Happy new year!
I’m a big fan of yours and have been following you for a while. I bought all your three books.
I would like to open a stocks and shares ISA for myself and two children aged 16 & 14 but I don’t know where to start due to fear of risk. I want to invest 15% of my income in stocks and also considering real estate.
I have seen some recommendations like Vanguard or Hargreaves Lansdowne but I’m clueless on what to go for. I am a nurse and the only debt I have is a repayment mortgage. I just finished paying off credit card debt.
I saw your post on Malawi Queens.
My name’s Angela by the way.
Angela – congratulations on getting rid of all your credit card debt, you must be super proud of yourself.
And a massive thank you for supporting me by buying my books. Book sales are helping to pay for the production of “The Money Spot” podcast so I don’t take your purchase for granted – it’s really appreciated.
Stocks and shares ISA
When it comes to investing in stocks and shares ISAs, target a minimum investment period of 5 years and ideally your should invest for much longer than that.
Is the money that you want to save for your children for university or for something else?
I will assume it’s to contribute towards the cost of university. One important thing that you need to keep in mind is that although tuition fees are given to students as long as they apply for them, the maintenance loan is assessed according to household wealth; basically, children that come from wealthier households are eligible for a smaller maintenance allowance. Only children from households with a total income of less than £25,000 qualify for the full maintenance loan.
In addition, students that live at home get a smaller maintenance allowance and those that attend universities outside of London qualify for a lower maintenance loan.
In my opinion, the less debt children can get themselves into by the time they graduate, the more disposable income they’ll have when they land their first jobs and the faster they can save for a deposit on a mortgage.
If you want to read a little more about what you might need to contribute towards university costs, have a look at the moneysavingexpert.com website. The site has a ready-made calculator that will tell you exactly how much you need to save for each child to contribute towards university. Or, for parents that don’t want to contribute then it’s how much their children will need to earn from a uni job to fill the gap.
The calculator will also tell you exactly how much you need to save every month from now to make sure you have enough by the time your child starts university.
Child aged 16
For your 16 year old, saving into a stocks and shares ISA is too risky because university is just around the corner – the stock market generally doesn’t offer good returns for periods of less than 5 years.
The safest option for the 16 year old is probably to save into a high interest account, this might not be a cash ISA so shop around. The best rate you will find at the moment is between 1.45% to 1.65%.
Child aged 14
As you could put money away for five years for your 14 year old, a stocks and shares ISA makes sense here. Again, use the calculator on money saving expert for an idea of how much you will need to contribute each month if you don’t want your children to have to work through university.
For your own ISA, you have a limit of £20,000 per year. If you prefer, you can save all the money into your own ISA rather than into junior ISAs so that you have more control over it.
Money saved into a Junior ISA is legally belongs to the child named on the account when they turn 18 and you would have no control over how they choose to spend it.
Before I tackle where you should save I will say that you have every right to fear taking risk with your money, you’ve worked hard to earn it so you should rightfully want to preserve what you have earned.
The safest path if you are investing in shares is to avoid single stocks and to invest in diversified index funds. There are two main types of fund to choose between, actively managed funds and passively managed funds.
Passively managed funds track a whole market such as the S&P500 for the USA or the FTSE100 for the UK; alternatively, instead of tracking the whole market in a given country you can choose to invest in a specific sector such as utilities or technology or retail.
Actively managed funds have a an actual person choosing what shares will outperform the market and investing exclusively in those. The objective of an active manager is to beat the index, while the objective of a passive fund is to match the return on an index.
Now, you would think the funds managed by clever fund managers are the ones to go for, right? Wrong! History suggests that over 95% of the time fund managers do not beat the index. Not only that, fees on actively managed funds are higher. The cheapest are about 0.5% nowadays and the most expensive charge in the region of 2%. Many passive funds now charge less 0.2% or what industry professionals call 20 basis points or bps.
How can you improve your risk appetite?
Improve your understanding of how stock markets work. I would recommend two investment books, if you can, get the audio versions:
Charlie Munger: The Complete Investor by Tren Griffin and
Common Sense Investing By John Bogle (the inventor of passive investing)
Which platform should you use for investing?
