Our journey to Financial Independence

Category: Saving Money

Banks abroad piggy bank and coins

How Much Can You Really Afford?

No matter how hard we try to save… Society is built on spending. From the roof over my head to the food on my plate. Everything comes at a cost. The only way to be free of expenses is by living off the grid. Then again that isn’t feasible for most of us.

So how much can you afford? Truly… It depends on who you are. The principal of the Financial Independence Retire Early (FIRE) movement is to maximize income and minimize expenses. Optimizing your saving rate to achieve freedom in x amount of years. 

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Even if FIRE isn’t your cup of tea and you just want to set a few dollars aside. There is one inevitable question. Can you afford it? Having the exact amount on your credit line or on your checking account means nothing. 

So what is affordable and why can you afford less than you think?

What does affordable mean?

Affordability is often only taken into account for big purchases. For example, the bank will calculate your affordability before allowing you to mortgage a home. You might also give more thought to a car purchase as it’s a milestone. 

Yet, we often overlook the affordability of everyday items. How many beers can you truly afford? Or a phone plan are you sure you can afford it? The biggest culprits are monthly payments and 0% financing. They insidiously increase your expenses.

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What is $20 more a month for a brand new TV! It will completely change your life, 8k is the new thing. On the other side, your monthly expenses have increased for an asset you won’t own for another 47 months. 

Understanding what you can truly afford is the key. Are there any rules? Not really. It’s up to you to find the best system and stick to it. To help you in this journey and avoid living paycheck to paycheck: this article will go into each type of expense and give a rough idea of ratios.

Let’s break it down into 3 categories: Transportation, Lodging, and leisure.

How much transportation can you afford?

Transportation covers as much a car as a commute. Are you truly making the most of your salary if most of your time and money is sunk into your commute? Let’s take London as an example cost of life overall is extortionate and living centrally on an entry-level salary is challenging… A yearly railcard costs over £2600/pa. 

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The cost of transportation therefore not only factors into a new car but into your choice of work… If you were to move out of the city center the savings on rent might be offset by your commute. Not only will it cost you financially, but your time will also disappear into the back and forth. 

How about a car? People tend to think their car is their business card. That it’s something they will be judged on. So much so that in the USA the median cost of a new car is $40,573 with the average buyer borrowing $35k. The median average salary in the States is $49,724… 

More than half of the yearly income went to buying or borrowing to buy a car. Without taking depreciation into account it’s a significant hole to put oneself in. As this doesn’t cover insurance or taxes. My friend Yasi from Fast Track Life makes a great case for the hidden costs of a car in her article “The Under Estimated Costs of Owning a Car”.

I personally don’t own a car but I have been on the prowl for a new ride. I’ve decided to apply Andrei Jikh’s idea of no more than 10% of my annual salary. The car won’t be anything fancy but it will get me from A to B without bankrupting me! You can discover his video below:

Just because you can pay for it today doesn’t mean you can afford it. Remember the long-term implications and how it will tie you up. I explore this more in-depth in “5 Ways To Stop Living Paycheck to Paycheck”.

How much housing can you afford?

Whether it’s buying or renting you are going to need to pay to get a roof over your head. Of course, you could go off-grid but even that would cost up front and still need to be factored in. 

Renting

I won’t delve too much into buying versus renting as that will be the object of a future article. I for one rent in London, England. The way my girlfriend and I have approached it is our share of the rent can’t be higher than 33% of our net monthly salary.

architecture bridge building city afford london
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This was a big factor when deciding to move to the UK from my native Switzerland. I explore more of it in “Should I Live Abroad?”. It allowed me to get started with the 50-30-20 rule. In which you should spend no more than 50% on needs which include energy, food, and shelter.

I decided to stick to 33% at first for our rent as it allows me to set aside 40%+ of my income monthly. Since then, we are looking to increase our income and take the cost of shelter below 30%. 

