Don't Budget! Record!

Why Budgeting Doesn't Work

I have a big problem with Financial advisors, Personal Finance Blogs and Gurus advising those who struggle with money to budget! It's irritating to someone who is poor at handling their finances to be told that the solution is simply to allocate their income in advance to various pools of spending. If budgeting was that easy then we would all be doing it. The truth is that most of us don't know what we're going to be spending in the next months or two let, nor are we disciplined enough to stick to our estimates.

I must admit that I am guilty of telling people to budget, having written two articles on the subject and mentioning it as part of the Multimillionaireroad Plan. On reviewing those previous articles it has become clear that the titles are misleading. What I advocate is a type of transaction recording system and not a budgeting system, with which to control personal spending habits.

Why you should record your transactions

I think that the main problem with telling people to budget is that those who don't know how to handle their money are not fully aware of their spending habits. As a result their estimates for budgeting purposes are wholly inaccurate and based on false assumptions of ones own spending habits. As a result actual spending in the following month is not in line with amounts budgeted for at the beginning if the month.

I believe that for every transaction that you make you should record it somewhere. I advocate writing a note (either on paper or on your phone) of the amount spent along with one word   description if the item such as "food" or "restaurant". Every so often you should spend a couple of minutes a week updating an excel spreadsheet with these amounts.

What are the benefits of recording transactions?

The reason why actively recording every transaction works is because the action forces you to be conscious of your spending habits. You need to mentally recognise every transaction and write it down, drawing your attention to it. Furthermore, every week or so you can open your spreadsheet and analyse the areas in which you are overspending. The longer you record your transactions the clearer your spending patterns will become. This can help identify where you are overspending - are you spending too much on eating out, for example? Additionally, any unusual spending will be recognisable as it will not be in line with your regular spending month to month. You can then adjust accordingly in the future.

Conclusion
Don't Budget! Record!

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Multi-Millionaire Road Plan Review (4)

Blueprints:
This post details what I have achieved so far. This article has a lot of links to other articles I have written to demonstrate how the articles interlink to form my plan. Think of these sorts of articles as review and the blueprints to my Multi-Millionaire Road Plan. Feel free to compare to my previous report:

Multi-Millionaire Road End of Year Report:

I wish to extend a big thank you to all my readers. I really enjoy any interaction that we have over comments and email. Please please get in touch - to chat, compliment, criticize, or even curse!

Picture from freedigitalphotos

I am now able to save roughly 20% of my monthly net (net of tax and pensions) income. This is around £340. Additionally, £135 goes into a pension scheme each month that is matched by my employer in full. This money is taken directly from my current account into a monthly saver earning a meagre 3.5%. At the end of my financial year (July for me) I will transfer the total sum into a trader account to buy more undervalued and dividend paying stocks and shares.Sometimes I am able to save more through careful buying and budgeting. I wish to emphasise that I do not budget in the conventional way - I do not plan every penny that I will spend, rather, I make a conscious effort to be aware of current spending.

My current share portfolio is having mixed results with my banks performing well, however the mining stocks are being crushed by falling gold prices. The FTSE100, for example currently sits at about 6450 points. As the Fiscal Cliff nears its end, things are looking good for the years ahead in the markets.

If you take a look back at an article back in March 2012, I gave my original financial breakdown. I now wish to update my current asset holdings:

• £925 - Sits in cash as a deposit for the flat I currently rent
• £2370.76 - Current Account
• £1763.70 - Monthly Savings Account
• £391.69 - Everyday Savings Account
• £7959.69 - Loyalty Reward ISA
• £100 - UK Premium Bonds
• £10,449.38 - Online Shares
• £2,007.73 - Funding Circle Investment

• Total Accessible Assets: £25,967.95
• £2,079.99 - Friend's Life Pension (7 months contribution)

As you can see my total accessible funds has fallen by about £120. I put this down to the fact I have almost doubled my stockmarket investments. I have found that my investment ideas take a little time to prove themselves good or bad. In this time I have lost out on interest that I otherwise would have got and on investment charges such as stamp duty taxes. Furthermore, it was during this period that I paid for my holiday (about £700). I am not worried about my asset growth progress. Since March 2012 - 13 months ago, I have grown my net wealth by about £3,000. This is track to grow my wealth by about £4,000 from September 2013 until September 2014.
I have now included the value of my pension as this will form part of my assets in later life.

