500,000 is a very big number. So big, in fact, that I am going to conveniently usher it to one side for the time being so that I can talk to you about money and my history with money.
It is decidedly un-British to talk about money; I feel squeamish at the thought of writing about it. I can not write this blog without writing about my finances in detail though because I can not achieve my Primary Aim without money. It is fundamental to my success.
You might feel squeamish or intrigued reading, I don’t know.
I became financially independent when I left university 8 years ago. I started off in September 2001 with about £5,000 of student loan debts, £2,500 credit card debt, and a £1,500 overdraft.
I don’t have the exact figures to hand but my first graduate job as a software engineer paid an annual salary of about £17,500. The figures below show my approximate gross salary earnings (accounting for mid-year salary reviews, et cetera) each year since.
2001-02 (£17,500)
2002-03 (£21,000)
2003-04 (£24,500)
2004-05 (£26,500)
2005-06 (£28,500)
2006-07 (£43,000)
2007-08 (£58,000)
2008-09 (£78,000)
So, I was worth minus £9,000 in September 2001. How much am I worth now? Go on, take a guess. £30,000? £40,000? £50,000?.
How about if I said £26,000? That sounds okay, doesn’t it? It’s perhaps a bit on the low side, but not too bad. Okay, now what if I said that figure includes a total parental contribution of £27,000 (comprising £2,000 in 2004 after I got back from travelling in South America, and £25,000 when Amy and I got married this year)?
Hmmm, so that means that without the parental contribution, I would be worth (go on, you can do the sum in your head) minus £1,000.
I have earned a shade under £300,000 over the last 8 years and I am worth minus £1,000.
Oh, dear.
The funny thing is that I don’t remember the casinos, the champagne, and the fast cars. I don’t remember eating caviar from the Geisha’s belly button or snorting cocaine like it was Sherbet dab. I lived in shared accommodation, ate average food, and drove a 1.4 litre Renault Clio.
How did I spend that much money? The answer is simple. I never set any money aside, so it just seeped away. When I left university, I was fed up of being a poor student. I wanted to have nice things, I wanted to be comfortable and I knew that my salary was going to increase anyway so I decided that paying off my credit card could wait. Why should I suffer now?
It was a delusion. The sad truth is that every time I got a raise, I used it to improve my standard of living. I got a slightly better car, or moved into slightly better accommodation. I never tackled the debt.
It is only within the last two years that I have started to learn about money management and it is only within the last six months that I have started to actually understand it. I originally read a book called The Rules of Wealth by Richard Templar which ultimately led me to my first fundamental insight.
Money management is primarily an emotional discipline, not an intellectual discipline.
That might sound obvious but it has taken me until the age of 30 to work it out. (I want to share this with you in case you are also struggling to understand why you are worth so little financially even though you have worked in a respectable job for the majority of your adult life.)
I realised that I had lots of positive associations with spending and lots of negative associations with saving. What did I do to reverse those associations? I decided to look back over the last 8 years and run a simulation. When I read The Richest Man in Babylon by George S. Clason, it recommended that you should aim to live on 70% of your income, use 20% to pay your debts (if you have any), and put the remainder into retirement savings.
I ran that simulation from 2001-2009 and assumed that any money I saved went into a basic savings account that earned interest at an annual rate of 0.5% above the Bank of England base rate.
How much do you think I would be worth now if I had followed those rules? (I’ll tell you next time.)
Subscribe to:
Post Comments (Atom)
Posts
I think you'd have saved at least a squillion, maybe two...
ReplyDeleteFor serious saving towards a goal, I usually just set up a standing order into a savings account and treat it like the other bills - it's untouchable once it's gone. I literally mentally treat it as gone, don't include it in any of my financial calculations about whether something is affordable - if I would have to dip into the savings, then it's not affordable.
If you do this at 10% of your earnings, you quickly save 1000's, but not hundreds of thousands...
I find the whole retirement savings and pension issue very tricky. I have two pensions from previous 'proper' jobs which suggest (at current calculations) that I will be living on somewhere around £3207 per annum from the age of 65. This is going to be a serious blow to my current lifestyle (which, while not luxurious, is very comfortable). However, I haven't contributed to a pension since 2001 and am totally disinclined to start doing so given (1) the unpredictability of what happens to the money I stash away, and (2) the fact that its growth is entirely under someone else's control. So, I'm looking at other options. The times they are a-changing...
ReplyDeleteA lot of what I have read suggests that the performance of managed pension funds is crippled by the fees taken by the management company. I am a big fan of Robert Kiyosaki (author of Rich Dad, Poor Dad) and he speaks quite disparagingly about 401K funds (the American equivalent of private pensions) and urges a more proactive approach to investing for retirement.
ReplyDeleteI have not decided what I will do about pensions at the moment. However, I have committed to saving 10% of everything I earn until retirement (and that means that money I put in this month, next month, next year, et cetera will not be touched at all until I retire). I will talk about that in a bit more detail in a later chapter, though.