A mistake even experienced investors make is to think of bonds and cash as identical.
Bonds are not the same as cash. Confusing the two is a bit like mixing up a bicycle with a unicycle. Yes, both have wheels. But one will give you a much smoother ride than the other.
For instance I once heard David Kuo, then head of personal finance at The Motley Fool UK and a frequent radio personality, mix up cash and bonds in a (now deleted) podcast.
Quoth Kuo to his guest:
“Do you buy into that rule of thumb that says that you express your age as a percentage, and that should be the amount of your portfolio allocated to cash? So somebody who is 20 years of age should have 20% of their portfolio in cash, a 30-year-old should have 30%, and so on and so forth?”
But as we’ve previously explained, the rule of thumb is to hold your age as bonds – not cash.
Similar idea, but potentially very different in practice.
This is not to pick on Kuo. I’m sure it was just an honest slip and Monevator is hardly not error-free. But I think it was telling mistake.
The fund manager Kuo was interviewing later pointed out the flaw in substituting cash for bonds:
“I wouldn’t necessarily say cash either, cash has not generated such good returns as fixed interest over the very long term, so you’re better off probably suffering a liquidity risk with fixed interest investments, rather than cash.”
Here liquidity risk means the chance that your investment will be worth less than you paid for it at any particular point in time, due to the fluctuating market value of bonds.
This risk is just one of several important differences with cash.
On the other hand, as the manager says bonds have delivered higher real returns than cash over the very long-term.1. And that difference in return profile is the other crucial distinction.
Cash pays a varying rate of income that shifts with market interest rates, competition between banks, and so on.
Cash is extremely liquid. You can typically transfer it from one person to another without any trading costs instantly. And you can withdraw it from a current account on demand.
Very long-term returns from cash are poor – in the UK only about 1% ahead of inflation.
Someone may be about to say something about inflation here, and how this is a big risk of holding cash.
But inflation is an equal opportunities wealth-sapper in its ability to erode real returns.
Everything is affected when a £1 today is worth 90p next year. Cash obviously. But also a share price, say, or the value of your home.
Yes equities have been a better defence against inflation than cash – but that’s because their total returns have historically been much higher. A nominal 10% return from equities still becomes a 5% real return when inflation is at 5%, just the same as a 5% return from cash becomes 0% in real terms.
So if you have reason to hold a chunk of cash instead of buying more equities or bonds or anything else (say for safety, emergency fund, portfolio ballast, diversification) then inflation is kind of moot.
Turning to bonds:
Bonds fluctuate in value – the price of a bond goes up and down between its issue and its eventual redemption. This makes bonds riskier. (See my old piece on what causes bond prices to vary).
Bonds can default which also makes them riskier than cash. Highly-rated UK government bonds are assumed to be risk-free (because the government can always print more money) but they are still riskier than cash, which has no default risk. Corporate bonds are much riskier than cash.
Bonds are less liquid than cash. You’ll need to buy and sell your bonds via a broker, who will charge a fee.
Bonds pay a fixed interest rate (usually).
Bonds repay their par value on redemption (unless they default, and without getting into the complications of linkers).
With government bonds your protection comes down to the ability of the issuing government to meet its obligations. (And separately, any investor protections that apply to the platform you’re holding the bonds on.)
Very long-term returns (50 to 100 years, say) from bonds are better than cash, but timing plays a part over the short to medium term.
As you can see, quite a difference!
Confusion marketing
I understand where the confusion between cash and bonds comes from.
Private investors – especially old-school stock picker types – tend to think either ‘equities or not equities’, rather than considering cash as a separate asset class. Let alone grappling with the different types of bonds, the intricacies of duration, or other bond-nerd-o-terica.
Meanwhile institution investors moving around vast quantities of assets typically don’t have the option of going to cash for any meaningful period. Instead, when they ‘go liquid’ they typically go into short-dated government treasuries, which are ‘cash-like’ investments but are not cash.
