Lessons in Habitual Saving
Some Thoughts on Savings Rates
Most writers will know that when an urge to write about something organically materialises in your head, you should pounce on that green shoot of an idea and run with it. I stumbled across the below tweet recently and it perfectly encapsulates that notion.
“So much of writing is just putting yourself in a position to capture the fleeting thoughts before they dissipate back into the ether from where they came” - Joe Norman
As I began to put my thoughts into words, reflecting on this year in the stock market (in a different post), my mind drifted towards the topic of personal finance. Readers know this is not something I frequently discuss in this newsletter, but I firmly believe that the greatest bedrock to successful investing is a clean bill of health when it comes to one’s own financial circumstances.
After all, if you are anxious about later requiring the funds you allocate (in the near term) then you won’t have the correct frame of mind to allocate in the first place. It’s something that often goes unsaid. I imagine I am now thinking about this topic in response to my active portfolio not performing so well in 2021. I found myself reflecting on what I could have done differently, my errors, my allocation process, and so on.
These reflections then drifted towards more holistic ponderings. I reminded myself that I am 25-years old. If I am still actively investing by the age of 70, then my current position in that journey is only 13% of the way there. Like most things I experience at this stage in my career, it’s a learning process. As a younger investor, and human being, I think about recurring collisions with life experiences as the act of sharpening my knowledge base on the whetstone that is life.
I will assert that I do not fear one year of underperformance. I am still ahead of my benchmark by an attractive margin from inception and I still sleep easy at night. In May of this year, when referring to Odysseus and the sirens of the sea, I wrote that; “just as he refused to pour the wax into his ears, we should not outright ignore the noise. Rather, be aware of it, and how it impacts our decision making. Daily stock prices for a long-term investor? 99% of the time, it’s noise.” (from “Reflections on Noise”)
I believe it’s important to become accustomed to insulating one’s self from the, at times, schizophrenic environment of Twitter. Focus on your own goals, your own process, and selectively absorb from external sources.
I wanted to take a momentary break from writing about the stock market today to write about the way that habits are formed with respect to saving. More specifically, borrowing from my own experience in that field.
In the UK, there is a peculiar reluctance to discuss money. Very seldom do people discuss their salaries or their personal finances. It can be perceived as ‘counting others money’. It’s almost as sinister as whispering the word ‘Voldemort’ in the Hogwarts School of Witchcraft and Wizardry. As such, many young Britons grow up with a lack of insight into how to effectively manage their money.
Here in the UK, we have a scheme called the ‘stocks and shares ISA’. With this account, individuals can invest up to £20K per year with the benefit of those returns being shielded from tax. As far as things go, this is a no-brainer. Allocating to a general investment account (GIA) without maxing out an ISA each year is either; (1) foolish or; (2) borne from a lack of awareness or understanding. But less than 5% of the UK population currently fund an ISA account. Despite the average account size having grown from 2009 to 2019 (£3.3K→£9.3K), the number of ISAs has fallen to 10-year lows of 2.4M.
Whilst aggregate retail participation has grown over the last decade, no doubt helped by the rise of retail-friendly brokerage apps like Freetrade and Trading 212, total participation rates are still extremely low. The ONS reports that just 14% of the UK population invest outside of their pensions in 2018.
Compare that to our American neighbours where this figure is upwards of 50% and you see that there is a severe lack of appetite. Some will argue that the divergence is cultural. Others will suggest that the British are naturally more risk-averse. There appears to be a tendency to save cash in low-interest bonds or within the minuscule interest-rate bank savings accounts, for fear of “losing money” in the stock market. I wonder if these people understand that inflation is chipping away at their savings.
As for why this disparity exists, that discussion can be saved for another day. I am currently writing another memo that dives deeper into that topic. Today, I wanted to spend some time discussing how savings habits form and will be sharing my own experience.
Lessons in Habitual Saving
I will now walk through the progression of my own relationship with money, and how that eventually led to an understanding of habitual saving. For the sake of simplicity, I will exclude my discovery of investing.
Growing up, my own social circle lacked discussion of finance or an interest in the stock market. This is one of the reasons I created a Twitter account in 2020, to quench that demand. Now, that circle is wider and more densely populated with others who are aligned on my interest graph.
But prior to that, there was nobody that taught me how to save or invest. Perhaps this was the byproduct of the culture that I was raised in. A culmination of the things that I have previously touched upon. As a young adult, my friend’s spending habits were wasteful, as most are in their adolescence. However, as I began to mature and take an interest in finance, I felt alone in that respect. The ignition of my interest in the stock market, as well as my understanding of how important saving can be, came from external sources. The importance of saving, the topic of this discussion, came from a time when I was a student and had no money and pondering why that was.
