Should You Pay Back Your Student Loan Early in UK?

Although there are different types of student loans in the UK depending on when you graduated, the short answer is no. In the UK, the Student Loans Company only collects repayments once you earn over a certain threshold. Even then, they only deduct 9% of whatever you earn above the threshold. If you are unfortunate enough not to earn enough to pay back the loan in about 30 years (that’s 83% of us), then we simply don’t have to pay it back anymore.

Knowing this, student loan debt doesn’t really behave like real debt. It’s more like a graduate tax or contribution you make for the funding you got towards your studies at university.

But, you might argue that there’s interest on your amount owing, and you don’t want to pay interest if you don’t have to. The good news is that the interest rate is so low compared to conventional debt interest that you’d be better off investing or saving the money and getting higher returns. It’s also important to prioritize contributing to an emergency fund in case you lose your job for instance, instead of paying back the student loan. If you voluntarily pay back the student loan in full and then realize you needed the money for something else, you won’t be able to get that money back and you may be forced to go into real debt if you borrow money conventionally.

Dan Lok’s Wealth Triangle: The Three Steps to Wealth

Dan Lok is a Chinese-Canadian entrepreneur and business mentor, and one of his ideas is of the Wealth Triangle. It consists of three sequential pillars for someone to follow in their journey towards financial confidence and freedom.

Here they are:

1. High-Income Skills

Learn a skill that has the potential to make you over $10,000/month or $100,000/year. Lok’s idea is if you’re going to trade your time for money, you may as well trade your time for a high amount of money. A high income skill could be in anything, and includes copywriting, sales, consulting, and social media marketing.

This was a large reason why I chose to learn sales in a commission-only compensation structure – it would give me the motivation to up-level my skills as quickly as possible, while being rewarded handsomely for any success. I’m happy to say that I reached and ticked off this pillar on the wealth triangle after two years of learning and applying sales skills.

The ideal here is to develop more than one high-income skill and bring them together to create even more confidence in your earning power.

If you’re not already practicing a high-income skill and you’re unhappy with your financial situation, this is where Lok suggests you start.

2. Scalable Business

So what happens when you’re already earning five figures a month and you’re ready to go to the next level? Lok’s next pillar is to create a scalable business. Not all businesses apply to this – Lok recommends avoiding businesses like restaurants that create lots of overhead costs or infrastructure. Scalable businesses leverage other people, systems and technology in order to create income from other people’s work. The idea of scalable business is to create cashflow in addition to your income.

In the industry I work in, I was able to start up a team of salespeople in order to leverage their skills instead of only relying on my own sales for income. This involved plenty of training, running sales meetings, and holding progress reviews. It’s definitely more of a challenge that just being responsible for yourself, but it can be more fulfilling if you bring a team along to succeed with you. The reason why it’s scalable is that the team can grow and the more experienced sales reps can become managers who recruit more reps too. The top sales managers in the industry I work earn millions per year.

However, Lok highlights that not everyone is cut out to start a scalable business. There can be risks of losing money, or carrying debt. It can be stressful. According to Lok, creating a scalable business is not essential for building wealth, and it is possible to become a multi-millionaire just from a mixture of high-income skill and the third pillar.

Lok reminds us that as we move onto building a scalable business, it’s important to skill be working on our high-income skill and generating income that way. If you’re just starting off with a scalable business, it’s unlikely that it will be immediately making more than your six-figure income, so keep utilizing your high-income skills to have the confidence of paying yourself, no matter what happens in your business. In my case, that meant going out and making my own sales while also managing other salespeople.

3. High-Return Investments

Lok defines a high-return investment as an investment that provides at least a 10 percent annual return, year in and year out. This is the best way to build your net-worth after you have at least developed your high-income skill. One example Lok gives of a high-return investment is real estate.

As good as a 10% annual return sounds, Lok recommends thinking more strategically – would this money get a better rate of return if I invested it into myself in training a high-income skill, or if I invested it in marketing for my scalable business? In my own life, I took advantage of reinvesting my money hundreds of times over into matched betting, a high-income skill I learned in 2015. At the time, I was saving for a trip to New Zealand and within six months of starting this “high-income skill”, I had earned over £15,000 for my trip, and actually started earning more through betting than I did with my regular job at the time. If I had instead put the savings I made from my low-wage job into a 10% investment vehicle, I would have come away with a tiny amount in comparison. The matched betting provided me with 500+% return, although I did have to spend time actively betting on my laptop.

