DUFFMONEY is about pushing hard towards Financial Independence. I recognise how important FI is and I want the freedom it brings. I want to be happy, and I want to spend more time with friends and family.
I’ve seen too many people who are still pushing hard in their 50s and 60s. Like contractors having to work abroad or work every weekend to make the money they need to pay the bills and have a bit of a life.
The weekly blog, podcast and YouTube video that I put out each week are also to help other investors, especially beginners. I have 20 years’ experience as an investor and have loads of useful info to pass on. I’ve made some big mistakes, and this is the focus of today’s post. I will be going over my 5 biggest mistakes in personal finance.
Many people make the mistake of steaming in and investing without getting their personal finances in order. And I’ve done this several times over the years.
Personal finances 1st. Find a way to spend less than you earn and save the rest. Or find a way to earn more than you currently spend and save the rest. Then build a cash buffer and this will ease your amygdala (emotional part of the brain). Once you have got solid personal finance foundations in-place, then it’s time to invest.
Take note of my 5 biggest mistakes in personal finance and it might just save you a few years of financial pain.
- Investing in ISA at 18 and then stopping after 6 months
This is a big mistake but one I’m not going to take all the blame for. I was young and I was clueless when it came to personal finance. No one had ever told me the importance of personal finance and investing. I certainly wasn’t taught it at school.
At the time I had no responsibilities, and my expenses were very low. I had a car loan to pay for and £100 for food and accommodation as I was in the RAF. I had a spare £500 pcm and started to invest into an ISA. The problem was that I didn’t know how to invest so I put it into a cash ISA. Another problem was that my investing only lasted 6 months.
If only I’d have kept investing for 20 odd years. If only I’d have known about index investing. Basically, where you put money into a fund and that fund tracks a market like the S+P 500 or a few markets. You have a small slice of several companies. But I didn’t and I don’t really have any regrets. I just want to tell younger investors what I should have done.
With a worked example, let’s look at what I would have had after 20 years of investing. And this is assuming I was able to achieve an average interest of 7% pa:
- £500 invested every month for 20 years (dollar cost average)
- 7% interest earned on average pa by investing in low-cost index fund
- Money is tax-free as held in UK ISA (allowance pa is £20k pa)
- Balance after 20 years is £260,463
- Interest earned is £140,463
If you are just starting to invest focus on the interest earned. This is the magic of compound interest and is a big one to understand. This would have been £140,463 for doing very little.
That £260,463 as a 38-year old would have made a massive difference. If this was my reality last year, I would have bought 5 properties and put the rest into Bitcoin. I would have been in a very good position financially. Let this sink in if you are a young investor. Discipline from an early age will make a huge difference when you’re in your late 30s and early 40s.
- Not putting tax away when I started Limited company
My very first limited company was set up in 2012 and I was a very naïve contractor. You could say I was clueless.
I set it up in the hope of getting into commissioning and getting paid a day rate. It was an alternative method of getting paid.
When I did get into commissioning, I was like a little sheep when it came to the do’s and don’ts of operating with a limited company. I copied an invoice off one of the lads I was working with, and I would simply put my timesheet and invoice in every week and would get paid the following week.
Over the years, I picked up bits and pieces but never really took the time to learn exactly what I needed to know about limited companies. I would have the odd meeting with my accountant and email him with any queries.
I would discuss issues like tax and how much you were allowed to take out each month or in a given year. I sort of knew what I was doing but never really knew and it caused me a few issues over the years.
As I wasn’t fully aware of the tax system, I always thought I had more money than I actually had. When you start operating and getting paid via a limited company, you don’t have to pay your tax for another 20 months.
In hindsight, I should have put 20% into a separate savings account to cover tax but being clueless, I didn’t think anything about tax. I was on good money and was just excited to see the bank balance building.
My first job in commissioning was a game changer. We were able to save a large amount of money in a short space of time. Within 18 months, I had saved £50,000 and this was taken from my limited company and put down as a deposit on the house we live in now.
Again, the last thing I was thinking about was tax, so I was also using tax money that wasn’t really mine.