Growing up, my family were never in dire straights when it came to our financial situation. The word “privilege” can take on many personas. To some, it means ultimate luxury. To others, it means having a home and warm bed to sleep in. Under the latter depiction, I have always been privileged.
For the initial period of my childhood, we were an ‘army’ family. Migrating across various bases, following my father as he was relocated throughout Germany, England, and eventually Scotland once he gave his year’s notice and changed careers.
As a youngster, I remember feeling frustrated that our family didn’t follow the typical ‘pocket money’ approach to parenting. We were never left without, but the idea of earning money for doing nothing was not in the zeitgeist of my household. I distinctly remember a common response to my complaining, including things outside of pocket money, was that “just because X’s parents do it, it doesn’t mean we do”. At the time, I thought about how unfair this was. Why couldn’t my parents conform?
Ultimately, I cherish the way I was raised. From an early age, I realised that things are not given to you on a plate at your request. As humans, we oft remember things how we want to remember them. So, I can’t be sure if this was by design or just a positive byproduct of their parenting style. I never bothered to ask them. I like to assume it was the former.
From the ages of 14 to 21, I worked every single weekend, barring a one month period where I had no job, and the occasional holiday. I worked out of necessity, for my parents were not willing to fund my lifestyle outside of the essentials and typical seasonal gifting. I am eternally grateful they didn’t because I feel my parents are to thank for the work ethic I have today.
At the age of 14, I began working in my Grandmother’s coffee shop in a neighbouring town about 4 miles from my home. Each Saturday and Sunday morning, I would grab a bus, go to work, and earn £5 per hour for the trouble. I was mostly pouring coffee, making sandwiches and coleslaw. I still have nightmares about the pain my eyes went through after shredding handfuls of onions to make one giant bowl of slaw.
I didn’t work for long each day, and I am sure that the £5 per hour was a nepotistic salary for a 14-year old, but at the end of each weekend, I earned anywhere between £30 and £50 of my own money. At this point in my life, I simply wanted to earn money. As you can imagine, the vast majority of the earnings were squandered on soda, sweets, and other activities that pre-teens like to engage in.
At the age of 15, I was promoted to a job at my mother’s small fruit and veg store in our town. It paid marginally better (still nepotistic rates) and didn’t require a bus fare. Both I and my older sibling (of two years) worked in this store during our weekends and holidays. I left at the age of 16, and once my sister left a few years later, my mother closed the doors to pursue other things.
I am grateful for that post, as it helped me land a position at a Morrison’s store (a supermarket chain in the UK) in the fruit and veg department. This was my first ‘real’ job. For the first time, I was paid by monthly bank transfer, was given payslips, and my superior was not a blood relative. I worked here for two years until I completed my secondary education (high school). I loved it. During high school, most students did not have jobs. The highlight of earning my own money at this age was being able to spend lavishly in the lunch hall and buy myself video games instead of asking my parents. It’s funny to reminisce about the things I found to be important back then.
When the time came for me to leave home and enrol in University, I chose Edinburgh. Correction, Edinburgh was the only one that chose me. I transferred my position at Morrisons to an Edinburgh store and started my life as a student.
The next 12 months, at the age of ~19, was the first moment I really grasped an understanding of how important it was to manage my finances. At this stage in my life, I was an undergraduate student, I had a part-time job, I had just discovered a love for investing, and the majority of my income was spent paying for rent, frequenting various student bars multiple nights per week, and burritos. I remember a particular store (Pintos) that I enjoyed greatly. It was later taken over by a chain called ‘Barburrito’.
In my second year of university, the ‘lifestyle’ caught up with me. Towards the end of my last semester, I was flat out broke. I say this with no intended hyperbole, as I am aware that I had no real responsibilities at this stage and a loving family to fall back on. But for the intents of this particular tale, I was broke. I had maxed out my student overdraft in my bank account, I was living hand-to-mouth during the week, and my job was barely allowing me to cover rent and food. I found myself worrying about how I would pay for things. This was the first time in my life I had experienced that. I could have gone home, and I eventually did. In hindsight, the situation was not quite a dire as I perceived it to be. But at the time these priorities, as pathetic as they seem now, were consuming.
That semester was particularly gruelling. I remember reading George Orwell’s ‘Keep the Aspidistra Flying’ at this time and relating to the main character, Gordon Comstock. In the book, Gordon, a lowly typewriter in 1930s London, becomes obsessed with money. In his own romanticised way, he seeks to defy the worship of money and status in society, likely because he had so little of it. It’s a grim tale, and my relation to it more than likely reflected my depressed mental state at the time. Looking back, I question what a 19-year old had to be sad about, but I am not intellectual enough to explain the human brain. Suffice to say, I got over it.