I personally use iWeb for share dealing because they are the cheapest but I wouldn’t recommend iWeb for most people because you can’t automate your investing. That said, iWeb have good fund centre that helps you sort through the different indices and allows you to order them in different ways, for example, you can sort funds or shares from those with the lowest fees or starting from those that are enjoying the highest return down, you can also exclusively analyse the different sectors that you might want to invest in – technology is enjoying pretty good returns at the moment but I don’t put too much into tech because it’s volatile it goes up fast and can also come down fast.
Even if you ultimately choose to invest using a different platform you might want to use iWeb for stock selection if their analysis tools are better than where you end up.
iWeb’s fund centre is actually easier for discovery than HL – HL seem to have a vested interest in people selecting actively managed funds so those show up more prominently on their site. They don’t seem, for example, to have a tool that allows you to just look at absolutely every fund they offer ordered by fees. If I just haven’t found this function, someone please help a sister out and send me the link.
So, what platform should you use?
The two options you have suggested (HL and vanguard) are very different.
The likes of Vanguard only offer their own funds. This isn’t a bad thing necessarily but it would mean you need to be sure you won’t want to invest any other fund manager’s products and that is a hard position for a beginner to take.
The likes of Hargreaves Lansdown offer you access to a large universe of fund managers. HL don’t create funds, they are essentially a supermarket for other fund managers. It’s the difference between shopping at Aldi and Sainsbury’s. If you want choice, you go to Sainsbury’s; if you’re not too bothered about choice and want to save money, you go to Aldi, but you’re mostly only going to find Aldi’s own-brand products at Aldi – this is not a perfect analogy but it’s not a bad one.
Vanguard’s passively managed index funds are known for being very cost effective but they’re platform charges are not the cheapest. At least not in the UK.
The likes of Fidelity have a hybrid model: they offer their own funds and other fund managers’ products BUT if you use their tools for selecting funds, which I did to write this piece, the resulting suggestion is one of their own funds.
The biggest driver for where you invest should be fees, customer service and ease of use of the platform.
Platform fees are the fees you get charged for using a given platform.
HL 0.45% (if less than £250k and 0 if > £2m)
Either way, if you have less than £50,000 invested the differences in fees aren’t that dramatic but as you start approaching £250,000 in investments you will feel the difference. Once you have £250k invested, and trust me you will get there, on iWeb you would be paying £60/year (if you trade once a month) and on HL you would be paying £1,125 for the same assets invested.
Little tip, because I invest for both my husband and I, instead of splitting monthly investments in half, so half goes to his account and half to me, each month I do one trade for either me or for him so that the net result is that we do 6 trades each. This saves £60 in dealing costs every year. Obviously I could save even more by doing one trade a year but as our incomes are paid monthly it’s better to invest monthly rather than just keep the money in a savings account for one trade at the end of the year. I’d lose all the gains I make within the year.
Transaction fees are the fees you pay for buying an investment product – these can be a fixed sum or a percentage. Some platforms will have one charge for buying and selling shares and another for funds.
Vanguard depends on the product – 0.02% to close to 2%
HL 0 for funds, £12/share falling to £6 a share for 20 trades +
Halifax £12.50/share or £2/month for scheduled investment
Fidelity £10/share or £1.50/month for scheduled investment
Because Fidelity’s platform fees are cheaper than HL, I am tempted to recommend them but I think you should make the decision. Why don’t you spend an hour a day on each of the following three site: HL, Fidelity and Halifax. Download their apps and see what you think of them. If by the end of that analysis you’re not sure then I will suggest you use HL as a beginner and as you figure out how things work move platforms, it’s very easy to do that.
Also, it’s worth mentioning that I pulled a couple of funds that I invest in on Fidelity and you pay more for them via Fidelity because HL negotiates discounts with actively managed funds due to the volume of business they direct their way.
NOW – I have spoken a lot about investing as I felt that that’s what you wanted me to focus on but I think this discussion would not be complete without me saying that, ultimately, if the stock market scares you, then you can go the property route.
There are many strategies you can follow with property. You can rent to families, or students or even another subset of people. One of my friends specialises in letting property to truck drivers. Letting to students or a migrant group like truck drivers has high turnover which means you need a lot of time to manage the property. And if you went down the AirBnB route that’s like managing a hotel because you have to think about changing sheets and cleaning literally week-on-week – as involving as it sounds, I have a friend who has a full time job as a professor and has also grown a good property portfolio on the side with a mix of AirBnB and family lets.
