Simple Pound

Admittedly, it’s been getting very quiet on the blog front and you’ve all heard the excuses of working late and being busy, so I won’t bore you for very long before moving on to more interesting stuff. But can I just say that I also walked 20 miles for charity and that took away some blogging time! I bet that’s a new one for most of you…

Anyway, as I promised in my last post (yes it’s been a while) I have had an idea about a series of posts that might be of interest to you, especially if you really really like numbers (like I do). While reallocating my pension across several funds, I kept wondering how to best measure how well (or badly) my choices were performing compared to the market in general. For a start I have split money fairly evenly across index funds and actively managed funds in a way that will hopefully allow me to compare apples with apples - i.e. simply speaking, for each asset class I have picked an index fund as well as an actively managed fund to compare their performance against each other.

Somehow, that didn’t seem good enough and so I did some research on what else I could do. As I said, I like Maths and numbers because they have an inherent logic and beauty… great, now I sound like a total geek. Or idiot. Your choice

Hence, here’s my line-up of posts that will hopefully appear throughout June and July (bear with me as I’m also going on holiday in three days). I’m not going to explain much (or anything) at this stage, because otherwise there’s not much point in writing separate posts about each. I simply hope you’ll be excited to read what’s coming up and all the things you might be able to learn soon(ish).

1. Post : The Basics
- arithmetic mean (average loss, average gain)
- geometric mean
- frequency distribution
- maximum value
- minimum value
- positive # of years / months / weeks
- negative # of years / months / weeks

2. Post : Risk
- VAR: value at risk
- M-squared

3. Post : Statistics
- standard deviation
- semi-variance (semi-deviation)
- downside variance
- below-target probability

4. Post : All About Interaction
- covariance: degree of variability of returns between two assets
- correlation coefficient
- units of annual return per unit of std. dev.
- expected final value of $1.00 / £1.00

5. Post : First lesson in Greek
- beta coefficient or an assets’ degree of responsiveness to market movements

6. Post : Advanced Greek
- alpha or superior returns

7. Post : More Jargon
- sharpe ratio

Some of these will be rather obvious, or aren’t even really mathematical but I thought they were nevertheless useful when analysing your portfolio. I’m going to try my best to explain even the more complex concepts in a straight-forward way that will make you (and me) understand why exactly a particular formula might in fact be useful.

Knowing myself, all of the above will eventually end up in a big spreadsheet, which I naturally will also make available to you so you don’t have to play with Excel for hours to get it all onto one page (surprisingly enough not everyone finds that sort of stuff fascinating).

I’m getting rather excited while writing this, so hopefully my energy won’t be wasted and you’ll enjoy it as well! Let me know if you think I’ve omitted anything absolutely obvious that shouldn’t be missing from a series of posts on portfolio calculations.

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A year ago I wrote about Zopa, a (then) new loan concept that wanted to bring people together in order to facilitate a lending and borrowing market that wouldn’t require banks. The concept is remarkably easy - on the one hand we have people with spare cash looking for a good and (reasonably) safe return while at the same time we have people out there who are looking for some spare cash (i.e. a loan). Why not make these people talk directly, instead of forcing the former group to deposit their savings into a bank account with a mediocre interest rate and subject the latter to bank’s exorbitant fees (exceptions apply)?

After I had been watching the Zopa site grow for quite some time, I decided that it was time to join the fun and have a go at it myself. With the house purchase one of my major short-term goals at the minute, I didn’t want to tie up a lot of capital for a long time, hence the amounts I’m allowing myself to use at Zopa are fairly small (£ 25 in total at the minute, increasing by about £ 10 a month). Nevertheless I figured I had seen enough to share my experience with the site so far…

Signing up: Ideally this should have been a fairly easy process, especially since I was intending to become a lender, not borrower. However, due to money laundering regulations Zopa is still required to verify your identity and address. Since we’ve moved to our current flat only a few months ago, this identity check could not be carried out online and I had to submit the usual proof of identity and address documentation. This is nothing unique to Zopa and I’ve encountered the same issue several times before with banks, credit card and loan companies. In the end it took only 2 days for them to process my documents and I could sign up successfully! Overall impression: good.

Customer Service: Apart from the registering process I’ve had several other encounters with the Customer Service department relating simple queries as well as a functionality problem at one point. The usual way of contacting them is by sending an email and the response time is always within the promised 1 - 2 business days. All requests were dealt with swiftly and the team is very helpful and always friendly. Overall impression: excellent.