Lok says that if you master the high-income skill portion of the Wealth Triangle, and invest it wisely, you can create a million dollar net worth in seven to 15 years if you’re able to keep your expenses in check.

The biggest reminder of the Wealth Triangle is that it is supposed to be used sequentially. Lots of people think about investing and starting businesses when they haven’t even harnessed any of their earning power yet. According to Lok, if you’re earning less than $10,000/month, hitting this consistently should be the main focus if your target is wealth. Trading your time for high dollars gives you a foundation that you can then move onto the second and third pillars. Sinking all your life savings into a business idea, like we see on Dragons’ Den, is a result of these entrepreneurs skipping the first stage of building up their high-income skills. When the Dragons inevitably say no, they are emotionally and financially bankrupt.

In summary: Build up a high-income skill, then work on a scalable business to create cashflow, and then invest in something with high returns to expand your net worth.

The Psychology of Money: Morgan Housel’s Finance Tips

Morgan Housel recently wrote The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. No matter how we think about it, managing our own money and trying to build wealth is a game of emotions. Here’s a summary of the main points:

Go out of your way to find humility when things are going right, and forgiveness/compassion when they go wrong. The journey of building wealth is based on risk and luck. Remind yourself that the journey of investing is filled with ups and downs and to be ready for that emotionally.

Less ego, more wealth. Building wealth is simply spending less than you earn. Richness is buying cars, houses and boats. Wealth is what you don’t see – it’s money saved/invested instead of spent. The hardest financial skill is to get the goalposts to stop moving – life isn’t any fun without any sense of “enough”.

Manage your money in a way that helps you sleep at night. If you’re finding that you can’t sleep at night because you’re risking too much investing, you need to rethink your strategy. You may know it’s the “right” strategy, but if you can’t manage it emotionally, you may need to accept a lower risk and lower return by holding a higher percentage of your net worth in cash, or choosing lower risk strategies.

If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon. Time is the most powerful force for growing your wealth. Be patient, and be in it for the long game like Ronald Read and Warren Buffett. In other words, just shut up and wait!

Become okay with a lot of things going wrong. You can be wrong half the time and still make a fortune. Having money in the market means you have to accept that on some days you may lose money, even as much as 30% or more of what you have invested. But if you can use the barbell strategy and invest in some assets with huge upside potential, you can still afford to be wrong most of the time while building wealth.

Use money to gain control over your time. Money means freedom. Being able to do what you want, when you want, with who you want is one thing that having money can bring.

Be nicer and less flashy. You may think people will like and respect you more based on your possessions, but in reality being more compassionate and kind works better. Make sure that when you’re buying possessions it’s for the right reasons – spending money to show people how much money you have is the fastest way to have less money.

Save. Just save. You don’t need a specific reason to save. Saving for something like a car or a down-payment for a house is good, but save as a default strategy too. Who knows what expenses can crop up as a surprise, wouldn’t it make more sense to be financially ready when they crop up?

Define the cost of success and be ready to pay it. The cost of success in investing is the uncertainty, the doubt, and the fear of losing some of your money. But if you want to play the game you need to see those things as a fee for participating. If you’re not willing to pay it, you may be better off just holding everything in cash and settling for a 0% return.

Worship room for error. You never want to be in a position where you could lose all your money, or losses in the market affecting the lifestyle that you live. If you lose a little you can still recover. If you lose it all, you have no money left, and you’ve been ejected from the game with no bankroll to buy back in. Avoid ruin at all costs.

Avoid the extreme ends of financial decisions. The more extreme your financial decisions, the more likely you may regret them if your goals and desires change at a later date. Good investing is less about making good decisions than it is about consistently not screwing up. You can afford not to be the best investor in the world, but you can’t afford to be a bad one.

You should like risk because it pays off over time. But you should be afraid of too much risk that would ruin your chances of winning the overall game.

Define the game you’re playing. Remember that everyone has their own unique financial goals based on the lifestyle and life goals they have. You don’t even necessarily have to compare yourself to overall market returns either. Just choose a strategy that you’d be happy with, without looking at other people and what they’re doing.

Respect the mess. There’s no single right answer in building wealth. Just find out what works for you.

Want to read more on investing? Read about Benjamin Graham’s value investing philosophy.

The Intelligent Investor: Insights From Benjamin Graham

“Don’t tell me what you think, tell me what you have in your portfolio.”

