“You only have so many hours in a day, let others make the money for you!” Nick Haase
Yes! At last! Something interesting, well more interesting. This is the first step that MAKES us money, rather than just organizes or spends money. And I am happy. Because I like money. Not in a weird obsessive way that it runs my life or creepy Scrooge McDuck swimming in my stash way, but in an “I don’t want to live in a cardboard box and I like to be able to travel, buy some shit, and pay bills” kind of way. The good way. The way that money is used to make positive steps forward.
Again, this is a UK focused post, because, well, that’s where I live so that is where I focus. I will try and find the way it is relevant for other countries as I go, and add a few things to the end of the post as I find them, but some of the principles are the same. Essentially it is about seeing what your employer will match, save, or invest for you.
How do I get free money?
One big, fat, easy way to get free money in the UK. Pensions. I know, people have told you to not trust pensions. Have told you there won’t be one when you get old. Have told you it’s not a good way to invest. Guess what? Those people are fucking idiots. I mean PROPER idiots.
In the UK your employer is legally required to enroll you in a workplace pension and to do that you have to contribute a few percent of your salary. If you do that, they put some money in as well. If you don’t do that, they don’t. Now, I am no maths genius, but every penny they put in the pension for you is money you would not have had. Would you turn down free money? No. You know why? Because you aren’t a fucking idiot.
It’s worth spending a bit of time understanding why this free money is worth your effort and the few percent you have to pay. For this little exercise, we are going to pretend you have a job working for some business or other, and you are a basic rate taxpayer, so earn under £50,000 (as of March 2021).
I am all for simple maths so let’s use a small and round number. Let’s say after your tax and National Insurance are taken from your pay, you end up with £80 to put into savings. That nasty government in the UK has taken 12% National Insurance and 20% tax (if you live in England, it changes in other parts of the UK, but its close).
Let’s start by considering what happens when you deposit your money in a bank account.
Now we take that £80, and put it in a bank account at one of the big banks. If you are a miracle worker you will find one that pays 2% interest. Most of them currently pay pretty much feck all and 2% is almost impossible. But we are generous so over the next 5 years you get this;
Year 1 £81.60
Year 2 £83.23
Year 3 £84.90
Year 4 £86.59
Year 5 £88.23
That looks ok. You have stuck the money in the bank and over 5 years you have it all plus £8.23 extra for doing nothing. Seems reasonable? Wake up call. It isn’t.
Lett’s compare that to a workplace pension…
We take that same £80 you had to invest. That nasty government has rocked up and taken its 12% National Insurance and 20% Income Tax again. But wait. We aren’t going to a bank with it this time, we are going to a pension. So when your money goes into the pension the Government applause your wise decision and gives you the Income Tax back. It’s basic rate tax relief, and while it is explained as 20%, they actually give you 25% to make sure you get back to the place you were before they took the income tax. The maths works, trust me.
So now your £80 is £100 going in your pension. Now, on day 1 of the tax relief, you already beat the 5 years from the bank. In fact, it would take the bank 12 years to get ahead of where you are now. Pretty good? But that’s not all! It gets better. Free money! We LOVE free money. Let’s say your employer matches your contributions to your workplace pension. Not all of them fully match it, but lots do and we are using simple numbers here to make a point. So we will say they match it.
You put in £80, so your employer puts in another £80. Which isn’t taxed or subject to NI. So you have given up £80 of take-home pay and now have £180 in the pension. £80 from you. £20 from the government. £80 from your employer. If we go back and compare that to the bank, it would take that account OVER 40 YEARS to get what you have on DAY ONE in a pension. Erm, did someone say pensions were bad?
That workplace pension has TWO lots of free money; the government gives you your tax back AND your employer has kicked in extra cash. That is the power of workplace pensions, the huge value of free money.
Now you just do that every month for your working life working towards retiring on the Costa Brava, sipping umbrella drinks and hanging out with the 80’s gangsters…..wicked. Or whatever they said in the ’80s. Probably some cockney rhyming slang or something.
OK, £180 a month isn’t going to put you in the Essex Wide Boy Costa Brava posse. But without any growth through a 40-year working life, it is over £86,000 and it cost you a lot less than half of that in take-home pay. So you have more than doubled your money without any interest or investment growth. And we will cover how we can make that a lot more when we get to pensions and ISAs investments later! Trust me, once you understand compound growth and see what it can do, your mind will be BLOWN.
But for now, remember the power of your free money and get.
This is a pretty simple explanation of all this, and pensions have a lot more complication than I just covered, and a few risks and constraints as well, but this post isn’t about pensions, it is the next step in the Roadmap and is simply to tell you one thing.
Your employer is legally obliged to give you more money. Your Government will give you tax back for doing nothing, It just has to be in a pension. Don’t be a fucking idiot. Take it and keep that workplace pension going!
See also this post on Pensions
See aso this post on the LISA
If you are in other countries, I will post links to locally relevant info below as I find it….