Timeless Wisdom - Lower My Charges

Timeless Wisdom

Timeless Wisdom

800 450 Jason Butler

Timeless wisdom

How an ancient philosophy can make you better with money

The Stoics were around during the time of the ancient Greeks and Romans.

One of their key teachings was that there are only two things that we can control in life – our judgements and our actions. The Stoics believed that accepting what we can and can’t control, and understanding the difference, was the route to a harmonious and fulfilling life.

The Stoic’s philosophy can be used to help you make better financial decisions – the key ones being how you earn your living and how you spend your money.

Increasing your human capital

How much income you earn throughout your working life – the cumulative value of which is known as human capital – depends on your resources. Those resources include your time, knowledge, skills, experience, contacts and energy.

The cumulative value of a £40,000 salary which escalates at 4% p.a., compared to the same salary escalating at 3% p.a. is a staggering £800,000, as shown in the chart below.

As you can see, investing in yourself, to improve your personal resources, and thereby your value to an employer who wants to hire your labour, is likely to be one of the best investments you ever make, particularly if you have many years of working life ahead of you.

Controlling your spending

There is no magic to building wealth from your own endeavour. You need to:

– Earn more than you spend
– Save the difference;
– Invest a significant amount in growth assets like company shares and property;
– Be very patient and think long-term.

See my recent article Frugality rocks! for an insight into avoiding ‘Lifestyle creep’ and why this is essential to enable the building of short-term financial resilience and long-term financial security.

Get the financial industry noses out of your financial trough

Jake and Jessica both want to save for their retirement.

They both want to generate an annual income of £20,000, on top of any state pension, by the time they reach age 65. They both adopt the same investment strategy, have the same tax treatment and will save over the same term.

My good chum and fellow personal finance writer Paul Claireaux has crunched the numbers for Jake and Jessica’s situation over a range of ages and these are set out in the chart below.

On this basis Jake will need to save about twice as much as Jessica each month to achieve the same outcome. The two main reasons being that Jake has chosen an expensive savings plan and an expensive inflation protected annuity, whereas Jessica has chosen a low-cost plan and a lower cost level annuity.

Source: www.paulclaireaux.com  2018 reproduced by kind permission

With investing (and a pension plan is merely a tax advantaged investment account) always remember that costs are certain, but investment returns are not. Or, in other words, you get everything you don’t pay for.

All other things being equal, you get higher reward for the same level of risk if you pay less in annual costs.

Financial firms like to express their charges as percentages because they seem more innocuous and less transparent. They now must also express total costs in actual £ cost, both at outset and each subsequent year.

For example, if you have a pension plan worth £100,000 and you incur charges of 2% per annum, that is actually a cash cost of £2,000 each year, and this will rise as your capital grows.

A different pension account which charges just 0.50% per annum actually costs you £500 per annum – a saving of £1,500 per annum!

A high cost investment plan means you’ll have to work longer, save more, take much higher investment risk to achieve the same outcome or a combination of all three.

Do yourself a favour and take a leaf out of the Stoics’ guidebook and start taking control of:

– Your human capital;

– The growth in your lifestyle spending;

– The annual costs of your long-term investment plans.

Doing these things won’t guarantee financial success or happiness but they will increase the odds in your favour.

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