Yes, my friends. You are looking at a gold coin minted by the Royal Mint. What you probably don’t realise is that this is my gold coin; my virginal venture into buying gold coins as an investment and hence, I hope, the first of many.
Hopefully, by the time you’ve finished reading this post you’d be persuaded that buying gold coins as an investment is not half as dumb as it sounds. First I tell you how I got to buy my first gold coin; this is personal and you could skip this part. Next, I’ll give you the reasons why buying gold coins as an investment makes sense. I’ll also tell you what my research about the best, and cheapest, way to buy gold coins as an investment concluded.
Now, let us start.
My story or why I decided to buy cold coins as an investment
Gold coins are part of my childhood and early memories of childhood rivalry. When I was very young – we are talking four, five years old – I lived with my grandparent. Apart from running wild in the fields around their farm and feeding myself from the garden, I spent countless hour rummaging through old chests that smelled musty of the times that have been.
I found many things. I found old pieces of paper, broken fountain pens and old photographs. One of these sepia photographs I found particularly intriguing. It showed a young couple, leaning towards each other and smiling at the camera. These were my great-grandparents. He had a formidable moustache and she was wearing the most bizarre necklace I’d ever seen: it went from her neck almost to her waist and was made of row after row of different gold coins.
“Who would want to wear all these coins?” – I thought.
“This is for my oldest granddaughter.” – my grandmother said.
It wasn’t for me. Oh well; I’ll have to make my own way in the world then, I’ll have to get my own gold coin.
When I grew up, I forgot about that. I earned money, spend money, got in debt and paid it off and always used my wealth to nourish my life. Some year back I started investing and I’ve experimented with value investing, toyed with dividend investing, invest with digital wealth managers and have bought and/or started businesses. I never thought of buying gold coins as an investment.
Until about six months ago.
What happened six months ago?
I looked at the world and it seemed a very unstable place to me. Armies moving around Europe, North Korea shooting nukes, the UK leaving the EU and the rise of the ultra-right in politics. Shall I mention the melting of the ice-cap and the rest of our pressing ecological concerns? No, I better not. Still, you get where I’m coming from and where I’m going with this one.
The image of my great-grandmother and her necklace shot through my mind. Suddenly I realised that the necklace wasn’t a piece of jewellery, it was peace of mind. This was the liquid part of my ancestors’ wealth that she carried around with her.
That is when I knew. Investing is all too well; keeping our money behind plastic cards is convenient. When things really get bad investments and bank balances will help little for survival. What I need is gold coins.
After discussing it with John, I ordered our first coin.
I still didn’t see buying cold coins as an investment, though; I saw buying gold coins as my peace of mind, my source of security in a volatile world.
Feel free to laugh; I may be a Business School professor and like the finer things in life but still deep down there is a peasant from the Balkans that remembers what it takes to have to get up and run for your life. And what it takes to survive.
Why buying gold coins as investment is not a dumb idea
I thought of buying cold coins as my private source of peace of mind until I did some research and some thinking. Now I think it’s worth having some of our investments in gold coins.
Before we go any further, I must tell you that not all gold coins are created equal; which probably kept me away from buying them to begin with.
On the one hand, there are the collectible gold coins. These have dual value – they are valuable because they are rare and they are valuable because they are gold. These are not the gold coins that interest me: somehow, collecting coins in my mind is up there with train-spotting as worthwhile way to spend time.
On the other hand, there are the so-called bullion gold coins. These are Sovereigns, Britannias and Lunars. Bullion gold coins are valuable only because they are gold and track the price of gold. These are the gold coins that interest me.
Having got this out of the way, let me tell you what makes buying gold coins a worthwhile investment.
Gold has returned good profit in the past
There is something that somewhat surprised me: gold has historically given very good returns. Yes, I know that past performance is not a guarantee for what may happen in the future but it is the best we have. Also, looking over sufficiently extended period provides some comfort.
Looking at very recent history, I’d agree that buying gold coins as an investment is not worth it (remember that I mean bullion gold coins). Let’s put it this way: between 2012 and 2013 the price of gold drop by over 27% and has been moving gently up and down ever since.
Looking at the last 20 years, however, shows a very different picture. (Yes, I’m such a hopeless nerd I looked over the last 200 years but won’t bore you with all these numbers.)
