2019-12-02 The M Word (Non-testing)

Today I will be writing about something other than software testing or related activities, and instead on something I’ve been getting more interested in, and that thing is….

Money

Everyone who reads this has it, uses it, and earns it. And yet people don’t like talking about their money.

I would like to write about how over the last few years, I decided to become more financially literate, and what you can do yourself.

DISCLAIMER

Before I go any further, I want to make two things clear.

  1. This is not formal advice, merely opinion, suggestion, guidance, and my own research. If you need formal money advice, pay for a Financial Advisor (though unless you have £50k+, you’re better researching online like me).
  2. Much of what I will mention has a UK bias to it, as that is where I live, and so I don’t know how different it will be in other countries.

Before I got into testing, I worked minimum wage in retail, shifted into an admin role paying £12000 (£6.59 p/h) 10 years ago.

Then I got into testing, starting at £20000 (£11 p/h) 8 years ago, steadily making my way to my current salary of £36,000 (£19.78).

Earning more money is great, but it is also extremely easy to find ways to spend it, rather than save the bulk of the extra.

I put my money into a cash ISA, as that’s the only way to save, right?

Except it isn’t, and the more people talk about the different options and de-mystify them, the better.

So here goes my attempt at making it all a little clearer.

For me, there are three time periods to be looking at when savings.

  1. Short term (up to 5 years) – Holiday, wedding, near-term house deposit
  1. Mid to long term (over 5 years) – Early retirement, big holiday such as 40th birthday
  1. Retirement

Short Term

For the short term, you want cash. Why? It’s not volatile, as the last thing you need is to invest your money in the stock market, only for it to crash and your overall money be reduced.

The downside with cash is that it grows poorly. If the interest rate on your savings is lower than inflation (1.9% at the time of writing), it steadily becomes LESS valuable.

Mid to long term

For the mid to long term, you want to invest in the stock market rather than cash. It’s the inverse of the short term, as if there are any dips in the stock market, time will allow it to recover (and historically has).

But if you want to invest in the stock market, where do you start, and how do you go about it?

Thankfully it can all be done online, and you want a Stocks & Shares ISA, as all the gains are tax-free.

As for what to invest in, a highly recommend option during my research is a passive, index-linked fund.

Now, that’s lots of different words which may not make sense. I know they didn’t to me when I started my journey to become more financially literate.

  • Funds – Rather than buying shares in a single company, which can go up or down (putting all our eggs in one basket), it’s a collection of hundreds or even thousands of companies together. By using a fund, it spreads out the risk so that if anything happens to a single company, you don’t lose all of your money. And if all the companies grow, even if only by 1%, it all builds up.
  • Passive – Funds can be passive or active, and the difference between them is if there is a fund manager deciding what companies to buy and when. By being passive, there is no overhead of a manager doing this, making the fee to use the fund is significantly lower, meaning you keep more of your money.
  • Index linked – Combining with passive, to decide with what companies to invest in, they mimic something else, such as the FTSE 100. So if a fund is copying the FTSE100, and a company represents 5% of the FTSE 100, the fund will allocate 5% of itself to that company. With this, it helps to copy the stock market, rather than trying to 

Retirement

For retirement, the most common way to do this is with a pension. Pensions can be seen as extremely confusing, as there are different types, and lots of terminology around them.

Final salary?
Defined benefit?
Defined contribution?
SIPP?
Salary sacrifice?

Additionally, it can be easy to question why save money now, when you won’t be able to access it when you are 55 (57 from 2028), and can be 30+ years for some people, when that money can help them now?

Or the attitude of “I might die by then”, to which I would say “What if you don’t?”.

If you are employed by a company, at least 22 years old, and earn more than £10,000, you will be automatically enrolled in a workplace pension. And I would encourage you to stick with it.

Why?

FREE MONEY

That’s right. By paying into a workplace pension, you get more money paid into it than you spent.

How? With these two ways:

  1. Tax Relief – When you pay into your pension, the tax you paid to earn that money is given back. For you to pay £100 into a pension, as a basic rate tax payer, it costs you £80, and the treasury tops it up with £20. If you’re a higher rate taxpayer, you pay £60, and the treasury tops it up with £40, to get it to £100.

Depending on your company, they may automatically do this for you when you get paid.

Why do they do this? Partly it’s because they class it as deferring the tax, as you will be taxed when you claim it back later. But also it incentivises you to pay into your pension, so the pension company grows, hire more staff, who then pay income tax, buy things with tax on them, and so on.

  1. Employer matching – Between you and your employer, a minimum of 8% must be contributed, with the employer paying 3%, and you paying 5% (technically 4% and 1% tax relief). However, your employer may have a better matching scheme (Mine is 5% for both me and them, but option to overpay up to 10% that they match).

This means when you pay in, your employer pays in too.

For example, you have a salary of £30,000, you pay 5% and they pay 3%.

Each month you pay £125 (technically £100 and then £25 tax relief), and then your employer pays £75.

So you spend £100, the treasury adds £25, and your employer adds £75, for a total of £200 that only cost you £100.

Doubling your money, on the condition you have to wait for it. Not a bad deal, as I don’t know of any account that gives 100% return each time you pay into it.

Now, you may work in the NHS or elsewhere in the public sector, and it’s different for them. Instead, you pay in, and you are building up a proportion of your average salary (in the case of the NHS).

As it’s not something I have personal experience with, and imagine it is less common for those of you who read this than a workplace pension, I won’t go into further detail.

With your workplace pension, it can behave very much like shares, where you have a range of funds to invest in, or you may be restricted to picking a risk category and can’t choose your finds directly. If you can, I would stick with a passive index fund for the same reason I would with a Stocks & Shares ISA, to keep your costs down whilst growing your money.

Hopefully this has helped you to not only think about investing in your future, but how you can go about it.

Links

There are many sites, books and podcasts that I have used to help me build up my knowledge, and I would encourage you to use them too.

https://www.reddit.com/r/UKPersonalFinance/ – A large spread of information can be found here, with lots of discussions, and a very helpful flowchart to get thinking about how to use your money in the best way

https://meaningfulmoney.tv/ – A great podcast, which is also recorded and available to watch if your prefer. UK focused, and has themed seasons as well as guest speakers.

https://monevator.com/ – Great UK based site around investing, encouraging passive funds, how to invest money, but also talks about earning money and property.

RESET: How to Restart Your Life and Get F.U. Money – Available on kindle and physical format, it has given me good ideas for how to look at reviewing my spending, building up my money, but also mental improvements too.

If you have recommendations you would like to give, please add them below in the comments. 

Feel free to message me directly if you would like to share my opinions and get ideas from me (not advice, remember my legal disclaimer), and leave a comment if you found this useful and would like more of this.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s