New from the uk. Where to start?

[Ukwhat?]

Hi This website and forum has already saved me so much money and I know it has the potential to help save so much more. Ive been reading the mmm website and forum for some time now and have been trying to think of ways of applying the concept to my life so me and my wife can retire early. I'm struggling to know where to start apart from the obvious of getting rid of the cars, which I'm working on. A lot of the ideas and advice is obviously only relevant for the USA, how can it be adapted for the uk? Any advice from anyone in the uk?

Im 27 and bought our house three years ago for 170000, currently have about £125000 left on the mortgage.

Thanks!

[cerat0n1a]

There's at least a couple of dozen regular posters from the UK here, so keep reading.

Most obvious thing is that you need to learn about ISAs and pensions, rather than Roths and 401-ks. Also to ignore most of what is written about the housing market in the US - just accept that for much of Southern England you're going to spend a big %age of your income on putting a roof over your head. Basically start off by trying to contribute (at least) enough to your pension to get whatever employer match is available and try to make full use of your ISA allowance each tax year.

Most common bit of advice is to thoroughly read monevator (for investment/ISA/pension learning) and perhaps moneysavingexpert (frugality tips) and motley fool UK (although the latter is mostly trying to sell you stuff these days).

There are quite a few UK posters in the Journals section here, also quite a lot of UK early retirment blogs. The reading list on the right hand side of http://keepingthecauldron.blogspot.co.uk/ would give you links to 15+ of those.

[Two9A]

As ceratonia says, keep an eye out for us European types; we tend to be drowned out by the US crowd, of course ;)

ISAs, particularly S&S ISAs, are your friend: I have a Vanguard LifeStrategy fund wrapped in an ISA, and it (will eventually) do me well as it tracks the markets. The famous Trinity study states 7% average returns on investment and recommends 4% withdrawal, but it's based entirely on US markets, so you may wish to be more conservative. Depending on the rate on your mortgage, consider paying that down: if you're expecting (say) 5% returns from the market, and your mortgage is around that, it begins to make sense.

Lifestyle-type recommendations from MMM can apply just as well here: I have basic cable because I work in the Internet sphere, so I need a good connection, but you get the same channels over-the-air. Ditching the multiple cars is a good plan, shopping at Aldi (there's a reason they open new stores all the time), etc.

[cerat0n1a]

The famous Trinity study states 7% average returns on investment and recommends 4% withdrawal, but it's based entirely on US markets, so you may wish to be more conservative. Depending on the rate on your mortgage, consider paying that down: if you're expecting (say) 5% returns from the market, and your mortgage is around that, it begins to make sense.

As an aside, from the UK, you can invest your money in whichever market you like, so if you believe that US markets will outperform the UK long term, you could allocate your investments accordingly. Obviously you are still affected by local rates of inflation and currency exchange rates, if planning to stay in the UK for retirement. A majority of the FTSE earnings are from outside the UK, but it's still only 10% of the world market and so most of us will try to diversify somewhat.

When I paid off my mortgage, interest rates were at 6% and my tax rate was 40%, so I would have needed a 10% pre-tax return on an investment to beat paying off the mortgage. So it was a no-brainer to do so. Today, mortgage interest rates are much lower and if you can fit your annual investments in an ISA/SIPP, tax rate is not relevant. So it might not make sense to prioritise paying down the mortgage over a riskier investment in shares, particularly if you have penalties on early repayment.

[sam]

Welcome to the community, there are some fantastic resources here!

Most of the fundamentals transfer world-wide (reducing expenses, increasing income and investing).

When I paid off my mortgage, interest rates were at 6% and my tax rate was 40%, so I would have needed a 10% pre-tax return on an investment to beat paying off the mortgage.

Would you be able to explain the math behind this please?

Sam

[cerat0n1a]

When I paid off my mortgage, interest rates were at 6% and my tax rate was 40%, so I would have needed a 10% pre-tax return on an investment to beat paying off the mortgage.

Would you be able to explain the math behind this please?

