Learning how to take control of your own finances and pension sounds confusing and scary but it doesn’t have to be!
I don’t know about you, but I just hear the words “finance”, “superannuation” and “stock market” and my eyes glaze over. However, as WordPress consultants, this is just not something that we can ignore- we need to be smart with our finances so that we are actually able to retire one day!
In this week’s episode, Mike speaks to Andrew Craig from Plain English Finance and the author of “How to Own the World”. Andrew talks to us about the essential ingredients for taking control of your own finance and money while allowing us to save, invest and even build a pension as WordPress consultants. According to Andrew, it doesn’t even need to be complicated! This is important one peeps, so listen in!
Watch the Video
A Bit About Andrew
Andrew started out in banking in the late 90’s, but after 15 years he realised that he had become an angry young man. It became clear to him when he would talk to people out and about, that there were so many myths out there about finance and he saw so many people that couldn’t manage their own financial affairs. So, he set up a website in 2011 and published a lot of free information which he was able to compile into his best-selling book “How to Own the World”. He describes the book as “an idiots guide to finance with a sophisticated overlay”.
Why Is Financial Literacy so Important for People Who Are Self-Employed?
With your own business, your income can have an uncertainty to it. You have times when the money is coming in and times when things are slow. However, if you learn about finance and make sensible investments, it won’t be long until you can build a nest egg which can throw off returns itself.
The Golden Rule
Andrew says that The Richest Man in Babylon, by George Clason, is an odd book but the one thing he took away from it was “Always put 10% of everything you earn into investments”. Sometimes you obviously can’t do this, especially when you are starting out, but as soon as you have income, put 10% of whatever you have made that month either into an investment account or into sensible investments. Having your own business puts you at risk of an impoverished retirement unless you apply this strategy.
He explains it like this – if Great Aunt Agatha put $5,000 into a tax-free account (like an ISA) for your newborn baby and you were able to achieve 10% interest rate, how much would that child have on their 55th birthday when they can legally retire? $945,000! So really your biggest ally in investment is time. Securing something like this early on in your life = winning!
Pension Funds. Do We Really Need Them?
People tell Andrew that “pension funds are shit” on a regular basis! However, he says that this isn’t true. A pension is a tax-sheltered account in which you can do thousands of things. The first thing people may do when they realise that they need to put money away is open a savings account, but keep in mind that if that savings account has an interest rate that is lower than inflation then you are actually losing money.
Ok, so What Do We Do from a Base Level?
- Save 10% of what you earn (unless you are at a development stage in your business then that can be an exception eg. buying equipment)
- Find the optimal tax sheltered account (He recommends an ISA for those in the UK as it has fewer risks and you can access it when you need rather than at retirement)
- Set up a direct debit with a quality stock broking firm. He has used eight but has ended up using Hargreaves Lansdown. They are a bit more expensive but they have good customer service and good reputation. AJ Bell also has good reviews. But all that matters is that the company that you use has access to a wide range of investments
But I’m Nervous to Invest!
If you are conservative and worried, at least just let your cash build up. Although, you may want to listen in at the 21-minute mark to hear why Andrew believes investing is the right option (and he provides more tips on how to do it safely). One thing that might reassure you is that when you are investing for a nest egg and long-term pension fund over many years, it is completely different to day trading and much less risky.
Tips for Investing
- Ignore the news! Don’t let world events and politics make you panic and sell your stock, or even make you believe that it isn’t a good time to invest
- Structure it well from a tax perspective and put a sensible strategy in place. By the time you’re 55 you will have a pretty good lump sum!
- Hedge out risk both by geography and by asset class. Then by doing that, investing isn’t that risky
- Know your stuff! Make sure you know the fundamentals of finance before you invest
- Find the optimal tax-sheltered account
- Never invest in single shares or commodities unless you have a thorough understanding of things such as share evaluation and what PE ratio is.
It’s All About the Fundamentals
Mike talks about the fact that there are many books these days that are actually easy to read and can help you understand the fundamentals of finance. Some examples are David Lynch’s “Beating the Market” and Warren Buffet’s books which explain that you don’t need to be a rocket scientist to invest. What you do need to know is:
- What is a share?
- What is the stock market?
- What are interest rates?
- What is inflation?
- How do you invest sensibly?
“If you’re looking to educate yourself about finances, seek out stuff about the fundamentals not about what the latest stock is or the latest fad is”.
Andrew has a list on his website “The Top 8 best Finance Books of all Time”. If you want to learn the fundamentals, he recommends “The Ascent of Money” by Niall Ferguson. This book asks “what is money?”. The more knowledge you have on finance, the more interesting it becomes!
And to Wrap up…
Mike talks about the huge amount of fear around money that we have in the freelance and entrepreneurial world simply because we are not educated on it. I hear you though – who has the time?! But Andrew talks about the importance of not parking this. If you can invest wisely then you have the ability to make the same amount of money from your savings and investments as you made from your business. Get a savings habit and “it’s remarkable how quickly your pot fills”. For those who are interested, there is an app called “Money Box” which Mike and Andrew recommend to help you stick to a savings plan.
Tune in to find out more on the history of finance and the trends of the stock market. As I said, this is an important podcast! Andrew talks about ISA accounts which are available in the UK, but we would love to know who you use in your country and any other finance tips that have worked for you.