Would we like a new fancy flat with a gym etc? Of course, who wouldn’t? The problem with this is it inevitably leads to Lifestyle inflation and an infinite circle of loss.

Buying

I’m yet to acquire my first property as I value geographical flexibility highly. But there are a few things to keep in mind. The goal of a Bank is to loan you the highest amount of money that you can afford. In this case, it would be as little as making ends meet. 

Having saved up the exact amount of money for a deposit is risky. It leaves you with no capital for unforeseen costs and taxes. You might be a homeowner but a mortgage can set you back.

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Old school sources would recommend you only by property worth 4.5 times your annual income. It would give you a strong ratio of debt to equity. I would personally always look to a mortgage when the interest rates are as low as today. You have a high chance to make a higher return by investing the remainder of the sum.

There are many reasons to invest in real estate as long as you can cover your cost. Check-out “Real Estate Investing: The 3 Edged Sword” by Plant Money Seeds for an in-depth look.

How much fun can you afford?

There is less of an absolute side here. Of course, some will tell you to stop drinking your Starbucks or getting a pint after work. But these are not the reason your portfolio isn’t growing. Leisure expenses can become insidious.

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Whether it’s spending a few thousand on a holiday or a new phone can you afford it? My rule of thumb here is if you were to spend twice as much would you still get it? This gives you a healthy mindset towards spending. 

Most importantly, will you need to go into debt for it? There is absolutely no reason to get into debt for a want. This is where monthly payments pile up. We all know about Credit Card payments and how easily you can overspend. 

The positive side of Credit Cards is that they immediately show you how little you can afford. On the other hand, the new financing options lead you to spend more than you should. 0% APR and only £75 a month! What a great deal for the new iPhone. Yet, when you add it to the new TV payment, your car payment, and all the other “bargains”. You end up starting the month with 90% of your income dedicated to fixed expenses. 

Time to spend

Here’s the bottom line… we are going to keep spending money. No matter what we think we will. The trick is to understand how much we can truly afford and let our money grow around it. 

For mid to long-term goals investing is a great solution. It allows you to fulfill your “buying” urge but put your money to work. Of course, if you are going to need the money in less than 10 years going to the high-yield savings account is the way.  

If you want to start your investing journey why not find out which investor you are and start off with my article “Trading 212 or Vanguard? What investor are you?

What are your tips and trips to figure out affordability?

Don’t forget to sign up for my monthly Newsletter which hold unique insights and much more!

person signing loan agreement for purchase of apartment

5 Ways To Stop Living Paycheck to Paycheck

No matter how much they earn, people end up living paycheck to paycheck. Whether you are a professional athlete or a student with a side job you might be in this situation. But stay positive, because you are struggling today doesn’t mean there is no hope.

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Although, many will have managed to save some money during the pandemic. It’s often down to having fewer opportunities to spend no more clubs, restaurants, or shops. The likelihood of us going on a spending spree diminished greatly.

“Act your Wage”

DAve Ramsey

It would be naive to think that once the opportunities return, spending will remain in place. So why not create healthy habits now and protect ourselves from temptation and expenditure?

The vicious circle of living paycheck to paycheck

32%, you read that right 32% of people, surveyed in 2020, were in financial distress. Whether they earned $40,000 or over 200,000 the result was the same 30% or more ran out of money before payday. Unsurprisingly, below that threshold people ran out closer to 40%.

Whether it’s taking on debt early in life or succumbing to Lifestyle inflation. The continuous chase for more leaves many behind grappling at straws. When your checking account approaches the inevitable overdraft – credit cards become a saving grace. 

Summers might be easier but when winter hits and the energy bill goes up things can change drastically. That new iPhone or brand new car might seem like only a few hundred per month now… In the long run, monthly payments and debts add up.

