Compound interest and retirement

This article is a repost promoting content originally published elsewhere. See more things Dan's reposted.

Compound interest and retirement (datagenetics.com)

Bert put aside three and a half times as much money as Alf, but by delaying he has a smaller pension pot.

Spectacular example of why when saving (e.g. for a pension) it’s often more important to save early than it is to save lots. So get saving! Even with an understanding of compound interest, these numbers can surprise you.

The only time better than today would have been yesterday, and you already missed that boat.

Supermarket “price match” deals are marketing genius

It’s been almost five years since Sainsbury’s supermarkets pioneered the “brand match” idea, which rivals Tesco and Asda later adopted into their own schemes, and I maintain that it’s one of the cleverest pieces of marketing that I’ve ever seen. In case you’ve not come across it before, the principle is this: if your shopping would have been cheaper at one of their major competitors, these supermarkets will give you a voucher for the difference right there at the checkout. Properly advertised (e.g. not in ways that get banned for being misleading), these schemes are an incredibly-compelling tool: no consumer should say no to getting the best possible prices without having to shop around, right?

A Sainsbury's Brand Match voucher worth 62p.
This voucher implies that I’d have saved 62p by shopping elsewhere. But that’s not the whole story.

But it’s nowhere near as simple as that. For a start, the terms and conditions (Asda, Sainsbury’s, Tesco) put significant limitations on how the schemes work. You need to buy at least a certain number of items (8 at Asda, 10 at the other two). Those items must be directly-comparable to competitors’ items: which basically means that only branded products count, but even among them, the competitor must stock the exact same size or else it doesn’t count, even if it would have been cheaper to buy two half-sized products there. There are upper limits to the value of the vouchers (usually £10) and the number that you can use per transaction or per month. “Buy X get Y free” offers are excluded. And there’s a huge list of not-compared products which may include batteries, toys, DVDs, some alcoholic drinks, cosmetics, homeware, flowers, baby formula, light bulbs, books, and anything (even non-medicines) from the pharmacy aisle.

Tesco Price Promise voucher worth 11p off my next shop.
A whole 11p off my next shop? That’s absolutely worth me carrying this piece of paper around in my wallet and trying not to lose it for a week.

But even if it only applies to some of your shopping – the stuff that’s easy to directly compare – it’s still a good deal, right? You’re getting money back towards what you would have saved if you’d have gone up the road? Not necessarily. Let us assume that on average the prices of these three supermarket giants are pretty much the same. Individual products might each be a little more expensive here and a little cheaper there, but if you buy a large enough trolley-load you’re not going to notice the difference. Following me so far? What does this mean for the voucher: it means that it no longer remotely represents what you would have saved if you’d actually been “shopping around”. Let’s take a concrete example:

Photo courtesy Johnathan Harford, used under a Creative Commons license.
A typical basket at any one of these supermarkets will, on average, come to about the same price… even if individual items vary wildly.

Suppose that this is my somewhat-eccentric shopping list (I wanted to select a variety of comparable branded products), and I’m considering shopping at either Sainsbury’s or Tesco:

  • Mozzarella
  • Fish fingers
  • Clover spread
  • Whole milk
  • Crunch corner yoghurts
  • Fromage frais
  • Cadbury Mini Rolls
  • Frozen chips
  • Frozen petit pois
  • Goodfella’s deep pan pizza
  • Dough balls
  • Chocolate-dipped flapjacks
  • Dry white wine
  • Bagels
  • Multigrain wraps
  • Red Bull multipack
  • Angel Slices
  • Cheerios
  • Windolene
  • Cornettos

Not too unreasonable, right? I’ve made a spreadsheet showing my working, where you’ll see today’s prices for each of these items (along with the actual brands and package sizes I’ve selected), if you’d like to check my maths, because here comes the clever bit.

Sainsbury's Basics range baked beans and coleslaw
These products don’t count as comparable. And personally, I’m not sure that “basics”-range coleslaw is likely to even count as ‘food’.

