Thoughts on my financial situation + investing questions?

[Edgeware1616]

Hello all-

I have been reading this forum for some time, and thought I would post my situation to hear your thoughts/comments on my financial situation and get your feedback on some of my investment questions.

First off, a little about me, I am a 26 year old American working in London. I have been out of the States for the past 2.5 years as for my work I relocated to Ireland for 1.5 years and now the UK for the past year. Just to make things clearer, I am going to put everything into USD, using 1.3 for the EUR/USD rate and 1.6 for the GBP/USD rate.

INCOME

Base salary: 120,000
Bonus:  80,000
Work Incentive:  3,250  (this is company performance related while bonus is individual related)
Travel & Food Stipend:  1,600
Pension:  12,000 (company contributes 10% with no match from me)

Annual gross income:  216,850
Annual net income:  151,298
Monthly net income:  6,891 (does not include bonuses or pension)

EXPENSES

Rent:  1,845
Council Tax:  117
Utilities:  84 (includes gas & electricity & water)
Cable/Internet:  39 (do not have tv, only internet)
Annual Transit Pass:  152
Food:  880 (includes meals at home plus restaurants)
Personal Items: 64 (includes household supplies plus dry cleaning)
Bars/Going Out:  403
Travelling:  560
Other Misc:  80 (includes clothes, ect)

I can't think of anything else that I am leaving out. As part of the expat contract, the company pays for my cell phone, gym membership, health insurance (including health, dental, eye, life and travel).

Total monthly expenses: 4,224

Savings per month:  2,666 + 1,000 (company pension contribution) + 4,718 (net bonus amortized monthly but paid annually) = 8,384

ASSETS

Cash Assets:
US Checking Account:  510
US Savings Account (0.85%):  28,245
UK Checking Account : 1,877
UK Restricted Cash:  2,592 (apartment security deposit)
UK Savings Account (1.1-4.0%):  41,859

Investment Assets:
US JPM High Yield Bond Fund:  83,743
US JPM Equity Income Fund:  26,390
US JPM Floating Rate Bond Fund:  20,075
US JPM Global Equity Income Fund:  20,556
US JPM Income Builder Fund:  17,301
US JPM Emerging Market Debt Fund:  7,688
US JPM Emerging Market Equity Fund:  4,938
US Treasury Bonds:  750

Retirement Assets:
US Traditional IRA:  7,904 (invested all in JPM Equity Income Fund)
US Roth IRA:  38,695 (split between JPM Equity Income Fund & JPM Global Equity Income Fund)
Irish Pension Account:  11,793 (split between cash fund & bond fund)
UK Pension Account:  22,846 (invested all in Standard Life Smart Retirement 2055)

LIABILITIES
None, I do not own a house or a car and I have no credit card debt or educational debt.

Total Net Worth:  337,762


So please let me know your feedback on this. I realize that my living expenses are not Mustachian, but I felt like I have a solid base and solid monthly savings to live in a nice apartment in a nice part of London (not cheap!). Being based in Europe, I have taken advantage of weekend trips and the joy of 30 vacation days, hence the high travel spend. Also, on the comment that a lot of my income is tied up in a bonus - the large bonus is actually guaranteed as part of the expat contract and is not discretionary, the work incentive is discretionary but a small amount - my bonus could increase by another 20,000 but I have always gotten the contracted % so I did not include. Also, I am allowed annually to put GBP 50,000 into my UK pension and my company will pay an additional 13.8% bonus ontop of my contribution (their share of National Insurance they would have to pay anyway if I was taxed) - I did this with GBP 10,000 (company added GBP 1,380 on top) this year but unsure of how much I want tied up in a UK pension. Plus, I travel for work in total about 3 months of the year which is all on expenses - so I think there is a bit of upside to my savings annually.

This budget is on the upper end, and I frequently beat it - the rent/utilities/transport are pretty much fixed, but I usually beat my food and going out expenses every month by about 500 USD per month. Also - while in London I do not see my cost of living increasing from this, but income wise I should be able to keep growing based on my colleagues who have been there about 3 years longer and are on around 275-300k USD.

