In this week's edition I take a look at how I invest my own money. There are a number of areas I funnel my own money each month so I thought it might be something interesting to share.
For some background, I am a full-time PAYE employee working in the financial services industry. Regular readers might recall that in the Let’s Tax About Tax Series I referenced the pension as a tax mitigation strategy when it comes to investing.
As I am on the left side of 30 (just about!) I am able to contribute 15% of my gross salary to my pension and receive tax relief on the contribution. Currently, my employer contributes 10% and I contribute 5% which equates to 15%. Technically, I can contribute another 10% myself as my employers contribution does not count towards my tax relief limit. My plan is to keep my overall pension contribution in line with the below table so as an example, when I turn 30 I plan to increase my own contribution to 10% and my employer will still contribute 10% which will equate to 20%. In my circumstances, contributing to my pension is a no brainer and is as close to “free money” as I will get.
After the pension contributions above and taxes are deducted from my gross salary what I receive into my bank account each month is referred to as my net pay. When I refer to my savings rate I am referring to my savings rate based on my net pay rather than my gross pay even though I am already saving by contributing to my pension.
The pandemic has been extremely tough on many people with lots of people losing their jobs or having to close their business. I have been fortunate in that I have been able to work from home for the past year and I have actually managed to save more money than before due to the restrictions and lockdowns.
I get paid monthly and on this day each month I transfer about 40% into my stock brokerage account where I invest it in individual stocks. I invest in a combination of growth and value stocks. If you are a new reader or looking to refresh your mind, you can check out any of the monthly portfolio reviews on my website for a closer look at the stocks in my portfolio.
I also transfer about 10% into my emergency fund or options fund as I like to call it. This is essentially cash sitting in a deposit account. In one of my early posts titled How To Start Investing, I discussed in detail the importance of the emergency fund and how you could go about establishing your own. In summary, the emergency fund is for unexpected costs that may arise but also for having options. If I want to go on holidays (not very much recently but hopefully soon), pay a lump sum expense like insurance or do things on short notice, the emergency or options fund means that these events will never impact my contribution to my investments. If you do not have an emergency fund and invest all of your money, you run the risk of having to sell investments to cover the expense which would disrupt the compounding process. Depending on the timing, you might also have to sell the investments for a loss.
The remainder of my net pay is spent on rent, bills and living expenses. Therefore, my current savings rate is about 50% excluding my pension contribution. I roughly budget my expenses each month so that I know how much “extra” I can contribute to my investments and savings. I expect that once lockdown officially ends my savings rate will fall back down to about between 35% and 40%. Those pints won’t drink themselves!
A reasonable question might be why I do not contribute more to my pension? As I mentioned above, I could contribute another 10% and avail of tax relief on this contribution. I am happy to have an overall contribution of 15% while I am under 30 and invest more heavily in my stock portfolio. The drawback with a pension is that you cannot access it until you retire which for me is a considerable number of years away. On top of this, I recently reviewed my pension performance for 2020 and it was not pretty! The return was significantly below both my stock portfolio and the S&P returns for 2020. However, the returns on the pension will compound tax free whilst if I make gains on any disposals on my individual stocks above €1,270 in a given year I will be liable for CGT @ 33%.
With my stock portfolio I can access this whenever I want, if I need to. A pension is a really tax efficient method of saving but I prefer to view it almost like a bonus. I do not want to depend on it solely for my future.
That is how I invest my own money. My circumstances will not be the same as yours. You might operate under very different conditions. Personal finance is exactly what is says on the tin - personal. Put a plan in place that puts you closer to achieving your goals.
So, how do you invest your money?
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Wolf of Harcourt Street
Disclaimer: I am not a financial adviser and I am not here to give specific financial advice. The opinions expressed are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The information is based on personal opinion and experience, it should not be considered professional financial investment advice. There is no substitute for doing your own due diligence and building your own conviction when it comes to investing.