The Ferrari Factor

One of the recurring pieces of advice in Financial Independence literature is the idea of curtailing discretionary spending, or reducing ‘unnecessary’ outlay. An oft provided example of such spending is purchasing coffee, or other hot beverage types if they’re your bag. There’s even a catchy phrase to describe it: ‘The Latte Factor’. Coined by David Bach, the idea is simple: a little spent often will rack up over time, compounding to an overall high amount. The viewpoint is not without its critics and comparisons can be drawn to the controversial ‘smashed avocado’ outburst of Australian millionaire Tim Gurner. 

In a Forbes article on the topic, the author explains that “The Latte Factor applies…to whether we own one car or two” and that if we shunned our “third car”, we wouldn’t miss it at all. This excessive spending on cars is what we call ‘the Ferrari Factor’.

The Cost of Cars

Cars are ubiquitous in today’s society and they can represent a large proportion of an individual’s outgoings. Depending on which source you choose, the average cost of running a car is in the range of £160 to £390/month. One article estimated the cost of buying a car and running it for a year was £1,575/month! Here at MedFI, our vehicular expenditure comes out at £170/month/person. These may not seem like staggeringly large amounts, though when you compare it to the average £671/month cost of a mortgage, it puts things nicely in perspective.

One factor influencing the amount spent on cars is the rise of car finance, including schemes such as Personal Contract Purchase (PCP*) agreements. The vast majority (8090%) of new cars are bought on finance and an increasing number of used cars are too, with 50% of used cars bought on finance in 2018. The period September 2018-2019 saw 2.4 million new and used cars purchased using such plans. The amount of credit issued by auto finance dealers more than doubled between 2011 and 2016. £37.7bn (yes, billion) of advances were issued for private car purchases in 2018-19, representing a 3% increase compared to the previous year. In all, the total growth in new and used car finance was over 200% and 175% respectively between 2008 and 2018.

Worrisome Figures

One of the concerns with the ready availability of such finance is that it encourages, or at least facilitates, people buying cars they could otherwise not afford. For example, higher-end manufacturers such as Audi are some of the most popular purchases on such plans. This is obviously part of their attraction too. As it has been eloquently stated, the “Mondeo man of 10 to 15 years ago is now….[a] BMW, Mercedes or Audi man”.

There has been a deleterious impact on personal finance as a consequence of this. Areas with higher car ownership have, perhaps unsurprisingly, demonstrated the biggest increases in personal debt. One article suggests that buying with finance cost 68% more than buying outright overall. This extra expense has seen people having to reduce their spending elsewhere, work extra hours or even voluntarily terminate their (unaffordable) agreements. Indeed both arrears and default rates are on the rise, particularly for those with high credit risk (i.e. lower credit scores). 

Furthermore, an alarmingly low proportion of those financing car purchases seem to actually understand the agreements they’re making. Indeed nearly half of those surveyed didn’t know how much they’d borrowed. The blame does not lie solely with consumers, however, and concerns over mis-selling of car finance have prompted the FCA to investigate. Their report comments on multiple issues, which include a lack of understandable information and a commission model that creates an incentive for brokers to act against customers’ interests. 

The FCA estimate that changes would save customers £165 million/year and these are due in 2019/20. Their worrying conclusion was that “the way commission arrangements are operating in motor finance may be leading to consumer harm on a potentially significant scale”. Parallels to the infamous sub-prime mortgage collapse have been made and peer-to-peer lending platform Ratesetter has withdrawn itself from these types of loans. It’s not apparent that the bubble has burst quite yet, though there remains concern that it might soon pop. 

The Ferrari Factor

Car ownership, depending on your viewpoint, could fall anywhere on a spectrum from necessity through convenience to luxury. Unlike the ‘little and often’ of the latte, flat white or even orange-mocha-frappuccino, car finance can represent a ‘large and often’ expense. Based on the statistics above, an increasing number of people are taking on high monthly outgoings for their car with a consequent hit to their finances.

We appreciate that for some there’s more to owning a car than getting from A to B. For some it’s a serious hobby or passion and, as always, a drive towards FI(RE) must strike the right balance in quality of life. Similarly, other modes of transport are not necessarily cheaper, as reliable or efficient, greener or more practical. As an example, Mr MedFI’s commute via train would take 30 mins longer each day and the annualised cost would be nearly £1500 more (minus the added depreciation cost on the car). 

The article is not designed to scaremonger; car finance can be beneficial if managed properly. As ever, we hope to encourage readers to think about their own financial journey and, in this case, the role cars and transport play in that. Perhaps next time you come to buy a car, if at all, keep the Ferrari Factor in mind. 

*Authors side-note: the initialism PCP carries notorious connotations, such as the potent hallucinogenic drug phencyclidine (“angel dust”) and the old term for a severe pneumonia of the immunocompromised, Pneumocystis carinii.

