I believe in the next couple of years we are approaching a junction and we should decide which route we want to take. At the moment I haven't decided upon any and so I 'flitter' between them, thinking and planning one way then a week later focusing on another. Not only is this inefficient but it'll mean we end up with dipping our toes into a number of approaches but not really going head on and maximizing any of them.
So at the junction that we're fast approaching what options are we considering?
- Paying down the mortgage.
- Investing in equities.
- Global tracker fund.
- Dividend paying portfolio.
- Invest in property - buy to let.
Obviously they aren't mutually exclusive however my expectation is that we'll only be 'successful' if we are targeting and putting most of our emphasis on one of these.
The internet is full of financially based advice on the pros and cons of each and against each other, but I am looking at these from a personal perspective.
Paying down the
mortgage
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Pros
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Cons
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De-risk any interest rate impact.
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Returns are known and guaranteed.
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Being mortgage free.
Best case end-state.
We are mortgage
free. So we would keep a far higher % of any and all income received.
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It’s not investing its debt repayment.
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If we have a planning time horizon of 25 years
an investment would ideally grow whereas our debt in real terms will decrease
over time anyway.
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It’s quite boring. No it is very boring J
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I think I would struggle to get buy-in from
the Mrs as she sees a mortgage as a long term commitment that will be paid
back in due course.
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If investing each month we would expect to see
growth month on month and year on year – certainly in the early part of
investing journey we’ll keep hitting new and exciting milestones. However, with debt repayment – starting as
high as we are – the difference for the first 1,2,5 years will probably be so
negligible that we would struggle to maintain motivation. It’s a silly physiological
quandary really. If we were closer to the destination motivation would be
higher. But for us I think it would be a very real one.
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Equities – Global fund
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Pros
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Cons
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Over a long term planning horizon it is very
likely to provide a decent return on growth
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Compared to Buy-to-let there is no set-up fees
and minimal on-going fees.
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I have started. I have a global fund set-up
and all it would take would be to tweak the monthly direct debit.
Best case end-state.
Investment pot grows
and we become wealthy on paper. We can then being to look at drawdown
options.
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Boring. I have the time and the importantly
the inclination to be heavily involved in my finances. Reviewing them each
month etc. This approach to investing is best left alone for 10+ years.
·
Investing in equities is a risk. Albeit a
Global Fund is lower risk than Dividend Portfolio. At some point in the future
there will be a market downturn. I am not sure how I would cope if my savings
I’d built up for the last X years were suddenly wiped in half. I think my
tolerance to losing money would be pretty low.
·
The Mrs would not buy-in to this due to the
above risk. She makes me feel like a cowboy gun-slinger happy to throw my
money around where. On a serious note – having something that she is bought
into is important as for me being able to share, discuss and have one common
goal is going to be a major contributing factor in making a success out of
it.
·
No physical ownership.
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Equities – Dividend portfolio
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Pros
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Cons
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Fun. I’ve been spending a bit of time lately
researching companies yields etc. Have built up a spreadsheet to see what
would be required to build up a portfolio receiving dividends most months. It
is exciting. There are lots of blogs out there which show how exciting it is
and how rewarding it is to see the dividend returns grow year on year.
·
There would be immediately visible returns
which I can monitor and graph.
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Compared to Buy-to-let no set-up fees, minimal
on-going fees.
Best case end-state.
We have an
investment portfolio which pays us a separate income.
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I know nothing about investing. I could be
investing in businesses which are 5 minutes away from going bankrupt and I
probably would miss the signs.
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Over time dividend receipts would grow, but
based on the above point the chances that this counter acts any capital losses
is pretty much 5050.
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The Mrs would not buy-in to this due to the
above risk. She makes me feel like a cowboy gun-slinger happy to throw my
money around where. On a serious note – having something that she is bought
into is important as for me being able to share, discuss and have one common
goal is going to be a major contributing factor in making a success out of
it. Interestingly I actually think she would be less against this approach
than against the global funds as she would see – or I could tell her about the
monthly receipts and see how they re-purchase shares.
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Buy to let
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Pros
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Cons
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Physical ownership
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It has always been something I have wanted to
do. In fact it’s been on my bucket list probably from the age of 18.
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I have the time and inclination to support the
investment. Often the time involved in a buy-to-let is seen as a con, for me
personally, it’s a pro that it would be something I can get stuck into and
spend time on.
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We’ve twice purchased a house and spent a
small amount of money and a pretty large amount of time on making it appear
nicer. My Mrs has a decorative eye and I am able to work away for many hours
to deliver on that. So we’ve got some experience and knowledge.
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I am a firm believer that property over the
long run will always go up. Population is only growing from what I can see.
So I see this as a low risk to my investment.
Best case end-state.
We have a BTL
property/portfolio which either we have capital growth in or receive rental
as income.
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Significant set-up cost. For fees alone it’s
likely to be in the region of £8k for a £125,000 property. Due to this I cannot start it immediately. It would take a couple of years to have the required capital.
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In terms of severity of impact this is the
riskiest of the options. Worst case scenario: we buy a BTL property, rates
rise dramatically and we are unable to sell or rent the property at the same
time as our family home mortgage rate rises. We’d be royally screwed.
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There is one other thing which I have considered. The potential down-side to option 1 - repay the mortgage can be largely mitigated by the fact that in 4 years time when this risk would be realized it would be possible for my wife to go back to work. She may not want too but if the reason for undertaking option 1 was the risk of losing the house then I am pretty confident she would be able to find a job which mean that did not come to pass.
Having that in the back-pocket as it were, I am being drawn between option 3 - dividends and 4 - buy to let. The fact that the buy-to-let would require me to save for a few years to gain the capital but the dividend investing is available now leans me to no.3 However, and I really think these may be the crucial factors, I have always wanted to own a buy-to-let so even the act itself would be a success in my eyes, and secondly the Mrs would be behind it. This would be important as having her supporting it would enable us to be on the same page when it comes to spending decisions etc etc.
What's my next steps... I have pretty much ruled out no.1 mainly because I want time to be on my side for growth and we have the fall-back of the Mrs working int he worst case. Even though no.2 Global fund is the only one of these approaches I am currently doing it feels like it isn't really 'active' enough to satisfy my desire to be involved.
No. 4 - buy-to-let is a very serious commitment so now I'll go away and run through numbers playing in excel to see what the next 2 or 3 years could hold. But if I can come up with a plan to have several milestones other the next 2 years to enable us to get on the property letting ladder in 3 years time... then I think that's looking like the winner.
It feels a bit crazy to be making such significant decisions, but really it is important that - although it may be vastly different to what other people choose to do - we have a clear goal and plan to get there. Currently it feels a little like we had a goal to buy our first house, then we had a goal to have a family forever house - now we've got that it feels like we've not really got a plan for the next step and if we are not careful we'd just sleep walk putting money all over the place with no strategy.
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