Excuse me…I don’t want to alarm anyone…but this is an emergency

EMERGENCY_SERVICES

Do you see what I did there?

I’m not going to soft soap this week’s message, which is that:

Getting your financial shit together is an emergency.

Generally, I don’t like the alarmism of the news media who grab our attention by revelling in reporting the latest miseries from all around the world…most of which we don’t need to know.

The Escape Artist generally likes his blogposts calm, with no SHOUTING.  He likes chilling with some tropical house or windchimes in the background…as zen as fuck.

But today is an exception…because this personal finance stuff is an EMERGENCY…not for the earthquake victims of some far away country but FOR YOU. RIGHT HERE, RIGHT NOW.

The Escape Artist has come to realise that, when it comes to money, most people out there are doing it all wrong. I thought that after I’d single-handedly solved the Pensions Crisis shared the story of Kate, everyone would get that this stuff is time critical.  I imagined a world where everyone had their pension sorted, no one left angry comments on the internet and we could all go to the pub.

After all, the maths are compelling.  You save £15,000 by the age of 25 which, with a Vanguard tracker fund and a bit of luck, could turn into over £1,000,000 by the time you’re 65. That’s right: you get to be a millionaire without saving another penny after the age of 25.

True, inflation means that £1,000,000 won’t buy as much then but still…not too shabby.  Pensions crisis? What pensions crisis?

But what happens if at the age of 18 you are too…errr…busy being young and you delay 5 years…only getting started at age 23? Well now you no longer have £1,000,000 at 65….you will only have £644,050.  Better than nothing…but quite a difference.

Now what happens if you delay 10 years and only get started at 28? Well now instead of £1,000,000 you will have £399,904 at 65.  No need to eat cat food but again…quite a difference.

This DOES NOT mean that you give up if you are 28 or over and have not been going for a decade or so.  You can still reach financial independence.  It just means that compound interest is going to do less of the heavy lifting for you.  Its now gonna be more down to your savings rate.

Which should you be doing: saving hard or investing early? BOTH!! This is not an either / or choice. Whatever your current situation, you can always improve it.  But it has been drawn to the attention of The Escape Artist that a number of people have been flagrantly disregarding my earlier article on procrastination and not getting their shit together.

We are going to have to consider the possibility that The Escape Artist was being too subtle. So for those of you that are still pfaffing around and haven’t yet set up your compounding machine, here is the first rule of wealth building:

IF YOU SNOOZE, YOU LOSE.

What is a compounding machine?  A compounding machine harnesses the awesome power of compound interest to make you rich.  Compund interest is the interest earned on interest. So if you invest £10,000 and get 10% a year return, in year 1 you make £1,000, in year 2 you make £1,100 and in year 40 you make £41,100.  That’s real money. The snowball rolls down the slope getting bigger and bigger on its own….without you pushing it.

A compounding machine can be powered by Vanguard tracker funds or it can be powered by Buy To Let properties or it can be powered by your own business. After you have your compounding machine set up properly, then if you snooze…YOU WIN!  Whilst you sleep, your compounding machine is working for you 24 / 7 / 365.

When you invest in a global tracker fund you own slices of the leading businesses in the world.  The Man is now working for you.  All those CEOs, middle managers and workers, turning up every day to factories, offices and warehouses around the world are working so that their companies can pay you a share of their profits.  You don’t even have to watch over them – you have people to do that for you.

The capitalist system is the most productive and the least unfair that we’ve ever been able to devise.  Unfortunately, most people choose to squander their money buying shit rather than own enough of the system to achieve freedom.

Sadly, when you are in debt your compounding machine is stuck in reverse gear. Your net worth is going backwards.   Think of this like being in a black cab with the meter running when you’re stuck in London traffic.  You’re going nowhere fast but you’re getting poorer with each passing minute (Pro tip: get out and walk). So yes, if you are in consumer debt, this is an emergency.

Whilst I’m here, I should remind people of the appropriate protocol to follow in an emergency:

clownDuring an emergency, you do not buy expensive avocado toast.  You do not fly to Ibiza for a mosh-up.  Nor do you drive your clown transporter 4×4 to a designer outlet centre to purchase soft furnishings, plastic flowers that squirt water or more red and white shoes.