Company reports use terms such as ‘cash-like’ or ‘near-cash’ when describing their assets, too.
It’s sometimes an appropriate shortcut to lump cash and bonds into the same – very wide – basket, but we need to remember when and why we did so, and to know when it’s definitely inappropriate.
Cashing up
The fact is you could put £10,000 into very long-dated – say 30-year – UK government bonds yielding 5% and I could put £10,000 into a bank account paying 5% and after a year your bonds could be worth almost anything – thousands of pounds more or less than you paid – while my cash would still be worth £10,000.
That’s the intrinsic risk of bonds.
Now, if you held your 3o-year bonds until they matured and we both kept spending all our income, then after 30 years you’d redeem your bonds and have the same amount of money as me: £10,000.
But if you needed to sell your bonds in-between?
Finger in the air time.
Note though that while I am ignoring income for simplicity and to make a point, over the long-term doing so is really unfair on bonds. That’s because the known-in-advance income stream from bonds is a huge component of what de-risks them as an asset class.
Thanks to the knowable elements of a bond’s future returns (the redemption value and coupon rate) you can pretty confidently approximate your long-term returns at the very moment you buy.2 Rather than it being a crapshoot like with equities, or even cash. (Interest on cash varies, whereas a bond coupon is fixed).
See our article on whether you should hold cash or bonds for more on this. (And remember the answer is often ‘both’!)
Horses for courses
To confuse matters in conclusion, you will sometimes hear high-falutin’ types who read Monevator (or who write it) describing cash as like a zero-duration bond.3
What they mean is that in having no maturity date, cash is like a bond that continually matures in the next micro-moment.
This mental accounting has some useful side effects. For example, it makes it obvious that one way to reduce the overall riskiness of your bond portfolio is to swap some of your bonds for cash. This reduces the average duration of your bond bucket, and hence how much it fluctuates with interest rate moves.
However as I’ve listed above, even a zero-duration bond – a bond that matures tomorrow, say, in practical terms – has a different risk profile to cash.
Sure, if I had to pick the asset most like cash – the safest, most liquid, and hence most ‘cash-like’ in the world – I’d choose very short-term US government bonds, hedged to your local currency. (And recent ratings downgrades be damned!)
The chances of you not getting your money back on those are tiny. You’d be paid an income, too.
Similarly, if you want to mix-up the non-equity holding part of your portfolio then diversifying beyond bonds into cash (or vice versa) is a logical first step.
But similar is not the same as identical. And as soon as you add any meaningful duration to the bonds in question, the differences become pretty clear.
Both cash and bonds are valuable assets precisely because they can play different roles in your portfolio. (Yes, even after the bond rout of the past 18 months.)
Cash and bonds are not the same.
Thanks for reading! Monevator is a spiffing blog about making, saving, and investing money. Please do sign-up to get our latest posts by email for free. Find us on Twitter and Facebook. Or peruse a few of our best articles.
At least if you ignore any hard-to-calculate boost from rate tarting your money from one best buy savings account to another [↩]
The reason you can’t ‘perfectly’ calculate the future return is you don’t know what price your bonds will be trading at as you come to reinvest that income over the years. [↩]
Specifically a floating-rate bond, as the interest rate varies. [↩]
For MAVENS and MOGULS byThe AccumulatoronAugust 15, 2023
The standard advice for passive investors is to match the duration of your bond holdings to your investment time horizon. Sensible enough – but, like many an oft-repeated heuristic, this duration matching strategy has been boiled down from a rich broth of nourishing guidance into a thin soup that amounts to empty calories for most people.
So let’s take a fresh look at duration matching’s nutrition label and find out:
This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.
Consumer Duty has been hailed by some as the biggest overhaul of financial services in 30 years. But to this jaded inexpert outsider – and skim-reader – it has mostly come across as either stuff you’d think a regulator would be regulating already, or else an open-ended mandate to change the playing field as it goes along.
