Money Management

Portfolio

OK so it’s time for HowToSaveCash to nail his colours to the mast and let you in on what the HTSC portfolio looks like. I’m going to update this page on a monthly basis as well as post monthly updates to show the progress the HTSC household is making on achieving their net worth goal. The portfolio will be in percentage values, as it makes absolutely no difference to you, dear reader, whether the HTSC goal is to have a net worth of £10, £100, £10,000, £100,000 or £1,000,000.

HTSC Portfolio – September 2018

Here’s a sexy pie chart which gives an overview of the portfolio.

Here’s the breakdown of what is in the portfolio.

Overall Percent
Cash 17
Stocks & Shares ISA  50
Fund Name Percent
Vanguard LifeStrategy 80% Equity  Fund – Accumulation 100
SIPP  24
Fund Name Percent
Vanguard LifeStrategy 100% Equity  Fund – Accumulation 100
Work Place Pension (Aviva) 7
Fund Name Percent
Aviva Pensions BlackRock Aquila UK Equity Index Tracker S6 20
Aviva Pensions BlackRock Aquila US Equity Index Tracker S6 45
Aviva Pensions BlackRock Aquila European Equity Index Tracker S6 20
Aviva Pensions BlackRock Aquila Pacific Rim Equity Index Tracker S6 5
Aviva Pensions BlackRock Aquila Japanese Equity Index Tracker S6 5
Aviva Pensions BlackRock Aquila Over 15 Years Gilt Index Tracker S6 5
BrewDog Shares 2

Notes 

The Aviva pension is an auto-enrollment work place pension that Mr HTSC was signed up for some time in 2016/2017. The funds in the pension are ones that have been manually selected since being enrolled. The default fund that was chosen was an actively managed, high fee fund which just doesn’t sit well with the ethos of saving cash, so it was changed for the 6 index funds listed above.

Yes, Mr HTSC invested in BrewDog some years ago and happens to benefit greatly from the discount received in their bars and online shop for being a share holder. Yes, I know, spending money on beer is not a basic need but hey, you have to live a little right? For those wanting to know more here’s a link Equity For Punks.

 

Ahh I’m drowning in ISAs

ISA (Individual Saving Account)

Up until about 5 years ago ISAs seemed pretty straight forward. There were 2 options (as far as I’m aware), there was either a Cash ISA, which your local bank or building society would offer or a Stocks and Shares ISA, which would be offered by brokerages. However, over the last 5 years it appears these ISAs have multiplied like rabbits and now it feels like untangling a bowl full of spaghetti when attempting to figure out which ISA right for what job.

Well if the conundrum of which ISA to open or contribute to this tax year has been keeping you up at night (and I’m taking a wild guess that it probably hasn’t), then don’t worry, we’ll go over what is currently available and when which ISA is best for what job. Now come on, together, we’ll get through this.

ISA Advantages

At the moment it’s simple, any gains on the money within an ISA (sometimes also referred to as a tax-wrapper, this isn’t someone who raps about tax) are currently protected from the tax man. There are other advantages which we’ll go over in the table below.

ISA Type Restrictions Best For Yearly Limit Benefits
Cash ISA Building up cash savings. 20,000 Interest earned on savings is not taxed.
Lifetime ISA Can only withdraw money for house purchase or retirement.

If using this for retirement savings, money cannot be withdrawn until age 60.

Saving for a house or retirement. 4,000 Government tops up amount by 25%. So you put in £4,000 and the Government will add £1,000.

 

Help to Buy ISA Can only be used for buying your first home. Saving for a house deposit.

2,400*

Maximum of £200 per month contributions.

In the first month of opening you can deposit £1,200.

The Government will top up the ISA when the ISA is closed for purchasing a house. The government top up by 25% of what is in the ISA up to a maximum of £3,000.
Stocks and Shares ISA Building up a shares/bonds/funds portfolio. 20,000 Any gains in value of shares or bonds are tax free. As are the dividends or interest which is paid to you.
Innovative Finance ISA Peer-to-peer lending 20,000 The money earned from peer-to-peer lending is tax free.

 

Scenario: Saving for a house

So you’ve got two options here, either the Lifetime ISA or the Help to Buy ISA, which is going to be best for you? Well you’re reading a HTSC post so we’ll get to the example.

