Last Chance U and Financial Independence

One of my favourite Netflix shows is Last Chance U. It’s about Junior College Football in the US. In the States, College Football is a big thing. Talented kids get scholarships to go to the top colleges to play American Football with the dream of making it to the NFL. In Last Chance U, the show follows a small rural Community College team, made up of kids booted out of top schools or desperately searching for their last shot to land a scholarship and a path to the NFL.

Set in rural Kansas (earlier seasons in Mississippi), the environment is as far away as possible for the mostly black kids. Many have had brutal lives; football being their perceived best shot out of extreme deprivation. The show is bittersweet, in that some of what these kids have gone through is heartbreaking: death, drugs, abuse, broken homes. Then again, watching some of them succeed, despite all adversity, and get closer to their dreams is very inspiring.

I think there are lots of lessons we can take from the show on our journeys toward Financial Independence.

1. No matter your setback you can make it

Most of the kids have had tough lives. Lots have barely had any decent education. Almost all of them have been made to believe they are stupid because they are black/redneck/from a broken family. Getting the grades to get into college is no mean feat for them. Both academically, and psychologically.

In terms of Financial Independence, it’s also about overcoming those limiting beliefs: “I can’t do it.“, “Sounds great but I’d never be able to save that kind of money.” There are no inherent limitations stopping you reaching FI. Society tells us being in control of your financial future is too hard; that you should ‘live for today’. But that’s nonsense, just like those people who tell the kids they’re never gonna be smart, or pass their tests.

2. You need discipline and process

“Ignorance is life f–ing threatening, man, 89% of the NFL and NBA players are broke three years after they f—ing retire. Broke! Bankrupt! Flat broke! And if you think football is gonna pave the way for the rest of your life, you’re f—ing sadly mistaken.”

That’s the coach telling his team that even the guys that make it big often end up bankrupt. It’s shocking how many professional sports persons end up broke. It’s the same in Soccer (Football to us Brits). A lot of it is down to discipline and process. Many of the kids have never had discipline in their lives. They come from chaotic backgrounds. Their pure athletic skill meant they got a pass through lots of life.

That chaos ain’t good for life, and it ain’t good for your financial plans. Just like the kids need discipline and process to get their grades, and improve their football skills; we need discipline and process to keep our finances in order. Sure some people are able to wing it and get to Financial Independence (in many ways, that’s kinda what happened for me). But, even then, you need a process otherwise all that money will slip through your fingers, just like it does for retired athletes.

3. Being the best means nothing

The best player on the team was the star Quarterback. But apparently, at the conclusion of the show, he had yet to get offers from a top school. Throughout the show, it’s the determined kids that come good, even if they are not as good on the field.

It’s the same with Financial Independence. You can earn mega bucks, but without the right attitude you’ll never save enough and fall into a lifestyle trap. Spending every pay rise on increasingly dumb stuff.

4. When you get knocked down – get back up

That Quarterback could really have done with listening to Tubthumping. His big weakness was he didn’t like getting hit – a pretty big flaw in football. But sometimes you’ve got to take the hits and get back up again. Getting knocked down sucks. But, even though it is cliche, those setbacks make you stronger. You learn from them.

As an aside, the Quarterback had a real pushy dad – and it’s clear he’s suffering from some kind of depression or mental illness. His heart wasn’t in playing, and his dad was a total d*ck to him. If your heart isn’t in something, when things go wrong you’re gonna want out. Financial Independence isn’t for everyone, it’s got to be right for you.

5. Quiet determination

This is in stark contrast to the team’s lead Running Back. Throughout the show, he’s calm, cool and not flash. He doesn’t get into fights, he just gets on with it. He has a rough start. It isn’t until halfway through the season he becomes a regular starter. But he was always quietly supporting his teammates, even when they scored at his expense. He actively avoided the camera and a telling moment was that when he asked if he’ll announce his big offer on the radio, he asked if he could not say anything.

Financial Independence can be lonely, and contrary to lots of the big blogs out there, it can be a lonely pursuit. You might lose some friends, a lot of people will be jealous and try to shame you. But it’s important to quietly get on with it and not let other people get on your back.

6. Financial Independence is a backroom pursuit

Perhaps the most telling thing about the show is what you don’t see. Many of the kids love the camera, but many of the top offers went to players that barely featured on film. I presume they just got on with things and sorted out what they needed to behind the scenes.

That’s a lot like Financial Independence. When you make it there ain’t no award or big public celebration. In fact, it might be that nobody even knows it’s happened. A lot of the FI stuff is in the backroom: saving, investing, the discipline. That’s the heavy lifting, not the showy stuff.

7. Football and Financial Independence is a privilege

In one scene, the Coach tells one of his players in a delightfully tasteful way that: “he’s not trying to f*ck [him over]”. He makes the point that the kid has a great deal, with lots of people rooting for him, because out in the real world a lot of people will be trying to screw you over – especially if you’re black. That goes too if you’re a woman, ethnic minority, or just don’t ‘fit in’. If you mope, the Man will wipe the floor with you. The Establishment doesn’t give a damn about you feeling sorry for yourself.

