Onwards to freedom!

SuperSecretSquirrel

Once again I find myself considering premium bonds...

I've got a good chunk of cash stashed in a cash isa that can stay put, 2.5% is fine for now (rates will eventually improve and I like the tax shelter). I have a very small amount in a s&s isa, again staying put, as I gain confidence the contributions will increase and this will be more worthwhile. Beyond that I have 1k in premium bonds (held for about three years, so far just the one £25 prize), a £300pm regular saver at 6% that I'll continue with until it matures (and hopefully a new issue will be available then for me to sign up for), and nearly 15k in lloyds vantage accounts at 3%.

That vantage 3% is nice enough considering how pants rates are at the moment, but after basic rate tax it's 2.4%, and after higher rate tax just 1.8%. My freelance earnings might possibly just about push me into the 40% bracket this year, and although it's stupid to moan as I'll still be better off paying 40% tax on income over the threshold than I would be having never crossed the threshold in the first place, I still kinda begrudge it.

I know premium bonds are an awful investment. I know the math, the statistical improbability, the fact that even at 1.8% net I could stick with lloyds, spend the interest on lottery tickets, and likely be better off at the end of it than I would be with premium bonds, but still I can't shake the idea completely.

Overpaying the mortgage beyond the 10% annual allowance is a non-starter, this early in our 10 year fixed deal will sting us with a 6% ERC if we do! I am almost certain the smartest thing to do with my money is to pay more into my pension, salary sacrifice would keep me in the 20% tax bracket, and tax relief and employer contributions mean free money, but at the end of the day I'm 30 with my first child on the way, I don't think it's too smart locking away too much money that we might be needing soon (certainly before retirment age). Increased pension makes the most financial sense, but it feels too final, and I'm not ready for that just yet. Once I have a clearer idea of how close I'll be to the 40% threshold at the end of this financial year, maybe I'll make slightly higher contributions so I stay in the 20% band, but no more than that.

So, 2.4% or maybe 1.8% after tax in a savings account, or most likely far less in premium bonds but with a miniscule chance of a life changing £1million appearing out of the blue. The statto in me says no to pb's, the dreamer says yes! Decisions, decisions...

What would you do?

SuperSecretSquirrel

I've just been checking the calendar... Without overpaying, we have 103 payments (at £828.48 each) to go between now and the official mortgage free date of 10th July 2022. I'm glad we reduced the term, a hundred or so payments doesn't seem like a huge amount Of course we intend to keep on overpaying, so that number should actually be far smaller in reality!

I don't really have any mortgage news other that the expected £499.99 OP was made a couple of days ago, and the balance has now dropped below 64k. I've been doing some financial pondering and spring cleaning though...

• Reshuffled my stocks and shares a little earlier in the week, and stepped up the monthly drip feed to £100. Still not a huge amount, but I'm very much still testing the waters. The plan is to gradually save less in cash and more in equities as time goes by.
  
  
• After a slight wobble regards the higher rate tax stuff, I've come to the realisation that it's no big deal. I could earn just under £41,449 and remain at 20% - I'd pay £6,300 income tax, £500 company car tax, and around £90 tax on savings. If I were to earn £41,451 and creep into the 40% band - £6,300 income tax, £1000 company car tax, and around £180 tax on savings - In this perverse situation I would be about £590 worse off for earning the extra £2. That sucks. If I were that close to the threshold, I'd certainly want to increase my salary sacrifice pension contribution. However, the chance of being that close to the threshold is pretty slim. Running the figures for earnings of £44,000 - £7,320 income tax, £1000 company car tax, and around £180 tax on savings - In this situation I'm around 1k better off than had I never crossed the higher rate threshold. It's still annoying that earning an extra 2.5k only sees me 1k better off, but better off is better off... I know the figures are a bit simplistic, not factoring in NI and student loan etc, but the principle stands. So long as I cross the threshold by a reasonable amount, it's all good. If it's looking a bit close, I pay a bit more into my pension in March so I'm no worse off. Of course the further I go past the threshold the better, so maybe I should concentrate less on how much tax I'll be paying and more on maximising my earnings!
  
  
• I'm not usually one for new years resolutions, but this year I think I should make an exception... It's time to get my head round my pension. Currently I contribute £75pm by salary sacrifice, and the total paid in thanks to tax relief and employer contributions is £200pm. I think I should probably be contributing a bit more. First step is to find out to what level my employer will continue matching contributions (I guess there must be a limit), I don't want to lock away too much in my pension at this point, but it seems silly not to maximise the free money if it's affordable. First thing to do is get all the information together, then I can start formulating a plan...
  
  
• Premium bonds. They are pretty rubbish. I know it deep down inside, but they have this annoying habit of short circuiting my logic. However, logic must prevail! Even if I end up paying 40% tax, I can get 1.8% net on 15k from lloyds, 3% net on 2.5k if I open a nationwide account, 1.8% net on 20k (minus the £24 annual fee) if I open a santander account, etc. The rates might be relatively low, but premium bonds offer less to the average (mean average) holder, and even less again (zero!) to the modal average. According to the MSE calculator, a single bond has a 1 in 46,776,797,960 chance of winning a million pounds each month. That £1000 of mine gives me a 1 in 46,760,306 shot each month, £15k would result in a 1 in 3,108,987 chance each month. Very long odds, no matter which way you cut it. I'll leave the 1k I have in there (the dream is worth a pound or two a month in lost interest), but for now I don't see any reason to increase my holdings.
  