Assumptions

  • Saving for 3 years (36 months)
  • Maximum contributions are made
ISA Type Contributions Total Contributions Bonus Total
Help to Buy ISA 1,200 x 1 Month

200 x 35 Months

8,200 2,050 10,250
Lifetime ISA 4000 each tax year 12,000 3,000 15,000

If maximum contributions can be made, the Lifetime ISA is the one to go with and even if you cannot make the maximum, it’s still the Lifetime ISA and here’s why. The Lifetime ISA has an age limit of 50 for when the 25% bonus stops being paid, where as the Help to Buy ISA will only pay a maximum bonus of £3,000. So there’s no point in saving into the Help to Buy ISA once you’ve saved £12,000.

If you open a Lifetime ISA and contribute the same as you would have if you opened a Help to Buy ISA, the bonus and total will be the same. It’s just the Lifetime ISA allows you to save more and in turn earn a bigger top up.

 

Scenario: I’ve budgeted like a pro and I’m sat on spare cash I want to get to work

So you’re not happy with the Cash ISA return (of a pitiful 1%) and you’re happy to take on a little more excitement (read risk) in the hope of greater returns.

Now the Stocks and Shares ISA and the Innovative Finance ISA are not directly comparable as they are out there to satisfy different needs but here’s a quick rundown.

ISA Type Pros Cons
Stocks and Shares ISA Any gains in the value of shares and bonds bought is tax free.

Any dividends or interest paid is tax free.

There is an ongoing fee for having a Stocks and Shares ISA.
Innovative Finance ISA Any money received from peer-to-peer lending activities is tax free. There is an ongoing fee for having an Innovative Finance ISA.

Not many platforms currently offer this ISA.

The Innovative Finance ISA is the new kid on the block and it’s out there to satisfy the growing demand of people wanting to loan out their spare cash to other people or businesses. This is known as peer-to-peer lending or crowd funding. More information can be found here: MoneySavingExport – Peer-to-peer lending

There are not a lot of platforms out there that offer the Innovative Finance ISA but one list I’ve found is: https://innovativefinanceisa.org.uk/isa-providers/ 

So I hope that clears a few bits and pieces up and you’re able to determine which ISA is best for you. I’m sure in years to come there will be even more ISA options out there, which will no doubt add to the confusion but don’t be afraid, as we’ll tackle each ISA as it is released into the wild.

As always, please do further reading when it comes to finance. The topic of ISAs is a large one and cannot be fully understood by reading one blog post by a guy on the internet. Happy hunting!

Buying a house – The dreaded mortgage

The chances are, the biggest loan you’re ever going to have is a mortgage and that prospect puts many people off even attempting to do their own research and selecting a mortgage that’s right for them.

DIY

When looking for a mortgage the most important thing to remember is that what you’re after is essentially a big loan. Unfortunately, as it’s a financial product, there is some jargon involved which I’ll cover as we go on.

There are 4 important factors to take into account when looking for a mortgage:

  • Amount you want to borrow
  • Length of mortgage
  • Interest rate
  • Fees

Amount – This is pretty simple. The more deposit you have the smaller the mortgage, which in the long run is a win for you. So apart from saving more for the deposit, there isn’t much more we can do here.

Mortgage Length – This is going to depend on your situation. The shorter the mortgage length, the more your monthly payments are going to be, however in the long run you’re going to have paid less interest on the loan. Meaning you’ll be better off sooner. Now depending on the mortgage provider, they may allow over payments, which gives you the flexibility of over paying when it suits you. Overpaying will also shorten the mortgage length. Mortgage providers tend to gloss over any overpayment allowances/restrictions, this is because they don’t want you to pay it off any sooner but it’s definitely worth knowing this information.

Interest Rate – Each mortgage provider is going to be vying for your custom, so be on the lookout for a competitive interest rate. Now it’s important to understand it’s not just a case of going with the cheapest rate as there might be steep application/booking fees with the mortgage, which could mean you would be better off getting a slightly higher interest rate and smaller or no fees.

Fees – It would appear each provider uses its own terminology when it comes to fees but two of the main ones I’ve seen are booking fee and/or application fee. In my opinion, you should be able to get a perfectly good deal without paying any fees at all. You just have to do a little digging.

The MoneySavingExpert has a great first time buyers guide which breaks down the fees which may be applied.

Ok, enough babble, example time.

Scenario

Mortgage Required £150,000
House Value £170,000
Mortgage Length 25 Years
Mortgage Type 2 Years fixed interest rate

Using the excellent MoneySavingExpert mortgage comparison tool, it’s come up with two mortgages which look similar but have a very big difference.