Between 1995 and 2015 the price of gold went from $387 to $1,060. In other words, the price almost tripled which is an annual average return of 5.17%. For comparison, in the same time the FTSE100 rose at 5.4% per year (although the average investor got only 2.5% per year.)
Gold bullion coins are exempt from VAT and tax
“Well” – you may be thinking – “why would I buy gold coins when the stock market still outperforms gold?”
Didn’t you hear what I said? The average investor, and this includes most of us, is lucky to get 2.5% return.
There is also the fact that the stock market seems to be going up and down as a yo-yo in the hands of a toddler; gold, according to data is somewhat more stable.
Still, this is the small stuff. Here are the two things – and doubt you know this – that make buying gold coins as an investment even more attractive.
#1. Gold bullion coins are exempt from VAT. Doesn’t sound like much but this is 20% in the UK now.
#2. Gold bullion coins are free of capital gains tax. This means that you can buy them on top of your ISA allowance.
Gold coins are very liquid
Remember that a key rule of investing is to keep high level of liquidity? Gold coins are very liquid – you can buy them and sell them very easily.
Also, you can keep your gold coins with you: either safe in your home or in a safe in your bank.
Gold coins are a source of security
This is very difficult to argue because it is very personal and impossible to measure. For me, having some gold coins makes me feel more secure and less fearful of the future. This is important for me: reducing my levels of worry leaves more space to focus on the things that bring meaning to my life.
May be this is just me.
Where to buy gold coins as an investment?
When I was only thinking about it, I looked at the gold coins in the local pawn shop. Yes, you heard right – it is a weird pawn shop where they also offer the best rate on currencies, sell jewellery and buy and sell gold coins.
When I got serious about buying gold coins I looked on the internet. I chose to buy my first coin directly from the Royal Mint. You see, it was enough that I decided to add some sparkle, literally, to my investment portfolio and worrying about authenticity and whether the coin would reach me were thing I didn’t wish to concern myself with.
It turns out that I probably should have looked wider. When I compared the cost of gold bullion coins across three providers – The Royal Mint, Coininvest.com and BullionByPost.com – it turned out that the Royal Mint is most expensive and Coininvest.com cheapest.
You don’t have to take my word for it – look around. Just make sure that you don’t get cheated (collect as much information on providers as possible).
I bought my first gold coin as way to ensure my peace of mind: in my opinion the world is a very dangerous place again. When the world is a dangerous place wealth, or at least some of it, should be easy to access and even easier to carry with you. Gold coins are a perfect match.
Looking more carefully, I found out that buying gold coins as an investment makes sense. The price of gold has increased by over 5% per year in the last 20 years and bullion gold coins are exempt from VAT and free of capital gains tax. Sounds good to me.
What do you think about buying gold coins as an investment? Is it worth it?
One question my readers seem to ask me regularly is whether ISAs are a good investment. Here I’d tell you why I believe ISAs are one of the best investments around and how you can select the ISA for you.
But let me tell you a story first.
The other day, I met and old friend of mine and, as often happens these days, our conversation over coffee turned to retirement dreams and the provisions we have made. (There was time when we didn’t talk about retirement and minor maladies but about nights spent partying and career ambitions. Oh well…). I mentioned my stocks and shares ISA with Nutmeg, proud that I maxed it out and hopeful that it is the foundation to a more secure future.
“But why are you doing this?” – my friend asked. “I didn’t put much in my ISA last year. The interest rates are so low now that it hardly matters whether you keep your cash in a savings account, under the mattress or in an ISA, right.”
Wrong. Contributing to an ISA, and maxing it out when the opportunity is there, is still very much worth it. It is worth contributing even to a cash ISA though the interest this will bring is on the low side. According to Money Week, the best interest rate on a cash ISA today is 1.95% with building society Principality’s five-year bond and this is branch based and available only if you live in Wales or the Welsh borders. The next best is Paragon Bank’s five-year bond paying 1.75% which is online only. You get the picture.
Despite the low interest rates, cash ISA can be a great saving vehicle.
Now let’s talk about stocks and shares ISAs.
Here are four features that make stocks and shares ISAs a good investment:
#1. Stocks and shares ISAs are a good investment because they are very tax efficient. You know that profit from investments is taxed, right? Well, if you keep your ISA contribution within the tax-free ISA limit (for 2017-2018 this has gone up to £20,000 in case you didn’t know) you won’t pay any tax. This is how ISAs are ‘tax-free’ (remember though that the Government has already taken its cut because you contribute after tax income).
