Wednesday, 12 October 2016

Should I continue to add to the Investment Pot ?


From the last few years of monitoring, I can see I've been saving around 50% of my income, most of which is now added to the pot on a monthly basis.

At current valuations, the pot has grown to the point where my monthly additions increase the pot value by only a fraction of a percent each time.    This is well within the expected volatility range of the combined investment pot, even in the most stable of market conditions.

So does it make any sense to continue to add to the pot, or should I put a stop to the monthly contributions and just accept the market return without adding fresh money ?

Now, I'm not about to start wild spending on things I don't need, so you might well ask what's the advantage here, since there's a monthly surplus anyway and therefore doesn't it count as savings if it's not being spent ?

Well, not necessarily....   I actually have control over my own income, and for the past few years I've been taking a fixed amount of money out of the company which, as a side effect, has allowed me to invest around 50% of it.   Until recently, there were no financial penalties associated with this strategy, and indeed it was beneficial because taking money out of a company without excessive taxation is the aim of most established business owners.

However, the rules have now changed with the introduction of the new dividend tax, so it might make more sense to reduce the total amount taken from the company, simply by taking an axe to the dividend and halving my income.  

This will have the effect of reducing my personal tax bill since the annual dividend component will be much lower, and it will also increase the length of time I could continue to withdraw funds from the company - things have been very slack over the summer months, so the worst-case scenario is that the company could have zero revenues going forward, although I don't really expect this will be the case.  

So in effect, reducing my income is still a form of personal savings, I'd just be postponing the withdrawals. 

Maybe it's worth an experiment - I can't really see too much of a downside here, because I could always reinstate the full dividend at any time to get me back to my current income level, albeit with an increased tax liability.  This might be necessary if the markets should really tank, a la 2008, and it made sense to pile in again ...

3 comments:

  1. Will the money you leave in the business continue to grow? If not is it becoming less valuable?

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  2. No, I wouldn't have said it would grow in real terms at the interest rate I can get in a business savings account, but I don't necessarily share the FI community's typical view that holding cash for longer periods is a bad thing.

    Return of capital is as important to me as return on capital...

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