The initial interest rate on offer is nearly the same 1.90% vs 1.93% (this is the interest rate you’ll be paying on the loan for the first two years) and the monthly mortgage payments are similar £628 vs £630. However, there is over a £10,000 difference in the total amount payable (highlighted in the red boxes). This is down to the fact that after the 2 years, the mortgage provider will put you onto their Standard Variable Rate (SVR), which is usually much higher than the rate you first get. The SVR for the first mortgage is 5.49% vs 4.99% on the second mortgage. Now, 0.5% doesn’t sound like a lot but over the 23 years you’ll be paying back the mortgage, as we’ve seen, it will add up to over £10,000 more being paid for the same mortgage. I don’t know about you but I’d definitely prefer that £10,000 stay in my pocket rather than someone else’s.

Now in reality after the 2 years you should be looking around to see what mortgage providers are offering for another fixed term. Invariably, these interest rates will be cheaper than the SVR so it’s a must do when your fixed term comes to an end.

This example uses just the one online tool. However, make sure you use a number of online tools as not one tool will cover all the mortgage providers out there.

You might be wondering, hey, just above you mentioned something about fee free mortgages, where do I get one of those? One provider that has them is HSBC, using the same details as above, HSBC’s online mortgage comparison tool presented this mortgage:

As we can see, the initial interest rate is higher than the 2 previous mortgages at 2.34% however the SVR you get put on after 2 years is 3.94%. That is significantly lower than the first two we looked at which were 5.49% and 4.99% respectively. So in the long run, your total amount payable would be much lower with the mortgage from HSBC. This mortgage doesn’t have any fees either compared to the £1,414 and £999 set-up fees of the previous two mortgages.

As always, do your own research and calculations when it comes to this as everyone’s situation is different.

Mortgage Advisor

Now I’m not saying that a mortgage advisor isn’t worth it, if the above scares you then don’t feel silly about arranging to use one. I know many people who have had one and they have been very happy with the service they have received and the mortgage they have ended up with.

The first question you’ll want answered is how is this advisor making a living? Some brokers charge a flat fee to find you a mortgage, some charge a percentage of the mortgage value (avoid at all costs, the paperwork for filling out a mortgage cannot be that much different when wanting £100,000 or £300,000) and some don’t charge a fee. Those that don’t charge a fee tend to get a kickback from the mortgage provider for sending the business their way.

They will all no doubt advertise they search the entire market but I highly doubt they do. Admittedly there are mortgages that can only be obtained with the use of a broker but having seen the interest rates on offer direct from mortgage providers, I highly doubt a broker can do much better in terms of the initial interest rate and fees.

I’m hoping you’ve found this useful and it’s given you the confidence to go off and do more of your own research and to select a mortgage that’s right for you (not your broker). I’m also hopeful that in the long run, this will help keep more of your hard earned cash in your pocket.

Our next stop will see us look at the solicitor/conveyancer fees that come with a house purchase.

Investing – Keeping an eye on fees

One of only a few variables you can control when making your spare cash work harder is fees. Unfortunately fees come in all shapes and sizes when looking at brokerages and funds. So I’m going to keep it simple and go over brokerage fees in this post.

Rule One: Keep fees to a minimum

Rule Two: Don’t forget rule one.

Brokerages are split into 2 camps when it comes to charging fees. Some charge a flat fee per quarter or year and some charge you a percentage of your portfolio value.

As for which broker you should use, generally, if you do not see your investment stash being worth more than £40,000 in the next 4/5 years then go with a percentage fee broker. If you see your investment portfolio value rapidly increasing it may be worth going with a flat fee broker straight away.

Platform Fee Example

We’ll use a portfolio value of £10,000 for the following examples. The examples will include the cost of 12 fund purchases over 1 year.

Hargreaves Lansdown (Percentage)

Here’s what Hargreaves Lansdown are currently offering when it when comes to their Stocks & Shares ISA charges: HL Fees

HL

Calculate annual fee: £10,000 x 0.0045 = £45

Total Annual Cost: £45

There are no dealing fees when dealing funds on HL so a monthly fee is all you will be paying. Just divide that annual amount by 12 for the monthly cost.

Lloyds Bank Share Dealing (Flat Fee)

Here’s what Lloyd’s are offering on their Stocks & Shares ISA: Lloyds Bank

lloyds

Annual fee: £40

Fund dealing charge: £1.50

Annual dealing fee: £1.50 x 12 = £18

Total Annual Cost: £58

As you can see, the percentage broker is the cheapest when the portfolio is worth £10,000. However, if you do the same calculations with a portfolio worth £40,000, the flat fee broker is the cheapest option.

Here’s a very simple breakdown of the fees that you should be mindful of when choosing a broker:

  • Brokerage platform fee (is it a percentage or flat fee)
  • Dealing fees (some platforms don’t charge for dealing funds but do individual stocks)
  • Exit fees

As always Monevator has done an exceedingly good job of taking the hard work out of choosing a broker: Monevator Compare Broker Table

 

Investing – Index Trackers

Hopefully you haven’t lost the will to live and you’re super excited about the prospect of your spare cash working hard for you. In a previous post I explained what a stock and a bond was.