#2. Stocks and shares ISAs are very flexible. This is most easily understood by imagining your investment as a delicious piece of chocolate and the ISA as the rapper around it. You can do two things:
Blend the chocolate and rap it in an ISA. This means that you can select the kind of investments that you can ‘rap’ in an ISA. There are some rules about what kind of investments are allowed but most stocks and shares play. (You are in full charge of selecting, rebalancing etc. your portfolio though it is in an ISA.)
Get a Lindt Dark Chocolate (or another variety you like) that is already rapped. This is the case when you start stocks and shares ISA with a specialised provider and they look after your portfolio for you. You still have to let them know some of your preferences. (An example here will be the Nutmeg ISA; or Scalable Capital ISA.)
#3. Stocks and shares ISAs can start you investing. Okay, to be more specific, the ‘off the shelf’ stocks and shares ISA could start you investing because they take away some of the responsibility for selecting stocks and, through this, some of the paralysing fear of making a mistake. These ISAs also make investing a ‘low entry’ activity since you don’t really need to know much about the technicalities of investing to dip in.
#4. Stocks and shares ISAs are ‘untouchable’. Do you find that you do this on going moving of money between your savings account and your current account? (For my readers in the US ‘checking’ account.) So do I. And do you know why I do it? Because I can always replace the money in my savings account. Guess what? ISAs are not like that. Whatever happens you cannot put in it more than the yearly amount (tax free). As a result, I’ve never ever taken a single penny out of my ISA. This is why I say that ISAs are ‘untouchable’ (and this is exactly as it should be).
Four rules to select the ISA for you
Now that I hope to have convinced you that ISAs are a good investment, particularly stocks and shares ISAs, let me tell you the four things I believe you should consider to select the one for you.
These are not something that I’ve plucked out of thin air. Quite the reverse; these are the four rules that according to Tony Roberts (in his book Unshakable) ensure that our investments are sound without being overly conservative.
Rule 1: Risk awareness or what is the potential loss?
Before you go and open a stocks and shares ISA (never mind the provider) you have to be aware that it is extremely unlikely it will only make profits. There will be times when the value of your ISA (your investment) will go down.
You also need to be aware that I’m not talking about your ISA going a little bit down. Research shows that at least once per year there are dips of 10% or more. Scary stuff, uh?
Well, not really. Despite these steep drops most years the stock market recovers and finishes up (there are very few exceptions).
Apart from that, roughly every three-four years we experience what is known as ‘bear’ market. This is when the stock market drops by 40% or more. This is real scary…in the short run. Again, research shows that the market always recovers and over-recovers; but it may take couple of years or so.
Your ISA doesn’t have to behave so erratically but this will depend some of the things we’ll discuss later. What is important is that you know that dips are normal so that you can ‘sit them out’. The worse thing for you and your ISA would be to pull out of it during a dip.
Rule 2: Profit awareness or what is the potential return?
Profit awareness when selecting an ISA is important but not that easy to judge. One thing you could do – when opening an “off the shelf” stocks and shares ISA – is to look at the returns that the provider has achieved historically.
Not perfect but still something.
Rule 3: Tax/fee awareness or what tax and charges you have to pay?
Taxes and fees can obliterate your earned interest; when compounded it gets really scary.
When you select the ISA for you, please make sure that you understand all fees and taxes you’d incur. Remember when I told you that one of the best things about ISAs, is that they are tax-free?
True. You still need to watch these fees. Some managed ISAs can have rather steep fees and even digital wealth managers divide their fees in several categories.
Remember: the lower the fee, the more likely it is that your ISA is a good investment.
Rule 4: Diversity awareness or how diversified is your ISA?
Any investor, even a beginner, knows that diversification reduces risk (there are caveats but we won’t get into these now).
When selecting an ISA you should make sure that it is diversified across:
Financial instruments: your ISA is a portfolio that can contain equities, bonds, real estate funds, commodities and cash. Usually the proportions would depend on your risk tolerance and the type of market.
Industrial sectors. Having a stocks and shares portfolio of companies from one sector is risky.