“If you can’t pay for it twice cash don’t buy it”

Peter Saddington

Lifestyle inflation is the culprit when wages go up, we tend to want to live “our best life”. Worse than that we increase our expenditures with the hope of a windfall. That is nothing short of lunacy. In an episode of the Fast Track Podcast, Peter Saddington shares the spending habits that brought him to 1milion net worth at 26!

Of course, it’s easier said than done once you have reached Financial Independence. Yet you need a backup plan and solutions. Time to dive in:

How to escape living paycheck to paycheck

You aren’t as smart as you think

I know it hurts to hear… But studies show that 71% of people have an inflated perception of their Financial Literacy. Only 34% of people were able to answer basic Financial Literacy questions.

That percentage rings a bell, doesn’t it? There might be no correlation but it seems like an unlikely coincidence. If you want to test your knowledge follow this link.

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By accepting our true knowledge we make a giant step towards saving more money. Lower financial knowledge leads to riskier investments. Not only does it mean you are taking more risk you lose track of your portfolio. 

Take the time to educate yourself and learn there are many resources out there to get yourself started.

BUDGET BUDGET BUDGET

If you want to get out of this vicious circle… you need to know where your paycheck is going. Track all your expenses and money sinks. Don’t be ashamed of where the money is going but try and understand why you are spending it. 

A great rule of thumb as a beginner is to follow the 50-30-20 rule. No more than 50% of your expenses go towards needs, 30% towards wants, and 20% towards savings. 

The 50/30/20 rule to avoid living paycheck to paycheck

By reverse engineering a budget you can make it fit your lifestyle. The biggest problem with budgeting and following plans is the same as with fad diets. They don’t fit you or your lifestyle. 

Build your budget from the ground up to protect yourself from financial trauma. Understanding why you are saving money and where it’s going will also give you a clear purpose. It’s also likely to help you stick to your habits! 

Debt First

Paying back your overdue debt is the highest guaranteed investment you can make. Credit Card debt is typically 15% and higher interest. If you stick to minimal payments and max out your credit line… You will quickly be in over your head.

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At a 20% interest rate, your debt will have doubled within 4 years. The compounding effect isn’t always your ally if you aren’t ready for it. Paying back debt should be your number 1 priority.

Debt will trap you into the vicious circle of living paycheck to paycheck.

Sneaky Influencers

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Our generation deals with a new kind of financial pressure: social media. Seeing people living their amazing lives on Instagram or quitting college to hustle on Twitter… It’s enough to drive anyone incoherent. 

Schwab’s “Modern Wealth Survey” showed FOMO is the leading cause for spending. 35% of people surveyed spend more than they can afford to join experiences. 34% will make unexpected purchases based on Social Media.

This is where lifestyle inflation often hits the hardest. Now that your salary has increased you need to show it through your lifestyle. You make $50k a year, so you definitely deserve a brand new BMW worth 40k. It doesn’t matter that you will be making a $600 payment monthly. 

The other trap is moving to a higher cost of living area to fit with your new lifestyle. The biggest fixed cost often is rent. Once you’ve signed a contract for 2 years you are stuck. No matter what happens you will be shelling out “the appearance cost” of your apartment. 

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By “improving” your lifestyle and de facto increasing your expenses you negate the effect of a raise. By relocating to a cheaper neighborhood, downsizing your flat, or finding a flatmate you will effectively decrease costs.  

Living in a mansion isn’t worth it if you end up bankrupt. If you want to learn more about how to avoid lifestyle inflation and other financial sins read my article “7 deadly Personal Finance Sins”.

Prepare for the worst

You’ve finally gotten out of debt and cut out most of your superfluous expenses! Congratulations. Unfortunately, you aren’t quite ready to invest yet. I know this feels like it’s taking forever but you are getting there!

Before, investing you need a security net. It will protect you from falling back into old habits and lose all the progress you have made. This magic tool is an Emergency Fund. Typically, an emergency fund is anywhere between 3 and 6 months of expenses saved. Having it at hand guarantees that you are ready for let’s say… a global pandemic?

