plonkee money an english-er's thoughts on personal finance

February 26, 2009

musings on child-free lives

Filed under: philosophical — Tags: — plonkee @ 9:59 pm

Parents like to justify having kids. I know this because I encounter it a lot. It’s fairly often of the *kids give life meaning* variety. You know, *kids change you so much, and that’s always good therefore everyone should have kids*.

Since I’m planning and hoping to remain child-free by choice, although I think it’s wrong, this attitude doesn’t bother me because I’ve already realised that I personally, can get more value from doing other things with my life. A couple of my friends however would desperately have liked to have children, but as single women in their early 40s have come to the realisation that it is unlikely to happen for them. Sure I think that you can have a great life without kids, but I don’t really like children. It’s much, much harder to enjoy being child-free when you hadn’t quite planned to end up that way.

I deliberately use child-free by the way because that’s how I see it – as a positive state rather than a negative one. And I do think it’s funny that natural selection is unselecting my genes.

Life without children is good for your finances. I don’t care how frugal you are, or how much harder you think you work, the fact remains that people, even fairly small people, consume resources and resources require money. Kids require educating as well as feeding and clothing, which to most people means being tied to an area with good schools (although home education has much to recommend it). Good schools cost money.

It’s often argued that being child-free is selfish. If you think about it, that’s trivially not true, but it is true that parents sacrifice time, money and energy for their children. I can see how one might begrudge the child-free their morning lie-ins and extra cash. But these are the consequences of the choices that we make, plain and simple.

The real problem with not having kids (aside from other people’s comments), is deciding what to do with all that extra time and money, of all the many things on offer. Just having kids can be treated as a bit of a pass on this front because the children effectively give you things to occupy your time, and then some.

But, even if you do have kids you are only putting off this decision until the time at which they leave home. And, as I remind my parents occasionally, just because you have kids, doesn’t mean your children will provide you with grandkids. With a bit of luck, eventually we’ll all have to find some kind of intrinsic value in our lives – not derived from any kids.

Thinking about what you want to do with your time and money is important, because otherwise you tend to waste it. And life is too short not to be as happy and content as you can be.

February 19, 2009

the magic money cupboard

Filed under: investment — Tags: , — plonkee @ 8:24 pm

One of my friends is an actuary with an insurance company. His favourite concept is that of the magic money cupboard. He reckons that when it really gets down to it, a surprisingly large number of people (who should know better) believe that when you take out an investment policy, the insurance company puts it into a magic money cupboard, and after a few years, it comes out much bigger.

As my friend quite rightly points out, there is no magic money cupboard. If you save or invest money with any company, they can only put the money in the same places that everyone else does – broadly speaking into bonds, shares, cash, property or commodities.

When you take out a pension, or an investment policy, or anything like that, you are really investing in bonds, shares and cash (and occasionally property or commodities). The value of bonds and shares can and will go up and down, and cash is at risk from inflation. If the whole stock market is doing badly, then it doesn’t matter who your investment is with, if there’s any component invested in shares that bit will be doing badly too.

People that look after the money you invest are clever, have passed lots of exams, and are genuinely trying to get the best return for your money. However, they don’t work miracles, and they aren’t likely to do much better than average because they have to work from the same information that everyone else does.

There’s no such thing as a risk-free investment, and nothing is immune from the major ups and downs of the markets. Understanding and accepting an appropriate level of risk are much better for you than mistakenly believing that the insurance policy you’ve taken out will make money come rain or shine because then, you’re taking on risk that you don’t even know about.

February 13, 2009

historic returns: looking back more than a century

Filed under: banking and economics — Tags: , , — plonkee @ 12:46 pm

JD @ Get Rich Slowly highlighted a municipal bond issued in the mid-Victorian era in New York state that is just now coming to completion. It was paying out annually at 7% per year, which is a very respectable rate of return, even though inflation has seriously ravaged away the purchasing power of the original sum of $1000.

a good book teaches a lot

It reminded me that nearly everything I know about pre-20th century finance, I know from reading literature. In Jane Austen’s Pride and Prejudice, Mr Bingley and Mr Darcy are extremely wealthy men – with incomes of several thousand pounds a year. Of course, nowadays several thousand pounds will go nowhere. I have also surmised that trade (business) was looked down upon, and that investors were fairly cautious in the early nineteenth century – investing in joint stock companies was considered speculative.

A bit more of my knowledge comes from Jayne Eyre (the wealth of Mr. Rochester was built on the work of freed slaves) and North and South (which covers the cotton mill recession of the mid nineteenth century).

inflation is omnipresent?

When I read about incomes and prices from one or two centuries ago, the long term effects of inflation become very clear. If Miss Darcy’s £20,000 had been solely used to generate an income for her to live on, and none of it reinvested that money would still be providing around say £1,000 a year, but that’s not enough to live on, let alone enough to be considered a catch by a fortune hunter.

It’s interesting to read, then, that inflation was not a major factor during the nineteenth century. A report by the House of Commons into the value of the pound since the beginning of the Georgian era in 1750 (pre-dating the American Revolution) shows that although during the Napoleonic Wars, inflation was high, and this was then followed by a period of deflation, for much of the nineteenth century when Britain was the most industrialised nation (and certainly the major superpower) inflation didn’t really exist. Prices in 1870 were not very much different from prices in 1830, compare that to the twentieth century where inflation is an important influence and prices have tended upwards throughout as a result.

stocks and shares

Although inflation wasn’t of great importance to the Victorians, they did still invest in equity, but they generally looked for preservation of capital and provision of an income, rather than capital growth. Stocks and shares didn’t experience all that much capital growth in this period – this table of historic FTSE index returns from 1800 onwards doesn’t show much in the way of share price increases during the nineteenth century. However, dividend income was much more important – making up around twice as much of returns as they have done in the twentieth century (more than 60% down to around 30%). Returns in the UK were higher than the US at this time.

An article from Vox (an economic thinktank) suggests that the reasons that returns were higher in the UK were the relative hegemony that the British Empire possessed during the first phase of the industrial revolution, and barriers to entry for companies at this time – particularly illiquidity (much money was tied up in land, and financial institutions were more local).

Sometimes it’s interesting to take the very long term view, and see what can be learned from the lessons of history. It’s definitely true that past performance is no indicator of future performance, but also I think that some things don’t change so much. Innovation drives business and wealth, and humans being what they are, I’m fairly certain that ingenuity will continue long into the distant future. It’s hard to tell what’s likely to be the dominant factor in twenty-first century financially, but sensible investing probably isn’t going to hurt.

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