#16: "Just tell me what to do"

4th January, 2020

Welcome to the Idiot Money newsletter. The newsletter that likes to bribe you to make yourself loadsa money. This week: becoming wiser with money by understanding that being able to keep on top of your finances in an hour a year requires a relatively tiny bit of homework upfront.

Greetings, now definitely older and possibly wiser friends.

As promised, this week’s newsletter contains a list of stuff you should do if you want to sort your financial shit out this new year.

Firstly, a huge thank you to all of you who sent me your thoughts about what ‘sorting out the finances’ means to you. While the existence of money concerns, even among the wealthiest people that have ever lived, ceased to surprise me a while ago, the expressions of those concerns are always enlightening. I’m heartened by those that said even making the small effort to answer the questions I posed was a useful (even fun!) exercise. I was going to share all the Qs and As, but the list got too long, so I’ve stuck to the most universal things.

Secondly, another huge thank you to the (lucky) few who’ve volunteered to let me further into their money worlds. I know talking about money can be super awkward, even when it could literally be worth millions. Bigger returns, smaller fees, and free government money aside, I hope to repay it many times over with all the important stuff that actually moves the needle on turning money into happiness. Failing that, at least we’ll have saved a life or two with the donation ‘fee’.

Onto the clickbait.

Remember, of course, that this is far from comprehensive, not at all tailored to your individual circumstances, and any such list of tactical things won’t solve the stuff that really bugs you. You can manage your money ‘perfectly’ and still live with money poorly. But if you think about money well, you’ll use it well, you’ll live well, and a lot of the managing will look after itself. And as I wrote elsewhere, the trouble with cool heads is that they make plans for other cool heads, when in fact they should be making plans for an entirely different beast.

Still, it’s a start, none of it is hard, or irrevocable, and the rewards are definitely worth it.

1. Insure what you can’t afford to replace

While extended warranties can do one, it’s a bit different if other people rely on your income-earning chops. If they do, you’ll want some income protection, life, medical, and critical-illness cover for core-living costs and to ensure your legacy isn’t a liability.

As an added bonus, first working out what your core-living costs are, and then having to pay to insure them, free from the eyes you think are judging you, but really aren’t, usually makes you define ‘core’ in a saner way.

You won’t do this because you don’t instantly know which provider to pick, and no deal is apparently better than a bad deal.

2. Stop putting off the legal stuff

Do this for your parents first.

Wills, Lasting Powers of Attorneys, and death-benefit nominations for your pension(s) let you choose who gets your stuff, or make decisions for you when you’re as capable of doing so as you were on the evening of your eighteenth birthday, only forever. Not to mention it cuts through potentially hideous amounts of admin at the exact time you or those you care about really don’t want to be doing admin.

You don’t tend to hear about these things except from those that didn’t think about it until it was too late. Their stories are horrifying. Don’t put yourself in the position to tell your own one day.

Stop the Netflix autoplay for a sec, click the link in the previous sentence, and sort it out.

You won’t do this because you think legal stuff is boring and you’re immortal. Channel your inner Brazilian: in Portuguese, ‘legal’ means ‘cool’.

3. Save up a cash emergency fund

The amount depends on your financial and psychological circumstances. It’ll be somewhere between 3 and 12 months of spending (not income – another good chance to redefine how much you really need to spend to live happily).

There are three main ways people bugger this up.

First is not doing it. Because something about money being the arbiter of value, and therefore to not spend it is to live a worse life, or something. See also those maverick financial advisers that believe their job is to help people spend their last penny on their last day.

Second is forgetting to stop. Because something about mistaking cash for both short-term and long-term safety, and you can never be too safe.

Third is not using it when it rains. A rainy-day fund loses its meaning when it’s not used on rainy days. I’ve seen too many people over the years save up money to not worry about emergencies, and then when the emergency arrives doing so anyway.

4. Merge your pensions into one (probably)

Ultimately, there’s no need to spend more than about an hour a year fiddling with your finances (and that includes thinking time). Part of this is streamlining your admin. And a major part of this for most people is putting all the pensions they’ve accumulated through various employments into one place.

There are reasons this isn’t always wise, e.g. pensions that build up an entitlement to an income, rather than an investment pot; current employers insisting on paying into a particular place; or for some freakishly fortunate few, terrific terms on old pensions that would be lost on transfer.

However, in 99% of cases, it should be done, especially given how completely crappy most pensions set up through employers are in terms of costs and fund choices. It’s also now way simpler than it used to be to transfer assets.

You won’t do this because it’s not instantly obvious how to do it (though unsurprisingly plenty of providers are keen to make it easy to give them your money). And while it could take ages, it’s only ages in the sense that making bone broth in a slow cooker takes two days: it’s mostly set-up and check-in.

5. Use your entitlements to free money and free tax avoidance

If your employer matches your pension contribution, contribute the maximum they match.

Additional pension contributions are usually wise too, but it’d be reckless to be too prescriptive given the lifetime and annual allowance limits, and alternative idiosyncratic sources of investment like personal businesses. This shouldn’t be read as ‘never breach those limits’, because it can be worth doing so in some circumstances.