Originally I wrote a post on a Get Rich Plan and am currently in the middle of implementation. Whilst I have a long way to go, I am currently laying the foundations of this plan. I will now go through each section, briefly:

1. Frugality - I spend about £100 a month on food and am careful in the sense that I keep an awareness of my spending habits.
2. Budgeting - all going according to plan. My method allows me to ascertain where I may be spending too much.
3. Saving - I am able to save 20% and above of my monthly net income. I still haven't switched my bank account. However, I really should consider it at some point in an effort to get a better interest rate, especially now that there is a lot more money going through the account.
4. Debt - Although I have two credit cards, I have no debt. I pay them off in full each month. I have one credit card which gives 3% cashback (up to a maximum of £100 a year) and another that gives 0.5% cashback. Read my article to explain how to maximise the cashback on credit cards.
5. Housing - I currently rent accommodation in London. Rent sits at £690 per month, not including bills. This seems rather high. In the summer when this tenancy agreement is up I will be moving to a cheaper area in London saving an extra £100 a month on accomodation. However, transport will cost an extra £30 per month. For more information on my ideas on Housing read my article: Renting Vs Buying
6. Investing - on the whole this area of my personal share portfolio is going well. After recent additions my current share portfolio has growth 7.4%. This drop in growth appears to be due to the poor performance of my mining stocks and the introduction of capital averaging down my growth rate.
7. Tax - I have utilized about £2,500 of my cash ISA this year so far. I need to top up my tax free ISAs before next April. I need to look into investing in a structured product that may give me 10.5% growth. I am now starting to utilize my investment ISA with an ISA stocks and shares trading account.
8. Job - My base salary is £27,150. In September I am hoping to get a bonus of £1,000 (gross) for passing my exams first time. Living as a young professional living in London has huge opportunities for networking but of course is highly expensive.
9. Time and Patience - Slowly but surely, year by year, the seeds which I am planting will grow into trees.
10. Self-belief - check. I will make it

As you can see, on the whole things are looking good. There is much work to be done but at 23, I have time on my side.

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Why inflation shouldn't matter to you

Don't worry about the inflation figure! It doesn't matter.

You're probably thinking I've gone mad, but read on before you judge me harshly.

Let us define the inflation figure as simply as possible. In the UK the Office for National Statistics (ONS) has put together an average basket of 100 items sold in the UK economy. For example, it includes the average price to fill up a car with a tank of petrol. It also includes the average price of a bottle of wine and so on and so forth. This basket of goods is supposed to representative of what the average consumer spends their money on in the year. The ONS then measures how the prices of those goods vary from one period to the next (a period could be a month or a quarter). The average of this variation across the whole basket of goods is the inflation figure. Currently it stands at 2.8%.

Why you shouldn't worry about the headline inflation figure

The inflation figure should only matter to you if that is the exact basket of good that you buy. Clearly the vast majority of people do not. It may be that the particular brand of beans (let us call it brand B) that you buy has not increased in price during that month. So the knowledge that brand A beans has gone up in price should be meaningless to you.

Furthermore, the inflation figure ignores the substitution effect of prices. It is not the case that if the inflation figure stands at 2.8% that our buying power has decreased by that much. Consumers have the power to increase their spending power by substituting to cheaper goods.

We have now dispelled the myth that inflation eats away your spending power, but what about the idea that it eats away at your savings?

Inflation, destroyer of the savings of the nation?

Part of the reason that people worry about inflation is that it destroys the real value of your savings over time. This is why many savers are conscious that the rate of return needs to beat inflation. This is particularly poignant in this current period of historically low interest rates. There has been much talk about how the Bank of England and the Government are punishing savers for the overspending habits of the borrowers, as low rates, coupled with inflation means that savers lose money in real terms.

Contrary to popular opinion, I don't have a big issue with inflation being slightly above savings rates. It all depends what your plans are for your savings. For example, if you're saving to put a deposit on a house then the increasing price of baked beans is irrelevant. The only prices that should concern you are house prices. The very least that you require is that your savings grow in line with house prices.

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Shares: the reasons that I bought

Buying Shares - the explanations for doing so...

I recently read an article on an investing website that said that you should state your reasoning for investing in the various companies in your portfolio. So here goes:

Barclays, RBS, and Lloyds - I invested these banks in the summer of 2010. At that time the prices of the various shares were cheap relative to the book value on the balance sheet. The balance sheets particularly for Barclays tended to suggest that the price should have been double what it was.

In the case of RBS and Lloyds my reasons for investing was fairly simple. Currently the biggest shareholder in these companies is the Government. It would be political suicide for the Government to sell these companies at a loss. Since I bought them at a price well below what the Government bought them, I figured that these are some of the safest stocks in the world, as the Government would not let them fail - ironically encouraging the 'too big to fail' view of UK banks.

Furthermore, it was rumoured that in 2013 RBS and Lloyds will start paying a dividend. In the mean time I expect the small dividend of Barclays Plc to begin to increase. All three Banks are therefore longterm growth prospects. RBS and Lloyds - I intend to sell half the shares once they've doubled in value. Barclays is a long term divided provider - after repeatedly good results I'm hoping to see a growth in the dividend per share over the next few years.

