Twelve percent

The past year has given me, and I’m sure many others too, pause for thought about the way we live our lives. In more recent months I’ve engaged in some hefty type two thinking, reflecting on my financial past (its evolutionary nascency) and future (plans for the endgame, or lack thereof). I’ve dwelled on the ‘personal’ in personal finance, the early retirement aspects of FIRE.

It’s sometimes beneficial to ground oneself in the here and now, rather than staring abstractly at the big picture. What of the present? What of the raw, tangible, limbic system-massaging numbers? There will undoubtedly be reams of writing in the years to come on Covid and its impact on our lives. Thinking purely about the pecuniary side of things, how did I fare in the ‘Covid tax year’ of 20/21?

Outstripping

At the current juncture one of the most sensitive measures of my financial progress is my savings rate. I have a target of 50%, which I surpassed by a mighty 12%…

The difference between pre-Covid and Covid times is abundantly clear, as evidenced by the difference in mean savings rate historically (green line) vs. the last tax year (purple line). Indeed, my savings rate exceeded 60% in three-quarters of months last tax year.

One exception was February, where I forked out the better part of £1,000 for an exam*.

The other exceptions were September and October. Thanks to a snafu over at HMRC, my take-home pay was slashed significantly. Turns out they thought I was working as, and earning the salary of, two full-time doctors. Though it definitely feels like the former on occasion, the latter is sadly not the case. After ironing out the creases with the taxman, the remaining months of the year represented a significant savings boost.

In light of a quintessentially static income year-to-year, this increase in savings rate is all as a result of spending less.

I’m reticent to chalk all of the differences in spending up to Covid. Granted some reductions in expenditure are directly linked, for example those related to travelling (-86%), haircuts (-49%) or dining out (-24%). Others come through deliberate action, with less spent on car insurance (-28%), phone contracts (-13%) or the supermarket bill (-5%).

The things I spent more on poignantly reflect the year gone by; a 75% growth in spending on home entertainment and a many hundred-fold increase in money burned on professional expenses.

Consequences

In the immortal words of Austin Powers, “what does it all mean Basil?”

The 12% outstripping of my savings rate target led to a +25% change in net worth. I’m very much still in the phase where it is savings, not interest earned, that provides the biggest impact on net worth. With that in mind, such a dramatic change is no great surprise.

Did the 12% increase in saving come at the cost of a 12% decrease in quality of living? Yes, if not more. It’s impossible to tease apart how much of this effect was:
money-related i.e. not allocating appropriate funds to enjoy life rather than just be a savings machine
Covid-related i.e. life was more bland regardless of spending due to limitations on personal/social activities
employment-related i.e. life was less enjoyable because of increased pressure at work, both from Covid and the requirement to jump through various professional hoops this year e.g. exams, portfolio requirements.

Life in the tax year 21/22 will be (fingers-crossed) less impinged upon by these factors.

If I were to be able to consistently save at a 60% savings rate, it would cut my time-to-FI by a quarter. A tantalising prospect indeed.

A year unlike any other?

Official statistics show that use of the word ‘unprecedented’ has reached an all time high**. Everyone is naturally and perhaps rightfully keen to wax lyrical about how different things have been. On the whole life has seen some significant disruption; certainly at the level of the individual there have been polarising effects on finance.

When it comes to my investments, I’m not convinced that things have been truly abnormal. Take a step back from the microscope to look at things in a broader context. Were the financial movements in 2020/21 significantly different to any other given year?

I made the diagram below using the S&P 500’s price over the past four years. Which one represents the ‘Covid tax year’ 2020/21? Which is 2017/18, where coronavirus was something only virologists might have heard of? Can you guess which graphs represent 2018/19 and 2019/20?

Performance of the S&P 500 index during four consecutive UK tax years (April-April). Graph from Yahoo Finance. NB scale left unadjusted.

If you’re someone who tracks the markets with enough vigour then perhaps you know the answers. To me they all share the same characteristics. General positive progression. Dips of differing degrees at varying points. With the exception of year A you’d have made a positive return on investment in years B, C or D, but suffered some volatility along the way. I appreciate that the performance of the S&P 500 is not the only marker of the state of the financial world, but it’s a nice way of demonstrating my point.

There will often be something unique and sensational happening in the (financial) world, driven in part by media furore and increasingly by the bandwagonism that is a natural consequence of increasing access to financial tools and material. For example the rise and rise of Bitcoin, or people flying to the moon on a GameStop rocket ship.

It’s easy to feel that current happenings carry a real significance going forward. If we look back at years gone by how many had (what appeared to be) noteworthy events that are now just minor blips along the inexorable march of progress? Will we see the events of 2020/21 as truly significant next year? In five years? In ten?

Answers
A – 2019/20, featuring a ~35% dip due to the ‘Covid crash’
B – 2018/19, featuring a ~20% dip due to the ‘cryptocurrency crash’ before recovering
C – 2020/21, featuring a ~50% rise in value; anyone could look like an investing deity by simply being in the game!
D – 2017/18, featuring a ~20% rise before a ~10% fall.

Keep the change

It’s not impossible that a similar trend in my savings rate would have emerged in the absence of a global pandemic, although perhaps not to quire the same extent.

Despite my skepticism about how truly different this year has been, I am treating it as an outlier i.e. not using it as the basis of any strong conclusions or changes in habit. I’ll keep my savings rate target at 50%. I’ll stick to a passive investing, equity-based plan. I’ll keep simply plodding along, Diplodocus-like, on the road to FI.

TTFN,

Mr. MedFI


*Insert much grumbling. At least I’ll see the VAT back.
**Statistics may be anecdotal and hyperbole applied.


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