Football and Financial Independence are a privilege. We’re lucky to partake. Sure things go wrong. But, ultimately it’s a great way to stick a finger up at the Establishment. And nobody can stop you from becoming FI but you.

Enough preaching from me

I really enjoy the show, and I’m not really into NFL or football. If you’ve got Netflix I’d recommend watching it. But do be warned, there is a lot of swearing. And I mean a lot (the coach in season 3 would make Tarantino blush). So if you don’t like foul language, this ain’t gonna be for you. Likewise, whilst there are some heroes on the show, the behaviour of the coaches can leave a lot to be desired.

Anyway, thanks for reading.

All the best,

Young FI Guy

Why the Lifetime ISA is not a simple to understand product

I’m gonna be upfront here, this is going to be a bit of a rough and ready post. It’s incredibly one-sided. But hopefully, I’ll be coherent to persuade you of one thing: the Lifetime ISA is a complex and confusing product.

The Lifetime ISA was drawn into the firing line after the Treasury Committee recommended it’s abolition (link). Some far smarter, wiser and more experienced people have made the case that the Lifetime ISA is a complex and confusing product. Most notably, former Pensions Minister Ros Altman (link).

Arguably, the most ‘no-brainer’ case for using a LISA is for those who are funding a house purchase. But even for these people the case is not as clearly made out as you’d think. Here are some reasons why.

Inheritance

Do you have parents? Grandparents? If you inherit a share of a family home sometime in the future that will block you from using the LISA towards your house buy.

Can you plan for that? No way, well except to get yourself written out of the will.

Joint ownership

If more than one Lifetime ISA investor is jointly purchasing a residential property, then each person must satisfy the Lifetime ISA requirements. Lifetime ISA investors can purchase a property as a joint owner with a person who already owns the property, but this is also subject to the conditions of the Lifetime ISA being satisfied.

Occupation

You have to intend to live in the property as your only or main residence. How long that’s for, nobody knows. Living there part-time, no idea. Got an overseas holiday home, no clue.

Helpfully, the government never set it out any more on this in the legislation. So if you’re an NHS worker, or regularly have to move jobs, you might find yourself on the wrong end of this. I’d like to give you some certainty, but nobody appears to know if the government will whack you with a penalty if you do end up leaving the home unoccupied. I’ve searched fruitlessly. If any wise owls out there know the answer please let me know!

Buy to let

Buy to let is therefore excluded. But there is a loophole to that. If you’re a crown employee serving overseas then you don’t have to take immediate occupation. In the meantime, you can buy to let until you return. Although, it’s not precisely clear what happens if you have to live on base on your return. The guidance notes and the legislation don’t seem to quite match.

There’s a cap

The house purchase price must not exceed £450,000. Good luck with that in London or South East England.

Also, there’s no mechanism in the legislation for that limit increasing. So, you’re gonna have to rely on a future government tinkering with the legislation for any increases. Otherwise, you’ve got to there’s a future reverse in house prices.

The cap applies even for share ownership

Want to buy 25% of a £500k flat in London (i.e. £100k purchase price)? You’re not allowed, the cap applies on the whole value, not just your share. So that probably rules out the savvy people co-purchasing their first homes in London.

You have to take a mortgage

Yep, you can’t buy the home outright. You can only use the LISA for a house purchase if you fund the purchase through a loan (mortgage) or under a home purchase plan.

You can only use it against the purchase price

You can’t use it against any solicitors fees, mortgage fees, stamp duty or anything else. Only the purchase price. So you’re gonna have to still save up a fair whack in another account to be able to pay all your purchase costs. That’s still better than the disastrous help to buy ISA which blocked you from using the funds on the exchange deposit!

Got a help to buy ISA?

You can have both a help to buy ISA and a LISA. But you can only use the funds from one. However, you can transfer from a help to buy ISA into a LISA if you want.

In a chain?

Watch out – because you’ve got 90 days from when you’ve withdrawn the funds to complete. Otherwise, you’ve got to put the money back. You can ask for an extension, but there are no guarantees. Hopefully, your chain won’t break. That never happens right?

Got a caravan?

Yeah, you might not qualify. Seriously. (link)

References:

Legislation: https://www.legislation.gov.uk/ukdsi/2017/9780111154618/pdfs/ukdsi_9780111154618_en.pdf

Government’s conveyancer guidance: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/691773/conveyancer__1___5_.pdf

Gov.uk Conveyancers technical guidance: https://www.gov.uk/government/publications/conveyancers-lifetime-isa-technical-guidance/conveyancers-lifetime-isa-technical-guidance

 

p.s. I know I’m being intentionally pernickety, it’s not all as bad as I’ve made out here. But, these rules do exist. And you do need to think about them. I know lots of you readers are very financially savvy, many savvier than me! But, do I think the average 20 year-old will get all this? No chance. But they need to if they want to use a LISA to fund their future first home. And what happens when potential savers or investors are faced with unnecessary complexity – they don’t save, they don’t invest. We need products that encourage people to save. They need to simple and accessible. They need to be easy to understand and usable in financial planning.