Medics and Money


The relationship between a person and their money is shaped by many factors, one of which is their ability to generate money in relation to time and energy spent doing so. For most people, this is primarily through their job. As such, what are the particular key factors in a medic’s life that will impact on their finances?

In the beginning

Going back to the halcyon days of university, medical undergraduates rack up more time at their alma mater than most. At the ‘short’ end of the spectrum, four-year ‘accelerated’ graduate programmes are still longer than most UK degrees (excluding Scotland) and you’ll already have clocked in for a whole degree beforehand. At the other end, a full blown undergraduate degree with intercalated BSc will set you back a princely six years. Only a complete architecture degree beats that for length (seven years). 

Since the government allowed a rise in the maximum chargeable tuition fee in 2012, new students can expect to pay £9,250 per year in tuition. Even with an NHS bursary covering the final one or two year’s tuition fees, new doctors can expected to be saddled with nearly £40,000 worth of tuition debt alone. Most graduate with between £50,000 and £90,000 of debt in total. Once you add in interest rates that reach 5-6%, things are off to a bad start. “Get a job at university!” is perhaps not an unfair retort, though don’t underestimate the difficulty of the degree and the requirement for some serious graft to pass. 

Another consequence of a long time studying is what one might call the ‘six-pointer effect’. In football, when two teams fighting it out in a similar position play, the value of a win over your rival is not just three points your team gets, but also the three points the opposition fail to pick up i.e. six points. For medics the extra one, two or three years spent studying compared to a standard degree length mean they have more time accruing student loan debt and less time in a job earning. A financial six-pointer, so to speak.

The working years

Pay

Pay is, as ever, a controversial topic. Are medics paid too much? Too little? Do they sit in the metaphorical Goldilocks zone of income? A full debate on this questions is beyond the scope of this initial offering, but let’s look at some numbers.

First year doctors’ basic pay is £27,689, according to the latest NHS pay circular. That falls pretty much in the middle of the Office of National Statistics‘ two ‘average’ UK salaries for 2019; £24,897 (median) and £30,629 (mean). As a source of comparison, those graduates who choose to enter the Civil Service’s fast-stream can expect a starting salary of £28,000 for three years, followed by an increase of between 61% and 96% (to £45,000-55,000).

From there it gets a bit tricky to calculate owing to the varying lengths of specialty training programmes. Assuming the longest training possible, one would experience three basic pay rises in the first five years (16%, 18% and 27% respectively). This is counter-balanced by five years of stagnant pay thereafter.

Another increase (66%) at the time of earning a consultant job is again balanced against multiple five-year blocks of unchanging salary. The increases in-between these blocks work out as annualised increases of <1.5%/year.

The Cost of Working

Income is not an isolated number, but can be related to the time and energy input to earn it. This is difficult to quantify as it will vary hugely amongst individuals and specialties. The European Working Time Directive keeps medical rotas to a 48hr week, although this doesn’t account for extra time spent staying late at work. In theory the latest junior doctor’s contract says time for the myriad of other bits and pieces (think exams, audits, portfolios etc.) that are required for career progression should be included in working hours; the reality is that most still use their free time to complete these requisite add-ons.

Similarly, the physical and emotional toll that is paid by a medical professional is nearly impossible to quantify. It’s a discussion for another post, perhaps, though a brief nod towards the GMC’s new ‘Caring for Doctors, Caring for Patients’ report is acknowledgement that there is a problem in this regard that needs addressing. 

A 2011 paper by the BMA concluded an ‘average’ UK doctor will spend ~£17,000 on post-graduate training (range £7,000-£25,000). Exams, the GMC’s licence to practice , medical indemnity, college membership subscriptions and a battery of other mandatory expenditure is required to stay on track.

The End is Nigh

As one’s time in NHS employment draws to a close, the NHS Pension comes ever-closer. Fully understanding the inner workings of the NHS Pension Scheme is a story for another time and we have planned a series on it. It’s anecdotally described as “good” and there’s probably some merit in that description. 

Recent news has been more to do with pension taxation. A new consultation regarding this, in order to prevent (more) consultants reducing their working hours to avoid hefty tax bills, is in process. Let’s not get bogged down in the nitty gritty now, but suffice to say that there’s a chance you’ll have a reasonable pension waiting at the end of the line. You might just need to keep an eye on the numbers.

What’s the point? Where’s the FI?

The aim of this initial post is not to dismay about student loan debt, whine about salary or bemoan the NHS Pension. Similarly, we hope you’ll find personal opinion scant and facts aplenty in a piece that is primarily aimed to educate those both in and outside the profession. 

Financial Independence is a personal quest that must come with a degree of introspection and understanding of the paths that one might, could or should take. Too few understand the nuance of their projected financial journey and the significant impact this will have on your life as a whole. We hope this post serves as a starting point for your own thoughts about finances, FI(RE) and ultimately the way you want your life to be.

We hope you enjoyed reading, 

TTFN,

Mr. MedFI