IGAS - this is a purely speculative shale gas play. It is a 50:50 gamble on a small player in the shale gas industry. If they strike it lucky in the gas market in the UK then this could return a large amount in terms of capital growth.

Centamin, Avocet Mining and Lonmin - these three miners are reflective of a large position in the mining sector. All three have a commonality in that I invested once there had been some sort of disaster in their particular industry, causing a large dip in share prices. Lonmin had problems with strikes in South Africa - that I believed must come to an end. Centamin, a gold miner located in Egypt had problems with supplies. I reasoned that supply issues tend to be short lived and the large price fall did not justify the true value of the company considering the strong balance sheet of the company.

Debenhams - this is the second largest clothing retailer in the UK. The purchase was within an ISA stocks and shares trading account, thus protecting the dividend income (and capital gains) from taxation. On purchase the company paid a generous 3.5% dividend yield. The company is showing a good transition to the Internet whilst retaining its market share in bricks and mortar.

Morrisons - as well as paying a generous dividend, paid into my stocks and shares ISA account, Morrisons has done the most investing in terms of utilising their store space out of all of the big four supermarkets. I see this investment in 'store experience' eventually paying off in terms of share price growth.

BT - this telecoms company is a solid dividend paying stock. BT is currently on an expansion programme, building their wireless and cable networks. BT are also looking to buy up rights to various sports tv and seem to be edging their way into that market. Whilst the company grows, I'm happy to enjoy a small dividend yield in the meantime.

Hornby - I originally made my investment into Hornby after they had a poor period of selling over the London Olympics. I looked at the company's balance sheet and, whilst a relatively small company it had a long and strong track record or producing cash to pay to shareholders. I don't expect anything special from this share - rather it is an attempt to reduce the volatility in my portfolio.

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Property portfolio strategy

None of us will have failed to realise that the current economic climate caused by the financial crisis of 2007 have meant some radical changes. We have seen a big change in politics, austerity measures, the euro zone crisis and a squeeze on capital.

Gone are the days of unlimited borrowing. It used to be the case that many consumers could qualify for mortgages up to 120% of the value of the property. Unsurprisingly, this madness has come to an end!

Making money from property - the old way

I talked to a few businessmen who operated property portfolios in those days of madness. It seemed to me that the way to make money from property was as follows:
1. Build a deposit for your first property
2. Move in to your first property using an interest only mortgage extended for as long as possible.
3. When you have built up equity in this property (which used to be the assumption) then release this equity by remortgaging
4. Use the newly released equity to put down a deposit on your first investment property
5. Get an interest only buy-to-let mortgage extended for as long as possible
6. Go back to step 3 to release more property and follow steps 4 and 5 for your second investment property
7. Continue following step 6 to grow your property empire as you gain more and more equity

This property portfolio building model was thought to work for several reasons:
1) it was assumed that property prices would go up over the long term
2) as the mortgage term came to a close you could always remortgage the property or sell it
3) tenants were easy to come by to and so the interest would be serviced

The problem with the old property portfolio model

I am no longer comfortable with this model. I want to build a portfolio of assets, not highly levereged debt! The problem with the old method is that if there is a sudden drop in house prices you are stuck with a lot of assets in negative equity. Furthermore, should the mortgage be up, crystallising losses becomes a reality.

The new method: the safe way

My new investment method attempts to circumvent the possibility or at least reduces the probability of being stuck in negative equity. Although, more painful on short term cash flow my method aims to pay off mortgages as quickly as possible.

The new method works as follows:
1. Rent/ live at home whilst building up a deposit
2. Once you have a deposit that provides you with one of the best possible mortgage rates go and find a property to buy to live in
3. Only borrow as much money as you can realistically afford to pay off between 5 to 10 years
4. Enjoy the property until the mortgage is paid off in full, whilst building up a new deposit in the meantime
5. Move into your new property using the same ideas as in section 2. Rent out the first property, looking for long term tenants ideally a family paying a 5%-7% yield. The extra income should help you to pay off your new property that you are living in, relatively quickly 5-10 years.
6. Follow sections 4 and 5 again.
7. Repeat sections 2 to 5
8. Now you have one property that you live in and 3 investment properties. You are ready for retirement!

The problems

One of the main concerns an investor may have with this technique is that it is inefficient. You don't receive any benefits from leveraging or from tax. But who said building a fortune was going to be easy or quick!? At least this method is safe. Thoughts?

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Investing with only one piece of information

I would never advise making an investment with only one piece of information. I would strongly advise careful analysis, with an aim to gain a strong insight into a business and how it works. However, I thought that it may be an interesting thought exercise to try to see what would happen if we limited ourselves to one piece of information.