That doesn’t mean the LISA is a bad product – in fact, the generosity of the bonus is unbeatable for many people. That’s what makes this all the more frustrating. This is a product that could help so many people. But the implementation is so poor. And we’re not just talking complexity like forecasting life-expectancy for pensions is complex. We’re talking about complicated legislation that even lawyers need guidance to understand. Good luck to the rest of us!

Are you a palms up or a palms down person?

I believe that there are two types of people in the world. There are those with their palms up – people who want something for nothing. And there are those with their palms down – jumping at opportunities as they arrive. The former are reactionary: things happen to them. The latter are masters of their own fate: things happen because of them.

Why I’m telling you this

I’m inspired to write about this from a BBC ‘news’ article (Mortgage misery: The homeowners facing repossession). The piece came to my attention through FIRE Shrink’s excellent weekly roundup (link). FIRE Shrink nailed the summary of the article:

Couple buy property on interest-only, self-certified mortgage which they don’t understand. Complain when in financial difficulty.

The couple’s story

The couple took out an interest-only mortgage pre-Credit Crunch. It was a self-certified mortgage (as in, they didn’t have to prove income) as they were self-employed. In other words, they got a mortgage with no affordability checks. They got their mortgage through an IFA, despite already having over 50k of debt.

Apparently, they were unaware they needed to save up to pay off the capital when the loan matured. The husband claiming:

We weren’t told we had to have a repayment vehicle, but at the time I was desperate. So we were mis-sold the mortgage.

It goes wrong

It wouldn’t be one of those oft familiar financial sob-stories were it not for some unlucky breaks. The husband was diagnosed with a chronic illness which forced the couple to give up work. Despite both being self-employed they apparently did not have any critical illness or income protection cover which could have paid off their debts in full.

Instead of being sensible and buying insurance, they complained to their bank (as it was all the bank’s fault). The bank offered to extend the mortgage-term or grant them a repayment holiday. The couple took the later (no doubt because that involved not paying anything). Of course, that wasn’t good enough. The bank should have offered them a cheaper mortgage the couple argue. The bank sniffily replied: if you’d been paying your mortgage we could have offered you a product switch – but you ain’t paying us a cent so no deal for you.

More complaints

Satisfied that it was everyone else’s fault but theirs, the couple took the bank to the Financial Ombudsman twice. And lost twice. Thankfully for them, the bank still has yet to foreclose on them.

The article ends:

They are now living on benefits, with poor health, and in nothing short of mortgage misery.

Belief

I don’t want to come across as though I’m dumping on this particular unfortunate couple. But they are one of many people who are going through this interest-only mortgage farrago. I don’t have the indignation of Mr Ermine when it comes to these things (link for a similar story, and epic rant). But let’s be clear, these people are not a victim of mis-selling. They are victims of their belief the world owes them something.

For me, the stand-out sentence in the article is:

As a result many people took out interest-only mortgages, knowing they were cheap, and believing that their rapidly growing housing equity would eventually help pay off the loan.

This is the quintessential palms facing up situation. People were attracted to these mortgages because they offered money for no effort. “I get a cheap way to buy a property, and I never have to save or be smart, as rising house prices will do all the work for me.” In other words, they are entirely reliant on things happening to them. 

Palms up / palms down

You can end up in bad situations like this when you are after something for nothing. It’s the same with all GET RICH QUICK! schemes. The allure of a windfall for no work or effort is too tempting for some. But there is always hidden risk: you are often left at luck’s whim (or with the GET RICH QUICK! schemes, being circled by sharks). If you are a palms up person life happens to you – both the good and the bad. You don’t own the good – it’s a gift to you. And you can’t control the bad.

If you keep your palms down, you take life’s opportunities as they come. And that’s where the idea that you make your own luck comes from. You take the chances on your terms. That’s one of the things I like about Financial Independence. It’s down to you to make your own breaks. That’s not to say bad things don’t happen; of course they do. But it’s on your terms, and the fix to the problems is usually in your control.

For example, a stock market crash wipes out a quarter of your FI fund. A palms up person will moan that it’s not fair, if only the market was rational I’d be fine. A palms down person takes it in their stride and doubles down on earning more / saving more / investing wisely – the things they can control.

You needn’t look far to find inspirational stories of people who took control of their lives and made it pay off. The beauty of being palms down is that there is no one way to success. Each successful Financial Independence story has it’s own journey. It’s own ups-and-downs and slices of luck.