First things first, what’s an index? You may or may not have heard of the ‘FTSE 100’. This is an index that is based in the UK and it’s a group of the UK’s top 100 companies based on market capitalisation (no worries if you don’t know what this means, here’s a nice explanation: Market Capitalisation ).

A list of the companies in the FTSE 100 can be found here: FTSE 100

As the previous blog post explained. Investing in just one company is as risky as it gets when buying stocks (unless you can set aside a large proportion of your time researching the company and I’m talking about analysing annual reports, investigating the company’s industry and what economic and global factors could affect the company’s profits in the future) and for the majority of investors like you and me, being able to spread our hard earned cash over many companies is probably the best way to go.

This is where index trackers come in. Instead of buying 1 company’s stock, you have the option to buy all 100 companies in one go by purchasing a unit from a fund.

Fund Basics

  • Funds sell units (not stocks).
  • Each unit is made up of the value of the group of stocks from the index that it’s tracking
  • There are 2 varieties of units
    • Income – These pay out distributions directly to you
    • Accumulation – These use the dividends paid by the companies in the index to buy more stocks on your behalf

A more in depth look at the different between income and accumulation units can be found here: Income vs Accumulation

Here’s a quick run down of looking at a fund’s page: Vanguard FTSE 100 Index

  1. This tells us that this tracker follows the FTSE 100 index and it’s the unit type of income
  2. This is the cost of 1 unit (you don’t have to buy them in whole units). The ‘Change’ tells us the change in price from the previous day
  3. This is the number of stocks that unit price comprises of
  4. This is the Ongoing Charge Figure. More on fees later
  5. How risky the unit is out of 7. 1 being the least riskiest and 7 being the riskiest

Here’s an example of why buying a unit from an index tracker fund trumps buying an individual stock:

Investor A buys 10 shares in Company A.

Company A’s shares will fluctuate on a daily basis and in the worst case scenario the company may eventually go bankrupt, in which case investor A loses all of his cash.

Investor B buys 10 units in a FTSE 100 index tracker

The index tracker unit price is going to fluctuate on a daily basis, however unlike investor A, if a company in the FTSE 100 was to go bust, the unit price will drop but the investor is still invested in 99 other companies. The only way investor B would lose his money is if all the businesses in the FTSE 100 went bust.

Units do pay out distributions (much like stocks paying dividends). When these are depends on the fund but you should be able to see from a funds website, how often it distributes money to its unit holders.

As well as stocks, you can invest in bond funds too. Another example is Vanguard’s UK Government Bond Index Fund. This fund buys Government bonds of varying lengths of maturity.

Now you might be thinking. Great! I don’t have to put all my spare cash in one company, I can buy an index tracker unit and effectively buy into 100 different companies. Plus, if I don’t fancy too much risk with companies, I can buy a unit in a Government bonds index tracker because hey, when did the Government last go bust?

Fantastic, now your on board with index tracking, there is just one last bit I want to show you. There are many stock market indexes around the world. The S&P 500 (US), Nikkei 225 (Hong Kong) and FTSE All Share (London) are just a few.

Now what if there was a fund out there that followed all these different indexes, so not only was your spare cash invested in many companies but these companies were all over the globe. Well there are and one of the cheapest funds you can purchase is from Vanguard: Vanguard LifeStrategy 100% Equity

If you take a look at the portfolio data tab, you’ll see this is actually a fund of funds, which is giving you global diversification. Just think, when you’re sleeping, your cash is still working away.

They also do a whole bunch of other funds which are split between a globally diversified portfolio and Government/Corporate bonds, Vanguard calls these LifeStrategy funds.

I personally have chosen to buy the Vanguard LifeStrategy 80% Equity fund. This means that if you were to invest £100, £80 of that would be used to be stocks and £20 would be used to buy Government/Corporate bonds.

I’m hoping this hasn’t been too overwhelming. There will be future posts on fees (which is a hotly debated topic in the finance industry) and tax efficient wrappers (I’m talking about the beauty of ISAs and the SIPP, Self Invested Personal Pension)

If this has only left you wanting more then welcome to the club!

Just a practical note here. Please, please do further reading if this is the first blog you’ve come across on this subject. It’s by no means certain that you’re money will go up over time and that you won’t lose all that you invest. However, I’m of the opinion that unless global capitalism fails spectacularly, I think investing in index trackers is about as good a break as you’re going to get in investing.