Now that I am building a sizeable investment portfolio, my investment questions are:

(1) I understand under FACTA that any investment I make in the UK in a non stock (i.e. mutual fund, REIT, ect) is treated as a PFIC and will not get the preferential cap gains tax or loss carry forward plus the complexities of reporting it, is this true?

(2) Because of this I have always transferred investment money back to the US in chunks giving me a large currency exposure, is there a better way to manage this?

(3) I am using JPM for investments because I have access to their private client services which gives me access to some more funds, plus an advisor, plus no fee to enter or exit funds. However their fund mgmt fees are between 0.5-1.75%. Do you think I would be better off in some low cost funds like Vanguard? If so, should I pull all my JPM money, some of it, or just don't put new investment money to JPM?

(4) Do you have any advise to better manage my tax accounts. I realize I can contribute 5,500 this year to a traditional IRA and put my entire bonus to my UK pension (although I am not sure how much I want in the UK as I don't plan to be here long term). I also have not taken advantage of any of the UK ISA tax advantaged accounts but not sure these will benefit me as an American. Anything else I am missing?

(5) For fun, and after reading MMM blog, I have started a Lending Club account - plan to fund it with $10,000. I realize this is not a question...

(6) Anything you think I am missing???


Many thanks for taking the time to read this and opine on my situation, I sincerely appreciate your help!

Best regards,
Edgeware1616

[huadpe]

Do you plan to return to the US to live, or remain in the UK permanently?  If the latter, is it a sure thing, or depend on squaring away immigration?  Where you plan to land permanently makes a huge difference in how to structure your finances.

[Edgeware1616]

Hi Huadpe-

Thanks for the response. Yes, it is my intention to return to the US within say 5-8 years - based on my job, most likely to New York. However, I am not 100% certain - as new opportunities are always popping up and I would not mind spending a few years in Asia (probably Singapore or Hong Kong).

Thanks,
Edgeware1616

[Lans Holman]

Seems like the big question would be, what are you trying to accomplish?  Do you like your job, or is this one of those "work as hard as you can for a few years so you can afford to quit" scenarios?   Is settling down somewhere and starting a family on the agenda?  You're making and saving a ton, and your expenses don't seem absurd considering where you live and the demands of your job.  I would just like to hear what you want that money to do for you.

[Edgeware1616]

Hi Lans Holman-

Thanks for the response. Good question, I wish I had a definitive answer to it. To be honest, I am not sure what I want it to do for me.

I really enjoy what I do and am career focused. In the four years since college, I am already on my third job, in my fourth city and my third country. As you can imagine, this does not bode well for my 'settling down' life! My job is a small investment fund that specializes in a rather niche alternative asset sector which I am quite passionate about and have been an enthusiast since I was about 6 years old. This, coupled with the fact that it is a 6 person company so I get a lot of exposure to clients, investors, counterparties, ect - and the flexibility a small company with no set HR policies provides - so I am having a lot of fun with it and have a lot of room for growth, so no plans to quit.

I am not sure what I want my money to do for me - fund my travel? By a house?

Unfortunately, I don't have a better answer, I figure I will just do what I am doing until I get bored.

[huadpe]

Hi Huadpe-

Thanks for the response. Yes, it is my intention to return to the US within say 5-8 years - based on my job, most likely to New York. However, I am not 100% certain - as new opportunities are always popping up and I would not mind spending a few years in Asia (probably Singapore or Hong Kong).

Thanks,
Edgeware1616

Important part - life choices

Do you plan to be working in your current field in 5-8 years?  I am assuming based on your income (and the fact that it contains a huge "bonus" portion) and the cities you mention that you're in finance.  You're currently saving 66%+ of your -gigantic- income, and have a net worth at age 26 that most "normal" people don't get to until age 66.  Being in finance can wildly alter your perspectives about how much money most people have and spend.  If you step outside that bubble, you're gonna see that you're crazy rich by any objective measure.

Spend some time thinking about where you actually see yourself being in 5-10 years.  At your current pace, you should be financially independent by then (probably ~$1,000,000+ net worth by age 31), and in a position to decide what it is you wanna do, without worrying about having an income from it.

