In the beginning...
About 2 weeks ago some of the students on my university discord (I'm a mature student studying for an MSc) were talking about stocks and shares. I had to admit that despite being twice their age they knew far more about it than me. They were 18-19 and already planning for their future retirement!
I'm 38, married with two kids. I'm disabled and self-employed (I loathe the idea of living off benefits) but my income is modest, to say the least. I'm not prepared for retirement and that scares me...
So we study...
I'm the type of person that hears about something and has to become an overnight expert - consuming videos, books, articles, everything... So I started watching a few videos about investing which led to some book recommendations and soon I was amassing a virtual library of literature from the likes of Dave Ramsey and Warren Buffet.
I came across the F.I.R.E concept - Financial Independence, Retire Early. These are two concepts rolled into one. The first, financial independence, means not relying on anyone else for my income. Being self-employed puts me halfway there - no-one can fire me or make me redundant, but it's more than that, it's having a stable income, an income that produces even when you do nothing... Stop working for money and make money work for you!
Right now that's all I can focus on because retiring early at thing point is just a dream and relies on getting the finances in order first. But how do you make money doing nothing?
Passive vs Active Income
Active income is trading your time and efforts for money. The rate of return can vary depending on demand and your skill level but there's always one limiting factor - there are only so many hours in the day.
Passive income flips this on its head and generates an income stream without any effort, it all ticks away in the background. The most common example of this would be interest earned on savings. Right now the interest rate is terrible and most standard accounts won't even pay interest but savings accounts can earn you around 1-2% annually. For every £100 you have in your account, the bank will give you £1-2 each year, and this compounds so next year you'll earn interest on your interest.
But interest rates barely match the rate of inflation (the increasing cost of everyday items) so over the long term you're not earning, you're just not losing. For a better rate of return, you have to take on a little more risk.
Enough educating...
So each time I make a post about this I'll give an update on our situation, he wins and the loses, the challenges and the victories alongside some new learnings on the subject. So let's get onto our situation right now...
We started taking budgeting and saving seriously about 2 weeks ago. In that time we've set up a monthly budget for rent, food, utilities etc along with itemising our debts and setting out a plan.
The last day of each month is now known as "Waterfall Day" as we go through all of our accounts and pass the excess down the chain, keeping 1 month's expenses in each account as we go.
Both my wife and I are self-employed and work from home. Scarlet makes glass memorial artwork (embedding cremation ashes into glass pendants and marbles) and produces a range of glass bar-ware (straws, stirrers, etc) which she sells via Etsy, eBay and Amazon. I run a web development business, focusing on high-complexity projects along with offering hosting and general IT support.
Both of our business accounts keep £300 at the end of the month and pass the rest down the chain to our joint account. The joint account pays all the household bills and we keep £500 in there at the end of the month. To ensure that the joint account is used ONLY for bills we each hold private accounts and we take £20 each per week for our own personal "spends". It's not a lot, but we're living on a low income here...
The overflow from the joint account first goes to the Emergency Fund, a savings account setup to hold, right now £1000. Anything beyond £1000 goes to the stocks and shares account...
But what about those debts?
Well, that gets a little complicated. We have a little under £30k in debts but let's break them down to explain more clearly.
£16'000 BSc Student Loan - 1.75% interest rate
£10'000 MSc Student Loan - 4.75% interest rate
£1'000 Utility bill - 0% interest rate
£700 loan from parents - 0% interest
The loan from my parents is the one I'm most obsessed with, mostly because they refuse to take any money from us and want us to treat it like a gift. We've tried sending the money and it gets sent straight back. The compromise we came to was that we would put it into savings and I've made them promise to tell me if they ever need it. We'll add this to the size of the Emergency Fund.
The utility bill is an odd one, it's over 15 years old, the company won't take anything beyond the monthly direct debit for our current usage and we're not paying interest on it. So, much as I'd love to clear it, it's not hurting us currently.
The student loans, well, when I hit 65 they both disappear. Until my earnings go over something like £12k per year I don't pay anything back on them and even then it's only 9% of the amount above £12k. Given my disability and despite my aptitude (I'm studying for the MSc right now and smashing it) I don't see me turning it into a high paying career. I'm not able to reliably work a 9-5 which is why being self employed suits me so well. We spent a week going back and forth over what to do about them, to pay them off or to ignore them (there really is no middle ground) and in the end, we're just going to ignore them. In the UK student debt doesn't count against your credit rating, when I hit 65 they get wiped out and if I die before then they also get wiped out (so my family won't inherit my debt).
So onto some figures...
As of the 30th November we have as follows:
Wife's Business - £300 / £300
My Business - £300 / £300
Joint Account - £500 / £500
Emergency Fund - £850 / £1'700
Stocks and Shares - £209 / ~
We managed to put £850 into the Emergency Fund in one month and frankly our budgeting was terrible! We've set new rules so that nothing comes from the Joint Account without both agreeing first, anything else we buy with our own "pocket money" accounts and claim back. I didn't list the pocket money accounts as that's for us to still enjoy life, little treats and save up for something personal.
But why do you have shares when the Emergency Fund isn't full?
Okay, I got impatient and that £200 came from my pocket money. In the UK we're in lockdown, I'm in the at-risk category so other than doctor and hospital visits I've barely left the house since March. I had some spare cash and wanted to play!
This post is rapidly turning into a wall of text so I'll end it here and probably post again next week about our progress and what shares we have (the astute amongst you will have noticed they have already gone up in value by £9, in fact £13 as of today...)
So, until next time - do YOU have a saving plan in place? are you debt free? Do you have any advice?