Transferring money: There are three major ways you can transfer money into your Zopa account: Debit card by phone (for instant transferral) or online (for transferral within the same business day), standing order (similar to the way you’d set up the standing order for a savings account) or by bank transfer (longest of all methods as it takes about 3 days to reach your account). With either option you will receive a confirmation email when your funds reach the account and are ready to be used. To transfer money out, you will need to have your bank account confirmed with Zopa. To do that, you simply need to transfer £1 by bank transfer once for them to be able to verify the account belongs to you. At this stage, you cannot transfer the money in your Zopa account to anybody else but yourself. Overall impression: very good.

Lending in Zopa Markets: With Zopa you have two major lending options - Markets
or Listings. If you allocate your money to the Markets section, most of the work matching your lending offer with a borrower request will be done behind the scenes for you. You merely see your money moving between the stages of being offered (currently available), processing (matched to a borrower, loan verification in progress), lent out and late payments (hopefully very few in the latter category). To determine your rate of return you can either give Zopa your desired rate of return and the longest amount of time you’re willing to tie up your capital or you can fine tune your offer by indicating an exact rate of return per market segment. These segments are determined by the borrowers credit rating and the duration of the loan and range from A* for 12 months to C for 60 months. Zopa is helping you to offer realistic rates by quoting you a range of rates that other lenders are offering.

My experience with the Markets section is thoroughly positive. I’ve got all my lending offers at the higher end of the market range and yet I find that my available money is usually processing within a time span of about 2 days. I’ve only had one slight hiccup so far that was explained to me and hence resolved by the Customer Service team within 2 days (my Zopa account contained a little less than the shown £ 10 due to the Zopa fees being earmarked but not deducted every month). Overall impression: good

Lending on Zopa Listings: Zopa Listings are essentially an eBay-like reverse auction system where borrowers advertise their borrowing needs together with an explanation of their finances and lenders can quote how much they’d be willing to lend to this one borrower and at which rate. All quotes get aggregated throughout the duration of the listing. When the borrower’s desired loan amount has been reached (i.e. funding is at 100%), lenders can continue to quote and hence will start outbidding each other with lower rates. Eventually only the minimum number of lenders with the lowest rates will be kept in the listing and hence will be able to lend their money to the borrower. The advantage of the Listings is that you might be able to get a higher rate than you’ve quoted in the Markets section by bidding at the last minute - similarly to how you can get a bargain at eBay through sniping (or old-fashioned pressing of refresh and bidding on the last second).

I’ve only (actively) participated in one Listing so far which ended at 4.20am in the morning. I waited to submit my quote until half past midnight and went to bed hoping lots of people would have already done the same. By the time I submitted my quote, I was about 50 offers (out of 130) away from being excluded so I felt pretty safe and happy as I had a good impression of the borrower. Unfortunately I was out-bid just 15 minutes before the end of the Listing… In any case, the entire process was certainly exciting and I’m intending to look out for other Listings as soon as I fund my Zopa account with more money (waiting for the paycheck, anyone?). Overall impression: excellent

Total verdict: For me, Zopa turned out to be everything I expected and wanted it to be. Obviously I can’t really comment on the bad loan rate at this stage, but then I don’t think it is a major part of evaluating Zopa itself. Every lender can adjust the risk he or she is willing to take by only offering money in certain (high-quality) markets or reducing the term of the loan they’re happy to accept. I believe that people might be less likely to default on their loans when they know that they owe their money to individual people, not big face-less institutions - if you had the choice, whom would you pay back first? Your neighbour or the bank? I might be wrong, but this is what I would like to believe and Zopa’s low bad-loan quota might prove just that.

If you’re intrigued by the concept and would like to explore alternative ways of making money / earning a return on investments, I urge you to give this a go. Sign up here to get £30 when you start lending (minimum amount applies) and become part of the Zopa Community. Trust me, it’s fun!

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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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It has been all over the news since August this year - credit squeeze here, liquidity crisis there. So we certainly can’t claim that we haven’t had enough press and media coverage on the topic, but - if someone walked up to you and asked you to explain the credit crisis to them, would you be able to?

To come to your (and most likely my own) rescue, I luckily discovered a really good video on the FT website that explains this rather complex economic phenomenon in fairly simple, easy to follow animations. It’s definitely a must read/watch if you want to understand how the world’s largest and most stable economies were forced to their knees.

