David Sawyer is allegedly a guest poster at Monevator, but he seems to have gotten hold of the front door keys. Having already written several articles for us since publishing his debut, RESET, he’s now back to tackle UK budgeting tool Money Dashboard – one of his nine underrated tools for seekers of financial independence.

Sitting through a two-hour-long meeting. Eczema. That strange repetitive farty-clicking sound your nine-year-old makes in the recesses of his mouth.

Chopping onions.

Giving a staff member a ‘could try harder’ in their annual appraisal.

Mild annoyances

In modern life there is a long list of things that we simply do not like. They range from mild annoyances to activities that send shivers down our spine.

When we reach the sanctuary of our homes after a tough day at the office, we don’t want to be adding to them. Instead we pass the time on social media and watching boxed sets.

Even if we do summon the strength to do something self-improving, we choose our challenges carefully. Perhaps we read, phone a friend, scan a blog post, or pick up a podcast.

What we typically don’t do is make like an accountant, crack open a spreadsheet, and track our expenditure.

Sure we may have read Robert Kiyosaki’s Rich Dad Poor Dad and imbibed the “take good care of every penny coming in going out of your pocket” mantra.

Sounds good, but he retired when he was just 47. I bet he doesn’t do it anymore?

Why not budget?

It’s funny, but among my friends I know no one who tracks their income and spending like me.

Yet most of those same people works for organisations with someone tracking all the money coming in and all the money going out.

This person is called the finance director – an important support to the CEO.

You wouldn’t run a business without someone looking at the books like this. So why then don’t we do it in our personal lives? Which is more important?

When I point this out to my friends, the usual excuses roll out:

• I don’t know how to do spreadsheets.
• Life is for living (take aim, FIRE!)
• We always have enough, why do I need to know where every pound goes?
• That’s boring.

For most of my adult life I agreed. Until a few years ago, I never realised how much my family was blowing every month on things we didn’t need or want.

Then things changed.

Over a few months in the summer of 2017 we saved £900 a month, and diverted that money to our investments.

But without the life-changing magic of Money Dashboard – assisted by Martin Lewis’ Budget Planner – my cash would still be lining Starbucks, David Lloyd, and Virgin et al’s pockets.

Budgeting

Zzzzzz. Yes, I know. It’s snore-inducing. It’s worthy. It’s not enjoyable.

On the flip side though, proper budgeting gives you a complete handle on your money – in most cases for the first time ever.

And if you use Money Dashboard it turns pain into pleasure.

David’s 13-point plan to mastering your budget with Money Dashboard

Other budgeting websites/apps exist. If you’re a fan of the US FIRE movement like me, you’ll have heard of Mint and You Need a Budget.

UK residents can use them, too. But the last time I tried, they didn’t sync with all my bank accounts. I gave up after a while.

So for the rest of this post I will explain how to get the best from Money Dashboard, a free website I use every few days.1 There’s an app, too, but my advice refers to using it as a website.

Note: Monevator founder and editor The Investor owns shares in Money Dashboard.

Never used a budgeting website before? Closest you get to tracking your money is logging in to your current account every six months?

Here’s my 13-point plan to get you started.

#1 Get Martin Lewis’s Budget Planner

Go on to Money Saving Expert and download the ‘spreadsheet version’ of Martin’s Budget Planner. It is an Excel document, but don’t let that put you off.

It’s split into 13 categories and 90 subcategories. In each of the 13 categories you can add a further three or so subcategories of your own, if you really want to break down your spending. Unfortunately, you can’t change the existing subcategories.

Download it to your computer/Dropbox/Google Drive ready for the next step.

#2 Current account

Analyse your current account statements for the past year. Online or paper. Work out what you’ve been spending your money on.

Click the ‘What you spend’ tab at the bottom and fill out the subcategories in Martin’s Budget Planner (not too many or you’ll be creating work for yourself). Assign monetary values to each subcategory. Save this version.

This is ‘spendy you’.

#3 Amend and save a new version

Now have a look through every line item, chat with your partner/family and see where you can change your spending, normally to reduce expenditure but occasionally to increase it in line with what you want out of life.

