READER CASE STUDIES: What Should I Do With My Savings?
Welcome to the 3rd Reader Case Studies on The Humble Penny.
The goal of these case studies is to solve real problems.
If you’re new this, the case studies are a way for me to better interact with the subscribers of this blog.
I refer to the subscribers as The Fearless Generation because they’ve got to a stage in life where they’re seeking another path.
This generation wants to be debt free, create multiple incomes ethically, become financially independent, live fulfilling lives and ultimately Create Financial Joy.
These case studies are a way in which I can help to solve their problems via free coaching.
Solving such problems is what The Humble Penny was created and exists to achieve.
In addition, they get crowdsourced responses from other readers in the comments below.
Together, we can help ourselves and each other.
As these case studies are real-life situations, I commit a fair amount of my time to consider them and respond.
Case Studies will be published monthly. If you want your problems solved, simply write to me and tell me how I can help.
The key requirement is that you must be a subscriber of The Humble Penny.
Your problem has to be within one of the categories of this blog.
I.e. Money Making, Money Saving, Investing, Side Hustles, Debt Free, Financial Independence, Blogging, Relationships, Life etc.
You can also choose an alias for privacy reasons if you prefer.
If your case is chosen, I’ll write to you immediately and let you know.
Simply write in and I’ll attend to you personally.
Now let’s dive into this month’s case study:
LETTER FROM REBECCA:
I'm hoping you can help.
I'm Rebecca and I'm 26 and currently working and living in Brighton after relocating from Devon.
Since moving to Brighton nearly two years ago, I've received a big jump in salary and annual bonus, which I've not had before so I've been saving hard and over-paying on my mortgage.
I bought my house nearly five years ago before meeting my partner and have been over-paying for just over a year now which is bringing down my mortgage at a rate of nearly £1000 a month with around £150 interest added.
I love my job but I envisage that at some point next year I'll be returning to Devon. This is because my home is based in Devon as are my immediate family and most of my lovely friends too.
In the meantime whilst I have been working away I've been renting my house out too, which has enabled me to cover the mortgage and some due to my previous overpayments.
As I'm sharing a flat and all bills with my partner in Brighton, my outgoings are manageable and I've built up a pot of savings.
It's likely when I return to Devon I might have to make a salary sacrifice, at least whilst I get my foot in the door, and I'll also be moving back into my house so I'll no longer have the rent coming in, or paying out on rent as I have been in Brighton.
I should also mention I have a credit card which has £1,780 on it. It's interest-free until 2021.
This was to pay for my rail fair and yoga pass up-front as it was much cheaper to pay for annual passes.
We also recently had our shared car breakdown which was a high unexpected outgoing, which I've put on there too.
My payments each month will ensure this is all paid back by April next year when my train ticket and yoga pass runs out.
I'm interested in getting your perspective about what I should be doing with my savings as I really want to maximise my money whilst I have this opportunity.
Then once I'm back in Devon I can work on building back up my income (still saving of course, but most likely to be around half of what I'm currently saving).
And getting into this position again before having children, paying out for a wedding all those futuristic things that I hope will happen for me and my partner.
Here are the numbers:
Salary: £41,000 with a 6% pension contribution (matched by 9% employer contributions)
Take home pay: £2,465
Bonus (27th March 2019): This has been 20% of my salary for the past two years.
Rent: £725 (monthly)
Mortgage: £70,440 (I've included these payments as outgoings below)
Mobile Phone: £55 a month (until February 2019 when this will be paid)
Credit card: £1780, paying £250 a month. Annual passes for train ticket/yoga pass/car breakdown (Interest free until 2021)
Mortgage Overpayment: £660
Joint account: £650
Credit Card: £250
Gas Safety policy: £6
Car Expenses: £50
Spending money: £300
Phone Bill: £21
Mobile Phone: £55
Streaming services: £16
Pet expenses: £141 (Insurance, Food, Dog Walking, Vet Plan)
Holiday fund: £100
Christmas gift fund: £50
I'm hoping by the time I return to Devon I'll be able to have around £25,000 saved as I'll bank the bonus I'm on track to receive this year.