Location. Experience shows that the stock market rarely collapses globally at the same time. This means that if you own only UK companies (or US companies) you are exposed to rather severe drops in value. Owning shares in companies in different countries can lower the drop substantially.
The ideal stocks and shares ISA formula:
Ideal ISA = (Relatively) low risk + high (potential) returns + low fees + high diversity
I have to tell you, friends, that my Nutmeg stocks and shares ISA seems to be ideal; particularly given that it is also very low maintenance because it is fully managed by the Nutmeg team.
How does you ISA score on the ideal ISA formula? (If your ISA doesn’t match the ideal formula it may be time for you to start looking around.)
If you were wondering what the second part of this sentence means it is:
Christ is risen!
This is the traditional Easter salutation in Bulgaria (and I suspect in several other Slavic language countries). The response is:
Voistina voskrese! (In truth is risen!)
My friends, you already know that I don’t do religion very well. Believing in God, particularly in a God that can be an evil, stubborn and angry deity, is not possible for me. Similarly, I can’t be an atheist: atheism in its extreme is no better (probably even worse) than fanatical faith.
I’m agnostic. This way I can recognise that God may not exist but he/she is still real: so much has been done in his/her name. Being an agnostic also keeps my options open: when desperate I can still resort to praying to a supreme being of my own choice.
I also believe that our destiny is in our own hands and the alignment of considerable number of conditions. I believe in social structures and agency (you see, the former provides opportunity and constraints and the latter the willingness and ability to act).
Even today, on this holiest of holy days in the Christian calendar – particularly in the Easter Orthodox Christianity – my mind is very far from God.
But I respect tradition.
I celebrate Easter and follow the traditions of my grandmother and the ones who come before her.
We don’t celebrate with over-prised chocolate eggs. Why would I miss on preparing some of the most delicious seasonal food? (Dropping the chocolate eggs also saves a lot of money.)
There are three essential parts to celebrating Easter in the Orthodox Christian tradition:
#1. Traditional Sweet Easter bread
I still remember my grandmother and my mother making sweet Easter bread. They used to get up very early in the morning to make it. It took the good eight hours of physically challenging work to make the dough, to have it raise couple of times, to shape the bread and to bake it. I reckon, only making the dough equals four-five hours Cross Fit.
Now, chunking up makes sense when so much effort is expanded. We always ended up with a lot of sweet Easter bread. Two days later my Dad will almost have to take an axe to the sweet bread to be able to cut it; the only way to eat it was either with water or with yoghurt.
Don’t let this put you off though. Things have moved on and sweet Easter bread may be 2-3000 calories a look but it is delicious.
#1. Place the milk, 260 g of flour and yeast in the breadmaker and process on dough setting (on mine it is programme 16 and takes 2 hours and 20 minutes)
#2. Mix the rest of the flour (260 g) with the sugar, salt and orange zest.
#3. Once the first dough cycle is complete add the flour mixture, olive oil and eggs. Process on dough setting again.
#4. When the second cycle is complete, remove the dough on floured surface, punch down and form into a ball.
#5. Cover with a towel and leave it to rest for 15 minutes.
#6. Divide and pleat.
#7. Allow the dough to rise (about an hour or place in a over at about 50C for 20 minutes)
#9. Bake for 35-40 minutes in an oven pre-heated to 170C.
After the Easter bread has cooled down, rap it in cling film to prevent it from drying out.
#2. Painted eggs
Painted eggs are a must for good Easter celebration. If you wish to try painting them you need to hard boil a dozen (or more) eggs. This takes approximately 15 minutes. Don’t forget to put a bit of vinegar in the water and to lower the flame after the eggs start boiling: otherwise the eggs will crack and would be no good as Easter eggs.
To colour the eggs, you need to buy special paint; this is sold by many Polish shops or you can buy it on amazon.com.
On Easter day, having an ‘egg fight’ is one of the entertainments. This means that you try to break each other’s egg and the one whose egg is still unbroken at the end of this wins. (I never win.)
Naturally, breakfast includes a hardboiled egg.
#3. Roast lamb
The celebratory lunch is roast lamb. We just had this and I feel so full that my lids are gently closing while writing this.
There is nothing much to roasting lamb. Except that my sister taught me to put is in tray (after rubbing some salt, paprika and olive oil in it) with a cup of water and well covered with foil. Roast it like this for two and a half hours (190C) then take the foil off and keep it in for 20-30 more minutes in the oven.