However this story in the Financial Times this week was pretty notable:
The UK Financial Conduct Authority has ordered asset managers to justify the fees charged on their funds, adding to the pressure firms are already facing from the rising popularity of cheap passive trackers.
The regulator on Thursday said a review of authorised fund managers showed that tensions between profitability concerns and assessments of funds’ value for money were influencing how much to charge clients.
The rise of passive investing in recent years has spurred competition within the industry, forcing some funds to reduce their fees and sparking a wave of consolidations as asset managers battle to cut costs to maintain their margins.
However, despite the reduction, the regulator has sought to reform the way fees are calculated, arguing that some asset managers are still failing to provide good value for clients facing high charges.
Active fund managers having to prove their funds are worth the money?
I imagine the industry has already drafted its initial reaction:
Given that all but the most incurious investors know there’s now abundant evidence that the majority of retail funds underperform their benchmarks, you almost wonder what the FCA is thinking here.
Does it want to blow up the golden goose that funds it?
If the regulator was just going after fund marketing, then perhaps the active fund industry would have a chance.
A start-up index fund manager used to tell me it was hard to compete with actives via advertising because he wasn’t allowed to cite positive performance comparisons in marketing. I have no idea if it was that simple. But certainly I noticed afterwards that active fund adverts focussed more on ships sailing over choppy waters or cartoons of Victorian-style adventurers hunting profits in the jungle than on citing any market-beating statistics. For obvious reasons, in the majority of cases, you’d have to think.
In any event, the FT headline reads: “FCA tells UK asset managers to prove they offer value for money”.
And this, frankly, seems an insurmountable challenge, on an industry-wide basis.
Cruise whiner
I’m not saying fund managers are evil or that beating the market at a portfolio level is all-important for every investor or that no active fund has ever outperformed for decades.
None of that is true.
But it’s a stone-cold fact that most active funds lag their passive equivalents, over the long-term.
So on the face of it, fund managers are just not going to be able to prove that most funds ‘offer value for money’. At least not whenever there’s a cheaper index fund equivalent available.
Hence, as characters used to say in 1990s sitcoms to make sure you noticed a plot twist …
…this should be interesting.
It’d be good to hear from any readers – or industry insiders – who’ve delved deeply into the Consumer Duty standard in the comments below.
Hurrah! We’ve persuaded another Monevator reader to pull up a pew and tell us their strategy for financial independence (FIRE). Learn how 42-year old Geoff – FatBritAbroad in the Monevator comments – is on-track to retire comfortably at 50, even if he stopped saving tomorrow.
A place by the FIRE
Hello! How do you feel about taking stock of your financial life today?
Very honoured to be asked – but a little nervous!
How old are you?
I’m 42 and I live with my fiancee who’s 40. We’ve been together for nine years and will get married next year.
Do you have any dependents?
One daughter, aged three. And a dog – does he count?
I would have previously considered my mother as a dependent, but she passed away at the end of 2021. My father is in his early 70s and my stepmother is late-60s. Both are far fitter than me!
Where do you live?
A suburb of Reading on a quiet side road.
I was born in Stockport but moved down at a very young age with my dad’s job. My mum had long-term health issues, so when I moved out of the family home I wanted to stay close.
Location-wise it’s very convenient – you can walk to the shops, doctor, café, children’s nursery and so on. It also has a 24-hour bus service which saves on taxi fares. London is just a short hop on the train.
But both my partner – who’s Cornish – and I would love to be in the countryside. We’re wrestling with when to make that move.
When do you consider you achieved Financial Independence (FI)?
That’s the million dollar question!
I’d class myself as ‘LeanFI’1 or possibly ‘CoastFI’2 in that my essential bills are covered and I could live a semi-frugal life (by my standards) without working.
I probably don’t have assets in the right places to fully retire yet to the life I want. However even if I don’t save another penny, the growth on my assets should easily get me there.
Will I ever decide I’ve got enough? Or will the goalposts will always move?
Assets: a cool million (and a bit)
What’s your net worth?