You do not go to a Food Emporium where servants in dinner jackets bring you food on silver plates.  You do not get your cocktails from Mahiki or your food from Harrods or Waitrose.  Nor do you get any additional tattoos or body piercings done.

No, during an emergency period you work and you make bank and, if necessary, live like a monk (sex is allowed) until your debt has been paid off and your compounding machine is up and running.

Now, we all have blind spots.  Many procrastinators don’t even know they’re doing it. So here’s a quick quiz to help you see whether you are a FI Ninja or a Clown Prince of Procrastination.

1. How much debt are you in?

A) None, fuck you very much 🙂

B) Only a mortgage. No credit card or hire purchase debt. Refinanced the mortgage last year so have a very low rate and can repay without penalty.

C) No idea, I’d need to ask my personal account manager at Payday Loans R Us…

2.What are your pension arrangements?

A) I’m sorted…I’m picking up the free money on the pavement. I put enough in to max out my employer matching contributions. The government adds more free money. Got me a Vanguard global equity index tracker. Costs less than 0.3% per year. Boom!

B) Errr….I think I got a letter about that from HR when I moved job a few years ago…I really must get around to looking at that…

C) What’s a pension?

3. How much does your financial adviser charge you?

A) Ha-ha!!…Financial adviser?!? As if!

B) Not sure to be honest…I read your post on Is Your Financial Adviser Screwing You? but I’ve been…errr…really busy at work or something

C) I’ve no idea…he seems really nice though. He’s got a tie and everything. And he tells me his fees are more than covered by the extra performance I’ll be getting from all my expensive, actively managed funds

Mostly A) s:  Congratulations!

Mostly B) s:  You might wanna work on that…

Mostly C) s:  Oh dear.

This blog is read by smart people. The problem is that smart people can actually be more prone to procrastination.  Smart people often fall into the traps of intellectualising and perfectionism.

Intellectualising

Yes, investing can be fascinating. Yes there are lots of interesting ideas, debates and fancy concepts. What are the correlations of your different asset classes? Does combining momentum with valuation enhance alpha? Does a Smart Beta strategy lead to better orgasms? blah-blah-blah…

The Escape Artist says: Keep it simple and get on with it.

Perfectionism

What’s the perfect fund for you? Wrong question!  This is not getting married. You’re not looking to connect 2 souls in everlasting harmony here…you’re looking to get started.

The Escape Artist says: Just get on with it.

Remember: procrastination is for clowns.  In the immortal words of Eminem:

Let’s get down to business
I don’t got no time to play around, what is this?
Must be a circus in town
Let’s shut this shit down


Further reading:

  1. Procrastination vs Just Doing It
  2. Financial Coaching 

11 comments

  1. sorabshroff · · Reply

    Loved this post – clearly explained all the key aspects of compounding and saving. Can’t be emphasised enough.

    I used to read the Motley Fool in the late-90s (when I was in my early 20s). Saving my income each month into a FTSE tracker through my 20s, allowed me to finally, in my mid-30s save up enough in the tracker/compounding-growth to have a deposit for a home. It allowed me to move out of a rough area of London into a safer area – changed my life. I didn’t have bank of mum and dad, so had to rough it out until the savings and the tracker and compounding did its work.

    After I saw you on the Channel 4 programme I looked you up (it took a long time to find you as the show didn’t really explain if you had a blog and what it was called!) and found your blog which I read through several times and loved (it chimed in with everything I believed in). Sometimes I read it out to my partner (who sadly isn’t as charged up by the magic of compounding as I am). Reading you helped me cut down further on my spending (got rid of cable; stopped going to cinema – got Netflix instead).

    I had two quick questions for you please Mr. Escape Artist 🙂

    I pay a healthy amount into my pension and so does my employer – but – I didn’t regularly review where the money is going. Reading you inspired me to check up on where my pension money is going – I arranged to get access to my pension online and I am investing the monthly in the fund “Pens Portfolio Two” with Scottish Widows – I am not sure if this is the right portfolio for me, but I will keep investigating. When I move on to my next job (mid next year) and I am given the option of a pension, can I reject the usual pension that the company goes with – and go with using a Vanguard tracker for my pension (whilst still getting employer matching contributions)?