Emergency Fund Piggy Bank

This is not a future “enjoyment” fund it’s the last resort. Having an emergency fund allows you to keep your head cool when a medical emergency arises or you lose your job. Additionally, you will feel at ease when looking at your bank statements. 

Breaking the Vicious Circle!

Now that you have the tools, how are you going to use them? Learning about Personal Finance and how to manage my income has changed my life. I’ve been on this journey for a little over a year now and would love to see you join me!

There is always more to be done and to be learnt. Living paycheck to paycheck isn’t a necessity. What was your first step towards living a Financial Stress-free life?

2020 in the rear mirror

2020 Retrospective: 10 Important Lessons

The time has come to say goodby to this awful year. Finishing the year with a retrospective is a great way to appreciate our growth. Yet at the same time… Saying the past year was tough is an understatement.

Like many, I was determined not to let 2020 go to waste. It would be easy to wallow and think that we wasted 365 days. Inaction is always the easy route. This year especially required creativity to grow and improve. 

On the other hand, despite all its flaws 2020 was an amazing learning opportunity from self-improvement to personal finance. Never has my life changed this much. This article is an opportunity for introspection and a window into my mind.

Embrace uncertainty

If I had to take 1 thing away it uncertainty is unavoidable. I always thought I could design my future. 2020 showed me you must make the most of the cards you are given. 

It was liberating as it taught me to be more laidback. I take things as they come and enjoy the moment.

Better late than never

Before 2020 my investment portfolio was all of £200. I had tiptoed into using a roboinvestor but it had never really stuck as a habit. That was until I discovered the power of compounding interest. 

When I realized that £500 per month for 20 years would be worth £312k with an interest gain of £173.7k. I became impatient and had to start that instant. If you want to get into investing check out my article on “Investing with Vanguard.”

It would’ve been easier to think why not wait an extra year? As I had already lost the first 2 years of my career. On the other hand, I could start today and reap bigger rewards. 

It was a no brainer

coins in front of a clock money is time

Just start

As I grew up, I had a flawed idea – I believed in perfect timing. There was no point starting something if all the stars didn’t align. If I wanted to work out my body needed to be in top shape. 

Yet as I spent most of the year on furlough. I realized that appetite comes as we eat. The first minutes of exercise, writing, or cooking might feel dreadful. But as it goes on the result feels more rewarding and empowering. 

All I need to do is get going.

Define yourself

I grew up in a family of very hard-workers. Coupled with the societal belief that your work defines your identity. As I was sent home for the foreseeable future in March – I felt directionless. 

My goals and purpose had been solidly tied to my job and before that to my studies. For the first time, I had no given path. It left me with an empty feeling. Until my partner helped me wake up and showed me life had more to give. 

As 2020 went by I rediscovered what mattered to me and how I would build myself. This lead to Cent by Cent and countless memories!

Remain true to your values

values Strong like an oak

My own mortality

I was always aware that I will die. Luckily, I’ve always been in good health. Never had the thought will this be my last breath crossed my mind before 2020. As I was struggling to breathe in March – the thought dawned on me. 

“I might not wake up tomorrow”

The hospitals were full… people were dying and the UK was in crisis. I was laying there wondering how I would draw air in. There were no regrets to be had but I was lost. The situation only truly became apparent as I looked into my partner’s eyes. She was sharing my pain. 

I have lived a life that leaves me with no regrets. Every decision has led me to where I am today and for that I’m thankful. Yet one thought kept ringing in my mind.

It’s too early I still have so much to do, see, and create.

Creativity is within us all

My talent for the arts is close to none. I can’t draw or paint and you most definitely do not want to hear me sing. On the other hand, I’ve always been drawn to art – the need to create was buried within. 

The game-changer was writing. As I started publishing on Medium I found my voice and strived to help people on their Personal Finance Journey. Do my early articles make me cringe? Undoubtedly but they are a sign of progress.

