Simple Pound

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Have you ever been annoyed because you’re getting blamed for someone else’s faults? More specifically, have you ever wondered why the tube/bus/train is running late just the day you needed to be on time? I’ve cursed the London public transport system more than once since having to use it every single day, despite knowing it’s meant to be one of the most efficient and reliable means of transportation in the world - I’ve certainly seen worse (New York City subway - anyone?).

In any case, a colleague of mine told me about the TfL’s (Transport for London) refunds website that you can use to re-claim the price of a single journey in the event that your normal journey time is delayed by more than 15 minutes due to circumstances within the control of TfL (this excludes announced station and underground line closures). Just imagine getting reimbursed for all those signal failures, late track replacement and engineering works!

I’ve done it twice myself so far, and I just received my first £4 voucher (equivalent price of a single journey on the tube) which I will be able to use towards any purchase with TfL in the next 13 months. Yes, it’s not quite as good as getting a cash reimbursement and hence limits the use of the proceeds, but imagine the amount of vouchers you could collect over 12 months (for people with annual season tickets like myself) and subsequently use to reduce your next season ticket - which is fairly unavoidable if you continue living and working in London.

So, whenever you’re next sitting in a dark tunnel, surrounded by strangers and the only words you hear are: “Transport for London would like to apologise for the inconvenience caused”, you can feel a little more content knowing you’ll be £4 richer because of it. Here is the all important link that’ll achieve this: Tube refunds.

One word of caution (inspired by the reaction of a friend after I had just told him about the website): Do not start to monitor delays of other tube lines not affecting your journey and submit claims for every single one of them. Bear in mind that the people responsible for the refunds are hardly stupid and in the best case you’ll get yourself banned from using the service (hence forfeiting a refund when you are actually affected yourself), but in the worst case you’ll ruin the deal for all of us by making TfL abandon the entire scheme (if just a few people started submitting claims for all delays every day it could cost them a fortune!). Thus, use refunds responsibly!

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Purchasing power risk is one of the most fundamental constraints you should always bear in mind when deciding how and where to invest your money. As much as compounded interest works in favour of any investor, inflation will always work against you and erode the real value of your money over time - if you don’t do your best to protect it.

The following table is taken from the book I’m currently reading (“The Art of Asset Allocation” by David M. Darst) and shows vividly how important capital protection is and what growth rates it requires over the years.

It is quite frightening to see that inflation at the 15% level would erode 96% of your money’s purchasing power if you kept it “safe” under your mattress. Obviously, most developed countries don’t face double-digit inflation rates anymore, but it is nevertheless an economic force that cannot be ignored. The list below (alphabetical by country name) should give you a reasonable idea of how much various countries are currently affected.

All figures express the year-on-year percentage change in inflation for March 2008, unless otherwise stated.

• Australia: 3.00% (December 2007)
• Bulgaria: 13.20%
• Canada: 1.40%
• China: 8.30%
• Colombia: 5.93%
• France: 3.50%
• Germany: 3.30%
• Iceland: 6.80%
• India: 5.20%
• Japan: 1.00% (February 2008)
  
• New Zealand: 3.44%
• Mexico: 4.25%
• Russia: 5.60%
• Spain: 4.60%
• South Africa: 9.8%
• Switzerland: 2.50%
• Turkey: 9.10%
• United Kingdom: 2.50%
• United States: 3.98%

It is immediately obvious that the inflation threat is more real in some countries than others - compare Japan and South Africa. To give you a better idea what sort of growth rates you need to achieve in order to simply maintain the purchasing power of your money, I have adapted the table above to show growth rates.

These are calculated by simply dividing 1 by the fraction representing the real value of your money after x years. For instance, if we assume that your money’s real value after 20 years at an inflation rate of 3% is equal to 0.54, then you need to nearly double your money to maintain purchasing power: 1 / 0.54 = 1.85.

So what can you do to achieve these growth rates?

• make sure the return on your savings account is positive in real terms (after inflation & tax)
• take advantage of tax-free savings and investments (ISAs, pensions etc.)
• if you want to play safe, inflation-linked gilts will always give you a fixed real return as they are linked to the current RPI (which includes mortgage costs and is hence usually a lot higher than the CPI)
• diversify your investments to reduce the impact of one asset class underperforming or showing negative growth rates
• avoid mutual funds with high entry and/or exit fees (where possible) as you will need even higher growth rates to just restore your purchasing power

A year ago on Simple Pound: Investment Choices - Bonds (I)

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A few days ago I added a little gimmick to the sidebar that I thought those of you who are interested in (Personal) Finance would enjoy. Since I assume that most of my readers fall into this category, I hope you will all find it helpful… The new feature I’m talking about is the Library section which gives you an overview of the books I’m reading or have most recently finished.

As I’m going through a tremendous amount of finance-related books these days (in preparation for making a career change), you will find this section updated reasonably frequently. The sidebar gives you a preview of the book I’m currently at while the Library page shows you all the relevant books I’ve read together with a short opinion on how helpful and/or entertaining I thought they were.

All books are linked directly to Amazon should you consider purchasing any one of them.

Now you’re probably wondering why this post is called “Warren Buffet and Institutional Investors” while I spent all my time talking about my new idea. Well… there is an explanation. Since I want to share a particularly good story with you that I have come across in my most recent book, I thought it would make sense to introduce you to the Library along the way. But now it’s time to focus on Warren Buffet’s opinion of Institutional Investors. He quotes the following story in one of his letters to the shareholders of Berkshire Hathaway (his company):

Originally told by Ben Graham in the 1940s, it is still applicable to the markets today and is a wonderful description of the importance of investor sentiment (no matter how unfounded it might be).