  
• Finally, the name of this diary, maybe I should change it now that I'm being more ambitious with the overpaying!

I can't help but notice it has been very quiet in the MFW forum the past few days - hopefully you've all had a great Christmas and are looking forward to a very moneysaving New Year!

chirpchirp

Check out the LLoyds Vantage account, I'm sure you can have three of them with 5k in each paying 3%.

SuperSecretSquirrel

chirpchirp wrote: »

Check out the LLoyds Vantage account, I'm sure you can have three of them with 5k in each paying 3%.

Thanks chirpchirp. You can indeed, and I have 3 vantage accounts with very near to 15k spread between them. They earn 3% gross, which is 2.4% net for basic rate tax payers, and 1.8% net for higher rate tax payers.

1.8%, although not great, is still a better return than premium bonds for the average investor.

SuperSecretSquirrel

MFiT3 is a great medium term challenge, but can be a little slow moving at times. To help maintain OP momentum this year (tricky when considering maternity and baby costs etc) I've joined the 2014 mfw thread. First OP of the year (£100) has been made thanks to a payday current account scrape by OH Every little helps!

SuperSecretSquirrel

It's official, the new aim is to become mortgage neutral in 2015!

If we manage the '2014 mfw' target, this time next year we'll have a mortgage balance of around 50k.

If we manage the 'MFiT3' target, by the end of next year we'll be down to 40k.

By then I want to have 40k in the bank and the option to pay off in full should we ever feel like doing so. It doesn't make sense to OP any more than this due to the big ERCs, but being fully offset in savings would be awesome.

I'm under no illusions and know that the best made plans can be upset at the drop of a hat, but that's partly the driving force behind this... Better to be unemployed when you have no mortgage to pay and secondary income streams up and running than be wasteful now and suffer later!

PS - I have tried renaming the thread to "Mortgage Neutral 2015" without any luck, is this something only mods/admins can do?

Calfuray

SuperSecretSquirrel wrote: »

It's official, the new aim is to become mortgage neutral in 2015!

If we manage the '2014 mfw' target, this time next year we'll have a mortgage balance of around 50k.

If we manage the 'MFiT3' target, by the end of next year we'll be down to 40k.

By then I want to have 40k in the bank and the option to pay off in full should we ever feel like doing so. It doesn't make sense to OP any more than this due to the big ERCs, but being fully offset in savings would be awesome.

I'm under no illusions and know that the best made plans can be upset at the drop of a hat, but that's partly the driving force behind this... Better to be unemployed when you have no mortgage to pay and secondary income streams up and running than be wasteful now and suffer later!

PS - I have tried renaming the thread to "Mortgage Neutral 2015" without any luck, is this something only mods/admins can do?

Congrats! Sounds like your plans are going well

To edit the title of the thread, you need to edit your first post, and click on the 'Advanced' button, that will give you option to edit title . Let me know if you get stuck

SuperSecretSquirrel

Calfuray wrote: »

Congrats! Sounds like your plans are going well

To edit the title of the thread, you need to edit your first post, and click on the 'Advanced' button, that will give you option to edit title . Let me know if you get stuck

Thanks Calfuray I did edit the first post myself but needed a board guide to change the name as listed in the forum thread list (thanks nearlyrich!)

SuperSecretSquirrel

Finally got round to doing a SoA for the household, something I've been meaning to do for ages! Some of the figures are estimates, but we've tried to be as honest and accurate as possible. The exercise has thrown up a few surprises, but on the whole we're very pleased.

Our regular (reduced term) mortgage payment is swallowing up 24% of the net household income. A further 38% goes on all other spends (includes all essentials and luxuries). The remaining 38% is in theory available for saving and mortgage OPs. This means that if we were currently MF we could save/invest 62% of our income without making any sacrifices - bit of a shock to be honest! Of course this all relies on everything staying the same, us keeping hold of our jobs, still making good SE earnings, income keeping up with inflation, not becoming super wasteful, etc. Thanks to maternity leave and having a child to take care of the numbers will obviously change very soon, but at least our minds are now at ease - barring any major disasters we can afford maternity leave and and then some!

Beyond paying off the mortgage, I love the idea of early retirement. Not full retirement, more a case of spending time with junior, running my own business part time, and OH accepting a dream (but much lower paid) job. Have been reading a lot of investing and ERE blogs recently, maybe I'm getting carried away with it all, but it's a nice aim/dream. Seems MFW might just be the first part of a much bigger story for us

Anyway, back down to earth and back to the mortgage... Just received payment for some freelance work, put half to one side as will have tax bill to pay later down the line, the other half (£214.09) has just been OPd

Yorkielass

The opportunities not having to pay mortgage payments/rent in my 50s and onwards could bring is what really motivates me to overpay.

Those are amazing percentages - I need to work on some for us, great motivators I hope.