If you were not working in finance, would you still want to live in NYC?  If so that's fine, but it's expensive to live there, so it will take a couple more years of working/saving to get to where you can be financially independent in NYC.  Is it worth 2 years of working at this kind of job for that?  The answer to that question can definitely be yes, but you should spend some time thinking about it.

There's not a big point in going over your spending with a fine-toothed comb, though I'm sure you could cut a lot pretty painlessly.  You save tons, and it's much more important to spend some time thinking about your goals.

Less important part - investments

I assume you got into these because you work for JPM.  These are pretty terrible investments though, both because of the high fees and because they're very ill suited to where you are in life. 

The private client thing you describe is worse than useless; it's costing you money.  You don't need access to shitty funds with high expense ratios.  The best funds in the world are available to the general public.  And their advisor is steering you to an insanely conservative allocation for a 26 year old who is still working.  And he is steering you to expensive funds with big fees (and thereby big commissions for him).  Dump them.

I haven't delved into your funds much, but it looks like you're somewhere between 80-90% bonds, 10-20% stocks.  Did you intend that?  Unless you have a reason I don't know about, I'd want to invert that ratio, so something like 80-90% stocks, 10-20% bonds.

Given your net worth and the complexity of international stuff, you might benefit from some professional advising, at least as regards taxes.  But if you're a US citizen, my move would be to repatriate your money as soon as you get it and invest it in the US where it will face normal taxation and not worry about FACTA craziness with it.  As you research someone for this, you want to make sure of 2 things.  1.  That you pay the person hourly or on a fixed basis, and that they DO NOT get a commission for selling you financial products; and 2, that they have what's called (in US law at least) a fiduciary duty to you.  Very few financial advisers meet those.  Your best bet is to look for a Certified Financial Planner.

If you want to just invest in the US (and apart from maxing your IRA, it's all gonna be after-tax), I'd try either Vanguard or Betterment.

Betterment charges a small-ish fee (0.15%) to put your money into a good set of index funds (themselves having fees around 0.17%), and has a huge convenience factor in managing things.  Basically set an asset allocation between bonds and stocks, and it will automate everything.

Vanguard has lower fees if you invest with them directly, and their hassle factor is still pretty low.  It's slightly less tax efficient to be in funds directly than ETFs, which might make a difference, but this is definitely a "seek professional advice" area.  You'll also have to allocate and rebalance manually, unless you pick a fund which meets your exact desired allocation, and they probably don't have that.

Don't mean to be too face-punchy on the investments, but JPM is taking you for a ride.  Get off the ride.

[George_PA]

Edgeware, you are doing pretty good for living in such an expensive area; Since its seems that by far your biggest expense is your rent from your apartment (or "flat" as a I assume it would be called there)

It sounds like you work in the finance industry, it is nice that you get such a large salary but a lot of jobs in this industry are in expensive areas, i.e. London, or New York city for example;

You may want to try to take a finance job that allows you to live in a cheaper area even if you have to take a paycut;  Find a hedge fund or boutique investment place out in the middle of nowhere to work at. Truth is an increase in income will not help you much because at the level of income you are at now, any additional money will be highly taxed; Thus, you may to focus on living somewhere very cheaply instead.  If you plan to continue living in England, try to find a finance job outside the city in the countryside somewhere (I know this is probably difficult) and then live close to that job so that you can bike everyday.  You may be able to find cheaper housing in Ireland or if you come back to the states work somewhere like Houston or Columbus OH where the house is cheaper, where you may still be able to find an ok job.  Also, this will remove you from the fancy, high paced life style of the big cities which can subconsciously encourage you to keep up and spend more.  You are influenced by your peers so don't hang around such fancy places and such hip crowds.   

As a side note, you may want to move some of your money out of the high yield junk bonds because word on the street is that interest rates will be going up soon here in the states (not sure if it is the same there in London or not).
 

[Edgeware1616]

Hi Huadpe-

Thanks for the comments. If you see my response in post #4, I do plan to be at my current role for the next 5-8 years. Yes, it is finance, but not the intense investment banking style finance people think about - there are no 3am nights and working through the weekend. Typically about 50-60 hours during the week and quite flexible with WFH, travel, ect.