As for whether it’s better to contribute to a pension or other tax-advantaged investment account (e.g. an ISA for UK people), this depends on all sorts of stuff, a lot of which you have no control over. The ‘best’ snapshot answer depends on legislation which changes all the time. However, hoovering up the free cash is always a wise idea, regardless of such changes.

If you’re in the UK and under 40 and don’t find a way to contribute £4,000 of your £20,000 annual ISA contribution limit to a Lifetime ISA, that’s your choice, but just ensure you’re cool that the benefits to you of not doing so are worth £1,000 of free money (and its accompanying compounding growth).

There are benefits to ensuring your investment accounts (e.g. pension, ISA, Lifetime ISA, or other country-specific equivalents, and an excess in non-tax-advantaged ones) are all in the same place, but it’s not a massive deal if they’re not, especially given the paucity of Lifetime ISA options. As far as the admin goes, it’s more important to make whatever you do habitual and automatic than it is to have all the components of your hifi made by the same brand.

Your post-hoc-justifying storytelling machinery is going to be stretched to explain why you don’t do this. If you ran out of money to take advantage of this year’s free money, maybe 2021 is the time to prioritise free money over wasted money.

6. Have an investment strategy

The best part of having an investment strategy that you understand to be as right for you as anything is ever likely to be, is never having to spend another second wondering if you should’ve invested in something else. As with any plan, all your design effort should go into sticking to it when it’s hardest to do so.

This is where I hope to get people who read Part Three of the book. There’s no chance of doing it here, so in the meantime, stop believing in superstar investment managers, stop mentally dividing your savings into different pots, stop believing investment ‘income’ is important, stop trying to time the markets, stop believing that you can ignore the price when deciding if something’s worth buying (as true for trinkets as Tesla shares), and so on.

You won’t do this because you’ll get stuck in a whirlwind of whataboutery. Feel free to investigate all that nonsense later. In the meantime, bet on the accumulated value of the world’s companies going up (via a globally diversified index-tracking fund) and don’t worry overly about which one.

Do this for all your investments (pension, ISA, other). The subtleties of adjusting a strategy depending on where the assets are held is 1000x less important than having a strategy in the first place. And of course by investments, I mean stuff you’re not going to need in cash in the next decade or two.

7. Invest habitually

Whatever you decide with where to contribute your cash, make it automatic. Depending on your circumstances, that could be better done via direct debit or a recurring calendar entry with instructions you can follow in your sleep.

You won’t do this because the whole world of money is set up to make us wait for ‘certainty’ in an inherently uncertain world. And because humanity’s track record of setting things up to be easy is terrible at the best of times, let alone when it comes to the mind-melting madness of living with money.

8. Review

If you’ve got a decent strategy and proper habits set up, reviewing your finances (checking contribution levels not investment values, ensuring you haven’t missed any new tax breaks etc.) should take minutes per year. Stick some time in your calendar now.

You won’t do this because easier-than-you-think-it-is, and more-important-to-future-you-than-current-you is procrastination’s favourite combo.

9. Consider getting professional help

Done properly (i.e. beyond pretending to be able to predict the markets and making some bullshit excuses why it didn’t happen in return for scraping a percentage of crumbs off your investment amount) financial planning is a hugely valuable service. Some situations definitely call for professional help.

Whether you’re better off going it alone or getting help is impossible to generalise. However, in either case, everyone should understand how to go it alone if they had to: otherwise it’s impossible to know what a large part of good help looks like when you’re paying for it.

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And finally, none of this is as important as living an examined life of course. But I can’t write about that every week. And besides, you won’t do it because you’ve been sucked into a Netflix wormhole and your rescue mission got distracted by Instagram.

Money Maxim of the week

Our words are the building blocks of our world. The metaphors that power our language are the myths by which we live. Everybody’s lexicon has a special inner circle. Words, phrases, and theories that ears can’t fail to hear across a crowded room. These Maxims are designed to interrupt our unthinking as quickly and as effectively as possible. To stop, challenge, and where helpful, rewire our relationships with money.

This week: Trigger #5: Next time

There’s no such thing as next time.

'In individual moments we all know how the most elaborate arrangements of our life are made only so as to flee from the tasks we actually ought to be performing, how we would like to hide our head somewhere as though our hundred-eyed conscience could not find us out there, how we hasten to give our heart to the state, to money-making, to sociability, or science merely so as to no longer possess it ourselves, how we labour at our daily work more ardently and thoughtlessly than is necessary to sustain our life because to us it is even more necessary not to have leisure to stop and think.’

So wrote Nietzsche in his Aphorisms on Love and Hate.

Innumerable financial errors are caused by people seeing their money mistakes (be they to do with investment, spending, or something else) as isolated blips, rather than something systematic. Whatever our excuses say, we are blocked from doing what we want to do – from becoming who we want to become – not by isolated incidents but by systematic errors. If you continue to think money problems are about money and not mindset, you'll continue to think it'll be different next time, and you'll continue to be wrong.