 

All the best,

Young FI Guy

Mrs YFG: why we don’t fight

Mr YFG and I were on holiday recently, sat on the beach in the delightful Mediterranean heat. All you could hear were the waves and seagulls….and an elderly couple bickering.

This couple had been on the same beach as us for a few days and the theme had been the same. The elderly lady barked instructions impatiently at her (very frail) husband, moaned about how she was too hot or felt ill and was just generally mean to him. She hissed his name (Alan, if you were wondering) again and again until he responded.

Given that they were both in their 80s and he seemed to have difficulty hearing, I’d have given him some slack. He could do nothing about her feeling unwell, and he could do nothing about the heat. I felt rather sorry for him.

It made me consider how I am lucky to have Mr YFG and he has the patience of a saint. I am the one with, let’s say, the more fragile emotional spectrum and he is more steady. I can get frustrated and angry about something and he just shrugs and moves on. Sometimes I am incredibly excited about something; he will again shrug and move on.

Despite our differences, Mr YFG and I don’t fight. We disagree on certain topics (sometimes severely), we negotiate and we can debate about things which we each value differently. We don’t argue in the normal way couples do. Where we disagree we don’t hold grudges, go to bed angry or give each other the silent treatment. We don’t snap at each other or let things heat up so one of us storms off.

I’ll share a few things that I have learned through being married and keeping the peace…

Be straight

Our policy is honesty: say what you really mean, what’s really bugging you?

I often get frustrated if Mr YFG takes me on a trip which involves relying only on his sense of direction (which is good, but it ain’t Google Maps). I’m not frustrated by the walking, I might well be thirsty, hungry or need the loo and I just want to address my thirst or hunger. If I can’t do that then I may well get snarky with Mr YFG. I have learned to just say I’m hungry or thirsty. He’ll then take us by the path of sustenance. Rather than grumpily pad along behind him asking if he knows where we’re going.

Get it out in the open

If I’ve had a bad day at work, I may come home and look for things to moan about. Just because I wanted to moan. I used to come home fuming. Mr YFG would take the brunt of my complaints about everything he hadn’t done that day and less praise for what he had achieved that day. If Mr YFG has not taken the bins out, rather than sniping about it, I just tell him I’ve had a tough day and I’m sorry if I am miserable. Going to the gym has also helped me release the frustration from work.

It’s the situation, not the person

Let’s say a train is late. Old me would be angry and frustrated, I’d snap at Mr YFG whilst waiting for the train. Nothing he or I can do about it and it’s certainly not his fault. I feel we have a tendency to blame others for problems that happen, especially those physically closest to you. The reality is that there’s rarely one sole reason for something going wrong, and it’s unlikely it’s the fault of your nearest and dearest.

Poor Alan…

It was a great shame to watch poor Alan get roasted on the beach (and I’m not talking about a killer tan). What should have been a fun vacation appeared, at least from my view, to be utter misery for the couple. Given we control how we feel and interact with others, it was self-imposed misery.

One of the things I like about FIRE is that it takes negative elements in our lives and takes a sanguine philosophy. We could sit around and complain about how much we despise work, or we could actively do something to make our lives better.

Financial Opportunities for Millennials and how to exploit them

Last time out I looked at some of the financial challenges Millennials face. Whilst there are lots of big challenges standing in the way of Millennials; there are also great opportunities. If my last post was sanguine, I hope that this one is optimistic.

Let’s have a look at five opportunities that Millennials can exploit to help them achieve their financial goals.

1. Knowledge

In the space of fewer than three decades, we’ve been able to compile the complete knowledge of human knowledge on the internet. That knowledge is free, easy to access and readily available. With a smartphone, you can access it anywhere in the world, from Siberia to Syndey. It’s remarkable. And an unprecedented point in human history. Like never before, we can avoid so many mistakes and costly lessons. We can learn new skills and take advantage of new opportunities. For those willing to learn and put the brain matter to work, we can learn how to successfully save, invest and plan our future. That’s a huge opportunity.

2. Protection

In my challenges post, I talked about how the Government can’t take all your money anymore (at least in Western Democracies). But more than that, savers and investors are protected like never before. Governments have set up regulatory bodies which actively police against mal-intentions. The days of Robert Maxwell and Equitable Life are long past. That’s not to say we can’t do better. There are still lots of regulatory issues out there: you need only look at the Port Talbot British Steel fiasco. But things are so much better than they were.

For Millennials, it requires us to put some trust and faith in ‘the system’ that is sorely lacking amongst older generations who have been burnt. I’m not imploring blissful ignorance of the shortcomings in the financial sector. A wary trust that investing early in a diversified investment portfolio is the best way to provide for our financial future.

3. Accessibility of financial services

Perhaps even more important than investor protection is the increasing accessibility of financial services. Not long ago investing in the market meant ringing up a stockbroker to place a deal or going to see an adviser in person to buy a product. The internet has washed all that away. It’s easier than ever to set up a brokerage account and get started. You can start investing in the market from only £10 a month.

