – costs will change. I review my needs on a bi-annual basis and adapt my fund as I go.

Don’t forget any additional savings can go to building up your investment portfolio whether it’s with Trading 212 (Get a free share valued up to £100/$100 with my link) or Vanguard.

List of sums representing emergency fund

How did I set my Emergency Fund up?

  1. I calculated my monthly expenses and reviewed the conditions of my work package (Severance pay) so I knew what I was entitled to. It led me to a targeted total of 3.5 months of expenses.
  2. I opened a separate bank account at my bank. Although it is easily accessible it makes sure I don’t tap into my fund inadvertently. I personally recommend Virgin Money’s Current Account. As you get 2% interest rate up to £1000 and 0.5% on the remainder of your money.
  3. Track your spending and round up. As I track my daily spending with Emma (AFL) I can track how much I spend weekly and round it up to the next £5. That way, at the end of the month I transfer the total to my Emergency savings. If you use the cash you could put the coins aside when you break a note.
  4. Automatic Transfers. I can save a minimum of £700 a month so I set up a standing order to my emergency account on payday. I make sure no matter what that money is set aside.
  5. Do you get a bonus? I’m lucky enough to get a yearly company bonus. You know where I’m going with this it goes straight into the piggy bank.
  6. In the first year of setting up this account, I would check the balance quarterly. It took me around 18 months to build my safety net. I know can invest the money elsewhere! 
  7. Priority Number 1. If ever I need to call on to the emergency fund my priority is to refill it as soon as possible.

What have we learnt about Emergency Funds?

Well, quite a bit so I decided to summarize the key points for you below.

 

Key points:

  1. Keep 3 to 6 months of expenses as an emergency fund.
  2. Review it frequently.
  3. Keep the money in a separate account.

I hope you enjoyed Cent by Cent’s first guide! I truly believe Emergency funds are often overlooked. Hopefully, you never need to tap into it, and peace of mind is priceless to achieve your financial goals. Feel free to share how many months you’ve set aside and how you built your Emergency fund. 

grow your investments graphs going up

What Is An ISA (Individual Savings Account)?

By

On November 5, 2020

In Saving Money

ISA the UK's tax free saving account

What if I told you that you could open an account and never pay a cent on the interest and capital gained?

Sounds amazing, doesn’t it? Almost like it’s too good to be true. 

Well, that’s partially true… You are limited to £20’000 per financial year. This target might seem unreachable right now, but if you are in the right place to change that. 

2 years ago, I had just arrived in London – my eyes full of stars. No idea what to do with my money though… A new country meant a new system. Thankfully, many of my colleagues had come from abroad and could help. They told me about Individual Saving Accounts (ISA). 

Honestly, I couldn’t believe it existed and I come from Switzerland… the country of Banks. This sounded like a golden opportunity. 

As a result, I can’t have you missing out can I? Here, is what you need to know about the ISA system. You can deposit up to £20,000 per financial year  all earnings will be tax free. They come in 4 forms:

  1. Cash ISA
  2. Lifetime ISA
  3. Stocks & Shares ISA
  4. Inovative Finance ISA

Why should you care?

You might be thinking why does it even matter? I’m barely able to save £100 whether my interest is taxed or not won’t make a difference. You couldn’t be further from the truth.

If you were to save £100 a month for 20 years and keep it in cash you would have £24,000. Whereas if you were to invest it in a fund tracking the S&P 500 which annually returns 7% on average – you would have £52,638.21. If you save this money in an ISA you will have earned £28,638.21 tax-free. On the other hand, if you kept the investment in a general account you would be taxed on account of capital gains.  

S&P 500 ETF tracking fund

Although the tax-saving might seem minor today, in the long run, your ISA will work for you. Aiming to max-out your ISA should be a goal every year. 

As of now, I have gone from saving around £1000 annually to targeting a £6000 saving goal this year. If I were to pay taxes on my return this year I would go from a £150 interest accrued to around £100. ISAs are a blessing in disguise.

What are the different ISA?

At this point, you might be wondering what are my options? Also, How do they work? In this article, I will summarize each ISA. In effect, giving you an overview of what each account does.

  1. Cash ISA

This one is straight forward it’s a fixed interest saving account. Which is either instant access with a lower interest rate or fixed-term and will incur a penalty for early withdrawal.

  1. Innovative Finance ISA (IFISA)

As an IFISA holder, your investment is in the form of a peer to peer (P2P) loan. Based on how long you are willing to leave your money in the account you will receive interest from the loanee. It’s risky as default is a common occurrence. Withdrawal of funds is also extremely challenging.

  1. Lifetime ISA 

This Account is capped at £4000 p/a and can only be opened between 18 and 40. You can contribute until you are 50. During this time, the government will add a 25% bonus. This contribution can only be accessed when withdrawing for retirement or first-time property buyers.

  1. Stocks & Shares ISA (My favorite)

This Individual Savings Account allows you to invest in stocks, funds, ETFs, and bonds of your choosing via a brokerage platform. Although capital is at risk, it allows you to earn interest, dividends, and coupons tax-free.

I will be doing individual reviews for each type of ISA and giving you tips on how to set them up. If any questions come to mind ask away in the comments.

Join the newsletter or check here.

Which one did I go for?