This is ‘aspirant you’. Save this new version.

#4 Sign up to Money Dashboard

• It’s free.
• It’s fun to use.
• Your passwords are safe. Everything’s encrypted.
• Know that they do anonymize your data and sell it on to, for example, market research companies – but you don’t get owt for nowt as they say.

#5 Sync all your accounts

Sync all your accounts to Money Dashboard. Every current account, savings account, and mortgage account that you have.

It doesn’t take too long and they usually work first time with no hassles. (The only thing that’ll slow you down is finding all your passwords!)

#6 Set your budgets

Go back to your ‘aspirant you’ Budget Planner – that second version you saved with the more efficient spending you aspire to.

Now replicate the categories (Martin’s) and subcategories (some of Martin’s and all of the ones you added) in Money Dashboard.

To do this, click ‘add budget’ and type in the relevant category from Budget Planner. Then press ‘add tag’ and allocate the tags (subcategories) to the budgets (categories).

Repeat this multiple times.

Adding your own tags in Money Dashboard enables you to replicate the pre-populated subcategories in Martin’s Budget Planner rather than finding similar-sounding Money Dashboard ones. This is crucial as you’re cross-referencing between your modified Budget Planner and Money Dashboard when you’re using the budgeting feature.

Set all these tags to be the same colour/type/icon so you can identify them.

#7 Transactions

By now you’ll notice your ‘transactions’ in the middle of the dashboard. Click on the ‘transactions’ tab at the top and they’ll go full screen. This is anything going into or coming out of your multiple accounts.

Transactions are important. By tracking all your myriad bits of moolah, Money Dashboard gives you a true ‘one pot’ look at your money (top left on the dashboard). And by money, I mean all that which is not invested.

As yet, Money Dashboard is no equivalent of the stateside Personal Capital, a truly one pot analysis of all your money.

However, more financial providers are hooking up with Money Dashboard all the time.

So, for instance, if your pensions are with PensionBee, a holistic overview of all your money in one place is possible.

For me (a Vanguard and Fidelity user) that dream will have to wait.

(Please Money Dashboard link up with these two global behemoths. Not to go all Kevin Keegan on your Edinburgh-based ass, but: “I’d love it if you did that.”)

#8 Tag your transactions

Every few days (or once a week if you like) go into your transactions, click each, and then tag them.

If you tick the box marked ‘Tag similar transactions’ it will remember for next time, so that when you log on seven days later after you’ve done another shop at Aldi, it’ll already have the transaction tagged as, for example, ‘food and household shopping’.

Of course, it’s not always as simple as that. If you buy a lot of gear from Amazon it’s unlikely to fall under the same tag every time, so un-tick the ‘Tag similar transactions’ box and tag each Amazon transaction.

#9 Splitting transactions

Whether you want to use this feature depends how anal exact you are.

Say if you were a fictional 47-year-old male from Glasgow who went to Lidl at Christmas for a mammoth shop.

On that trip, let’s say there was everyday ‘food and household shopping’, a big slug of ‘Christmas’ shopping and five January birthday cards (‘birthday cards and prezzies’).

You would go to the transaction, hover over the cost (in this case £242.34) and click ‘split transaction’. Then divide it three ways.

#10 ‘Offline Sources’ accounts

Aside from the obvious budgeting and one-pot benefits of Money Dashboard, for me this is where the gold lies – the ‘Offline Sources’ accounts.

These are accounts you set up and modify manually in Money Dashboard.

For instance, you could have:

• VAT owed
• Invoices out
• Corporation tax owed
• Dividend tax owed
• Pocket money
• Rental income
• Cash in the house
• Accountancy fees owed

This facility is most useful if you have different sources of income or own a business. (I used to get confused with all the tax I owed for different accounting and financial years, due at wildly different times of the year).

Most of you will be salaried but many people do have complicated financial lives, and this feature gives flexibility to bend Money Dashboard to your own ends.