I have no other debt such as student loans or car finance etc. So this is completely mine with no immediate need for this money, maybe in five years or so and even then I'd be hoping to keep growing it significantly between now and then.
Thank you for giving me the opportunity to share my story with you, I'm looking forward to hearing your thoughts.
MORE ABOUT REBECCA:
1) What are your dreams for the near future?
My dreams for the near future are relocating back down to Devon, hopefully in the next year.
I also dream of planning permission on my house down in Devon as I have a plot of land next to my house.
If I can get planning and build a new dwelling I would be mortgage free much sooner than I had planned. I'd also love to get married and have children in the next 5 – 10 years.
2) What are your hobbies
I love walking my dog Daphne, visiting the beach and generally being active.
Plus I often work out at home using streaming services after investing in some home equipment and I'm a frequent visitor to my local yoga studio.
I also like eating out and going to music concerts!
3) What do you do for a living?
My current title is Digital Transformation Lead and I do this for a financial services company called OneFamily.
This involves heading up all of our digital projects and moving the business forward to become a digital-first organisation.
I've always worked in Digital since I was around 17 so I've seen a lot of change and I really love it. My skills are transferable and I'm always learning new things.
It's an exciting time to work in Digital as more and more businesses embrace the new digital landscape.
4) What's your biggest money-related fear or concern?
My immediate concern is how I'm going to manage when I have children. I really want to have the option to be able to take a career break if I want to be a stay at home mum.
In the future, it's 100% my retirement. As I'm only 26, I absolutely don't want the government to decide when I should retire.
I really want to be able to make those decisions myself and be financially independent.
If interested, please join the waiting list for my video Course on how to get started, create and action your Plan for Financial Independence:
KEN’S RESPONSE TO REBECCA:
Thank you for writing in and sharing your story. We really appreciate it.
I read your story with a smile on my face because you’ve achieved some amazing things at 26!
If I’ve read this properly, then you bought your home at the age of 21 (RARE!) and the choice of not going to university has been a brilliant move.
I also find your move from Devon to Brighton fascinating as the location arbitrage is working well in your favour and is getting you closer to some huge milestones.
Your overall money discipline is impressive, which is another reason why I’m pleased that you wrote in.
I wrote a post a while back called 10 Game-Changing Money Moves To Make In Your 30s. Looking at that list, you’re already doing at least 4 of the 10 in your 20s!
It would be interesting to see your responses later in the comments as to who your early money related influencers were.
Before I dive into my thoughts on your situation, I'd like to point out that what I am writing about below is not financial advice.
It's boring but important admin that I need to make clear. As such, always seek professional advice if you need to.
Now onto your case…
Main observation: What should I do with my savings?
You’re in a very fortunate position to have this problem. As I stress a lot on this blog, in order to begin having any form of life options, one must first have savings.
As such, savings should always be prioritised over investing, although, in order to see significant wealth growth, one must invest.
Given savings take hard work and lots of resistance to build, putting your savings to work should be done with care and diligence.
When money is invested, it is usually done for a one or more of the following reasons:
- Diversification to reduce risk
- Capital gains to grow wealth
- Generating a regular income and cash flow
- Capital preservation to protect wealth
- Liquidity to offer flexibility – This is extremely important for Financial Independence.
Your attitude to risk plays an important role in determining what type of investments you choose in order to achieve some of the above.
As you’re only 26 years old and with a decent time horizon (5 years+), I would aim for investments that offer maximum gain coupled with liquidity.
It should be noted that risk and returns typically move in the same direction.
So the higher the risk, the higher the likely returns.
Below are some thoughts and options to consider:
1. Invest in paying off your mortgage
Although you’re already overpaying on your mortgage and saving on interest, diverting more of your savings towards paying off your mortgage earlier carries various benefits.
You get a guaranteed return on your money and can see the life-changing impact from mortgage freedom quicker.
It also gives you the opportunity to enter married life completely mortgage free and without the huge pressure to earn at the same level as you do now.
This is game-changing on many levels and could even improve your relationship.
Money (and the struggle to pay the mortgage) causes issues in many relationships.
Note though that putting all your money into your home reduces your liquidity and inability to be agile.
2. Fixed term deposits
These are useful if you want a guarantee that your original capital will be safe and remain protected, whilst still getting a return.
