The Risk of Inaction

This blog post was originally written on 9 February 2014 for our sister website – The Money Muppet. We set that site up in January 2014 as we embarked on our journey to financial freedom. The Money Muppet site no loner exists, so we’ve incorporated our financial journey into our travel blog.

Just a quick post: food for thought.

As we strive for financial independence we’ll have to face up to risk. This won’t be anything new, but it’s a continual battle with ourselves to get a handle on it. The very word ‘risk’ used to make me feel ill, in discomfort, something to be shied away from. Over time I’ve slowly tackled it, realising in every situation where a decision has to be made, there is risk either way:

There’s risk if you do something, and risk if you don’t.

An example: we decided a few years ago we’d take a year out, leave our safe jobs and travel. This was, of course, a huge risk. Would we ever get work back in the UK again? If we did, would they be good jobs, or whatever we could find? Would we find we hated travelling and come back immediately, having given up both of our employments in the midst of one of the worst recessions in history? Would we be robbed on the road, or worse, assaulted? The list goes on.

The flip side: what if we didn’t go? What would we miss out on? The people we met altered our life view in such a way we’re likely to be emotionally AND financially richer than we would have been if we’d just carried on as we were before, in our safe lives. The lifestyle taught us we can live on little AND be very happy. The exposure to poverty, the Islamic world and to less materialistic cultures has balanced our view of the world. And of course, the biggest risk of all: if we’d not done it when we could, how would we feel if we found later that the opportunity was gone?

The risk of inaction was simply too high.

The same will apply to our future financial life. We could save money and take the ‘safe’ option and pop it in the bank. At the time of writing (Feb 2014), the best savings interest rates are sat at around 3.25%. Inflation is running at between 2% and 2.7%, depending on how you measure it. At best we’d be making 1.25% on our money, at worst 0.55%. We’d then have to pay income tax on whatever interest we made. The money would sit there, doing no work for us, safe, but in no way helping us become financially free. We need this money to be working.

To avoid paying income or capital gains tax, we could go for a cash ISA, another ‘safe’ bet. At the moment we’d be looking at around 1.75% interest. Whoopee doo. Unless I’ve got this twisted, which is entirely possible, our money would be gradually worth less and less sat in a cash ISA at today’s rates. It’s not all doom and gloom of course, we’re in a period of very low interest rates and we’re only 41, so we’re hoping to live another 40 years (helped by me drinking less beer to save money!). Using this source of info, UK interest rates have averaged about 5.8% since 1960, and around 4.3% since 1993.

So where do we put any hard-earned money that we can save? At the moment we’re thinking a spread of bricks and mortar rental property with other investments, but we’ve no idea which ones. We’re wary of the stock market, simply because we don’t understand it. More reading required. Whatever we go for, it’s sure to be more ‘risky’ than a savings account or a cash ISA, but we’ll research and understand the risk, and make our decisions deliberately, with good reasoning, ignoring the gut ‘that sounds risky’ feeling and planning for the long haul.

Cheers, Jason

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