£1.1 million.
How’s it comprised?
I own my house worth around £600,000, with an interest-only mortgage of £270,000 – fixed until 2027 at just 0.99%, thankfully. (Yes, I am that insufferably smug person at parties.)
There’s £270,000 in ISAs and other investment accounts and £450,000 in pensions, as well as about £45,000 in cash.
This is between me and my partner. But the vast majority is in my name.
I also have – on paper – a stake in my employer. If it works out that should net mid six-figures. But I don’t count that yet. I also don’t count jewellery or cars in my net worth. If I did there’s about £50,000 of assets there.
I’ve thought about a buy-to-let. But property terrifies me. It’s so illiquid!
Can you explain how these assets will let you coast to FIRE ?
The 4% rule is my guide. So: £750,000 at age 42. Let’s say I retire at 65 like normal people. A 5% real return gives me £2.3m in today’s money. Plenty.
That’s not taking into account our two state pensions or my house equity or future inheritances. So I’m okay should the worst happen and I can’t continue to put savings aside. It’s just a question of when.
What’s your main residence like?
It’s a four-bed one-bathroom semi built in the 1930s, but extended. There’s a large kitchen, decent-sized rooms, and so on. It was my house originally and when I got divorced a few years ago I was fortunate to be able to keep it, then my now-partner moved in.
I would like a larger house with a second bathroom. Emotionally I love the idea of choosing a property with my partner, which she can really call hers. But having just become effectively mortgage-free, I’m struggling with the idea of taking on extra debt again.
Do you consider your home as an asset?
It’s an asset in that I could sell it and realise the cash. But it’s definitely not an investment.
My opinion on property has changed. If I had my time again I’d have stayed in a much smaller property and built up other assets before upsizing. But they don’t teach you these things in school.
This was why I went interest-only on my mortgage a few years ago. I realised tying up a load of money in a property wasn’t very smart and that you could be ‘mortgage free’ by holding equivalent assets elsewhere, while hopefully generating higher returns – as well as having access if needed – and so be far more secure overall.
My opinion is most people in this country own far too much house – by necessity, given house prices – and not enough of everything else.
Earning: by the book
What’s your job?
I’m a broker dealing with business insurance. I advise businesses on risk and have my own roster of clients.
The industry has changed in the last few years and I don’t enjoy it as much as I did. I find the stress difficult, which is what led me to explore FIRE.
My partner works in marketing.
What’s your annual income?
£100,000 exactly! Plus 6% pension contributions. I also earn bonuses for referring clients to other parts of the business, and a theoretical earn-out if the company does well.
My partner works four days a week and earns £32,000 plus an annual bonus – usually around £3,000.
How did your career financial plans progress over the years?
I was interested in money from an early age. I think this stemmed from my background, which is upper middle-class.
My dad was a CEO of various mid-sized companies so he earned good money and was self-made, having come from a very poor background. So I had a very privileged upbringing. I went to private school and always felt I needed to prove myself.
After finishing A-levels, I took a year out before university. I worked in an insurance call centre dealing with personal lines insurance. My first salary was around £10,500 a year.
I decided not to go to uni. Instead I got a job with a small family broker and learned the ropes on commercial insurance. I quickly realised that’s where the money could be made.
Starting salary was around £14,500 in personal lines. During that time I studied and got my insurance diploma. I then went into commercial and worked there for a seven or eight years, with various small increases in salary, before that company was bought out.
I stayed on for two years but I really wanted an advisory role. The business was willing to let me do the job – but didn’t want to pay me!
So I left, but then returned within six months in an advisory role. By now my pay was around £29,000 and I was aged about 30.
The turning point for me was aged around 32 and earning around £32,000, when our company offered us a new contract. We’d be paid as a percentage of our book value. I was good at my job and had a decent-sized book – and I was vastly underpaid. I realised the new contract would result in a 50% hike in my salary year one!
Unsurprisingly I jumped at it. This was life-changing, as I’ve been lucky enough to grow my account by 5% to as much as 20% every year since.