There is also so much readily available information out there. Sites like Monevator and Candid Money have led the way in making almost every aspect of investing available for the layperson. If you invest in a product you can transparently find information on: exactly how the product works; what the aim of it is; and how much it costs.

Again, things aren’t perfect. Investors deserve greater transparency (thankfully we have some great people on our side such as The Transparency Task Force and the Evidence-Based Investing Conferences). But the days of people being locked out of the market are gone. Anybody can, and should, start investing for the future today.

4. Flexibility of opportunities

A comment on the challenges post beautifully captured this opportunity (thank you Roberto Sans):

Another thing widely available now and near impossible a generation ago was the fantastic geographic mobility that we enjoy today. I you have marketable skills in a country different from your own you can just move and work there for a while but you do not have to lose all contact with your friends and family. You can be in touch by social media, Voip telephony and cheap flights.

Whilst in some respects it is lamentable that the old ‘job for life’ or ‘company man’ has faded into extinction, it’s never been easier to move jobs, careers and countries. Prior to WWI the merchant and aristocracy of the world moved freely around the world picking up the best opportunities. Skilled tradesmen would often be prevented from leaving their own towns and cities.

The horror of WWI and mutual distrust between countries led to the creation of the modern passport, preventing the movement of people and skills. Since that point 100 years ago it has become easier and easier to move to find new opportunities. An example is how I, sitting in London, can communicate to people all over the world (and vice versa).

So for Millennials, the relaxation of physical constraints in where and how they work presents many opportunities. My advice to Millennials would be to look out for those opportunities, and jump at them when you get the chance.

5. People

I’m no Cassandra when it comes to social media, but there is a great aspect to it. Like never before I can talk and listen to a range of viewpoints that were previously unavailable. I can find immediate insight from leading experts in investing, pensions and saving through Twitter. We can keep in contact with people from around the world with social media and VOIP.

Perhaps more than that, I can speak to and learn from my Italian, Malaysian Chinese and Albanian neighbours. I can learn from their cultures and experiences in other countries. What aspects of life are better here (or worse). Or simply thinking about life from a viewpoint other than my own. Because when you work, you’re clients and customers are going to be different to you; and the more open you are to understanding what makes them happy, the easier your job will be.

Over to you

What opportunities do you think are available to Millenials? Do you agree with the opportunities I’ve written about? Or do you think I’m overly optimistic? If you had to give some advice to a Millennial, what would it be?

 

All the best,

Young FI Guy

[p.s. thank you to all those that read and commented on challenges post. I felt quite down about it after struggling to write it and feeling unhappy with the quality of my writing. Thank you all for giving me the encouragement to keep going!]

Financial challenges Millennials face and how to beat them

Last weekend Monevator linked to, and discussed, a Financial Times article on money-saving tips between a Gen X’er and a Millennial. The post got me thinking about the financial challenges facing Millennials. As I mentioned over on Monevator, I think things are financially difficult for Millenials. Unfortunately, however, that conversation then tends to go down one of two lines. Either older generations raise their arms in anger: “don’t you know how difficult it was for me!”. Or younger generations blow their lids and blame their ancestors for all their hardships.

Neither reaction is helpful in dealing with the challenges Millenials face. The reality is, blaming other people won’t make things better. Likewise, dismissing these issues means that we collectively lose out on debating how we can overcome these challenges.

As I’ve talked about before: today the greatest ever time to be alive. But, I think the important thing to remember is not that life today is not more or less difficult than before; life is different. Hardships that our parents and grandparents would suffer have evaporated away. Only to be replaced by new challenges. That means that some things that worked in the past are no longer quite as effective. We need to update the tools we use to build our financial future.

So today I’m going to look at some challenges for Millenials and they can go about making the best out of them. Now do bear in mind this isn’t exhaustive. Society is, as always, rapidly changing. I couldn’t write about every change and hope to not put you all to sleep. So there are things, that you may rightly think are missing. That’s not to say I don’t think they aren’t important. But, I’ve looked to write about some changes that are perhaps less talked about or to discuss them in a less-conventional light.

The challenges

1. The death of the DB pension

Very few Millenials have the benefit of a Defined Benefit (DB) pension. Most DB schemes have been shuttered over the past 20-30 years. Replaced by a combination of employment and private Defined Contribution (DC) pensions.

The reality is, DB schemes are generally speaking much more generous than their DC counterparts. But for me, there is an even more important element in the transition from DB to DC that is overlooked. That is, in DB schemes, people were in effect outsourcing their investment and retirement planning – the pension scheme did it all for them. It was entirely possible for a steelworker to never think about saving and investing and still be sure that they would have a financially secure retirement.