Hell, it would be a bit Heath Robinson and you’d still have to track this elsewhere, but you could even now use Money Dashboard as a net worth tracker by setting up two offline sources accounts:

• Value of investments
• House equity

Leaving that aside, to give an example most people can relate to, say you and your partner share your money and have a pocket money system where you each get a certain amount a month in order to give you that much-needed guilt-free discretionary spending.

Here you would go to ‘accounts’, ‘add account’. Press ‘select my bank’ and scroll down to ‘offline sources’. Name it, for example, ‘David pocket money’ and add an ‘opening balance’. In this system you would assign a minus to the pocket money because it’s money that’s in your bank accounts but not available to spend.

Similarly, if you owe money, such as taxes, remember to stick a minus before the ‘opening balance’.

#11 Hiding accounts

We are now entering the nether regions of Money Dashboard. Skip this bit if you’re not a power user.

Say you want to have an account in the accounts side bar on the left-hand side, but for some reason you don’t want to have the money in it showing in your overall balances because it confuses matters.

Go to ‘accounts’, ‘edit account’ then toggle-to-off the bit that says ‘include in total balances’.

This could be perhaps a mortgage account you want to monitor but don’t want to show in your overall one pot figure (‘net balance’, top left in Money Dashboard).

#12 Balance history

Not for everyday use this one, but a neat feature to use every few months. It shows the ‘trendline’ of your overall balance and each account.

Up is good. Down not so much.

#13 Back to where we started

After you’ve used Money Dashboard for a while (and note it won’t work for you if you don’t take the transaction-tagging seriously) it’s time to find out whether the ‘aspirant you’ second version of Budget Planner has become a reality or remains a pipe dream.

How frequently you want to do this is up to you. Some do it monthly. I’d suggest waiting three months before you check your spending, or only check the big varying line items such as ‘eating out’ or ‘food and household shopping’ every 30 days.

We do it yearly. Irksomely, the overall ‘budget’ figure only goes back six months, so if you click on ‘budgets’, ‘previous budgets’ you won’t get very far analysing your yearly spend versus budget.

To get around this, I (virtually) whip out Martin’s Budget Planner, open Money Dashboard and click on ‘transactions’. There’s then a bit at the top, above the transactions, where you can change the filter.

I set it for January 1 to December 31. Then I tap in the first of 65 subcategories and see if what I spent matches what I wanted to spend. Sixty five taps later I know where we are.

The every-12-months frequency works for us because we have a lot of one-off costs – seemingly every week.

For instance, deposits for holidays and holiday spending (we like our holidays!) exits our current account throughout the year. Unless we take a yearly look at spending in areas like this, we can’t see the wood for the trees.

Our next step is to analyse what we’ve spent in each subcategory and decrease or increase the amount allocated to each one in Martin’s Budget Planner (that colourful spreadsheet).

Our 65 subcategories (tags) form part of 12 budget categories. Make sure you go into the budget section of Money Dashboard and update the budget for each of your budget categories.

Last, there will be yearly and monthly costs that go up and down as inflation hits or you make efficiencies or change providers. Don’t wait until the yearly budgeting extravaganza.

Make sure you update both Martin’s Budget Planner and the budgeting category in Money Dashboard to reflect the modified cost.

(Note: You do not have to use Money Dashboard with Martin’s Budget Planner like I do. But having used both separately and together, I highly recommend it.)

Money Dashboard’s minor annoyances

There are minor annoyances with Money Dashboard.

I’ve already mentioned you can’t look back at the entire budget for more than six months, which is not ideal for yearly budgeting.

In addition, you can’t add transactions. I get why this is. But what it means is every time you pay for something using cash (a rarity, admittedly) you find yourself trying to find a random high-value transaction you’ve left untagged, to split and allocate a set amount to the tag category.

Also, some account transactions sync almost real-time, others (from different financial providers) take longer.

This is no-doubt due to factors beyond Money Dashboard’s control, but if you’re transferring money between two of your own accounts, it can mean your one pot figure is out of whack temporarily.

Wrapping up

They say whatever you track becomes a focus.