Check it out here. Don’t disregard the suggested further reading either as it will provide you with a deeper understanding of the dependencies between the different players in the market, their role in the crisis and the wider macro-economic impact the current situation is likely to have.

If any questions remain unanswered, you’re welcome to post them in the comments and I will do my best to shed some more light!

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This post appeared as a guest post at Wellheeled.

We all know that having a budget and controlling your spending is a good thing. In theory. That’s great, but there are so many things we know are good for us, yet we still don’t manage to put them into practice. Think exercise… After I grew up with my mum telling me I should really track all my expenses, I have tried so many things, but none of them worked for longer than a couple of weeks when the novelty wore off.

When I realised that I was going to start earning a salary soon (i.e. regular income) and would have bills to pay (i.e. regular outgoings) as well as many dreams to fulfill (car, property…), it became clear that there was no way around coming to grips with my money. And that’s what I did. I have been sticking with the same process for the last 7 months, and I hope this is gonna be it. So what am I doing?

First of all, I didn’t set myself a budget but simply started tracking my expenses. If you haven’t paid attention to what you spend your money on, chances are you have no idea what life actually costs. Setting yourself a budget in a situation like this is likely to have a disastrous outcome because most probably your budget won’t work, you’ll get annoyed or disappointed and abandon it.

Thus, step 1: get a receipt. Bagel on the way to work? Coffee in your lunch break? Simply ask for a receipt. You’ll be surprised how readily you’ll be able to get one. For transactions you can’t get a receipt for, make a mental note or write it down – either in a little notebook, or on another receipt. All we want is to keep track.

When you get home in the evening, allow 2 minutes for your finances and enter your day’s expenses into a spreadsheet (or anything similar like Microsoft Money, Quicken etc.). But make sure you enter them in a way that will allow you to easily compare figures over months. With all my failed budgeting attempts I compiled my expenses on a day-by-day basis, i.e. I would know that I spend $ 4 on coffee on Thursday, the 2nd of March. The result was that I never looked at these figures ever again. But that’s really not the point of tracking your expenses – the reason you do this is to figure out where your money is going. And if you will have to sit down an spend hours compiling figures at the end of the month, you’re simply not going to do it.

I have arranged my spreadsheet into months and categories, as shown below. This way I’m calculating the monthly running total straight away and can see immediately how I’m doing compared to the previous month.

The first line lists the month’s overall expenses, with the line underneath telling you how much money you should have left assuming the figures in the „Income“ category are correct. Further down, my expenses are broken down by categories (e.g. „Home“) and subcategories (e.g. „Mortgage“). My spreadsheet is actually based on a template that I downloaded from the Microsoft Office site. This way I didn’t have to worry about the spreadsheet details (for instance, all the sums it computes) while still being able to customise it enough to reflect my own personal lifestyle.

Roughly once a week I consolidate the spreadsheet with my online bank statement to include any regular expenses that are deducted by Direct Debit and to make sure that any card transactions are reflected accurately (both in the spreadsheet and on the bank statement).

As of today, I still don’t have an actual budget but I’m constantly trying to undercut expenses or increase my savings rate (which I have included in the spreadsheet as well) as compared to the previous month – therefore moving closer to a figure that accurately reflects my spending per category and that I could potentially use to draw up a budget.

The main reason I haven’t done this so far is that I knew my financial situation in 2007 would change dramatically and hence any budget that worked in March would be obsolete by July. And a budget I would set myself while being in New York (on a business trip for two months) wouldn’t be appropriate for the last quarter of the year when I’m back in London. But I’m nevertheless one step ahead for next year’s New Year resolutions!

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A few weeks ago I stumbled across this little story at The Personal MBA, which I simply have to share:

One day, a man approached JP Morgan, held up an envelope, and said “Sir, in my hand I hold a guaranteed formula for success, which I will gladly sell to you for $ 25,000.”

“Sir,” JP Morgan replied, “I do not know what is in the envelope. However, if you show me and I like it, I give you my word as a gentleman that I will pay you what you ask.”

The man agreed to the terms and handed over the envelope. JP Morgan opened it, and extracted a single sheet of paper. He gave it one look and handed the piece of paper back to the gent, pulled out his chequebook, and paid the man the agreed-upon $ 25,000.

The paper read:

1. Every morning, write a list of things that need to be done that day.
2. Do them.

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