The key is to start with your first property.
Have you heard of the 3 for 1 property strategy?
With this strategy you set a goal of investing in 3 buy to let properties and you work to have all mortgages paid off by the time you retire.
This would mean that you live in one fully paid off house and you would live off the rent of the three properties – this reduces the risk somewhat. For each buy-to-let property you would target a given amount of rental earnings that you can choose yourself . For example if each property earned £800 per month, then you would retire on £2,400 / month. This would be linked to inflation because as prices rise, rents also tend to rise and sometimes rental increases rise far faster [example].
If this feels safer for you and you have at least 20 years until retirement then think about either just going for the 3 for 1 property strategy with a good lump-sum saved in a savings account for emergencies might feel less risky OR follow a combination of investing small amount in the stock market with property as your security blanket.
Massively enjoyed answering this question, Angela, especially from a fellow Malawian. It’s nice to know other people are investing and getting wealth focused.
Let’s summarise what you need to do:
I hope this helps!
Have a money question for me?
I’m Melissa. As a full-time entrepreneur myself, I often find a difficulty in deciding how much monthly income to re-invest into my business and not OVERDO IT.
This reminds me of why I often lose at the board game "Monopoly", ha! Because I'll spend every last dollar on buying up houses and hotels and when I fall on someone else's property, I don't have the money to pay them. And it's a downward spiral from there, haha.
I'm sure you know just as well as I do that our businesses are our babies and sometimes we think we aren't feeding them enough to grow as fast as they can. But at times, over-investing can cause immediate problems.
What should I do to find a balance between re-investing as a business owner and putting money aside?
The trick to answering this question is uncovering what your goals are for the business and what your goals are for your private life. This will both allow you to decide how much to take out of the business and also when to exit the business, if ever.
I ran my own business from 2012 to 2017 and I had to answer this question myself. In the first year of the business I earned very little but I had saved over GBP60,000 because I knew I wouldn't make money from the get go. This is the reality for most businesses but from your question it sounds like you are past this stage and have some cash coming in, well done! You've gone past the first hurdle.
So, what kind of business are you running?
I’ll define the three categories:
The Lifestyle Business
A lifestyle business to me is one where you want to earn enough to support all your needs and a good portion of your wants. You don't hire too many permanent staff - perhaps you have a couple of virtual assistants - for your social media and bookkeeping and use freelancers for everything else.
The 'grow and sell' business
With a ‘grow and sell business’ you’re a little more focused on the business than on yourself so you’re a little more willing to “suffer” for a period of time by cutting off all wants and just extracting enough for your needs because the business comes first.
You want to get a consistent level of year-on-year growth and you want to track several observable metrics that will make it easier to sell your business in a time frame which you set. Sales numbers are the best metric to track but even social media statistics can be something worth measuring: healthy email lists, social media accounts with real followers, that kind of thing.
The legacy business
A legacy business is one that has to satisfy your income requirements for a prolonged period of time with a view to passing the business on to your children or selling far in the future if your children are not interested in running a business.
Once you’ve decided the type of business you’re running, then you need to go through the following process:
1. Figure out how much cash your business needs every month? This is your, “monthly cost of operations”
Some people think running an online business is virtually cost free but you and I both know it isn't so.
Sit down and calculate the minimum amount of cash the business needs to have just to keep chugging along. This should include the cost of all your tools: email marketing software, social media software, graphics tools, website hosts, budget for freelancers and other staff costs, advertising!
Back in 2012 when I started my business you could get a decent level of exposure for free, Facebook posts on pages were actually shown to people that had liked the page and you could monetise that exposure. Nowadays you have to spend money to get even low levels of exposure.
You probably also need a budget for taking courses that will help you grow your business. The marketing techniques that work are constantly changing and you will need to keep on top of marketing intelligence to grow your business.
So, it really is worth sitting down to figure these costs out. Once you have the number, you’ll know the minimum level of money you need to leave in your business bank account every month. Divide annual costs by 12 so that you have a reliable monthly cost of operations figure.
2. Figure out how much you need to live. This is your “monthly cost of living”
If you are fortunate enough to have your living costs mostly met by your parents or your partner then this won't be a large number.