It’s an unusual path to a six-figure income…
Yes, I’m unusual possibly in that I’ve only changed companies three times. And one of those was to go back to my old firm after four months!
The last time was at the end of 2021 when the company I’d worked at for 15 years was bought by a large international brokerage.
My old CEO left, set up a new business, and invited me to join. I was burnt out in my old job – I was already struggling when the pandemic tipped me over the edge – so I decided for once to take the ‘risky’ option.
It’s been a tough first year – particularly losing my mum at the same time – but I’m glad I did it. It’s been a massive confidence boost, which I needed.
What did you learn on this path that you wished you’d known earlier?
That careers aren’t linear and to not put so much pressure on myself to earn a certain amount by a certain age.
The decisions I took were purely financial, whereas I wish I’d got more varied experience. That would have stood me in better stead now. I’d like to change careers but have no idea what else I’d do!
I guess it’s natural when you’re a low-earner to focus on the salary. But when I hit my target of £100,000 a couple of years ago, I was surprised it didn’t make me any happier.
Do you have any other sources of income?
I regard my investments as my alternative sources of income. But that’s it.
Did pursuing FIRE get in the way of your career?
That’s an interesting question. One downside of FIRE is as I’ve become more financially secure, the drive to progress has diminished. To the point where I’m considering going the other way – to a lower-paid, less stressful job.
A lot of my self worth is wrapped up in what I do and what I earn though, and I have felt like this would be going ‘backwards’.
The reality is I’m bloody lucky to have the choice.
Saving: dealing with temptation
What is your annual spending?
It’s changed recently as I’m trying to enjoy the money more.
My annual spending has been around £40,000 in recent years. That includes nursery fees, which are extortionate!
I now keep my fixed costs as low as possible but splurge on one-offs. My basic bills are less than £2,000 per month.
Do you stick to a budget?
I used to, ruthlessly. But there’s such a decent margin between our earnings and our fixed costs now that I don’t really budget anymore.
I do use an app to track spending and investments. The latter is mostly automated, and I also top-up with extra spare money.
What percentage of your gross income did you save over the years?
I’ve always been a saver, even on much lower wages – at least 15% into a pension. I had around £100,000 by 30, despite not earning a high wage.
When I found FIRE and with my earnings increases, my savings rate rose to as much as 50%, particularly during the pandemic.
What’s the secret to saving more money?
Paying yourself first and earning more.
Do you have any hints about spending less?
Focus on what you can control and shop around for fixed bills where you can. Allocate time to this or it will drift.
Do you have any passions or hobbies or vices that eat up your income?
Yes! I often describe myself as a FIRE groupie. I love the philosophy of intentional spending and high savings rates – but I am a product of my upbringing and I struggle sometimes with wanting the finer things in life.
I do indoor rock climbing as a hobby and for fitness. We enjoy travel – harder with a child now – and we like short breaks and nice hotels and restaurants. I’m more about spending on experiences than things, though I did buy myself a nice watch with part of an inheritance as a keepsake.
I limit myself to maybe once a year going to top restaurants and five-star spas. Otherwise it’s free holidays to Cornwall, staying with parents, and playing on the beach.
I’m slowly realising that I enjoy these simple holidays as much as swanky hotels. Part of my journey is deciding whether I really enjoy those fancier things enough to continue to work for them.
I’m definitely a work in progress. Is SchizophrenicFIRE a thing?
Family in Cornwall is perfect for FIRE-friendly getaways.
Why are you still saving if you believe you’re on-track to hit FIRE?
A multitude of reasons – starting with anxiety, which I’ve had counselling for this year and which led to me to try to enjoy spending more now.
I’ve found it helps to consider purchases as a percentage of my net assets. If I’m making a fairly big purchase and it’s less than 1-2% of my net assets, I spend more spend freely now.