Easter in Eastern Orthodoxy is also about respect. Young people visit their older relatives to show their respect.
We hosted my family this year.
Now the celebration is over and we have another day of rest. May this day be the first a new, productive cycle for John and me.
For me the matter of retirement – be it early or not – is not mixed with longing for twisty, ribbed stockings, bubbly cardigans and watching daytime TV. I can’t stand daytime TV.
For me, the matter of retirement is tangled with the lust for independence, the desire to create without restrictions and contribute to people’s lives with no limitations. While I’m employed this is not possible.
‘Oh, but you are a university professor.’ – I hear you say. ‘If you are not able to create and contribute value to people’s life, who can.’
You’d be surprised. In the past, I have made some positive contributions through my research; like contributing to a very substantial increase of the science budget in the UK in mid-1990s. I have touched the destinies of generations of Doctoral, Masters and undergraduate students…reputedly. Still the changes in Higher Education and the universities over the last decade or so, have been consistently robbing my life of meaning.
I want the meaning back. After all, we are all mortal and we are not born to make money, spend money and die with regrets.
So I’ve been trying to decide whether I’m ready to retire – and when I’ll be ready if I’m not there yet – and have had a big problem.
This problem is called ‘enough money to last me for life’. I am not looking to stop being employed so that I could put my feet up and do b*gger all, that’s true. Still, leaving the security of a full professorship and having to make a living is scary. I’d like to know that I have enough at a very basic level so I don’t need to obsess and panic about earning.
So, I played around a bit with our retirement calculator. It is fun but…I had to make too many assumptions that are highly problematic. Like my annual spending in ten years’ time.
While looking for something else, I came across an easy formula that helps you decide whether you are ready to retire; it was introduced by Quora reader Doug Massey and is known as F*ck That Index (or FTI).
Are you ready to retire: what is FTI?
FTI, or your readiness to retire, is calculated using the following:
Your Age * Your Net worth/Annual spending
The index should be greater than 1,000 for you to be ready to retire.
I love this one! I love it not only because it is the kind of thing that tells you ‘yes’ or ‘no’ but also because it allows you to play with the conditions for readiness. For instance, you may be closer if you reduce your annual spending; or you need to wait several more years.
Where do I stand in all this retirement lark?
Remember when I was telling you how important it is to know your net worth and that you should follow it religiously. Hope you did! I do know my net worth exactly and update it every month so calculating my FTI is easy.
…my index is 1,705.
(Had to correct this one up after carefully calculating my net worth. What am I waiting for, I wonder.)
Which is over 1,000 anyway and this means that I can jack my job tomorrow is I want to. And this makes me feel all warm and glowing inside. This is without changing our current level of spending at all.
(Just for the record, John’s FTI is well over 1,000 as well. I haven’t factored keeping a teenage son through university but this may be why I have to make a lot of money some other way.)
Do you live your life or life keeps happening to you?
Life happens to you at least some of the time? I thought so.
This is the case with most of us; we inhabit a personal space – mental or physical – where our control over the events shaping our lives is fairly limited.
It doesn’t have to be like that. Moving away from ‘life just happens to me’ to ‘I live my life’ is a matter, I’d say, of maturity, confidence, self-esteem and a substantial freedom fund.
Life happened to my sister. I’ll never forget the hot summer day when she broke down in tears and told me what her married life is really like. It was a life of early passion, followed by drink, infidelity and psychological and physical abuse.
‘How long has this been going on?’ – I asked.
‘Over a decade.’ – she mumbled.
‘Why don’t you get out?’
‘I don’t have money to get divorced and how am I going to raise my daughter as a single mother?’
We helped her get out. We paid for her divorce, my parents supported her emotionally and psychologically and we pledged to pay for my niece’s university education (incidentally, one of the best investments we ever made including buying the apartment in Sofia for her to live in).
And if you think that finding yourself in the tight corners of life is exclusively for women, think again.
One of my friends – a man and a very high achiever at that – found himself with nothing but the clothes on his back and the cash in his wallet when he left his wife. He sorted it all out later, as it happens, but living his life was touch and go for some time.
Life used to happen to me as well.
Debt happened to me.