Unlimited

It was easy to think that I wasn’t:

  • Talented enough
  • Creative enough
  • Funny enough

2020 is the year I realized. I create my own limitations. It’s up to me to set my limits and break them. There is no limit to my personal growth. The only way I stop growing is when I stop learning. 

A lifelong learner is unstoppable.

Agility is key

This year was a nightmare for all control freaks. Everything went out the window. Rules society relied on for decades were gone. Some reacted by closing themselves up and throwing up the white flag. Others used 2020 as a catalyst and put down the fight of their lives. 

A situation although immovable is what you make of it. 2020 could have been a lost year but I decided to make it mine. 

Was it perfect?

Far from it. 

But I adapted to this ever-changing world and made the most of it. My friend the Financial Imagineer shared this bit of wisdom: 

“When the wind of change blows, some build walls, some build windmills.”

An old Chinese saying

money in a tissue box

Money isn’t important

Sorry for misleading you. It is. But not as much as we think. Money is a tool. It allows us to purchase freedom and peace of mind. On the other hand, money isn’t the key to happiness. 

Have you ever tried hugging a stack of banknotes?

It’s cold and probably feels very lonely. Wealth is important as it allows you to focus on your true values. Falling in love with money is greed personified and a slippery slope to loneliness.

I explore this more in-depth in my article “Financial Goals: Why I Was Wrong”.

Never Alone

The grind is often sold as a 1 player game. Work as hard as you can neglect your relationships and build your wealth. On the other hand, you’ll reap the rewards down the road they say.

I have a simple question what is the point?

Throughout this year I was lucky enough to move in with my Significant Other, spend time with family and friends. After all, I found a community of like-minded people online that I’m excited to grow with. 

2020 might’ve been the year we were all a part but for me, it shone a bright light on my relationships. Don’t give up building meaningful relationships in pursuit of wealth. Life isn’t made to be lived in isolation.

If unfortunately, you had to spend the Holidays in isolation or alone. Please know that you are loved and valued whoever you are.

2020 retrospective

This year was full of surprises good or bad. But looking back, never have I grown and learned this much. Although, it came with its load of troubles 2020 counted double in many cases. 

The end of the year doesn’t mean the end of the pandemic, unfortunately. Yet it’s a great time to reflect and learn. What have you drawn from 2020 and how will you apply it in the future?

fireworks on 2021

5 Easy Personal Finance New Year’s Resolutions for 2021

New Year’s Resolutions or Financial Goals

Every year the same dance begins. We look back onto the last 365 days and realize we haven’t turned our life around. What’s the next logical step you might ask?

It’s easy we engage in the yearly ritual of New Year’s Resolutions. 2021 is a blank slate that we are determined to transform into a new chapter. From new diets, learning a new language, or more exercise everything will change. Instead of seeking a gradual change, we decide to make drastic changes.

Surprise, surprise…

We never stick to them. How many times have I told myself: “Next year I will exercise every day” more than I would care to admit. Unfortunately, I cannot say I’ve stuck to it so far.

So why not try a new type of New Year’s Resolutions? Let’s set financial goals and build the base of new healthy habits. Whether you decide to try out all of my tips or only to set 1 goal is up to you. Remember small changes are always preferable to no changes.

1. Build an Emergency Fund

If you don’t have one yet this should be at the top of your list. If 2020 has taught me anything it’s that life is highly unpredictable. Building an emergency fund is a great way to cover your back. 

You are ready to face any curveball directed at you. Take a look at your essential monthly outgoings from food, rent, and energy. Then keep in a high-yield saving account the equivalent of 3 to 6 months of these expenses.

Learn more about building your emergency fund for 2021 with my article “How To Build An Emergency Fund”.

2. Invest in being debt-free

Consumer debt is a plague in today’s society. The average Personal Debt in the US was $16,529 in 2018. You might think if everyone has it why do I need to pay it back? Isn’t it just part of life? I’ll make more money by continuously investing. 