My husband supported us for a good portion of my self-employment but I paid myself enough to cover my lifestyle costs: beauty products, going to cafes with friends, clothes, that type of thing and when we had our son, I made sure that the business covered his nursery costs too because the only reason he was going to nursery was because I needed to work.
Ultimately, this meant I took out about £600/month to cover four half-days of nursery each week and £670/month for myself.
The amount I paid myself wasn’t random: my accountant set my wage level just low enough not to have to pay national insurance tax. You will have to consider the tax impacts for yourself. That threshold moves every year. You could pay yourself more through dividends but speak to an accountant to get the balance right because if you pay dividends too often the taxman could say it looks like a salary and should therefore be taxed at the higher earned income tax rates.
If you can live on less than the sort of figure I am suggesting, even better.
If you're not living in a supported situation and have to pay all your own bills then this number could be much larger.
So, having done steps 1 and 2 you will know the minimum amount you need to keep the business going and plus the minimum amount the business needs to make to keep you going too. Is your business producing at least this much? I hope so.
3. How much do you want to save?
The next step is one I regret not having given enough focus when I was self-employed. I didn't save much at all for the household in that entire time. In fact, the only person that built up any savings is our son who had about £12,000 by the time I ditched the business and went back to work.
In fairness, the business was not making enough for me to save but if I think back I could probably have managed to put away £300-500/month for the family if I really wanted to. I didn't suddenly start earning more when my son was born so the fact that we managed to find over £300/month to grow his savings shows the money was there.
To decide on the ideal amount of money to save every month, project how much money you want to have at the age when you want to retire then using an online retirement calculator to figure out how much you ought to be saving every month. I found a good UK pension calculator on PensionBee.com and a good US retirement calculator on vanguard.com.
If you are running a lifestyle or legacy business and the business is generating not only enough to support operations but enough to save and live. Fab!
So, how's this different for a 'grow and flip' business?
If you are building a 'grow and flip' business then I wouldn't worry too much about the savings elements. If you can sustain operations and yourself then you can continue running the business and ploughing all excess money back into it in the hope that you will sell the business for a good lump-sum in say, 5 to 7 years.
Because this is a higher risk strategy you need to decide when you will quit the business. You can't continue running a business that doesn't allow you to put money into savings and investments indefinitely. You need to decide for yourself the point at which you will decide it isn't work.
What you take out of the business depends on:
1. What the business needs to keep going.
2. What you need to live.
3. What you need and want to save.
To attach some numbers to this discussion:
If your business is generating at least £1,500 every month (for example purposes) and it needs £800 to just keep moving then there's £700 left for you to either take for yourself or re-invest in the business.
If £700/month isn't enough to meet your living costs then you need to figure out how long your savings can support you while you give the business a chance to grow.
If your business is generating at least £5,000 or more every month and it needs £1,000 per month to sustain operations and you need another £2,000 for yourself then there's still £2,000 to play with. In this scenario, even if I was running a 'grow and flip' business I would save to hedge myself against the risk that my business isn't sellable.
A final thought. Ultimately, I left my business because it produced lower profits than I could earn in "regular job" and fortunately for me, I discovered that I actually love the routine of going to work and communing with my colleagues.
If over a two to three year period the business is generating you, say, £30,000/year and you know you could earn £50,000, £60,000 or even £100,000/year working, have a deep think through whether the long hours of building the business are worth it.
Many glamorise entrepreneurship but we both know the hours can be long and hard and the returns inconsistent from month to month and year to year.
For knowledge workers (Economists, lawyers, researchers etc. – desk-type jobs), the in-work flexibility is unreal nowadays and you could pretty much set up your life to be more flexible than an entrepreneurial life, with much more free time and real holidays where you actually leave your laptop at home!
Sorry if any of this last bit sound discouraging but I promised myself that when I blog about business I will always give people a real sense of what it's like. There are enough blogs out there pretending every 'trep is a millionaire when the reality is that the average self-employed person in both the UK and the US earns less than the average worker – shocking, right?
Hope this helps, Melissa.
Have a money question for me?
Heather on Wealth
I enjoy helping people think through their personal finances and blog about that here. Join my personal finance community at The Money Spot™.