And 1-2% of £750,000 is a lot! I think this is the biggest difference in your attitude to money when you’re wealthy versus just having a high income. Though I don’t really feel well-off yet – I was shocked to read statistically I’m probably in the top couple of percent in the UK for my age. Saving into accessible ISAs and keeping more in cash has helped.
I’d like to bring my retirement date forward, but having prioritised pensions for so long I don’t have assets in the right place yet.
My aim is ‘FatFIRE’3, but with the option to retire earlier on less. It’s a moveable feast as I’m trying to work out what makes me happy instead of living up to my father. The important thing is flexibility.
I do want a feeling of security whatever happens, and I’d like to be able to help my daughter without it impacting our own living standards.
Finally, there’s a certain amount of making hay while the sun shines. I feel very lucky to end up on this salary, and I want to make the most of it.
Investing: passive, with small lapses
What kind of investor are you?
I’m boringly passive but aggressive – 100% equities at the moment. Almost everything is in a Vanguard global ETF. But I also have a nominal amount in Fundsmith because I like Terry Smith’s targeted approach.
I need to bring some bonds in. But I can’t get my head round why I wouldn’t just hold say three years cash and the rest in shares when I retire. More reading required!
I have a few thousand in a share called Pantheon International too. That’s about as far from a tracker as you can get.
What was your best investment?
Definitely my pension. Given I only really started earning good money ten years ago, I’m living proof of the power of starting early and compounding.
Did you make any big mistakes on your investing journey?
Probably not keeping my first house as a buy-to-let – and divorce. While it was amicable, it cost me £150,000.
The biggest other mistake was falling into the leasing trap for cars. I did this for six years. I rationalised the monthly payment wasn’t much more than the loan I had for my old car, for which I could drive a nice new BMW. A car allowance covered most of the cost.
It was only after reading blogs like Monevator that I realised that between the payments and the opportunity cost this cost me probably around £60,000!
What has been your overall return, as best you can tell?
Being a passive investor I don’t track returns – I wouldn’t know how! I know my money will do better in investments than cash and that’s all that matters.
How much have you maxed out your ISA and pension contributions?
I’ve filled my pension several times – including making use of previous years allowances when I’ve had lump sums from SAYE4.
I usually fill one ISA. I haven’t made much of a dent in my partner’s.
When my mum passed I received an inheritance of around £150,000. I’ve kept a lump sum from that in cash as I’ve never held much before.
To what extent did tax incentives and shelters influence your strategy?
More than it should. I’ve had a weird mortal fear since I was young of being poor in old age so I prioritised my pension, especially when I became a higher-rate tax payer.
I’m now dialing back as of this year, despite the tax hit, which may have been the wrong way round to do it. But I’m still contributing 16% with my employers’ match.
How often do you check your investments?
Daily but only because I find it interesting how the market movements affect it. As your assets grow you’re supposed to become more risk averse but to me it’s been the opposite. The numbers don’t feel real anymore.
When the pandemic hit and the market tanked I upped my pension to the max and did the same with my ISAs.
Wealth management: wealth is health
We know how you made your money, but how did you keep it?
I’m fortunate I’ve always been a saver so I’ve always saved the maximum I can each month. Any lump sums like bonuses or inheritances I regard as just that – a bonus. I invest those as they come.
I suspect I’ve topped out, salary-wise. I’m probably paid 25-50% more than is standard for my job role, and I’m not confident if my new job doesn’t work out that I would get anything like this elsewhere.
My plan is to continue to save 20% of my net salary, but prioritising ISAs for flexibility. This hopefully has me retiring at 50 – or at least gives the option.
I was aiming for a million and a paid-off house but now think I will need more like £2m for the lifestyle I want.
One more year, anyone?
Which is more important, saving or investing?
The savings habit is crucial to build some assets, but then learning about investing is how you make real wealth as a normal person. I wish I’d known this in my 20s.
We’re conditioned by social media with a perception of what a millionaire is – private jets and flash cars. When you get there you realise a million is very attainable. Also – it sounds stupid to say so – but it’s not that much!