With DC pensions that is not the case. It is incumbent on everyone – from Wall Street bankers through to street sweepers – to actively engage in managing their investments. Do I think that is sensible? No, it’s bloody stupid. But that is the world we are in now. That means, every Millennial should know exactly how much is going into the pension, how it’s being invested, where it’s being invested and what that means for their retirement. It means, working out if you need to be putting away more money and how that savings pot can be converted into a future income.

Once upon a time, it was fine (though highly discouraged) to have a laugh about not being ‘good with finances’. Now you cannot afford to not be ‘good with finances’.

2. The importance of capital

Capital has always been important. If you could summarise Thomas Piketty’s famous tome (with the shocking title) Capital in the Twenty-First Century in one sentence it might be: having lots of money makes it easier to have lots of money. In a way, that’s a universal truth. But we don’t have to go far back in time to when Western Governments (or autocrats) could expropriate your assets at will. Likewise, expropriation is a real threat to billions of people even today.

We needn’t travel very far to a time when many governments would pursue inflationary policies that could quickly wipe away the value of large stash of cash. Today, most modern economies have independent central banks that explicitly target managed inflation. Together, these two things mean that a pot of capital today is the more secure than at any other point in human history (although, we can never be sure that a catastrophic event is around the corner to wake us from our bliss). It also means that those who have capital now can rapidly accumulate more of it than ever.

Is that a good thing? That’ll depend on how you feel about inequality, capitalism, socialism and politics. But it’s a fact of life. So what can you do about it? Ironically, we can learn a lot from the poorest people in the world.

If you go to many ‘developing countries’ (I don’t like that phrase, but that’s for another day) you’ll often find half-built houses. The reason is not that they are too lazy to finish their homes. It’s that bricks are like a bank account. When they’ve saved enough, they buy a brick and add it to their home. They do this because a house can’t be stolen by the government or criminals nor inflated away by a dictator.

Millenials need to adopt this brick-by-brick strategy. Each month we need to squirrel away want we can. Instead of bricks, we stick the money in a brokerage account and buy a cheap global investment tracker fund. It might only be a brick at first. But one day it might become a course each month. Then maybe even a wall. Step-by-step we build our financial future. But until we start, we can never hope to finish.

3. Student loans

There’s not much debate about it: the cost of going to university has rocketed. Since I left uni nearly a decade ago, the cost has more than doubled. Graduates are left with over £50,000 of student loans (and it can be even more in the US). I’ll avoid the debate on tuition fees (at least for now). For those thinking about going to university, or for parents with children thinking about going to university, I would really encourage thinking carefully about whether it is the right thing. The math has changed. It used to be that going to uni was a ‘no-brainer’. But the equation has changed.

Firstly, student loans are an immense drag on finances. This is exasperated by being at the worst possible time (as we saw in point 2, getting capital as soon as possible is very important).

In the UK, graduates get 9% added to their marginal tax rate. It might not seem much, but it is a large amount of money to lose every month (even at the UK average, that’s 1% of earnings, and as a graduate, I’m sure you’d hope to earn more than average). If you earn less than £60,000(!) you won’t even be repaying the principal (on a debt of £50,000 under plan 2). Sure, you will have your ‘debt’ wiped after 30 years, but that is 30 years of having somewhere between 1% and 6% knocked off your savings rate. That is, putting it mildly, going to really set you back in building a savings pot.

Secondly, it is possible to pursue a number of professions without needing a university education. Taking my profession as an example (accountancy), many firms now offer school leaver programs (including one of my old employers) as well as there is a number of professional qualification paths that don’t need a £50,000 trip to a red brick. If I had one bit of career advice, it is to get a profession. Be that as a doctor, engineer, lawyer, accountant, carpenter, architect, plumber, programmer, surveyor. Most professions don’t need you to be academically minded; many don’t need a degree.

Put those two things together: uni is more expensive and it’s possible to go down your chosen career path without going to uni; it means it’s not necessarily a straight-forward choice. Going to university is still the right call for a lot of people. But it might not be for a growing part of society.

4. Winner takes all

I may be talking total nonsense, but I perceive a growing ‘winner takes all’ mentality in society. We see it in the intractable attitude of either ‘side’ in the Brexit debate or in discussing Donald Trump. One side is the winner – one is the loser. The loser needs to shut up and like it or lump it. The winner is entitled to ignore the losers grumblings.

It’s infected our workplaces – you win the rat race or you are a career failure. The days of plodding along as Joe Average are dwindling.

Of course, that’s, in many respects, a bit of hyperbole. But as sure as some days we are winners, we will be losers. We learn in both winning and losing. Listening to and learning from others is a massively under-appreciated. Just speaking from personal experience, I’ve learnt a great deal from starting this blog. Particularly, where readers have picked up on things I’ve got wrong or overlooked. It’s not really even about being right or wrong, or winning and losing. It’s about a mindset of being open to being wrong or failing. And what is more “If you can meet with Triumph and Disaster; And treat those two impostors just the same” you’ll be a man (or woman).