There’s a lot to the financial independence movement. But efficiency, making best use of your money, and developing good habits would be up there in the top 10 key pieces of the picture.

Developing the habit of tracking every pound that comes into your family and goes out is an obvious way to get a handle on your spending and grow your wealth long-term.

As I say, you do it at work. Why should home be less important?

Websites/apps like Money Dashboard (in my case coupled with Martin’s souped-up fancy-coloured Budget Planner) make this boring task less time-consuming and more fun.

The information you glean helps you spend more intentionally, relax about your money, and siphon more into growing your stash to reach FIRE a few years earlier.

Codicil

Well @TI I did it, I won the bet – I managed to go through a whole Monevator guest post without mentioning my book!

David’s Book

David wrote the UK’s first financial independence book, RESET: How to Restart Your Life and Get F.U. Money. It’s available today on Amazon at £8.17 for the paperback, £2.95 for the Kindle and, if you buy the Kindle first, £3.49 for the audiobook.

If you’d like to find out what else David has to say, he puts out a weekly newsletter. If you sign up to his email list, you can get the first 8,000 words of his book for free. You can also read his other articles on Monevator.

Coda to the Codicil

Oh damn… How much do I owe you?

Do you track your spending? With Money Dashboard? Have you tried it? What other budgeting apps do you use? Let us know in the comments below!

1. In case you’re wondering I’ve never received a bean from the Edinburgh-based company. [↩]

This is part three of a series on how to maximise your ISAs and SIPPs to achieve financial independence. Part two explained why the tax advantages of personal pensions make them superior to ISAs later in life. Be sure to also read the first part of the series.

To make the most tax efficient use of your savings, your ISAs need only fund the years between early retirement and your minimum pension age.

Obviously it’d be marvellous if our ISAs piped hot income streams into our lives long after that, but our primary concern is to fund them so we’re unlikely to run out of money before our personal pensions take over.

That’s because there’s no point oversaving into our ISAs, either. That would see you delay financial independence by paying tax that would have instead been clawed back through pension tax relief and added to your growing nest egg.

The ISA/pension balancing act

Should investment returns turn out to be poor, we would expect our ISAs to be running on empty as we dock with our SIPPs.1

We would then discard the ISAs like empty booster rockets and ride on using our SIPPs, and eventually a State Pension slingshot.

To put that plainly:

Phase 1 – You need to be able to draw all your income needs from your ISA / taxable accounts without fear of running out of money,2 until you reach the minimum pension age.

Phase 2 – You need to be able to draw all your income needs from your personal pension, once you can access it, without fear of running out of money until you die.

Lifeboat – It’s quite likely the State Pension will provide some support later in life. The lower your income, the older you are, and/or the sketchier your plan, the more important the State Pension becomes.

We’ll construct the plan so the State Pension is primarily a back-up and, later in the series, we’ll draw upon research that shows how you can adjust your plan to account for it.

How much income and for how long?

How much annual income do you need in retirement? And how many years do you need it to last?

These are the big two questions to answer for each phase of our plan.

Guesstimating your required retirement income is not so hard, especially if you already track your expenses.

Let’s say you’ve decided you’ll need £25,000 per year for the rest of your life. (We’ll assume all calculations are in real terms, so we’re accounting for inflation.)

How much wealth do you need in your ISA to sustain £25,000 in annual income?

It depends on how long you need that income to last (Phase 1) before your pension income becomes available (Phase 2).

There are two basic ways to fund your Phase 1 pre-pension, post-retirement income:

1. The usual sustainable withdrawal rate (SWR) approach – a portfolio of mixed assets in your ISA that you ‘create’ an income from by selling a planned proportion each year.

2. Liability matching – a big pot of cash or bonds3 that won’t grow much or at all after-inflation, but that starts out big enough to take your desired income from each year until you can crack open your pension.

Let’s look at both in turn.

Method #1: Drawing down an ISA portfolio

The infamous 4% rule says we need to build wealth that’s worth 25 times our annual income requirement to become financially independent.