    My second question was: my company is letting go of me in May next year. I hope to find a new job so that my redundancy can be used to invest for financial independence. Would you pay off a chunk of your mortgage first (it’s recently refinanced on a low rate as you recommend; can overpay 10% per year) or would you put the money into Vanguard tracker? I am veering towards the latter, given that the stock market return over the long term will be greater than the saving on my mortgage interest.

    I will definitely reach out to you for coaching once I am hopefully and safely installed in a new job 🙂 Thank you for your informative and amazing blog. I read you and Mr Money Mustache 🙂

    1. Sorabshroff. The SW Pens Portfolio two is a fund of funds. I believe 85% global equities and 15% Corporate Bonds. It’s a pretty reasonable fund that has performed well over the last couple of years. The main difference between that and one of the Vanguard funds referred to in the article is the costs. Vanguard trackers can be as low as 0.06% whereas the SW fund is 1-1.5%. The amount you pay will be dependent upon what your employer negotiated.

  2. ladyaurora · · Reply

    What sort of time scale is needed to get the compounding machine working on a noticable scale ? 10 years?

  3. All true, I started early and saved aggressively and invested in low cost funds and now I’m, well, past ever needing to earn another cent or need a government check. I’ll accept any and all checks of course but not needing any is pretty nice. It isn’t all that hard to do if you start early but it is incredibly difficult if you don’t. Good job of smacking people around! If you just motivate a few people you will have done more than most people to help others.

  4. Hello, I’ve been reading your blog for a while but not posted before. My husband and I have always been fairly good with our money i.e. no debt, paid off the mortgage, good amount of savings, always spending less than we earn etc. but have been procrastinating over investing for too long. I read the post above whilst on the train home from work tonight and it was just the kick up the backside I needed…and so I have finally set us up a S&S ISA account investing in VLS. I just wanted to say Thank You as I don’t think we would have made this step if it wasn’t for your blog and it feels good to have finally started.

  5. The most important thing for me is to build up 6 months of emergency funds and mainly store them as p2p loans or vanguard bond trackers.

    Getting out of credit card debt is important, STAYING out of credit card debt is even more important.

    An emergency fund is like having a credit card, it’s just you run the line of credit and if you don’t use it, then that line of credit grows.

    1. ladyaurora · · Reply

      Hi an emergency fund really needs to be in cash p2p is far too risky for this part of your money even bonds can lose value. Mines in premium bonds 100% safe and a chance of winning and instant liquidation.

      1. Hi Ladyaurora, I aim for two months in cash and the final four months in investments. I know p2p and bonds are risky, but whilst I have borrowers who have defaulted, it’s spread amongst many borrowers and I usually get north of 5% a year. The reason why I wouldn’t want the whole 6 months in easy access cash is ill spent it!!

      2. The Rhino · ·

        Talking about credit cards and emergency funds. Why not combine the two?

        http://earlyretirementextreme.com/i-dont-need-an-emergency-fund-i-have-a-credit-card.html

      3. Hi Rhino

        You’ve got to be a tough cookie to see a credit card as an emergency fund. Jacob at ERE is mentally tough. Living on $7000 a year or whatever it is defines his toughness.

        I would be worried that if I have a credit card as an emergency fund then the definition of an emergency would be very vague and very wide.

        However if I have hard earned savings invested in reasonable illiquid assets, then I will be less likely to see a new TV as an emergency.

        I only see credit cards as useful for the protecting against the bankruptcy risk of the vendor, especially in the case of buying holidays or a new sofa or an electrical appliance. Curry’s, Dixon’s and the like have been teetering in the edge for years.

        QT

  6. I am a total procrastinator. It took me about 6 months of reading FI blogs and researching before I started investing, but even then I only started because I set myself a hard, no mucking around, date to get started. And I still only did it right on the due date. Is it perfect? I don’t know. What I do know is that it’s working for us, I’ve now harnessed my laziness by using automation, and we’ve got a far higher balance than I would have thought possible… just by choosing good enough and getting started.

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