If you are an Index Fund Investor and invest in an S&P 500 tracking fund such as VTI or VUSA. You can expect an annual return of around 7% although it could very well fall. On the other hand, Credit Cards charge an APR of 16+%. 

When you invest you are hoping for a return nothing is guaranteed. All you have to do to get an instant return on investment of 15+% is repay your debt. It’s the first step towards Financial Independence.

If you can’t afford to pay the balance in full, work towards paying more than the minimum deposit. Future you will thank you!

grow your investments graphs going up

3. Plant the first seeds

2021 is the year to invest your first $1. It might sound scary, risky, or even pointless to invest so little. Your mind is more at ease with the cash in a savings account. There is 1 simple problem with that…

High-yield saving accounts earn around 0.6% at most in 2020. Whereas inflation is on average at 1.2% in the US. You effectively lose 60 cents by 100 dollars you keep in the bank. 

You can start investing easily today with Vanguard for example that offers a wide array of index funds. If you were to invest $1 per day into an S&P500 index fund you would have 16,949. The power of compounding interest is mind-boggling.

If you want to learn more about investing with Vanguard and Index Fund investing discover my article “How To Start Investing With Vanguard”. If you want a no-fee and easily accessible trading, I use “Trading 212”. Give it a try with as little as $1 and if you use my link you will get a free share valued up to $100.

Change your life  by getting a headstart on your New Year’s Resolutions by starting today.

4. Learn Something New

If you are like me you need to know what you are getting into. It might be the Swiss in me but I like planning ahead. On my side, I use 2 tools books and financial podcasts. My favorite is adding a book to my library as I can always come back to it and grow my knowledge. 

If I had to read 1 book on the subject it would be “Your Money or Your Life” by Vicki Robin. If you are one of my regular readers you probably can’t stand me talking about this book anymore. But it truly changed the way I view money and my relationship to finances. I won’t spoil any more of it but it will change your life.

As for podcasts, there are thousands out there, I was lucky enough to be on an episode of “The Art of Money Saving” that you can find here. Otherwise, I strongly recommend fasttrack.life as Yasi Zhang regularly receives high-profile guests that breakdown the essentials of Personal Finance.

a desk with increasing returns

5. Just Talk

This New Year’s Resolution is simultaneously the easiest and hardest. The best way to grow your wealth and hopefully achieve financial independence is by talking about it. 

That’s it?

Well no… but it’s a great start. Sharing your experiences and asking experts about their’s will lead to a higher understanding. You liberate yourself of stigma and make financial decisions more rational. Yet one of my favorite quotes comes to mind:

“Money is the last taboo. People will talk about their sex lives before they discuss their finances.” Marvin H. McIntyre

Money is kept in a sacrosanct position. Society and big firms will have you believe that it’s a private matter. Yet, knowledge is power. So start talking! 

What will yours be?

Now it’s time to decide what will you do? Don’t pick too many choose 1 and get started. It doesn’t need to be suggested here. I personally have the goal to have £10,000 invested by the end of 2021.

To achieve it I will need to increase my monthly contributions as soon as I get a raise or am able to monetize Cent by Cent. I also aim to make my blog a secondary source of income for 2021 and further.

What will you be doing to better your financial future?

7 Steps To a Great Start With Personal Finance

Personal finance is just that. Personal. Yet there is a lot to learn from other people’s stories. It isn’t straightforward as a I learned when I graduated.

Everything changed the day I left University. I left Switzerland for the UK. A new country meant a new financial system. It also meant losing my financial security net.

“But Lionel, you are Swiss of course you can manage money”

My gosh, have I cursed, the reputation the Swiss bankers gave us… Yet I can’t deny it, I have a passion for personal finance. There I said it… a walking stereotype that’s what I am. The good news is I’ve learned some stuff along the way. Keep reading to start your journey with Personal Finance

1 Download a Budgeting App

Personal Finance through expense tracking

The first thing you should do is get an expense tracking app. It’s stores all my current accounts, credit cards and saving accounts. I’m able to visualize all my expenditures, find the hidden money sinks, and track my overall wealth.