As I had loaned the £50,000 from my business account, I would have to pay additional tax. Funnily enough, this didn’t fully register, as I would have been sat in my accountant’s office listening like a nodding dog when he had explained the full picture.
Obviously, I chose to defer the additional tax payments until further down the line. Fast forward to 2014 and I had an additional £5000 to pay on tax. This was very inconvenient but luckily, I had the money, so no major problem.
This wasn’t the full picture. Fast forward to January 2017 and my savings were going down fast. Consequently, my old money anxiety was coming back and fast.
My anxiety kicked in further when I was hit with a £7500 self-assessment tax bill I wasn’t expecting. The reason was that I had taken more dividends out of my limited company, and it took me over into the higher tax bracket.
Part of the self-assessment was made up of £5000 from the loan I took out for the house deposit. The full picture was that I had £10,000 to pay back (20% of £50,000). I really was clueless.
I always seemed to get a horrible little email from my accountant (regarding tax) which would take me by surprise and this is not acceptable when you have a limited company or you have any type of business.
A word of advice – if you start a limited company, make sure you are fully up to speed with all the tax implications. Speak to your accountant and make sure you put a set amount away each month (to cover your tax).
- Losing life savings on single shares in 2010
In my late 20s I lost approximately £8,000 on shares. I put a significant amount of money (money I didn’t really have to lose) on the strength of what my colleagues told me when I first started offshore. This was without any research.
During the period I invested in single shares, I made mistake after mistake. This is a personal finance mistake because I put my cash buffer into investing. Personal finances. Then cash buffer. Keep the cash buffer. Then invest.
The example I want to share highlights my emotions and shows how greed can kick in and rob you of your senses.
This time I had done some serious research (for me at the time) and I had read the shares section in one of the tabloids and a share I really fancied was JJB. All in all, I had done about 30 minutes of research.
I can’t remember the dates but the prices at which I bought, should have sold and what it went down to are burned in my memory.
The price I bought in at was 4p and I spent £2000 (again money I didn’t have to gamble with) and pretty much spent 6 months obsessing over it and checking the price every single day.
I think the highest it went up to was 50p and my balance was around £25,000. My educated reason for not selling was that I had convinced myself it would get to £1 and that I would cash in at around £50,000. It is clear that this was not an educated decision – it was pure stupidity and greed.
I bought the shares at 4p (worth £2000), they went up to 50p (worth £25,000) and went down in spectacular fashion to 0p (worth nothing). If you do invest in single shares, be prepared to lose it. This is not a half empty mentality it is just common sense and a bit of self-preservation. Do not invest without doing your own research.
- Getting LOAN to pay tax bill … 2 years in a row
Premium Bonds are an investment product issued by National Savings and Investment (NS&I). You are entered into a monthly prize draw where you can win between £25 and £1 million tax free. There have been 2 periods in my life that I have invested in Premium Bonds. I had £7000 during my 20s for about 5 years and £70,000 invested in my 30s for about 3 years.
During those 8 years, the interest rates my investments earned never went above 0.5%. This highlights two issues that are not good for any aspiring investor.
The first issue is that I have gambling in my blood and during the 8 years of investing, I was convinced I would win one of the big prizes. The second issue was the fact that I had no concept of interest rates. If I had no concept of interest rates, I definitely had no idea about real interest rates.
My interest rate was about 0.5%. If the inflation rate was 3% (I know this is high but I am trying to emphasize the point) during this period, it means my real interest rate was -2.5%. I had no idea, and this just goes to show my personal finance skills at the time. But it gets worse.
This was at a time when personal finance really wasn’t a priority. I was still chasing the pot at the end of the rainbow with my Premium Bonds, lottery tickets and football bets.
During the period I had Premium Bonds in my 30s, for 2 years in a row I took a loan out to pay my tax bill for my limited company (DUFFY ELECTRICAL). This is 100% not the way to invest and manage your money and I hope you are taking note of how not to do it.
