The Benefit of Ignorance
Lesson 1 – Ignorance helps to numb past mistakes made at the time, but hindsight will not make you feel better about.
When I was younger and even going into my mid-twenties, my understanding of how to build wealth was very typical: get a job, work hard to get a few pay rises along the way and if I can pay all my monthly expenses (including debt commitments) then I must be doing alright. Even during university where I studied finance and investment, the idea of investing to build up my own wealth wasn’t even on my radar. This was not unusual. The talk amongst us budding Warren Buffet wannabes in the student halls was how we can get a job at an international investment firm and work in ‘The City’. All the while, what we were actually unconsciously working towards was how we could make money for other people. As I approached the end of my degree course, I decided that a career in finance didn’t suit me and pursued one of my childhood dreams of being a Police Officer.
I think that being completely ignorant about how to really build wealth and not knowing about FI/RE allowed me to make some really bad financial decisions. It allowed me to experience the brief period of enjoyment by succumbing to consumerism completely guilt-free. I didn’t know any better. Just like when I look at my 18-month-old son explore the world around him, fearless, yet ignorant of all the dangers out there. I enjoyed my mistakes at the time because I didn’t actually know I was making a mistake and utterly unaware of how destructive they can be for my long-term financial wellbeing.
So to show that I am not perfect and that the path towards financial independence does not require perfection, the post is about my own mistakes so far. Maybe you can avoid some of these mistakes. On the other hand, you might not be able to help yourself and there will be times when the urge to spend unnecessarily is too strong to fight. That’s okay too. We all need to let our hair down every so often. Just don’t make a habit of it unless you can really afford to.
There have been times when I look back and reflect. It’s the very nature of my imperfect path towards financial independence which has helped me learn how to avoid moments of weakness at the latter part of the journey. With potentially just a few years to go, these experiences have taught me to become conscious when these urges inevitably re-awaken. There will be times when a shiny new gadget comes along at just the right moment to test my willpower. There is a saying which goes something like: your experiences shape who you are today. That’s partly true. Such a saying is sometimes used as an excuse to justify the poor decisions of the past. It’s missing the part where if we don’t learn from our experiences, then who we are today might be exactly the same as who we used to be. In fact, there is a risk of the now you being worse than the past you.
Finally, there will come a moment when you realise you’ve made a financial mistake. Don’t be too hard on yourself. Take the invaluable lesson from it and be grateful that you’re one step closer towards FI because there are many people who continue to sleepwalk themselves into financial ruin.
Lesson 2 – People will take as much as you will give so choose your moments of generosity carefully.
I’m an introvert and for those really interested in the personality testing stuff, then I’m an INFJ-T. Growing up I found it difficult to make friends. I was usually the quiet one sat in the corner of the classroom just getting on with my work. I would never put my hand up to ask questions because I would be too shy. Instead, I would end up going to the library during breaks to find the answers in books. I rarely went to speak to the teacher privately because I saw them as an authoritative figure which scared me. To think that I’m now a Police Officer surprised not only me but those closest to me. This serves as a reminder to me to not let my own self-limiting beliefs prevent me from pursuing my goals, be it work, our FI Plan or anything else.
During sixth-form and university, I got my first part-time job in Nando’s (I love a cheeky a Nando’s and am even considering having a separate monthly budget for it once FI). My starting pay was about £3.60 an hour. I spent a large proportion of that money going out and always buying other people drinks. There were occasions where I was out with ‘friends’ and would wait until midnight to get paid. I would then go straight to the nearest ATM to withdraw the whole lot and buy a round of drinks. Madness. Looking back now, I feel a mixture of shame and sadness. I honestly felt at the time that I was being generous and these people were my friends. In truth, I was probably just trying my hardest to fit in and wanted to be liked. It bought me a sense of happiness despite how false and fleeting it was. Deep down, I didn’t enjoy going out as much as I thought I did. I especially disliked ‘clubbing’, the environment was dirty, loud, sweaty and smelly but I still went. I wish I had the courage to be comfortable with who I was and had the wisdom to know which relationships were worth investing in.
The Car (and a Motorbike)
Lesson 3 – A car is a depreciating asset and is not an investment. Getting it on finance is like allowing someone to rob you 10 times the original amount.
As soon as I was old enough to drive, I started to take lessons. Fortunately, my parents were kind enough to pay for these lessons which back then were £10 per lesson. I managed to pass with about 20 one-hour lessons which were about the average back then. With licence in hand, I could smell the freedom. No longer did I have to endure the journey to my sixth-form school in my suit and sports briefcase. I was a perfect target for any bully; all that I was missing was a spotty face, dorky haircut, slanty overworn shoes and reading glasses…oh wait. In addition, it wasn’t so much the walk to the nearest bus stop, but more of the bus journey itself. On a rainy day, the buses stank of BO, it was humid, the air was stale and there was usually the pungent smell of cannabis which everyone knew to turn a blind eye to unless you wanted to be spat at or worse.