Sam

This is where I find out my maths was wrong! Bear in mind that mortgages work differently in the UK compared to US - nearly all of our mortgages have variable interest rates which historically could go up and down significantly, sometimes month by month. You can now fix your interest rate, but typically only for terms of 1-5 years. There is a recent trend for people to have a series of such fixes, but this was not the case in the past. There is no tax benefit to having a mortgage in the UK (unless it's on a buy-to-let property and even that is changing.)

To make it simple, let's say I had a sum of £100 000 to invest and a mortgage of £100 000 on which the interest rate back then was 6%. So interest payments of £6 000 per year. If I invested that £100k in a savings account paying interest at 10% gross, I would receive £10 000 p.a gross interest. My marginal income tax rate at that time was 40%, therefore I would pay £4 000 tax on that interest and earn £6 000 per year. So in that case, the bank account and paying off the mortgage would be equal, both earn me £6k. If I was getting a lower than 10% return therefore, paying off the mortgage made more sense (and remember that paying off the mortgage is a guaranteed, risk-free return, unlike stocks.) At the time, I could get around 4-5% interest on a bank account, so as I say, it was a no-brainer. A more sophisticated calculation would've been to recognise that the 6% was only for the remaining term of the mortgage, not in perpetuity, but given the level of inflation at the time, it doesn't change things much. Key point is that I was paying mortgage interest out of post-tax earnings, but when looking at investment rates of return, I was limited to things which I would pay tax on.

In hindsight, given the property boom in the UK, it may have been better to have mortgaged up to the hilt and bought the biggest property I could afford, or a BTL portfolio, but of course investing is easy with hindsight. (Equally, I could have bought an index tracker and the FTSE-100 is lower today than it was in 1999, so that might've been a bad move, although presumably dividends could've put me ahead.)

Ukwhat?'s situation may be different because his/her mortgage interest rate is almost certainly much lower, marginal tax rate may be different and he/she may be able to use tax-shelters like ISAs for investments. Sounds like Ukwhat? has been significantly over-paying mortgage already (going from £170k to £125k in 3 years  - a normal 25 year team would see it reduce by more like £20k in that timeframe.)

[Ukwhat?]

This is all brilliant advice... Thank you everyone.

It does seem the housing market is very different in the US. I didn't realise it was such a big difference!

Our mortgage is a 25 year term with 5 year fixed at 4.29% that expires in July 2017. Im allowed to overpay 10% of the balance every year without penalty. I can also pay into an overpayment fund that stops the interest being calculated on the amount in the fund as long as it is in the fund, if or when it comes out they start charging interest again. So at the minute I'm using this like a savings account and moving money around as needed.

I pay 3% into my pension and my employer pays in 6%, I plan on increasing my contribution next year to keep me out the 40% tax bracket. Currently this is a bit messed up as I moved jobs for a year and now have two pensions from the same company. Both of them are invested in the 'higher risk' automatic funds. I don't know enough to pick and choose myself yet.

I don't have enough savings to put into ISAs but I thought the interest on them was quite low now days, although it is better than nothing! I assume the S&S ISAs can offer a better return.

At the minute, and until I reach the 10% payments into my mortgage each year I don't see a better place to put the money. Once I hit the 10% and take the fees into account, then I guess Ill need to look at this again.

Im trying to figure out what to do with the cars, but see myself having to spend a lot of money to end PCP (what was I thinking!) to save money in the long run. Cant figure out how to include these costs and the saved interest for money spent on mortgage to make the best overall decision!

After this, groceries are our biggest cost. Last month we spent £721 on groceries due to a new Sainsbury's that opened near us. When I told my wife how much difference it would make if we cut back on groceries and put it on the mortgage she was amazed. We now go to Aldi.. The difference is insane... My wife does the shopping list online for Sainsburys and I go and get it from Aldi, last week I got £120 of Sainsburys 'stuff' for £40!

I truly do not understand why advice like this forum and website is not 'taught'. Conventional thoughts and ideas for saving and that having a mortgage is OK and is just life in the UK seems just wrong now..... Hopefully, we will life a happier life with all the help from everyone on here!

[cerat0n1a]

I don't have enough savings to put into ISAs but I thought the interest on them was quite low now days, although it is better than nothing! I assume the S&S ISAs can offer a better return.