Worrying about how we’ll pay for our modest but fun wedding happened to me.
Heck, life still, occasionally, happens to me. Most of the time though I live my life.
What made the difference?
Many things. I’m older, have more experience, feel more secure and confident and have got to grips with my mortality. Even more importantly, I have choices in life sustained by having a rather generous freedom fund.
Guys, most people will tell you that to ‘take life by the horns’ you need to find yourself, to figure out who you are and what you stand for. This is true. Still, your ability to act on what you find depends on whether you are able to meet the money obligations that come with standing by your principles; in other words it comes down to you having a freedom fund.
Much has been written in personal finance about having an emergency fund; this is money that you keep to be able to pay for life events that may happen to you. A bit has been written about having a ‘f*ck you’ fund.
In my book, positivity rates very highly. So, I won’t be talking to you about starting and emergency fund or building up a f*ck you fund.
Today I’ll ask you to start a freedom fun; this is money that will give you the option to do what you want to do.
You know what the difference is? A freedom fund is about you and your level of control over your life; it is not about what may happen to you or getting your own back.
#1. What is a freedom fund?
A freedom fund is a fund that allows you to do what you want in your life; it allows you to plan and finance life events you value and welcome in your life. Incidentally, a freedom fund would afford you control over the emergencies, the do-dads, in your life as well.
Generally, a freedom fund does ‘exactly what it says on the tin’: it gives you the freedom to live your life on your own terms.
#2. Why do you need a freedom fund
Each and every one of us needs a freedom fund. It doesn’t matter whether you are a woman or a man, whether you have safe job that you enjoy or not. Your freedom fund is the one thing that stands between you and the unpleasantness of life that could happen. Having a freedom fund means that you have a level of control over your life; over what you keep and bring into it.
More specifically, you need a freedom fund because:
Things may change at work
Even if you love your job today employers have a way with changing conditions and doing away with the parts of the job you enjoy.
Employers change their goals, they can change the way in which they go about achieving these goals and this can have a large negative effect on your job and working conditions.
Now, the thing is that whenever your employer, their demands and your job description change you have three possible ways to react.
One, you may be completely attuned with the change and fit into the new job description like a hand in a well cut glove. If this were the case you are very lucky.
Another way to react, would be to decide that there are other things that matter. In other words, you are not attuned with the change, you have a problem with the new demands of the job but you think that you can still do it because there things on the fringes that still feel right.
And last, you can refuse to comply and adjust. In this case you have to leave immediately.
In my experience, when employers change their demands the latter two options are the more likely outcome. If you don’t have a freedom fund this can cause a lot of personal unhappiness and life disturbance.
If you have freedom fund, on the other hand, this can be the best opportunity that life threw you as a curveball.
Things may change at home
Okay, I get it!
You really, really love this guy/girl next to you and you have made public promises to stick by them for the rest of your life. You trust him/her. Until one day he/she gets so mad at you that they hit you.
He/she is apologetic; what’s more you shouldn’t have got him/her so mad, right?
Wrong. Abuse is abuse and you don’t have to put up with it for any length of time.
You don’t have to put up with it particularly and specifically because you don’t have the money to leave the relationship. Now here is where having a personal freedom fund can come very handy.
Oh, and abusers can be men or women.
Life will happen to you anyway
Do know what I mean?
There are life events that are difficult to avoid.
People get born.
People get married.
Are these emergencies? Not really. These are life events we know will happen (well most of them anyway) but we have no way of predicting when they will happen.
A freedom fund gives you peace of mind; when such events occur it is your choice to decide how to tackle them.
#3. How large should your freedom fund be
A good question but why do you ask me?
The size of your freedom fund is a very personal matter; a matter that only you can settle. How large or small your freedom fund needs to be, among other things, depends on:
how expensive is your lifestyle;
how long do you take to sort your sh*t out; and
your freedom purpose (what is the freedom you want, freedom from what and for what).
I intend to write more about the freedoms we crave and how to calculate how much these cost you. For now, I can only tell you how large is my freedom fund.
I have a personal freedom fund that would allow me to sort out my life were everything to go wrong (e.g. leave job, leave family). This fund is roughly 8 months of my personal living expenses (allowing for accommodation of course).