As soon as I turned 18, I marched into a Toyota dealership coincidentally just outside the Nandos where I worked and placed a deposit for a brand new Toyota Yaris. What was the interest rate? I have no idea. Not because I have forgotten which would be understandable, but because I don’t even remember asking. All I cared about was how much the monthly payments were going to be. My mind at the time calculated the cost by how many shifts I needed to do each month. So what if the car payment accounted for 75% of my pay. It was under a 100%, so hell yeah I could afford it. In fact, show me the list of upgrades!
Fortunately, when I told my parents about this purchase I was so proud of, they marched me back to the dealership the next day to try and cancel the order. To avoid losing my deposit, which I think was about £500, I bought a used car from them instead. Still on finance though. That car cost me £250 a month for the next three years. Money which could have gone a long way during my time at university. Lesson learnt? Far from it.
I spent money on the car, getting alloy wheels, changing the exhaust, improving the suspension, getting a better sound system. Once university was over, I got myself a motorbike, brand new one and on finance. I sold it back to the finance company a few years later having realised the errors of my ways and paying them for the privilege to do so. That’s the reality of buying something that falls in value the moment your name is written on the title and even before it has a single mile on it. It was a cost I was willing to take a hit on as a valuable lesson to not do it again. It was about the same time when I stumbled across the first book which introduced me to personal finance: The Richest Man in Babylon, by George Samuel Clason and my relationship with money started to change. I owe a lot to that book. It’s not the best personal finance book but for some reason, what I read made sense and stuck with me.
So back to the car. At the end of the day, it’s just a chunk of metal and plastic where its sole purpose is to get me from A to B. Even then, it’s not very efficient at doing that with fuel costs, road tax, MOT and maintenance. There is also the time cost of sitting in standstill traffic on the M25. What’s even worse than getting a car on finance is some form of Personal Contract Hire where you pay a monthly fee to drive a new car every few years but you never own that car. The opportunity cost of those monthly payments say £300, not even including the initial payment in the thousands had the money been invested is astonishing. Lets take an example of a medium size family car, like a Toyta Auris. At the time of writing (24/09/18), one of the ‘deals’ available is as follows:
Total Amount Payable (less Optional Final Payment)
Optional Final Payment to Keep the Car
So for the privilege of driving that car for 3.5 years, it will cost £14,289 and you won’t even own it. At the end of the term, you can pay the final payment to keep it, or simply hand it back subject to a detailed inspection and mileage limits. How these things are so popular is beyond me. It is a ridiculous amount of money for not only is it a depreciating asset, but one that has ongoing running costs. That £14,289 if for simplicity was invested as a lump sum in an index fund which returns an average of 7% per year over 30 years would give £108,771.51.
The joke of it all is that many people are not doing this as a one-off and some paying much more to drive an Audi or BMW. They are suckered into this sort of agreement, upgrading and changing to newer cars every few years. £108,771.51 is just a drop in the ocean from the true amount they are stealing from their future selves. I have a friend who pays about £500 per month on an Audi which he will not even own at the end of it. I have politely asked him about this and he feels he doesn’t spend much on himself and a nice car is something he treats himself to. I am not saying he shouldn’t be doing this. It is his money and who am I to judge. What I will say is that for me, £500 a month is a lot of money. It’s as much as some people’s mortgages! Would he still do this if he knew the true cost? I haven’t taken the conversation that far because he might feel like I am judging him or make him feel bad for enjoying his money.
I currently drive a 14-year-old car. I have one of the oldest cars in the Police Station and it is definitely looking its age with a few bumps and scrapes. Do I feel self-conscious driving around in such a sorry state of a car? Not in the slightest. In fact, pretty proud of myself. Last week I had a break down because the car wouldn’t start. I had to call the AA out to check my battery and ultimately change it. I could just about see the look of pity on his face when he saw my car. When we started talking about work and I told him I was a Police Officer, his look of pity changed to surprise: don’t I get paid enough to afford a better car? I bought the car used when it had 40k miles on the clock. It now has 180k. I intend to run it to the ground and if I continue to maintain it well and change the oil regularly, I hope to get 500k miles out of it. Realistically though, I would be happy if it got to 250k.
The Real Cost of University
Lesson 4 – If you must get into debt for an education, study something which will provide a return on the the time and money you invest in it.
I took out a student loan to help fund my studies. I remember being in sixth-form and be told that these loans are interest-free by a representative. What they failed to mention was that the loan increases with inflation so it is only interest-free if our income went up by the same rate as inflation. So I was completely shocked when I started to receive the annual statements and saw that the balance was increasing. They also use RPI instead of the lower CPI to measure inflation. For many other things, such as welfare and pensions, the government uses the lower CPI measure. Funny that. Had it been explained properly to me, I honestly feel it wouldn’t have made a difference because I needed the money to go to university. However, at least the decision I made would have been an informed one and I would have likely borrowed less. Whether or not I needed to go to university is another issue altogether.