The longer the period that you’re willing to lock away your money for, the higher the returns you will get.
Given interest rates are super low at present, it is likely that you won’t get more than a 3% return on your money.
Locking away your money also reduces the liquidity (ability to convert to accessible cash) that you have.
The Financial Services Compensation Scheme (FSCS) protects your deposits fully for up to £85,000.
3. Invest in Index Funds
Index funds represent a simple path to wealth that many people overlook due to impatience for quick gains.
The goal here is to invest in broad-based index funds that track major indices around the world.
These include the FTSE All Share Index, S&P 500 etc.
The beauty of investing through the stock market but via index funds is that you get liquidity, diversification, income and capital gains all in one.
You can also automate the investing here and can stand off and never need to time the market.
Given this is a passive investing strategy, it is also cheap to get involved, and you’ll get richer quicker as more of your money is a work.
You can make such investments straight from a Stocks and shares ISA.
Related post: Understanding Investment Fees And Why It Matters
4. Create a Side Hustle
Given your concern about the fall in income when you move to Devon, how about starting your own business?
What I’d recommend is start small, and create an expert business that uses your existing skills.
This way, you can get started asap, and you have one year from now to do some experiments and see how things turn out.
Start up costs are so cheap. A good example is what I went through to start The Humble Penny.
Hosting, domain costs, and web design costs are super cheap.
I’d highly recommend either starting a blog or site that sells your services in small packages or via coaching.
Your digital skills are in such huge demand that you’ll already have a ready market.
In time, I’d also highly recommend creating virtual products using your existing skills.
The chances are, if you play this game well, you’d most certainly earn more from this side hustle than you do from your job today.
Medium Risk Investments
5. Explore Peer to Peer Lending
Peer to Peer (P2P) lending is growing a lot in popularity and for good reason.
From a risk perspective, it sits between cash at bank (no risk) and stock picking (risky).
Check them out as we currently use them ourselves. The above link will take you to a detailed review I wrote on them.
Liquidity is decent with P2P but note that you don’t get FSCS protection.
6. Property Investing
Investing in another property that you can let out is definitely another option to explore.
However, this has little liquidity and should only be done if you want a very long-term investment.
With £25k, you can put down a deposit for a decent freehold property provided the rent yield is attractive.
Property investing takes a lot of work, although I appreciate that you’ve got your feet wet by letting your current place out.
7. Build on your land
Episode 6 of How To Live Mortgage Free showed a couple that made this same move and became mortgage free at 30!
As you already have the land, provided you get planning, this would be a smart move to make.
However, this is likely to be capital intensive, although the upsides of mortgage freedom is a strong enough reason to do it.
8. Dividend Paying Stocks
Stock picking is one of the riskiest of these investment choices.
Note that it is the one that most of the public get excited about.
This is because all the noise out there is designed to push people to pick stocks and pay fees!
Note that three important things happen when you pick stocks:
i) You are timing the market – How exactly do you know if this is the right time to invest?
ii) All your eggs are potentially going into one basket
iii) You give up control of your money and have no diversification. If that company fails, that’s it – Gone!
You can minimise some of the risks here by picking bluechip dividend-paying companies with large market caps.
For example, we hold Apple, Amazon and Google shares, but more for growth than dividends. However, don’t just buy these because they sound cool.
They can perform badly anytime and you should only go into them with a long-term view.
Related post: Investing Risks You Should Be Aware Of
As you can see, there are many options for your money. I’ve merely listed this selection to keep this post from getting too long.
If I were sat in your shoes right now, I’d go for a blend of 4 ideas from above i.e. #1, 3, 4 and 5 in the short to medium term.
These options will offer you the best of diversification, capital gains, liquidity, capital preservation, and options to make new money.
Then in the medium to long-term, I’d explore investing some of that new money into 6 or 7.
Please let us know how you decide to proceed. Thanks again for sharing your story and money journey.
- 85 Ways To Make Extra Money Today
- Why Saving Money Should Be Prioritised Over Investing
- How Index Trackers Work To Make You Rich
- READER CASE STUDIES: Pay Off Large Debts Or Invest?
What would be your recommendation to Rebecca? Got a totally different idea to suggest?
Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.