I personally use Emma, it categories my expenses automatically! As soon as I get close to reaching a budget –  I receive a notification. I had no excuse for forgetting to track an expense. Not only could I visualize my expenses – I got to know myself.

I have now set up an external sheet for my budget but I still use Emma daily. It keeps me on top of my finances with one quick stop.

2 Apply the 50-30-20 Rule

At the start of my personal finance journey, it was difficult to grasp what my spending targets should be. After learning about Elizabeth Warren’s 50-30-20 rule. I had found a framework on which to base my decisions.

It suggests you should spend your after-tax income as follows:

  • 50% for needs (rent, food, transport, insurance)
  • 30% for wants (entertainment, gym, holidays)
  • 20% for savings (investments, paying off debt, saving accounts)

This rule helped me when deciding which country I should move to when graduating. And whether it was financially sound to do so. Since moving to the London, I’ve aimed at decreasing the 50% to grow my savings.

I have managed to shift take it down to around 40% in a couple of years. I cannot say I have achieved my goal but I am on my way.

Currently, I’m saving 43% of my income mostly supported by lockdown diminishing my expenses. Thankfully, it has lead me to increasing my investment rate to 25%. I mostly invest through Vanguard and ETFs although I also invest through Trading 212. (You can get 1 free share worth up to £100/$100 with my link.)

Wealth consists not in having great possessions, but in having few wants. — Epictetus

3. Paying off debt is an investment

Debt is like a weed. It will grow especially if you ignore it. Paying off your credit card debt should be at the top of your priorities. Most of the money they make comes from the predatory APR interest rate they charge.

When you pay off a debt you do not only increase your credit score. You lower your future debt as you curb the interest growth.

4. Build an emergency fund

Since COVID-19 hit I have become a massive Emergency Fund advocate. I keep upwards of 3 months of expenses saved at all times. It allows me to keep my mind at ease. When the ghost of unemployment comes looming — I have breathing room.

Whenever I need to tap into this fund my priority is to refuel it as soon as possible. You can learn more about how to build your own with my article “How to Build an Emergency Fund in 2020“.

5. Check your finances daily

Every day, I take a couple of minutes to go through my budgeting app. It helps in making the money real. I know where, when, and what I spent.

Of course, I end up letting myself down every now and then; but my impulse purchases have gone down tremendously. Instead of treating “mistakes”. they are now learning opportunities.

6. Educate yourself

I try and read as much as I can about financial law, investment opportunities, and saving tips. The world of personal finance is ever-changing and different from 1 country to the next. Researching what applies to your area will help you grow and be critical about what you read online.

“Winning at money is 80 percent behavior and 20 percent head knowledge.” — Dave Ramsey

7. There is no "get rich quick"

When I started reading about personal finance; every other article talked about the X trick. I quickly learned that there is no such thing as easy money. Passive income is not a myth but it takes a lot of work before it becomes sustainable.

Take your time, let your money grow, and be disciplined it will all come eventually. Remember that passive income although it’s attainable is often looked at through rosy lenses. You can learn more here “Passive Income It’s All a Lie“.

Here’s the major problem with going on strike for more money: You cannot get rich by demand! — Jim Rohn

Personal Finance Is Worth It

Starting off with personal finance isn’t an easy thing. It takes rigor, discipline, and courage. It means tracking expenses and making every penny count. Yet, I find it freeing. It gives me control over my life and lets me decide where I’m going. You’ve now seen a few of my tricks. I hope they will help you begin this exciting journey.

Share you experience of Personal Finance and what gave you the bug! I would love to hear your thoughts and tips.

Investments around the world

How To Start Investing With Vanguard in 2020

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.

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

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)?

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.

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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.

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