Money books

My friend is looking at his money situation, seeing if he can afford all his planned spending (he’ll probably be able to do most of it).

He asked me for advice on motivational books, so here was my reply to him:

Well boss,

to get into the money mentality instantly, I recommend reading Mr. Money Mustache. Here’s a list of his classic posts. It’s a principles-based opinionated blog about calculating the true cost of money. Some of the articles I like were:

On the same thread, there’s the book Your Money or Your Life. It’s a way to reconsider the value of money – and realising how much of your life energy goes into making it.

Then there’s the book The Millionaire Next Door. I don’t remember if this is very actionable advice, but it does paint the picture of real wealth based on some research: that it’s not about having the big monthly car payment, but living modestly and watching your spending (as Warren Buffet seems to do).

I do recommend YNAB for budgeting. It’s probably worth reading some of their blog for their approach (to only budget money you actually have, plus it helps you set goals for different categories). It’s worth doing it quite often when getting started (weekly or even daily) until you know you’ve got a handle on it.

FIRE in Ireland

There’s a “thing” out there on the internets called Financial Independence and Early Retirement (FIRE).

The topic is promising: mental and habitual strategies to becoming financially independent. The topic is also dominated by writers in the United States, so their advice can simply not apply if you’re in Ireland. That’s especially important when it comes to taxation.

What is this Financial Independence?

This term seems to mean having enough wealth to cover your lifestyle costs. The related idea of “early retirement” it seems is to not be in a full-time profession. I suppose that includes running a business you own. Indeed the deep question them becomes, what do you want to do with your life if you ever attain this goal?

Strategies that don’t seem to apply in Ireland

Investing in index funds outside of a pension: Index funds or ETFs are taxed prohibitively in Ireland. I’m no expert, but it seems you need to declare these purchases in a tax return yearly (so that’s a problem if you’re not doing that usually). Then every seven years they are “deemed to have been disposed”, which means you pay tax on your profits even if you didn’t cash out by selling your part in the ETFs. Losses in one ETF also cannot be offset against another ETF. Index funds are taxed, it seems, like savings funds. You pay around 40% on such profits. This to me is absolutely unfair, and the Irish state should make such investment feasible, as after a pension it’s your simplest route to exposing your money to the stock market.

Perhaps it’s more feasible to purchase stocks directly, since they are covered by Capital Gains Tax. However, you’d need a large chunk of wealth to have a diverse portfolio – something that index funds would give you immediately.

There are other strategies that are outside of my understanding, such as investing in savings funds in the UK. I’ll stop there, as I don’t understand more!

Things to be aware of if you “early retire” in Ireland

Pension contributions: The System wants you to work. If you’re not contributing to PRSI, you’re not accumulating a right to a full state pension later.

What CAN you do in Ireland

  • Frugality. Read Mr Money Mustache and put his strategies in practice. Have you considered the 10-year cost of buying a sandwich each lunchtime? How about the 10-year cost of petrol for going to work?
  • Mortgage. Push for a shorter-term mortgage if getting one. The bank’s objective is to maximise profits from you, and thus to get you to take a longer-term mortgage which pays higher interest ultimately. In getting my last mortgage, I had to ask for a quote of a shorter term mortgage. The lady warned me “ooh, I don’t know if that will be within the lending limits”. Turns out, it was well below the lending limits – her objective had been to maximise my mortgage term.
  • Pension. Pay in to, at the maximum rate allowed by Revenue. If you pay a cent in higher-rate income tax, and you are not maxing out your pension, then you’re taking out cash after paying a huge chunk of cash, instead of getting the pre-tax amount straight onto the stockmarket. Push for passively-managed index funds in your pension if they are available with lower annual fees.
  • Business. In fairness to the Irish system, it’s relatively easy to start a business. You’re allowed to be a sole trader from your home (imagine an online business that you can run from your computer). If you have this inkling, go for it. If you’re a company director, then you’re on the sweet side of Irish society, because the company can put a whopping one third of your salary (on top of your salary) into an executive pension plan and count it as a company cost. These executive pensions also seem to have relatively lenient rules, like being able to take out €200,000 tax free at retirement (to my understanding at the time of writing, check it!)
  • Reach out. Get Irish-based advice. Start with asking a question on askaboutmoney.com. Then find a “financial advisor”, but one that doesn’t charge you exorbitant fees. Asking for recommendations on askaboutmoney.com is a good place to start for that.
  • Property. Not something I’ve dabbled in, and extra taxes have come in in Ireland related to second homes, but renting out a property while paying off its mortgage is a route that many people in Ireland seem to have taken.

It’s not all about money. One of my friends specifically maximises flexibility and lifestyle against a top salary. It’s hard to step away from the maximum salary available to you, but it’s worth investigating what’s possible.

Can you “retire early” in Ireland? I’m sure it’s possible, but you won’t get to it if you’re on the default path of employment, large mortgage, large cars, and no pension.