I recently read Frederik Gieschen’s “Gratitude, Desire, and a Money Paradox”. In that article, he, brilliantly and vulnerably, shares a short story about the paradox of money. More specifically, the anxiety that follows the desire to never worry about money. In wishing to stop worrying about money (in the future), the anxiety naturally bloats in stature in the present day.
“I realized that my desires require time and attention much more than money. It was a paradox: What I wanted was to not ever have to worry about money again. Instead, all I worried about was money. As Tim Ferris said, “An obsession with security breeds a feeling of insecurity.”
Money was supposed to provide safety. Instead, an obsession with money made me feel anxious and inadequate. I failed to appreciate what I already had. To reach an imagined state of freedom, I focused my time and attention on money. I encaged myself and ended up with neither.” - Frederik Gieschen
Digressing now, there shortly came a point in this perceived feeble existence when all of my anxieties dissolved into the air. Strangely, it came at the exact moment that everything turned to shit. My job at Morrison’s, which I loved previously, had grown to be another source of displeasure. After transferring to the new store in the city, I found the culture to be grating. One day, I forget which, I entered work in the morning, and was dismissed.
I would like to say I left my job amicably, but in truth, I was caught lighting a cigarette as I exited the building one day (maybe 2 feet from the door) and the HR manager (who was already not fond of me) saught the opportunity to dismiss me. I recall being so taken aback that I stole the minutes from the dismissal meeting, tucked them into my shirt, collected my things, and left the store. I was 19 at the time, so forgive my immaturity.
As I exited the store that morning, I had a strange sense of elation. I remember it vividly. As I walked out of the store, in my lime-green shirt, the air was damp and crisply cold. People whizzed around the parking lot as normal.
I remember driving back to my apartment, in my beat-up Citreon Saxo, and feeling pretty ecstatic. I was not anxious about having lost my job, despite my financial woes at the time. I hated the job, and to be candid, I hated the rut I was in at the time. Between the classes, the work, and the overdraft that loomed over my shoulders, I had no time to have fun. Being dismissed felt like a speedbump that would take me off course from the miserable destination I was heading. It felt like a weight had been lifted and I was strangely excited despite having no idea about what I’d do next.
To me, it had felt like I hit rock bottom, and it was relieving, to say the least. Once again, I say ‘rock bottom’ figuratively. It’s how I felt.
Ultimatley, I decided to head home to my parents for my third year. The rent was considerably cheaper and the food was tremendously better. After one month of doing nothing, I picked up a job at a local restaurant/hotel working the bar at various functions. In this establishment, the owner-operator was a relic of prior decades. He had run the business for 30-years, liked things to be done a certain way, and I learned a lot from him. Mostly about how I never wanted to come across in a position of ‘power’. I learned how ‘not’ to be a good boss, and for that I am thankful.
I worked here for the remainder of my undergraduate education. For minimum wage, and cash in hand payment, I slugged away my weekends, frequently working 12-hour shifts. This was the moment that I look back to and pinpoint my obsession with saving. As I worked to burrow out of my student overdraft, being paid in cash each week allowed me to tangibly identify how much I could afford to spend. On Sunday’s (payday) I would walk home, go to my room, and the first thing I would do is cut my wage in half and throw the cash into plastic money bags before wrapping it up in an army-issue green waterproof bag. I would throw the coins into a sealed jar and I would live from whatever was left.
In effect, spending what is left after saving, opposed to saving what is left after spending. This became a ritual for me.
After a few semesters of doing this, I found that I had begun to save more money than I had been able to at my previous job, despite being paid ~1/2 less. I would routinely save up a certain amount in my green bag, take it to the bank, manually deposit the cash, and send it straight to my overdraft account.
I realise that the ‘low’ moment I faced at the age of 19 pales in comparison to what most people in the world face every day. I am certainly not ignorant to that, which is something I feel necessary to point out. In the scope of my own experience, it was a low point for me. I now look back at that time and thank the lord (figuratively) that I experienced it.
The rest of that journey (from age 21 until now) saw me complete my degree, complete a Masters, move to the city once again, grab an analyst position in fintech, and leave that to pursue Substack full-time in 2021, all of which I documented in “One Year of Writing on Substack”. I will save repeating myself here. Today, I routinely save more than 50% of my income, most of which is dispersed across investing and savings accounts.
This tale was a long-winded way (readers will know I am great at that) to demonstrate how I learned to save habitually. I think it to be highly unlikely that this is the most efficient method of education. So, my question surrounding the lack of knowledge amongst the UK population still stands. People shouldn’t have to learn how to save by getting knee-deep into a student overdraft. They should learn about these things proactively.