So far I have held both a Cash and Stocks & Shares ISA. After seeing the interest rates plummet in March. I decided to close my Cash ISA. Since then, I have invested with both Vanguard and Moneybox. I will review both services in an upcoming blog post. 

Currently, I’m satisfied with my return as on average Vanguard has returned 14% and Moneybox hovers around 6%. As I look to get on the property ladder. The Lifetime ISA will most likely be the next stop in my ISA adventure.

I would love to hear your thoughts on ISAs, if you are not from the UK what does your country offer?

I’ll be writing individual articles for each type of ISA going in-depth on the pros and cons. Watch this space as I will backlink towards each post and include the articles in my Newsletter!

Feel free to share the article with your friends and if you know of anyone with the same question as you.

A chair in a gray room

Financial Goals: Why I Was Wrong

By

On November 5, 2020

In Financial Minimalism, Financial Thinking

The fulfillment curve changed my outlook on wealth.

“Lionel, you should always strive for more”

How many times have I heard this? Whether it was from parents, teachers, or managers. The common advice always seems to be you need more. Whether it is money, possessions, or likes. I was taught that if I want to win at life — I must be rich.

There is no such thing as enough.

The baseline of our society. Yet this constant race for more left me feeling empty. More = Happy right? I will be fulfilled the more I have. On the other hand, every new purchase makes me feel guilty. As my Financial Goals became clearer – I found fulfillment.

I never understood this feeling before I read “Your Money or Your Life” (the link is an affiliate link to Amazon to find the book). Vicki Robin introduces the concept of the fulfillment curve.

Fulfillment Curve, a tool to set Financial Goals

The idea is that fulfillment progresses along the curve before it hits a point of diminishing returns. It serves the idea that money=fulfillment no longer works. It works against us.

What happens after the peak?

Clutter strikes. Although, I have enough coats for 12 seasons, 1 more won’t harm me. It’s impossible to have too much money, right?

One thing leads to another, with more income comes more taxes, a larger house, and new “needs”. Yet at each upgrade, I feel less satisfied. I need to spend more to get a tenth of the thrill. As a teen, receiving a new phone felt exceptional. Last year, I bought the latest smartphone — the thrill lasted a day or two. 1 thought was on my mind once I left the shop. Have I really spent this much when my previous phone was fine? The familiar guilt was creeping in.

All these new luxuries and must-haves ended up crowding my flat. I recently moved and was appalled by the things I bought and never used. I was ashamed. How much money had disappeared?

I don’t want to know…

Not only was I losing money. I quickly realized that I could replace “money spent” with “time spent”. I started looking at how I spent my time. Forgetting an item on my weekly grocery run meant an additional trip. When I get passionate about something new the clutter is never far. I enjoy running. You’d think a pair of shoes would suffice. I quickly add all “recommended” paraphernalia. Not only did it have a financial cost, but it also took a lot of research time.

The ideal amount of money is that which neither falls within the range of poverty nor far exceeds it. — Seneca

Why I tied my Financial Goals to my values

I realized that when I fix a problem. I don’t ask what can I do but what can I buy. Materialism is more than wanting shiny things. Vicki Robin says it’s an easy substitute for problem-solving. I feel like I’m losing my resourcefulness.

Not only does “more” not lead to fulfillment. It has a terrible impact on the environment. Every purchase has an environmental cost. I decided that if I were to buy an unnecessary item it would be second hand. I’ll clutter my life but help the environment.

Row of hangers a representation of Financial Goals
Photo by Rene Asmussen from Pexels

When is it enough?

Sorry to disappoint, I don’t have an answer. Enough is different for everyone. It’s also constantly evolving. What is enough as a single 25-year-old is not the same as a married 40 something.

Great isn’t it? Not only am I supposed to stop wanting more but it isn’t clear when. Vicki Robin defines it as:

“It’s appreciating and fully enjoying what money brings into your life yet never purchasing anything that isn’t needed and wanted”

To figure out what my Financial Goals are; I had to get to know myself. More precisely my spending habits. I divided my monthly expenses by category (food, shelter, clothing, etc.). At the end of the month, I review my expenditure and assess whether it brought value to my life. It has led me to save money without guilt.

When I spend time/money — I wonder if it aligns with my values. Not only did this approach quickly make the need for a budget disappear. It took the shame away from shopping. Every purchase is meaningful. When it isn’t I learn and change my habits.

Consistently thinking about the fulfillment curve led me to understand my patterns. I found peace of mind. I realized a treat loses its value if bought every day. If I want my Matcha Latte to feel special I should buy it less often. 

Am I fulfilled?

I’m getting there. Understanding what your Financial Goals should be – is tough. Especially when you leave your home country. I had to find my financial “enough” alone. On the upside not having any l influence meant I could explore freely.

It led to me realizing — I don’t need to be rich. What is the point to have everything. What would I do with all of it? It’s liberating to have a new objective. I’m no longer aiming to be rich. My goal is to achieve an amount of wealth that lets me be true to my values.

Fulfillment might not be a given. Relearning what society teaches isn’t easy. Yet, this evolution feels wonderful. I feel lighter and the pressure has been alleviated. Join me on my journey to enough!

I would love to know how you have been setting your Financial Goals! Please share them in the comment box below. If you want to know more about Cent by Cent and what we do go to our homepage!

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