Over to you

What do you think are the biggest financial challenges facing Millenials? Do you agree with the challenges I’ve written about? Or do you think I’m talking utter b*llocks?

 

All the best,

Young FI Guy

[p.s. I would say that this to be the most difficult post to write so far on the blog. The idea started with 5 challenges and 5 opportunities. But it became clear that would be too long, so I thought I’d save the opportunities for another day. I then got really bogged down. I couldn’t even finish my ‘5th challenge’ on housing costs; I felt like I was just writing the standard tropes. Maybe I’ll revisit that particular issue in another post. I think the advice I’m setting out is still helpful – although maybe it’s a bit cliche and a bit abstract. Maybe the issue with this post is that there isn’t a clear message or theme. I know you’re probably “not meant to say this” but sorry if you read this post and think it’s sh*t.]

p2p lending: A review of the market

Despite being only a decade old, peer-to-peer lending (p2p) appears ubiquitous; particularly in the FIRE community. In six years, UK p2p lending has grown from a £200m market to an estimated £7.5bn one in 2018.

With interest rates and the returns on conventional cash investments still below inflation, p2p is an attractive alternative to traditional cash savings.

Since 2016 investors can hold p2p investments in the Innovative Finance ISA (IFISA), offering a further enticement to cash-weary investors.

Today, I’m going to have a look at the UK p2p market. Personally, I don’t have any p2p investments; it’s never something that has felt like it’d work for me. So I won’t be talking about it from a practical experience. If you have dipped your feet (or plunged right in) with p2p lending, do share your experiences in the comments!

History of p2p in the UK

The first p2p lender in the UK was Zopa. Starting up in 2005. Since those heady days, Zopa has been joined by over 80 firms (as well as some others that have been unsuccessful).

In 2014, recognising the rapid growth in the p2p market, George Osborne (then Chancellor) announced that p2p investments would qualify for being held in an Individual Savings Account (ISA). Offering p2p investors the chance to squirrel away their investments in a tax-efficient wrapper.

It took some time for the Innovative Finance ISA (IFISA) to get set up. It wasn’t until April 2016 that IFISAs finally launched. Even then, few platforms offered IFISAs due to regulatory hurdles.

The personal interest allowance also kicked in on 6 April 2016. Basic rate taxpayers could receive £1,000 interest tax-free and higher rate taxpayers up to £500. Somewhat reducing the desirability of putting p2p investments in an ISA wrapper.

But those setbacks haven’t stemmed the flow into p2p investments. Platforms are still struggling to match supply and demand; many platforms still do not offer IFISAs. Only 2,000 IFISA accounts were opened in the 2016/17 tax year, compared to 2.6m stocks and shares ISA subscriptions and 11.7m cash ISA subscriptions.

The market

As mentioned above, there has been rapid growth in both lending volume and the number of platforms. Lending volumes topped £5bn last year; and with a more than four-fold increase in the number of platforms.

Source: Chartered Institute of Securities and Investment (CISI)

Overall, the market is dominated by four big players – Zopa, Funding Circle, RateSetter, MarketInvoice. Together they control over 60% of the total market. Each are market leaders in their own segment.

Zopa is the leading consumer-to-consumer (c2c) platform and has an almost 50% market share in the segment. Funding Circle is the leading lender to SME businesses; last year lending out more than the traditional high street banks. RateSetter distinguishes itself by offers property and asset-backed loans. Finally, MarketInvoice is one of the market-leaders in the rapidly growing invoice-financing sector.

Regulatory authorisation by the FCA has held back the number of IFISA platforms. But over the tail-end of 2017 and the first half of 2018, authorisations have picked up. About 60 platforms are now fully authorised, and over 40 of those are registered with HMRC.

As an investment

The first big thing to remember about p2p investing is that, unlike traditional bank deposits, it’s outside the Financial Services Compensation Scheme (FSCS). That very much means capital is at risk.

p2p investors are open to both default risk (the borrowers default on money lent) and counterparty risk (the platform itself defaults). Also, whilst not specific to p2p lending, there is an element of fraud risk. With some high-profile troubles at US lenders and in other countries.

An issue that personally troubles me (harking back to my days as a forensic accountant) are legal and operational risks. Where the legal ownership of assets or funds is unclear due to poor record keeping; fraud; or operational oversights.

One of the selling-points for p2p lending is that returns are thought to be un-correlated with equity returns. This makes the investments particularly appealing for diversification purposes. One caveat to that is that: “When the $h!t hits the fan all correlations go to one!” (thank you to Karsten at Early Retirement Now for that saying).

However, p2p lending offers the possibility of significantly higher returns than both cash deposits and equity returns. Returns of up to 15% are not unheard of. The variability of returns makes appraising an expected return challenging. A number of FIRE bloggers have been carefully documenting their returns over the years (among others, Retirement Investing Today with RateSetter and FoxyMonkey with a number of platforms).