I intend to address that topic in an upcoming ‘Company Spotlight’ issue I am currently writing. Before concluding, I wanted to spend a moment discussing a complimentary subject to the idea of habitual saving.
A strong appetite for saving is nothing without a well-handled marginal propensity to consume. If an individual is wired in a way that will see their additional expenditure become directly correlated with their additional income, they will remain fixated with the same level of disposable income (‘spending power’).
As people earn more money, their desire to consume a greater quantity (or quality) of goods and services tends to rise too. In the field of economics, they try to quantify this effect through the marginal propensity to consume (MPC). Theory suggests that an increase in personal consumer spending occurs with an increase in disposable income. The proportion at which the consumer spends each additional unit of income is the MPC.
Should an individual earn a basic salary of $75,000 per annum, and their typical expenditure is $30,000 per year, their disposable income is $45,000. Should that same individual migrate into a new role that pays $100,000 per annum, then it is likely their spending will increase too. The additional amount they spend per $1 of extra disposable income is the MPC. The act of increasing expenditure, in-line with the increase in income, is what is known as lifestyle creep.
Assume that for every $1 of additional income the individual earns, they spend $0.50 of that $1. The MPC would be 0.5. The relative MPC of a product, a person, or whatever it may be can differ. For example, if you were to continuously add $1 to someone’s income and observe how many more cans of store-brand baked beans they buy as part of their weekly shop then past a certain point, no amount of additional income will result in them buying more cans of baked beans. The MPC will gradually decline.
If we were to hike up the $1 into $1,000 increments, then it’s possible the individual may not demand store-brand baked beans at all. They may purchase Heinz baked beans instead. With the additional income, they might stop buying baked beans altogether. They might upgrade to Cannellini. They might start shopping at Wholefoods. I think my point has now been made.
Without getting too deep in the weeds of microeconomic theory (this relates to elasticity too), it is enough to say that most people consume more goods and services as their incomes rise.
This doesn’t mean that you should live like a frugal maniac. For some people that works and credit to them. To avoid lifestyle creep, I think you first need to be aware of your human instincts and then be cautious not to allow them to get out of control. Below I have shared a basic example of two individuals; A and B. Each is paid a salary of $75,000 (which grows at 5% per annum). Each initially spends 40% of their salary, leaving $45,000 in disposable income at the end of the year. For the sake of simplicity, we are not going to address how they spend that leftover cash, inflation, or any other variables that are likely to impact the below results.
The only variable amongst the two individuals is their propensity to consume. Person A demonstrates an MPC of 0.85, thus spends $0.85 of every additional $1 they earn and Person B has an MPC of 0.25.
After ten years, both A and B grew their salary at a 5% CAGR, reaching a little over $122K per annum. However, given the difference in MPC you will see that:
Person A’s expenditure grew at a CAGR of 8.9% over the 10-year period whilst their disposable income grew at a CAGR of 1.5%.
Person B’s expenditure grew at a lower CAGR of 3.4% whilst their disposable income grew at a CAGR of 6%.
As a result, by the end of the decade, Person A had a disposable income rate of 42.6% (down 1,737bps) and Person B had a disposable income rate of 65.8% (up 579bps).
Let’s assume that both people were fairly savvy with their investment rate, and both contributed 70% of their disposable income each year to the stock market. Let's say it earns 8% per year, compounded annually. After ten years Person B will have amassed over $100,000 more in returns than Person B.
There are a number of ways to increase your savings rate, and I find that it mostly boils down to abundance vs scarcity mindsets. The former will suggest that earning more is the best way to increase savings, whilst the latter refutes that saving more (tightening the purse strings) is the way. I personally lean towards abundance. Life is a short road trip and sacrificing the pleasures of a Starbucks or the occasional restaurant outing is not how I envision myself having fun on said road trip. I say this without disregarding the scarcity mantra altogether; there is a time and a place for it.
However, earning more is ineffectual without curbing the MPC. Should I earn an additional $1, I prefer to reinvest $0.95 of that dollar and continue living as though I had no earnings increase at all. From the point I was earning a graduate analyst salary to today, my annual income has multiplied a few times over, but my expenditure has increased only modestly. I have not upsized apartments, I have not financed a ‘better’ car, and I don’t really do anything differently, besides allocate more towards my portfolios.
But this is a situation personal to me. I imagine that these things will shift somewhat as I age and collect more responsibilities. In the future, I intend on welcoming a doggo into my family, for instance.
That concludes what was on my mind this morning. I will revisit this topic again in December when sharing my findings on a UK-domiciled brokerage.
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