We also have a family freedom fund. This assumes that I stop working and we stay in the house we live in. We keep approximately a year worth of expenses above our monthly passive income (this is not yet large enough to cover all our expenses).
#4. How do you build a freedom fund
You do it just like you build up any other fund: with patience and persistence. You have to persist with the persistence of a drug addict.
Only caveat is that if you try to save this fund from what you normally bring home every month can be a stretch; and despite all dedication and persistence you may claim other savings and spending will easily take priority.
I’m a great believer in making more money. Build your freedom fund by thinking of side hustle, building it up and keeping at it.
I built my personal freedom fund from my site hustle – all money earned from activities other than my job were directed to build this fund. Our family freedom fund was built by our positive cash flow minus what we keep for investments.
There are novel and imaginative ways to build a freedom fund fast. Some have used GoFundMe.com to garner support and raise funds for their freedom.
While this can, and indeed does, work remember that there are severe limitation. To begin with, you will still depend on the benevolence of others for your freedom and this can be granted or withdrawn. Further, your success would depend greatly on your ability to ‘sell’ your story and not everyone has that. And lastly, you need considerable media savvy because crowd funding is a very noisy space.
In balance, it is better and easier to build your own freedom fund.
We all need a freedom fund. You need a freedom fund and you need it now.
So, stop surfing the net and go get yourself a side hustle; save the money from this side hustle; and very soon you’d have your freedom fund.
Start now. Trust me: it feels better than smooth chocolate melting on your tongue; better than running silk velvet through your fingers.
Do you have a freedom fund? How long did it take to build?
You know, I can hardly look through the personal finance articles of the day without reading something that extols the power and beauty of compound interest.
Personal finance geeks will tell you to start saving as early as you can so you don’t miss out on compound interest. They’d tell you that saving small amounts regularly and not withdrawing your money will make you, eventually, a millionaire. They’d tell you that compound interest is a wonder.
Call me contrary but I’m not convinced. Never have been and never will be.
Why, you may wonder, the attractions of compound interest leave me cold?
It is simple: for compound interest to generate monetary results that are not entirely negligible you either need a very long time or very large amounts of money.
I’ll explain this further and will add some other reasons why I believe that compound interest is overrated. I’d illustrate my arguments with examples and different scenarios (where necessary and possible).
Before I get down to business, I feel it necessary to remind you of a quote by Albert Einstein that is often used to support the claims of the compound interest supporters.
This goes like this:
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein
This quote is often taken to mean that even a genius like Albert Einstein bowed to the power of compound interest and the wonder of making money, and a lot of it, this way.
Have you ever read any of the biographies of Albert Einstein, my friend?
Because I have. And what I’ve learned is that Albert Einstein had very rudimentary understanding of, and virtually no interest, in money. His preoccupation was with the workings of the universe. (Biographers mention that Einstein’s wife negotiated his university salary.)
Knowing that, I suspect that his statement has a meaning broader than money. You see, in the universe things don’t just appear and/or disappear. Einstein’s famous formula is about the equivalence of matter and energy. Seen through the eyes of a physicist, compound interest is a wonder: you get something for nothing because more money appears without you putting more labour or capital in.
I’d urge you to interpret Einstein’s quote with caution because I believe it is rather ‘tongue in cheek’. And he found the equivalence in that some earn it and some pay it…
This out of the way, let me tell you why I believe that compound interest is overrated.
#1. Decent outcome of compound interest needs very long time
Here I simply have to mention another case of which the proponents of compound interest make a very big deal.
Have you heard about Ben Franklin’s experiment?
Okay; here it is.
In his will Benjamin Franklin, who died in 1790, left $4,400 each to the cities of Boston and Philadelphia. There was a condition that this money is used to offer loans to young apprentices that had proven worthy of a loan. His will also stipulated that the cities would have access to some of the funds after 100 years and receive the rest after 200 years.
Now the part about which the compound interest geeks get really excited: when the cities received their balances after 200 years, the combined bequest had grown to $6.5 million!
Can you see anything wrong with this?
Let me help you. This money took 200 years to compound to this staggering amount. Correct me if I’m wrong but there are no vampires amongst you. So, you don’t have 200 year.
Also, once we take inflation into account the number stops being that impressive.
#2. Decent compounding needs high interest rate
There are different ways to shorten the time that note-worthy compounding takes.
One of these is to find high(er) interest rates.