After this, groceries are our biggest cost. Last month we spent £721 on groceries due to a new Sainsbury's that opened near us.

I think (given your mortgage rate and current situation), that paying down the mortgage is the best move. The trick is of course to then make sure you continue to save the extra money coming in from the reduced monthly mortgage payment, rather than just spending it. I suspect that when you come to the end of your fix, you might well get a lower rate.

Stocks and Shares ISA would be the way to go eventually - highly likely to outperform cash (i.e. interest from the bank) over the long-term, which is what we're talking about when it comes to retirement. But do take the time to get up to speed on index trackers etc. at monevator. You'd want to have at least a few months emergency savings before thinking about share investments, although it sounds like your mortgage gives you that facility.

We buy food etc. without much attention to saving money (at Waitrose amongst other places) and yet for a family of 4 (2 boys late teens who can pile it away) we're a lot less than £700 per month. Nearly £25 per day - is it foie gras and caviar every lunchtime ;-) ?

At least with the PCP, you have the option to just give it back at the end and pay nothing further. I suspect trying to get out of it part way through may not be worth it. We found that having 1 cheap car rather than 2 cheap cars resulted in significantly higher petrol costs and actually produced very little saving, so be sure to do the sums properly.

[RobFIRE]

First thing is to ensure you have an emergency fund to cover e.g. you or wife losing job / being in an accident. Typical suggestions for that are 6 or 12 months of minimum living expenses, in a readily available form e.g. savings account. You don't say if you have that covered or not.

Second thing is to understand your income, spending and costs by tracking it. Don't need to go to the level of recording every receipt, but understand reasonably well where your income goes. You've already mentioned £700 a month on supermarket shopping, which certainly sounds high (I'd say my girlfriend and I spend £150 a month or so for the two of us).

Once you understand your spending and costs you can start making/trialling changes.

After that, things get more interesting.

Paying down your mortgage is a simple and guaranteed return option. So with your current 4.29% deal you would need to earn about 5.5% gross as a 20% taxpayer or just over 7% as a 40% taxpayer. Those figures are similar to long-term average returns for bonds or shares funds respectively, but of course those are long-term averages with risks, your figure is equivalent to a guaranteed return. So yes I would agree paying down/offsetting your mortgage is a good option, nowhere else will guarantee you such returns. You say you have an offset mortgage, are you allowed to offset cash that is in a cash ISA, or does it have to be a regular savings account?

Sounds like you have car loan(s) that with hindsight you wouldn't have chosen. If the terms don't let you get out early then all you can do is stick with it. If the terms of the contract depend on the condition of the car at the end of it, try to look after the car of course.

Pensions & 40%: agree, I recently increased my pension contributions to avoid being a 40% taxpayer. Details: as my company offers a salary sacrifice scheme and gives me half of the employer NI savings back as well, it means for every £100 of net income I give up that would have been taxed at 40%, I get nearly £200 in my pension (40% + 1% NI + half of 13.7% Employer NI). Can't beat instant double money!

2 pensions: no problem, pensions can be consolidated later.

ISAs: with your offset mortgage you could justifiably ignore these for now and just put all spare money towards the mortgage/offset. However, I would do some investigation of ISAs. Consideration being that in the future you will have money to invest and want as much as possible in tax-sheltered accounts (i.e. ISA as nobody wants all of their money in pensions they can't touch until 55 or older) so starting to get savings into an ISA now (can be just a cash ISA as that can be converted to bonds/shares later if desired) sets you up for the future.

[tetlee]

You said you had two different pensions, you combine them into one and sometimes for free.
You might want to check the fees associated with both of them as well as the funds they provide.

This is all brilliant advice... Thank you everyone.

It does seem the housing market is very different in the US. I didn't realise it was such a big difference!

It's pretty crazy the difference, 30 year fixed rate mortgages for under 4% and to sweeten that deal you can write the interest off your taxable income. Crazy.

Being from the UK I was always in the mindset of paying the mortgage down asap, but now I live in the US that thinking has been hard to escape.