Was financial independence a goal with a timeline?
It’s been a goal since I was young though I didn’t have a word for it.
My early goal was to have the option to retire at 50, as I’d seen a lot of people lose their jobs and struggle to get a new one.
Did anything unexpected get in your way?
My divorce was a big shock. We’d been together since we were teenagers. I had a life plan laid out and suddenly it was ashes.
I think a lot of my stress and burn-out stemmed from that.
A lot of people fear divorce will derail their finances for life…
Yes it’s normally a catastrophe. It wasn’t in my case for a few reasons.
We were both high-earners, yet we were young so we had few assets. Also there were was no kids.
Once I realised it was over I became very practical on the finance side. We agreed to a 50-50 split and not to touch pensions.
We had only bought the house a year before so there wasn’t that emotional baggage. I thought about moving and looked at apartments but they weren’t much cheaper. I realised I could keep the house, just about, with a mortgage of nearly six-times my then-salary. I rented two rooms to friends on mate’s rates and that basically covered it.
I was single for about a year before I met my partner, who moved in after 12 months. She was renting the flat she’d had with her ex and couldn’t afford it anymore. I paid my mortgage down aggressively and thanks to salary increases and price rises after five years I could remortgage at 60% LTV.
So divorce was more of a blip for me, as I continued to save aggressively into my pension. A high saving rate is a superpower!
Does money cause friction with you guys, given the wealth disparity?
Great question. Having seen parents in this exact situation tear themselves apart in a divorce I’ve chosen a different approach.
We had the money conversation very early. My partner is very independent and – quite rightly – insisted on paying for every other date.
After a couple of months I sat her down and said: “I want to ask you a personal question. How much do you earn?”
She was earning less than a third what I did, on which she was supporting herself and paying rent. She had less than £50 spare a month after essential bills. I said I didn’t want to be a meal ticket but I’d like to do things she may not be able to afford and it would suck the enjoyment out if I worried about her. I get pleasure from spending on others – more than I do on myself.
I suggested that if I took her out I would assume I was paying and then she could contribute what she was able to, so she didn’t feel she was taking advantage. It worked well. We’d go to the theatre and she’d pay for the train tickets and I’d pay for the seats and dinner, for example.
When she moved in she paid me rent to begin with – her choice, not mine. I kept it in a separate account and made sure she knew it was there and that if we broke up she’d have it back as an asset. She’d had nothing from her ex.
She’s still fiercely independent but she trusts me completely. She knows I’m good with money. She’s frugal but doesn’t understand investing. There are no secrets and I involve her as much as I can. She pays the nursery fees, enabling me to invest more and I made her up her pension contributions as she had very little when we met. She pays a bit into our ISAs (in her name) and the balance of £600 or so of her income she spends on her mobile and as she sees fit, so she doesn’t feel beholden to me.
It’s a struggle to even get her to put non-frivolous spending like petrol for her car on our joint credit card, instead of taking it from her ‘fun money’.
I’ve continued to contribute to her pension periodically. The house is still in my name – one reason I want to remarry. We’ve been together nine years and the vast majority of our assets were built as a couple. She’s been instrumental in supporting me. If we broke up she’d have a home bought and I’d support her and our child until the latter was 18.
It’s what you sign up to. When I left my job she knew it might not work and when I said I might end up on a lower salary and I was the main breadwinner she responded: “being the breadwinner involves keeping some kind of roof over our heads and food and clothing for your daughter. It does not involve business class flights and luxury hotels”.
She’s a good egg. It works because we’re both empathetic of the other’s position.
Do you have any further financial goals?
I would love to be in a position to buy my daughter her first small property. Despite my wealthy background I received almost no help from family and it was only my financial weirdness from a young age that meant I started early.
There’s a balance with these things as I don’t want her to grow up with no struggles. But it’s even harder now than it was when I was young.
At least she already has an ISA and pension!