On the investing side, no I do not work for JPM. I got into their private client services through a family member who worked there. I agree with your asset allocation comments, I believe this is because when I first started I was an very conservative investor (hence the income focus), but am in the process of shifting (the global equity and emerging markets equity are new this year). Agree with you on the JPM expense ratios - so two questions:

(1) Do you think it is worth exiting all my JPM funds now to transfer them to something like Vanguard ETFs? My concerns would be first the tax hit I will take by liquidating these positions and it is a large chunk of money to move right now when the market is quite high.

(2) On moving my investing money back to the US, any advice on transferring it with lower fees involved? Obviously there is not much I can do about the exchange rate, but if I transfer a portion each month I guess it is a natural hedge as I will get the highs and lows.


Hi George_PA-

Thanks for the comments - I have often thought about looking for something in a less expensive city, but I have never been a big fan of the cost of living trade off - at least at my age I really enjoy the bustle of New York and London - perhaps it will change in time. Also, I think that I have a lot of room to grow my earnings here over the next 8 or so years until it plateaus.

Aware of my exposure to rising int rates and would like to get out of some of the bonds - just not too sure where else to put it at the moment, need to do some research.

Thanks,
Edgeware1616

[huadpe]

Hi Huadpe-

Thanks for the comments. If you see my response in post #4, I do plan to be at my current role for the next 5-8 years. Yes, it is finance, but not the intense investment banking style finance people think about - there are no 3am nights and working through the weekend. Typically about 50-60 hours during the week and quite flexible with WFH, travel, ect.

On the investing side, no I do not work for JPM. I got into their private client services through a family member who worked there. I agree with your asset allocation comments, I believe this is because when I first started I was an very conservative investor (hence the income focus), but am in the process of shifting (the global equity and emerging markets equity are new this year). Agree with you on the JPM expense ratios - so two questions:

(1) Do you think it is worth exiting all my JPM funds now to transfer them to something like Vanguard ETFs? My concerns would be first the tax hit I will take by liquidating these positions and it is a large chunk of money to move right now when the market is quite high.

(2) On moving my investing money back to the US, any advice on transferring it with lower fees involved? Obviously there is not much I can do about the exchange rate, but if I transfer a portion each month I guess it is a natural hedge as I will get the highs and lows.

Well, 50-60 hrs a week still seems like a lot to me, though it isn't very high for a finance world position.  Given your current income and savings rate, you can really end up wherever you want to, both geographically and in regards to what activities fill your days.  Spend some time considering where you see things not just in 5 years, but in 25.  If you keep up this pace, at some point you're going to be a multi-millionaire who has enough passive income to lead a quite lavish lifestyle even by non-mustache standards.  What will you want to do then, when the paycheck from work makes basically no difference in what you spend or your future security?  You don't need to answer this now.  Take some time to reflect over the next weeks and months and think about what your goals are.  You may still be doing this sort of job in 5 years.  I suspect you won't be in 25.

Re investing:

1. As far as the taxes, seek professional advice.  If it's just normal US cap gains taxes, I wouldn't sweat it too much, especially since most of your gains have probably come from dividends (already taxed).  But you want to be dead sure that the UK isn't gonna try to get its hands on the money too.  So seek professional advice.

As far as market timing, unless you have insider information, there's no way to know where the market will go.  I'm a big proponent of the efficient markets hypothesis on this kind of stuff.

2. This probably depends on your US bank.  But I'd shop around some credit unions to see who will give you the best rates.  For example my CU (Bethpage FCU) gives me market exchange rates with no fees, and charges me $1 per check to deposit foreign currency checks.  My international transactions are all Canada-related though, so I don't know what they'd do exactly for UK.  Generally though, big commercial banks give you the worst deals on almost anything related to retail banking.  I've yet to see any financial product on which JPM was price competitive with my credit union (for retail banking) or vanguard (for investing).

I don't know what retail banking in the UK is like choice-wise, but don't be tied to the idea that you need the same company name over the door in both countries.  A small local bank in each country may well serve you better.