Nassim Nicholas Taleb

I recently read The Intelligent Investor by the legendary value investor Benjamin Graham. Known as the most complete guide to investing ever written, his wisdom has stood the test of time. His legacy lives on not only in this book, but in his students such as the mighty Warren Buffett.

The book is extensive and can be tough to digest at times, but it was well worth reading and I learned a lot.

One of the key lessons I learned is that you cannot sensibly become an enterprising investor unless you are willing to read a company’s annual report. An enterprising investor is one that picks specific stocks and buys them for a price that they deem is good value. The only way they can do that reliably is by perusing through several years’ worth of annual reports with a fine-toothed comb, looking for information to judge whether the company is undervalued or overvalued in the stock market. Even then they could still be wrong and end up losing money.

The good news is that I can become what’s termed a “defensive investor”. It doesn’t sound nearly as cool, and there’s no longer the possibility of bragging to your friends about picking winning stocks, but it is much less risky and takes much less time. Defensive investors usually buy a combination of low-cost index funds (groups of stocks that follow the entire market such as The Dow Jones Industrial Index or the Standard & Poors 500 Index) and bonds from governments and companies.

I was 15 years old the first time I was introduced to the idea of the stock market in my Statistics class in school. We were asked to go on the Internet and pretend we were investing in some stocks. I looked on the Dow Jones list and I remember just choosing the companies that had the green numbers next to them – the stock price was going up. If a stock price was going up, I could sell the stock a week later and win the competition of getting the highest profit in my class. But I was in for a shock.

The next week, I logged back in to find that not only had I not got the highest profit in the class, I had lost money! Unfortunately this is the reality for many wannabe traders who don’t do their homework.

That formative experience gave me a couple of conclusions – The stock market doesn’t extrapolate well, and I don’t understand the stock market. But there’s no shame in that, very few people do. No person on Earth knows what the market will do next.

One of the biggest lessons in The Intelligent Investor is the importance of not losing money. It takes a lot more time to recoup losses than it does to increase the investment by the same amount. People that lost 90%+ of their money when the dot-com bubble burst in 2000 still would not have been able to break-even over 20 years since. So how can you be in the market as a defensive investor but lose as little as possible?

Graham recommends a combination of bonds and index funds in a 50-50 split. If the investor is feeling bullish (optimistic) about the market, he can go up to a maximum of 75% index funds. If he is feeling bearish (pessimistic), he can increase the bonds proportion up to 75% instead. The diversification of the bonds and having shares in all the companies in an index such as the S & P 500 will shelter the investor from undue losses.

In March 2020 the stock market dropped significantly and the market value of my investments dropped several thousand dollars. With a global pandemic looming and plenty of uncertainty, I took most of my invested money out of the market. I had turned an “unrealized” paper loss into a “realized” loss. This turned out to be a big mistake, as I missed the gains I could have had on the subsequent recovery of the market to an even higher level than before.

The biggest lesson I learned from that experience is that my risk tolerance wasn’t as high as I thought it was, and it had changed over the years as my investment fund got larger. I had sensed this in the back of my mind for months on end, but I didn’t do anything about it because the market was steadily going up at the time.

Another lesson was that the more often I check my investments, the worse decisions I will make. I use a robo-investing app that rebalances my portfolio and gives me the option to automate my contributions to my fund, so there’s no real reason I should be logging in if I don’t need to. Checking investments frequently is the equivalent to appraising your house all the time, even if you don’t plan to ever sell it.

Another important thing to consider is how much money do I need in savings before I put money into investments instead? Money in savings accounts will track the rate of inflation at best, and at worst it could be losing value if inflation rates happen to be high. Over the long-term, money invested will beat the rate of inflation and will be worth more when you eventually decide to use it. This doesn’t mean that all spare money should go into investments. If you are saving for a deposit on a house, it’s better off in a savings account. Emergency funds (12-24 months of expenses) should also be in savings in case of a loss of job or a sudden large expense.

One insight The Intelligent Investor brought to me was that everyone that invests is obsessed with beating the market. But what’s actually important is asking: “Do I have enough money for my life goals?” It can be so easy to get lost in the numbers and forget what you’re actually wanting in life.

Since starting to use a robo-investing app over the last couple of years, I have noticed that it is way more fun to save and invest. Even if (or should I say when?) I end up losing a significant proportion of my portfolio again, I can be grateful in years to come that I took the conscious decision to take responsibility of my finances.