I wanted to go to university because that was the path set out for me through school. It was what was expected of me from my school and my parents. I would not be a Police Officer if I didn’t go to university because it was through university which helped me realise a career in finance was not for me. I wish I spent more time thinking through my decision to go to university. Looking back now, it feels like it wasn’t even a decision, it was a given. Would I have joined the Police sooner had I given it a bit more thought?
I know of so many people who have gone to university choosing subjects of ‘passion’ which ultimately provided little chance of helping them get a decent paying job. Whilst I understand learning for learning sake is valuable, it can be done for free. In the case of technical subjects like medicine or engineering, then university is unavoidable, but then again those degrees are far more likely to secure a job than a three-year degree in Puppetry. It is not about simply following the money. It’s important to study something that the student enjoys and it would be wonderful to pursue a career they are passionate about. However, to blindly get into debt in order to go to university with no long-term financial plan is foolish. Just look at the number of students who go through clearing every year. I would bet a large portion end up on courses they have little interest in and only accept in order to get away from home or to experience university social life.
For my own children, I would hope that if they choose to go to university, they do so for the right reasons. It is not to ‘gain life experience’. There are far more cost-effective ways to do this. For me, if it means they need to get into debt to fund their studies, then the course they choose needs to be one which they are passionate about whilst also having the potential to provide a return on the money and time they invest in it. The argument that the university debt is written off after a certain amount of time doesn’t sit well with me. The decision to borrow money is a voluntary and conscious one. If my children decide to take out a student loan, then I would hope they understand that they have an obligation to pay it off in full. There are so many articles online explaining how and when a student loan can be written off. Many even encourage students to max out their student loans and not to worry about it because most of the loans are not fully paid back. What message this does send out about being responsible adults and being sensible with money? The fact that almost half of the total value of student loans will never be paid back (75% of students never pay off their loans) is a clear sign to me that many degrees provide extremely poor value for money not only for the students but also ultimately the tax-payer. With universities having this constant flow of money from students who get into debt and the universities themselves bearing none of the risks, what incentive do they have to provide high-quality courses? Not all degrees even if they are on the same subject matter are of equal quality. A first-class degree from University A can be far superior to one from University B. This is all the more reason why I believe it is important that the decision to go to university should not be one that is taken for granted.
I’ve been fortunate during my time with the Police so far. They paid for me to study for a Masters degree in criminology from a prestigious university which cost them at least £25,000 in fees plus my usual salary. I was taught rather than lectured at. I was given plenty of time with the Professors in 1-to-1 sessions and small seminar groups. My undergraduate was not to this standard. If I were to do it again, I would tell my younger self to work harder at school and if university is something which will add value to my life, then to try and secure a scholarship to help fund it. Instead of working in a typical catering job to help fund my studies, I should have taken some risks and been brave enough to seek out other work which would have provided me with more experiences (perhaps pay better as well).
Making of a ‘Home’
Lesson 5 – Be patient. It’s the people, not the things inside a house that makes it a home.
I bought my first house in 2007; at the height of one of the housing cycles and the same month after I bought it, everything crashed. The house I bought dropped 20%. The lesson here is not about trying to time the market. The house I bought has more than recovered since then. The lesson is in what I did after I bought the house.
Having the house was one thing. We had saved up and searched for so long. There was no point in having an empty shell. What came next was a shopping spree of so-called 0% finance deals on furniture and whatever else I could get my hands on. What I didn’t know at the time was the fact that I was already overpaying for these items and the 0% interest was just an illusion. These companies have already factored in the finance cost to the overall cost of the item. It wasn’t really 0%. I was paying for the finance by overpaying for the item itself! Fortunately, I didn’t go crazy and change everything unnecessarily using finance. I also had rolling maxed out credit cards, continually transferring the balance on so-called 0% balance transfer deals and not taking into account the 3-5% whole balance admin fee each time. I thought that by getting everything as near perfect as possible and as quickly as possible we would then have a home we can be proud of. What I didn’t know was that all this was a helpful distraction as my relationship with my long-term girlfriend at the time was coming to an end. We were so caught up in buying ‘stuff’ that we didn’t even realise we had completely drifted apart, not only in terms of our dreams and our attitudes towards money but also our fundamental values.
Do I wish I was taught how to manage my money when I was younger? Yes, I do. Do I think about where I’d be now if I had started pursuing FI/RE sooner? Without a doubt. Despite these mistakes, I am very grateful to be in the position I’m in and the family I have. I hope it demonstrates that it really is never too late to change your relationship with money. More than this, these financial lessons have had a positive impact on who I am today and my ability to provide a solid foundation for my family’s future. I have no doubt that there will be other financial slip-ups for me in the future. At least this time I might be more prepared for them and I have Mrs. CC and my children to pick me back up.