Dividend cover ratio

If I could invest with only one piece of company information to look at, I would look at the dividend cover ratio. Literally, this measures the company's ability to pay dividends out of the cash generated.
It is the division of the company's earnings per share divided by it's dividend per share. Put more simply, it states how much money the company pays out compared to how much it generates.

The reasoning for preferring dividend cover ratio

Why do would you invest in a company? Primarily for a return in the form of a capital gain and for dividends. The dividend cover ratio tells you several pieces of vital information. It tells you that the company pays a dividend. Furthermore, it tells you how sustainable those payments and whether those payments are likely to continue into the future.

Ideally we would want a dividend cover ratio of 2. This suggests that for every two pounds of net profit generated by the Company, it pays out one pound in dividends. This is ideal as it provides a level of comfort to suggest that the Company will be able to continue paying those dividends into the future. Furthermore you would also want to see a sustained or increasing dividend cover over the last few years.

A point of note

I would emphasise here that noone should ever make an investment decision based solely on one metric. There are many other pieces of information that an investor would want before making a decision. For example you would want to know that the Company has growing revenues, assets and liabilities.

However, whilst I would never invest based on this one metric it is an interesting thought experiment. Additionally, the dividend cover ratio is a good place to start when trying to identify companies with which to invest. The dividend cover ratio provides a very good means by which to produce a shortlist of investments.

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Pensions

Pension Prompt

I recently had a conversation with an older friend (he's 26) who told me that he didn't have a pension. This surprised me as naively I just assumed many working people put money each month into a pension. This conversation prompted me to do a quick poll of relatives and friends. I was quite surprised to discover how few people seemed to invest into a pension.

What is a Pension?

Firstly I think I should quickly outline what a pension is. A pension is a means by which you can invest tax-free income that comes out of your gross monthly salary. The pot grows over time as you add to it and gains capital growth. The (simple) end result is that once you have reached the age of 55 you are able to retire from work as you use the pot to buy an annuity which will provide you with an income for life. For more information on annuities, read my previous article on the subject.

Why you should invest into a Pension

There are several reasons to invest into a pension. The first is that the state pension is only £144 per week and you need to be 65 if you are a man or 62 if you are a woman to claim. This is not ideal for someone looking to retire early or to retire on a relatively large salary or both. This is one extremely good reason to invest in a pension.

A second reason to invest in a pension is that the Government encourages you to look after yourselves in retirement. As a result the Government tops up your contributions relative to the amount of tax you pay. If you are a basic rate tax payer and pay 20%, for every £80 you invest into a pension the Government will top up your contribution by £20, paid for out of your tax contribution. Likewise, if you are a higher rate tax payer and pay 40% on your marginal income, then for every £60 that you put into a pension the Government will contribute £40! Think of it as free money. It means that once you invest money into a pension it has already grown in size and that's before any capital gains!

A third excellent reason for investing in a pension is that if you work for a relatively large Company they may have a policy of matching your contribution up until a certain percentage of your gross salary. Just as before this is free money. Do not pass up the opportunity!

My personal pension story so far

I am no expert on pensions - I'm only 23! Most people my age cannot fathom thinking about something so far into the future. It is my goals to become a multimillionaire that drives me to consider these things. It is just one of a portfolio of investments that I intend to have throughout life.

I currently put aside 6% of my gross salary into a pension. That's about £135 per month. My employer generously matches up-to-a 6% contribution so that adds another £135 to my pension. The Government then tops up my contribution by £33.76. After excluding fees my total pension contribution is about £297 per month.

I am young. I have a lot of time ahead of me. I reasoned that I also had plenty of time to make a mistake when it came to the sort of investments that my pension should be allocated in. I've split my pension contribution between 3 different funds. 40% of my pension goes into a standard UK equities-bond split fund. Here, the fund manager divides the money in such a way: 60% into bluechip stocks and 40% into bonds. The other two funds that make up an even split of the remaining 60% of my pension contribution is split between an Emerging Markets equity fund and an Far East equities fund. This clearly makes my portfolio a risky one. I feel that I can mitigate this risk with time on my side and will reduce the amount of risk in about a decades time.

The results:

Thusfar, in the 5 months that I have been contributing towards a pension I have put in £675 into my pot from my own money. Through the various forms of topup this has resulted in a contribution of £1,483.9 which has grown in the last 5 months due to the investment vehicles by 4.6% into £1,552.6. It also means that for 6% contribution of my gross salary, I am virtually springboarding my contribution into a 14% gross salary contribution.

My intention is that by the time I am 60, assuming various levels of growth in salary and pension I intend to have a pension pot of about £825,000 in today's money. Assuming I take 25% of this out as a tax free lump sum this will leave me with a pension salary of about  £30,000 (a very rough estimation!) in today's money - not to be sniffed at in retirement. Of course, along side this I intend to have other investments with which to top up this salary.

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.