I was earning 0.5% (with a real interest of -2.5%) from the Premium Bonds on one hand and then ended up with a £20,000 loan with an interest rate of 6.8%. I didn’t have a clue about interest rates; I just had tunnel vision as I actually thought I had a chance of winning £1,000,000 from the Premium Bonds.
Don’t take a loan out to pay the tax bill. Put your tax money away from day 1 like I was saying in biggest mistake number 4.
1.Letting my spending match my income after 2012
After 2012 things changed for the better work wise. My income increased and I was able to save money for the home we live in. Once we moved in, any spare money went into premium bonds. I built up some decent money, but I was clueless as premium bonds were making me 0.5% interest pa. I could have bought properties during this period but I didn’t.
What was worse is that my spending soon matched my income. Don’t let this be you! If you get an increase in income, save it and invest it. This is my biggest mistake to date by far. Please if you have an increase in income save it then invest it.
2016 was a year my personal finances went south. I decided I’d had enough of offshore as my fear of helicopters was getting worse. Plus, I was spending 50% of my life in the North Sea away from my family.
I managed to get a good job onshore, but my wages dropped significantly. With our high expenses, we were now spending more than we were earning. Spend more than you earn and worry about it later! This was what I was about at the time, and this is the opposite of being good at personal finances.
Not only that, but this was also a year we really made a fuss of ourselves. Instead of tightening the purse strings, we buried our heads in the sand with our personal finances.
We decided we would buy a log burner. This cost £5000. Not only that we had to get a new sofa, a new armchair, basically a new front room. The front room cost £10,000 in total. Alarm bells started ringing and this is the time when I discovered spreadsheets.
I was on a job in Chester working in a team of about ten. We had a good team. A team that had been spoilt work-wise and were all used to decent money at this point. And we were all poor with money.
We all got into putting all our income and expense on spreadsheets as we didn’t know where our money was going. This was the start of me half-heartedly telling Mrs Duffy that we needed to change our ways. I was sick of the high outgoings and having to chase the money offshore and am now away from home Monday to Friday. My obsession with spreadsheets was very half-hearted as we pushed on with our horrendous personal finances.
The next little treat was a brand-new Audi Q5. This was on lease and added £400 pcm to our outgoings. Not to mention the cost of running it. We did love this car, but we just didn’t have the spare money to go out and get this upgrade.
Then there were the holidays. Now we felt like we deserved at least one holiday as we both worked hard and we wanted to treat our girls. But we didn’t have the money.
We just thought we had good savings. We ignored the fact that our outgoings were now devouring our income. So, the savings started to head south very quickly.
The week’s holiday in Spain was about £4000 all in. We loved it don’t get me wrong. But again, we couldn’t afford it.
Then there was Lapland to see Santa Claus. Again, this cost about £4000 all in. And again, we couldn’t afford it.
Putting my poor personal finances aside, I have no regrets about Lapland. It was awesome and me and Mrs Duffy were very grateful to take our girls to see Santa Claus. This was a once in a lifetime holiday and it was worth every penny. We were aware of making the most of the kids believing in Santa and this added fuel to the fire. They loved everything about it.
The country where Santa lives (Finland) is beautiful and the cold snowy conditions add a bit of magic. The holidaymakers go above and beyond as well and even me and Mrs Duffy were believing in Santa by the end of the holiday.
As we had decent savings still, you could be thinking what is he talking about? Why is he getting worried and why is he getting obsessed with spreadsheets?
The point was our expenses were now devouring our income. And I was aware of this fact. This brought with it a lot of stress and anxiety. I did enjoy our holidays and other luxuries but the nagging thoughts about money and work wouldn’t go away.
Along with our big mortgage, our new spending habits caused me a big headache. One positive from this headache was that I forced myself to focus on my three existing rentals. This was hard to do as I really had a bad relationship with the rentals due to the negative equity. I’d now had enough of my negative equity and decided to overpay my interest-only mortgages.
Ive made too many personal finance mistakes over the years and this is what I want you to avoid. Learn from my painful lessons. Work on your personal finances. Build a cash buffer of 3-6 months. Then go and invest with skill.