For instance, were you to put your money into an account that compounds at 10% per year, your money will double in 7 years.
Regretfully, what we consider a ‘decent’ interest rate is more like 2% per year. At this rate you can expect your money to double in approximately 35 years.
Which brings us back to the small matter of the span of human life.
#3. Decent compounding needs a lot of cash
Another way to maximise the results of compound interest would be to start with a lot of cash to begin with.
For example, if you have £20,000 compounding at 2% annual interest rate, in 10 years you will have the princely sum of £24,424. In other words, you made £4,424 in ten years which is probably less than the amount your money inflated by.
On the other hand, if you start with £200,000 at the same annual interest rate, in ten years you will have £244,240. This is compound interest of £44,240 which looks a bit more respectable (though the inflation concerns hold).
#4. Compound interest is often over-estimated
This is about something that we’ve already gleaned.
Having your savings/investments make 10% annual interest and double every 7 years sound sexy, doesn’t it?
It sounds great but you may be very unpleasantly surprised when you do your accounting in 7 years and discover that your money hasn’t doubled.
Because when you started out so full of hope 7 years ago, you forgot to deduce inflation and taxes from your calculation. Which more than halves the level of compounding.
(Please note that the tax systems work very differently in the UK and the US. In the UK we pay marginal tax on earned interest above £5,000 except in the case of ISAs where the interest earned is not taxed.)
#5. Sh*t happens
This one is straight forward, really.
Because earning notable compound interest takes a long time, life can – and indeed it does – get in the way.
And it is not only personal life that can get in the way. We know that banks can fail, the economy can collapse and cataclysmic historical events do occur. Think about what would have happened to an equivalent of Ben Franklin’s endowment made in Russia in 1790, for example? Remember this thing knows as the Bolshevik Revolution of 1917? Yep. It would have messed up the whole compound interest thing big time.
#6. Your money is locked in
Yep; this is correct.
To take advantage of compound interest, such as it is, you have to keep your money in the compounding account.
What if better opportunities come about?
#7. Compounding is speculative
This one is a particular pet objection of mine. You see, compound interest is ‘interest on interest’. It is money born from speculation, not from adding value to people’s lives and the economy. (Remember that value is added by labour?)
‘Money for nothing’ concerns me; it, I believe, increases the imbalance between money and value in our economies and ends in a cataclysm like a financial crash or economic downturn.
#8. Banks are the winners of compounding
Ask yourself why banks offer you interest on your savings?
Yes, this is it. Bank offer you interest because in effect they are borrowing your money to use as they please. They use it mostly to land to other (for much higher interest than they give you) and to speculate big time (according to some, banks are involved in high frequency trading big time).
#9. Investing in yourself probably compounds better
This may be a bit of a controversial statement but…
If you are in your 20s and people tell you to start saving/investing so that you don’t lose on compound interest I’d urge you to think very carefully.
Because investing small sums over a long time is less effective in terms of compounding than investing large sums over a much shorter time span.
Let’s do some numbers here.
Case 1: Joe is in his early 20s and he is saving £300 per month in an account that brings 4% annual interest. Joe doesn’t have much spare cash but what he has goes in savings. He gets married, has family and continues to save £300 per month – he cannot afford any more. He does this for 40 years. In his early 60s this has compounded to the tidy sum of £355,770.
Case 2: Joanne is also in her early 20s. She has a bit of money put on the side for the do-dads of life (unexpected things you have to pay) but all her spare cash goes on developing herself. She enrols in professional courses and develops competencies that get her higher paid positions. She get married, has family and her money goes on life – housing, opportunities for the kids etc. When she is 45 her expenses drop and her salary is still going up. She can put aside £2,000 per month. She stashes it in an account that brings 4% annual interest for 15 years. When Joanne is 60 she has £493,821 in her account.
Who is better off?
I’d say Joanne; and it is because she cleverly invested in herself.
(If you think that Joanne’s case is hypothetical, think again. Joanne is very much me and how my life has panned out. And I still invest in myself a lot.)
It had to be said and I had to say it.
Compound interest is very much a myth of personal finance today.
I believe it’s wrong to live with the worry about the next debt payment, about losing your house, your job or whether you’d have dignity in old age. So I’ve dedicated myself to teaching people in financial trouble how to build sustainable wealth.