Editor’s note: Several days back we talked about the possibility to re-write your money story and I asserted that what you need is not simply knowledge; you need inspiration. This post is by Erith who has been happily retired for 10 years. She lives with her husband in Edinburgh and writes Cracking Retirement – a blog focusing on how to have fun in retirement. Erith makes the most of her money which doesn’t stop her traveling far and wide (pre-Covid!). She is also a keen Metal Artist. Why is this story part of my ‘let’s inspire’ series? Erith and her husband, coming from modest backgrounds, built wealth slowly and now enjoy abundant retirement. Their story is one that anyone can replicate. And I mean anyone!
The four pillars of building wealth according to The Money Principle are: Make Money, Control Spending, Get Out of Debt and Invest for the future.
I realised recently that I have used these pillars all my adult life, although I may have phrased them slightly differently. I am now 65, both my husband and I have been retired 10 years, we continue to be comfortably off, so I feel I am able to talk with confidence about our journey, and some of the opportunities and pitfalls along the way.
Here is how we build wealth The Money Principle way even though we didn’t realise it at the time.
Make Money, Grow Income
I worked in IT with a couple of breaks to have children. I was well paid. My husband is an engineer. I never earned a second income, but a couple of things I did in my main employment, made a significant difference to my salary.
Pay increase: it is worth asking, reasonably and with a clear rationale.
Don’t be embarrassed to ask for a pay increase where it is due.
I discovered I was being paid £5 an hour, and the person sitting next to me, employed through an agency was being paid £6 an hour for the same job. I immediately raised it with my boss, who agreed that it was unreasonable.
Outcome? A 20% pay rise! The same thing happened many years later. I moved jobs and was being paid a lot less than my peers, with similar experience. Again, a reasonable conversation had a favourable outcome.
Also, I noticed a job advert in the paper for my company, in the area I worked in. The same jobs were not being advertised in-house. I raised it with the HR Director and suggested internal applications should be allowed too. He agreed. I applied and was successful in getting one of the posts – a 25% pay rise! Another internal applicant was also successful!
I continued my education and kept up to date in my profession. As did my husband. My MBA was fully funded by my company.
My husband was funded through both his MPhil and his Ph.D. by his company, and those specialist qualifications, mean that his skills are still needed today, 10 years after retirement, and his previous company still employs him as a part-time consultant.
While my MBA didn’t get me a pay rise, it really did increase my confidence in my own abilities, I was ready to be more visible, and take on additional responsibilities. Over the period of the 5 years following my MBA my take-home pay nearly doubled.
In my opinion, this is the area that really makes the difference. It took us a wee while, but we finally recognised the difference between a ‘need’ and a ‘want’.
We worked out where and when money drift happened and stopped it immediately. In the same way that small savings add up, so do small spends! Spending itself isn’t a problem, but making a logical, balanced decision on a one-off or ongoing expenditures is entirely different from maxing out credit cards for random purchases.
We had a few difficult years, as most families do, (2 young children, needing more space, a bigger house, increased mortgage, single income, etc), but our path through that period was definitely made easier by focusing on where our money was going, and being pretty ruthless!
Today, we drive an 8-year-old car. We have been in the same house for 25 years. Learning – This is a bit mixed because the house hasn’t appreciated as much as it might have, had we bought in a slightly different area…
Travel is our one big Retirement extravagance. Pre-Covid, we spent 1 or 2 months in a different European city each year and had regular long-haul trips. I look forward to the opportunity to start spending in that area again!
My parents were very anti-debt, so I absorbed that ethos early on. In a way, when money was tightest, we were protected from ourselves. Credit wasn’t readily available in the ’70s. My first full-time job was working for a bank, if I was overdrawn, it meant an interview with your manager, and a stern talking to, about managing within your means!
Avoiding debt, except a mortgage, was a really big win for us. No overdraft fees, no big interest payments. We cleared our mortgage when I was 48, 10 years ahead of our planned date.
Learning – we could and should have done this earlier and should have!
Invest for the future
Neither of us ever earned a fortune, although I did have a couple of good years before the Crash, which helped get our retirement steps in place! But saving (and the security that comes from having a safety fund), has always been extremely important to us.
We’re both thrifty, and small amounts of money add up quickly. We saved, invested, and never underestimated the power of compound interest, and dividend reinvestment!
Here is what we learned along the way:
- Don’t have too many eggs in one basket. I was badly hit by the 2008 Financial Crash. I had taken every option to invest in my company shares, including dividend reinvestment, share option schemes, you name it. When the crash hit my 20 years of savings vanished overnight. Huge mistake. We learned about diversification the hard way!
- Final salary pensions can terminate. My husband’s pension scheme closed in 2002. The reincarnation was nowhere as generous. We reacted and started saving into a separate pension.
- The law changes – 20 years ago, there were no pension pot restrictions, then a limit of £1.5m was introduced. Today that limit is just £1m, which isn’t great.
- We started investing in the stock market around 2000, using Halifax which at the time allowed regular monthly savings of £50+, and low-cost investing. It added up quickly. We started getting braver and investing more. Today, 20 years on, we have a healthy investment portfolio, which started in this humble way!
Where are we financially now?
Ten years into retirement, where are we?
- We spend less than half our income, so our estimates were pretty safe. We make full use of our ISA entitlements to ensure we have easy access to tax-free money
- We did not anticipate that my husband would still be working, but he enjoys it, and it keeps his brain going. His salary each month is invested in a pension fund. Our long term aim is never to touch this fund, and it can be left direct to our children with no Inheritance Tax implications. (Quite an important consideration in the UK)
- We have gifted a couple of lump sums to our children to enable them to climb on the mortgage ladder. There are 2 sides to this. It made a big difference to them, and because we gifted it early in our retirement, there is no future Inheritance Tax issue.
Can anyone build wealth The Money Principle way?
Absolutely! Before you decide this is impossible, and you can’t be bothered, consider the following:
- Both my husband and I grew up in families where there was little spare money. We were very determined to work hard, get good jobs, and earn decent money, so we would never have to struggle in the same way our parents did. As I was writing this, it made me realise that financial security has been one of our core values for many years, and it has saved us so much anxiety.
- Instant pleasure versus delayed gratification. The answer to happiness for us was a bit of both. If you restrict yourself too much, you become unhappy. It is important to keep things in perspective. What things would make it easier for you? Work out what is best for you. If you’re in a partnership, it helps if you both agree on the way ahead….
- Make it a habit. David Bach in his book ‘The Automatic Millionaire’ talks about paying yourself first. He recommends putting your savings away at the start of the month. If you leave it to the end of the month, you’ll find little left. But if you put it away at the start, you will live on what’s left. It worked for us!
- Start Now! Don’t put it off to next month or next year when it will be easier. (It won’t be!). If you’re deep in debt, it’s even more important to face it. You’ll get great ideas on The Money Principle and can also check Maria’s new book ‘Never Bet on Red: how to pay off debt fast and live debt free forever’.
- Try and avoid Lifestyle inflation. Great you got a pay rise, save it, don’t spend it!
- You don’t have to earn a fortune for this to work. Someone who earns £20k needs less money in their three-month emergency fund than someone earning £200k.
- Make compound interest/investment growth work for you. Your investments are like your garden and need time to grow, blossom, and yield fruit.