We’d like to move to Cornwall in the next few years but the salaries aren’t what they are here. And although I work from home most of the time I’d also worry about commuting.
We’ll move when money isn’t an issue anymore.
What would you say to Monevator readers pursuing financial freedom?
Even if you don’t want to retire early, having financial security is life-changing. You never know how you will feel a few years from now.
I always thrived on high-pressure jobs but the last few years are the closest I’ve come to knowing what mental illness feels like. The knowledge I could walk away and be okay has helped me cope.
Wrapping up
When did you first start thinking seriously about money and investing?
I’ve been interested since I was a teenager. From some counselling I’ve had recently, I think it stems from the fact that although I was privileged financially, my childhood was very chaotic – a parent with mental health issues, several breakdowns in my parents’ marriage culminating in a very acrimonious divorce – and I think that instability meant I craved security.
From starting work my process was basically invest a lot in my pension, save a big chunk in cash for things like houses and cars and a safety net, then spend the rest like most people. It was only in the last ten years that I began to think more seriously. Particularly with the big jump in salary.
I began by dabbling with individual stocks and shares. I thought the way you invested was to keep most of your money in cash and then gamble on the market with the small amount you were willing to lose.
It will sound ridiculous to readers given I work in financial services but I suddenly had a light bulb moment: I was already entrusting my financial future to the market with my pension. Through all its ups and downs I’d continued to invest. So why wouldn’t I invest that way in my ISA?
This led me John Bogle’s book and finally to Monevator. My eyes were opened, and at last I understood how the market worked and felt comfortable putting nearly all my money into it.
On a personal note, I also lost a close family member aged 53 suddenly who was a classic high-earner, high-spender. This coincided with me getting towards where I wanted to be salary-wise, and realising I wasn’t any happier than when I earned less. Together with my divorce it all had a profound effect on me – almost a mid-life crisis, in my mid-30s.
All my goals were financial and they felt quite hollow to be honest. A Pyrrhic victory. But then I discovered the FIRE movement. The philosophy resonated with me as a way out. I haven’t looked back since.
Did any particular individuals inspire you to become financially free?
In terms of people in the movement, The Escape Artist and Monevator were the first blogs I’d read.
My grandfather retired at 53. Seeing him have a number of very happy years before Alzheimer’s took him in his 80s – with a cruel decline from his late-70s – brought home that life is too short.
What resources would you suggest?
Monevator is hands down the best blog I’ve read both in terms of simple and complex topics. (I’m not on commission, honestly!)
I’m generous on an ad hoc basis when something resonates with me but I need to do better at giving more regularly. I guess it’s part of my financial anxiety that I don’t feel able to yet.
I’m more on the ‘charity begins at home’ side. Our extended family don’t have much, so we treat them to experiences they wouldn’t otherwise have.
Inheritance wise I’ve been called a champagne socialist… Set the limit to a decent amount – what I’m not sure, a million does feel low in today’s world – and then tax based on the income of the recipient, that’s my feeling.
If the money could be ring-fenced for social mobility plays I would be very pro that. It’s easy to say I did everything myself but the reality is with a private education and the ability to live at home and save I was streets ahead of friends who are successful now, but who struggled early on.
What will your finances look like towards the end of your life?
I’m mindful of the trap of holding on to assets too long on the off-chance I might need a golden bedpan when I’m 80. I’d like to pass them down earlier and teach my child to manage money to build a legacy for her.
On-track for FIRE on-demand, and with a fair wind any remaining challenges look mostly mental to me. We love to see it! Questions and reflections welcome but please remember Geoff (/FatBritAbroad) is a reader sharing his story, not a hardened trench warrior like moi. Constructive feedback is fine. Personal attacks will be deleted. See our other FIRE case studies.
The low-budget take on Financial Independence Retire Early. [↩]
Standard Financial Independence Retire Early, but it’s still a few years away. They key is you coast there on investment growth, without needing to save any more. [↩]
The luxury higher-income version of Financial Independence Retire Early. [↩]