A year ago on Simple Pound: What are we tracking? Top 5 indices to invest in

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By now we are half way through April and this is probably the least-timely monthly review I’ve ever written and published here. It feels strange to still be dwelling on March when it’s nearly time to think about the April review. The main reason this review has taken its time is that I wanted to re-publish my net worth progress bar on the front page which got a little messed up after I updated the site’s theme. I still haven’t sat down to look at the code again, so I’ve decided that the review should really not wait any longer… The progress bar will come up soon though - I promise

I was a little worried about the outcome of this month’s review as I had set myself a fairly ambitious goal last month by proclaiming that I wanted to increase my net worth to 40% of my overall net worth goal. This 1.5% increase over last month translates into a fairly substantial increase of assets (~ 4%) I would have had to achieve in order to meet my target.

The good news is - I did it I saved aggressively last month and also had a decent amount of extra income (blog, Easter presents) which means that I can proudly announce an asset increase of nearly 9%! Overall, I’ve achieved 42% of my net worth goal! To be honest, I was a little surprised how well last month shaped out, so I made sure to double-check all the numbers, but it appears to be true. I’m - understandably - very proud of myself.

Unfortunately, April’s numbers are very unlikely to be anywhere near as good. The reason? Well, mostly the shopping therapy I’ve engaged in since the last time I recorded my net worth figures. But that coat was just so gorgeous and earned me a lot of compliments already… somehow I think that makes the price tag more acceptable. While this is obviously delusional, I’ve always adored Karen Millen outfits and I’ll probably always will. I guess the lesson learnt from that splurge was: “Stay away from Selfridges”.

But don’t you agree it’s gorgeous? Yes, it’s not as important as buying a house and it’s certainly not helpful when trying to save for the deposit of such, but it’s just … sigh.

As usual, I have updated the Progress and Best Of pages - but then you knew that.

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With the new tax year having started yesterday we find ourselves facing a complete overhaul of the tax system that will affect (pretty much) every one of use. Well, it’s not exactly a complete make-over, but still relevant enough to have a noticeable impact. Since my post “What the taxman claims” still holds the pole position of popular posts (awesome alliteration!), I figured it was time to update the spreadsheet that comes with that post to reflect the new tax regime. A version 2.0 if you like…

But before I’ll share a link with you that you can use to download the new version of the tax spreadsheet, a short summary of what exactly has changed since we last wondered how much tax the government was getting from us:

• Personal Allowance: This tax-free allowance was increased from previously £5,225 to £5,435 - a 4% increase to keep up with inflation, if you really wanted to know. As long as you’re under 65 years old this is the amount you don’t owe the government a penny on (per tax year).
• Tax rates: As of yesterday there is no such thing as a 10% tax rate anymore. It has been completely abandoned in favour of reducing the basic tax rate from 22% to 20%. No changes to the 40% tax rate though I’m afraid - except for the threshold after which you will have to pay it. Once your personal allowances is fully used, you can expect to pay 20% tax on the next £36,000 you earn a year. Hence, any income that goes beyond £41,435 (£1,500 higher than before!) will be taxed at 40%.
• National Insurance: In line with the tax amendments, National Insurance contributions were adjusted as well. The basic threshold now lies at £90 p.w. (or £4,680 p.a.) below which you don’t have to make any contributions at all. After that, you are expected to pay 11% of your gross pay up to a limit of £770 p.w. (£40,040 p.a.) followed by 1% of everything that exceeds £40,040. Last year’s 1% threshold was fixed at £34,840 which means that people can now expect to pay slightly more NI as the 11% rate applies to a further £5,200.
• Student loan repayments: No change here Earnings threshold is still sitting at £15,000 p.a. beyond which point you are expected to pay 9% of the remainder (i.e. everything beyond 15k) to settle your debt.

That’s a very brief summary of what’s going to change this (tax) year. The only additional change I have made to the spreadsheet concerns non-taxable benefits. If you are, like me, fortunate enough to be in a position were you get certain benefits from your employer which are deducted from your salary pre-tax, then you can now take these into account when calculating your annual tax due. Just add them into the cell below the bonus payments and it will be automatically deducted from your gross annual salary and not taken into account for the tax, NI and student loan calculations.

And now here it is - the one thing you’ve been waiting for while I’ve been rambling about boring tax changes: the new spreadsheet! Download it here.

A year ago on Simple Pound: Investment Choices - Index Funds

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Update: The transition to the new theme is nearly done. The site should be back to its usual stability. There are a few things left for me to do (like adding in my net worth progress bar and playing with the colour scheme which I’m not 100% happy with yet), but first I will have to go to work

Let me know what you think of the new design and whether you find any broken pages or links that resulted from the upgrade. I’m curious to hear your opinion!

Just in time for Simple Pound’s birthday, the author of the Wordpress theme I’m using has released a new version compatible with the latest Wordpress installation. I’ve had some minor issues here and there since we upgraded to Wordpress 2.5, so I’m hoping that updating the entire theme will take care of that.

Hence, if you experience any issues within the next hour or so, please bear with me while I’m fiddling with the layout. We should soon be back to normal service

Thanks for your patience!

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