25 times your assets comes from: 1 / 4 x 100 = 25

£25,000 x 25 = £625,000

So we need £625,000 to take an annual, inflation-adjusted income of £25,000 at a 4% sustainable withdrawal rate (SWR).

But the 4% rule applies specifically to 30 year time frames.

What if you only need your ISA to last ten or 20 years until your personal pension comes on stream?

Then your sustainable withdrawal rate (SWR) from your ISA can be higher.

Let’s say you can use an 8% SWR to sustain spending from your ISA for ten years.

We can save much less into our ISA in that scenario:

1 / 8 x 100 = 12.5

£25,000 x 12.5 = £312,500

Now we only need ISA wealth of approx £312,500 to draw an income of £25,000 for ten years. After that, we will look to rely on our personal pension income, if our ISA is exhausted.

Bear in mind that a SWR calculates the maximum amount you can take from your portfolio without running out of money, based on historical returns data. (Terms and conditions apply.)

In most scenarios, you actually end up with a healthy surplus in your account when you use an appropriate SWR, even if your retirement was blighted by economic times of darkness such as the Great Depression, Stagflation, and the World Wars (provided you were on the winning side).

Nonetheless, we want a plan that minimises the chances of being forced back to work against our will.

We’ll therefore use cautious SWRs throughout this series that suit our possible timeframes – no matter if we need our tax shelters to last ten years or 50.

Method #2: Liability matching

The safest way to fund your retirement is to match your future expenses (liabilities) with a treasure chest of near risk-less, guaranteed income.

A ladder of inflation-linked bonds would be ideal.

In the ISA example above, a tranche of your bonds would mature every year, depositing £25,000 of inflation-adjusted income into your account for each of the ten years until you can access your pension.

Alternatively, you could save up enough cash to cover the ten years, remembering to factor in an allowance for inflation.

Liability matching with low risk assets generally requires more capital than investing in an equity heavy portfolio. The more resources you have, the less growth you need, and the less risk you need to take. It’s a trade-off.

My assumptions suggest that it’s likely quicker and safer for everybody to save cash4 to bridge an eight-year gap or shorter, between Phase 1 and Phase 2.

I’ll go into more detail on this later in the series.

Minimum pension age

Our ISAs need to span the gap between our early retirement age and our minimum pension age – the latter being when we can officially smash open our defined contribution pensions like piñatas.

Which will be when exactly?

Unbelievably – ahem – that’s not so easy to pin down.

Currently you can get into your defined contribution personal pension from age 55.

But the 2014 Coalition Government (remember them?) indicated that the minimum pension age would rise to 57 in 2028. Your minimum age would then be set to ten years before your State Pension age, from then on.

Thing is, they didn’t get around to legislating the minimum pension age change. So it’s not yet law. And then Brexit happened. Eyes were taken off the ball. Now no one knows what’s going on.

We don’t know whether the rise in the minimum age will take place as mooted. But many industry insiders say the change is still coming and can be legislated whenever the government likes, so it’s best to assume the worst.

If you were born in 1972, you will be 55 in 2027, so you should be fine, right? You can tap your pension in 2027 before the minimum age hikes to 57 in 2028.

Not so fast. There has been talk of tapering the change in. It could be you’re still caught out, even if you’re 55 a few years before 2028.

It’s a mess.

We’ll play it safe by assuming that our minimum pension age is set to ten years before our State Pension age for the purposes of the upcoming and unbelievably exciting case studies we’ve got planned for this series.

These case studies will also show how to calculate how long your ISAs will need to last (roughly), given your current circumstances.

How much do you need in your personal pension?

By the time you retire, your portfolio – when combined across all accounts – should be funded to last the rest of your life. How long might that be? If you’re age 60 or less today then you have at least a 10% chance of living to age 98 according to UK life expectancy data – unless you have good reason to think otherwise. There’s an even greater chance that one of you could survive if you’re part of a couple.

SWRs tend to reduce over longer periods of time, but the curve flattens out. Multiple research papers point5 to a 3% SWR being suitable for retirements of forty years and over – which likely accounts for the majority of people on the FI fast track.