One particular criticism is that p2p investors are enticed to invest by the promise of an unrealistically high rate of return. At the moment, we have only a short period over which to assess return claims and have yet to (arguably) go through a full market cycle. This is an area that the FCA are keeping a particularly keen eye on.

Comparison of platforms

As mentioned above, I don’t have any p2p investments so I’m always on the lookout for platform comparisons. The CISI recently published an excellent (and comprehensive) platform comparison table which I share below:

p2p uk platform comparison

Source: CISI

Factors to consider

As there is such a wide diversity of p2p platforms it is difficult to compare p2p lending as an investment versus other asset classes. With that in mind, investors will need to compare different platforms and products to find ones that are suitable for them.

Some of the factors that investors should consider when investing in p2p lending are:

  • Cost: What charges does the platform explicitly AND implicitly levy on investors?
  • Robustness of provider: Whilst incredibly difficult to evaluate, it is worth thinking about who are the backers behind the platform?; Is the platform turning a profit (or making huge losses)?; How long a track record does the platform have?; What authorisations, controls and processes does the platform have?
  • No. of lenders / no. of borrowers: Are there large numbers of diversified lenders and borrowers? What is supply/demand like on the platform? Is there an abundance of lenders and little demand?
  • Diversification and risk-selection: Are loans diversified across a number of borrowers (type, size, sector)? Is it possible to specify what types of loans can be made and to whom?
  • Liquidity: How easy is it to get money out of the platform? Does the platform make it difficult to get money out? Can loans be encashed early and at what cost? Is there a secondary market for loans?
  • Default: What is the rate of default? (And perhaps more importantly) How is that rate calculated? How does the platform account for and deal with defaults?

Why I don’t invest in p2p

There are three main reasons I don’t invest in p2p (do let me know if there are holes in my thinking):

  1. Unlike my cash deposits, capital is at risk. In that sense, I’d lump it with my bond and equities investments and not my cash holdings. And given that, I’m quite reluctant to sell those investments to put it into p2p.
  2. The lack of correlation to other assets is enticing, but one of the first rules of finance I learned was that in market shocks the correlation of assets tends towards 1. We don’t know yet if this will also apply to p2p, so for now, the correlation stats have an asterisk next to them.
  3. The market is still quite young; there are lots of players out there – it feels like too many. I’d expect there to be some consolidation and some platforms going out of business. Trying to work out which platforms will be the winner seems like too much effort to me – in my ‘too hard pile’. I like my investing to be easy and lazy!

So for now, I’m sitting on the sidelines as a curious spectator.

Closing thoughts

It’s still early days in the p2p market, but it’s clear that p2p lending is here to stay. The big players and early movers are now establishing a track record. With overall rates of return and default becoming easier to gauge.

However, it’s not all been plain-sailing. With several high-profile problems at some platforms as well as some going out of business. Further, some platforms don’t seem to be sustainable in long-run, racking up huge losses.

p2p investing offers the potential to make higher rates of return than cash deposits and equity investments at apparently low levels of correlation to other assets. But in market crises asset returns tend to all move together, and p2p investing has yet to sail through truly choppy waters.

 

Please post a comment if you are (or were) a p2p investor. I’d be interested to know your experiences – both good and bad.

[Disclaimer: none of this post should be construed as a recommendation to invest in a particular investment or with a particular platform. This post is for information purposes only. Please do your own research, and speak to an FCA authorised investment adviser if necessary. I won’t take any liability for any decisions you make off the back of this post.]

All the best,

Young FI Guy

[p.s. I’ve just realised Monevator updated his RateSetter post whilst I was on holiday – http://monevator.com/ratesetter-high-interest-offer/]

An interview with David at Let’s Automate Your Money

A lovely chap called David got in touch with me to ask me some money questions. David runs a site called Let’s Automate Your Money (https://letsautomateyourmoney.com/).

I was honoured to be asked for my thoughts. Especially considering his previous interviewees include some FIRE community big-hitters such as J. Money and Making Sense of Cents.

In writing up my responses to David’s questions I read all the other interviews he’s done. There were two common themes that jumped out for me (and I wrote about in my interview). Those are:

  • Start today (investing, learning, doing what you want)
  • Take full advantage of opportunities that come your way

Those are big themes of this blog too. I’m where I am today because of some big dollops of luck which I was able to take advantage of. I firmly believe that everyone has an edge in something (or can learn or develop that edge). If you’re reading this, I’d really encourage you to think about what edges you have and how you can exploit them to reach your financial and life goals.

You can read the full interview here: https://letsautomateyourmoney.com/blog/interview-with-youngfiguy

You can read the great insights from other interviewees here: https://letsautomateyourmoney.com/blog/?category=INTERVIEW+SERIES

 

All the best,

Young FI Guy