Carrying on the £25,000 retirement income example, the wealth needed to sustain lifetime spending for over 40 years at a 3% SWR is:

1 / 3 x 100 = 33.333

£25,000 x 33.333 = £833,325.

We’ve established that the ISA portion of this wealth target needs to be £312,500 to ensure it doesn’t run out before the pensions come on stream ten years later.

Therefore, your personal pensions need to be funded to the tune of:

£833,325 – £312,500 = £520,825 by the time you pull the trigger.

My thanks to Monevator readers Aleph, Naeclue, and Oxdoc whose dogged persistence corrected my mistaken assumptions when this article was originally published.

Other income streams – So you’ve got other income streams like buy-to-let property and defined benefit pensions to tap into? Lovely. Just deduct those additional income streams from your assumed retirement income when they’re available. Your portfolio will only need to cover the remainder. We’ll cover the State Pension and DB pensions that become available further down the track at a later point in the series.

In the next post, we’ll cover how to choose a credible SWR that matches your personal timeframe and accounts for a low interest rate world, non-US investment returns and the implications that has for your asset allocation in retirement.

Take it steady,

The Accumulator

1. Self Invested Personal Pensions. [↩]
2. We mean without fear on a practicable level. Ultimately there is no absolute safety. [↩]
3. We’re talking a ladder of individual bonds (not a fund) with staggered maturity dates. Each tranche of maturing bonds delivers a payload of capital to match your income needs per year you need to fund. Inflation-linked government bonds are best. A Purchase Life Annuity could also conceivably fit the bill. [↩]
4. A lack of suitable bonds makes it hard to build an inflation-linked bond ladder in the UK. [↩]
5. We’ll cover the research in more detail in the next episode in the series. [↩]

What caught my eye this week.

The IT Investor has a honeypot of a post up this week for active investing junkies. He’s dived into his investment trust data to sieve out what he’s calling ‘double doublers’ – investment trusts that doubled their share price in the first half of the last decade, then did it again in the second.

It sounds spectacular – it is – but qualification requires ‘only’ about a 15% return a year. You could have got a slightly better return from a US S&P 500 index fund, and many passive investors did.

The best double doublers did even better though, and the result is catnip for an active investing sinner like me. (Reminder: it’s my co-blogger The Accumulator who is Mr Passive).

Here are IT Investor’s top five double doublers:

What’s particularly galling is I owned four of these five trusts at some point in the last decade – but I hung on to none of them for anything like ten years.1

The curses of active investors are indeed many and various. They’re not just down to the fact it’s a zero sum game, which guarantees net disappointment for average pot of money, after costs and fees. There’s also the way that even when you get it right, sooner or later it turns into wrong.

How so?

Well maybe you sell too soon. Or maybe you realize you should have bought more. Or dozens of variations on the theme. Stock picking is not a hobby for anyone who occasionally brings a box of old love letters down from the attic to tearfully wonder what might have been.

But it’s not a game for those who wouldn’t even keep the letters of their old flames, either. If you’re that rational, buy the market!

I did it my way

Despite all this, until we grow bored or are physically restrained, some unfortunates like me will always be there to continue the quixotic quest of trying to beat the market. If you want more ways to understand why, Robin Powell tackles the subject in a guest post on Humble Dollar this week.

Robin cites Meir Statman, a finance professor at Santa Clara University, who gives several good (/bad) reasons including this particular bugbear of mine:

Many investors, Statman says, frame their returns relative to zero, rather than relative to the market return — the performance they could have earned by investing in a low-cost index fund.

“A 15% annual return is excellent,” he says, “but it is inferior when an index fund delivers 20%.”

It’s been at least a decade since I’ve taken seriously any active investor who doesn’t benchmark properly. Yet go to a meet-up and you’ll find they abound.

Perhaps that’s because as the wonderfully-named Professor Statman says, many of us:

…need to feel that we’re better than average.

And nobody active investing to that end wants a number telling them otherwise!

Have a great weekend.

[continue reading…]

1. I currently own only Lindsell Train off this list. [↩]