Based on my calculation, taking my imaginary shopping list to Sainsbury’s will ultimately cost me £52.85. Taking it to Tesco will cost me £54.13. Pretty close, right, and I’m not likely to care about the difference because Tesco would give me a £1.28 voucher off my next shop which makes up for the difference (note that Sainsbury’s wouldn’t reciprocate in kind if it were the other way around, after a policy change they made late last year). But that’s not actually a true representation of the value of ‘shopping around’. As my spreadsheet shows, if I were to buy each item on my list at the supermarket that was cheapest, it’d only cost me a total of £43.75: that’s a saving of £9.10 (or about 17% off my entire shop) compared to the cheapest of these supermarkets. These schemes don’t give you a real “best of all worlds”. Instead, they give you, at most, a “best of all worlds, assuming that you’re still going to be lazy enough to only shop in one place”.

Ruth and JTA shopping in advance of Murder At The Magic College.
When you’re buying this much shopping, you’re unlikely to want to go to two different supermarkets to do it, however much money it might save you.

If you’re particularly devious of mind, you can exploit this. For example, suppose I went to Tesco but when I reached the checkout I split my shopping into two transactions. The first transaction contains the frozen goods, milk, wine, dough balls, flapjacks, and mini rolls. This comes out at £33.73, which is £10.38 more than Sainsbury’s would charge me for the same goods. Tesco therefore gives me a £10 voucher, which I immediately use on the second batch of shopping: the one which contains goods that are cheaper than their Sainsbury’s equivalents. The total price of my shopping: £44.13 – only 38p more than if I’d gone to both supermarkets and bought only the best-value goods from each (the 38p discrepancy comes from the fact that Tesco won’t ever give you a voucher worth more than £10, no matter how much you’re losing out).

Photo by 'alisdair' on Flickr. Used under a Creative Commons license.
“I’d like to run these through as two transactions, please.”

It’s not even that hard to do. Obviously, somebody’s probably written an app for it, but even if you’re just doing it by guesswork you can get a better result than just piling all of your shopping onto the conveyor belt together. Simply put the things which seem like a good deal (all of the discounted products, plus anything that feels like it’s good value) at one end of your trolley, and unload those things last. Making sure that you’ve got at least ten items on the conveyor, ‘split’ your shopping somewhere towards the beginning of these items. Then take any voucher you get from your first load, and apply it to the second.

It’s pretty easy, so long as you don’t mind looking like a bit of a tool at the checkout.

A Sainsbury's Brand Match voucher advising that my shopping was 1p cheaper than the competition. In total. Photo with thanks to Brett Jordan, used under a Creative Commons license.
Well that makes it all worthwhile then, doesn’t it?

But to most people, most of the time, this is nothing more than a strong and compelling piece of marketing. Either you get reminded that you allegedly “saved money”, on a piece of paper that probably goes into your wallet and helps to combat buyer’s remorse, or else we get told that we paid a particular amount more than we needed to, and are offered the difference back so long as we return to the same store within the next fortnight. Either way, the supermarket wins your loyalty, which – for a couple of pence on each transaction (assuming that the customer doesn’t lose the voucher or otherwise fail to get an opportunity to use it) – is a miniscule price to pay.

Solar Power, part 2

At the very end of last year, right before the subsidy rate dropped in January, I had solar panels installed: you may remember that I blogged about it at the time. I thought you might be interested to know how that’s working out for us.

Solar panels on our roof.
A power plant, right on top of our house. It’s very small – like, a “13” on Power Grid – but it’s ours.

Because I’m a data nerd, I decided to monitor our energy usage, production, and total cost in order to fully understand the economic impact of our tiny power station. I appreciate that many of you might not be able to appreciate how cool this kind of data is, but that’s because you don’t have as good an appreciation of how fun statistics can be… it is cool, damn it!

This chart, for example, shows our energy usage in KWh of each of gas and electricity for the last 8 months.
This stacked area chart, for example, shows our energy usage in KWh of each of gas and electricity for the last 8 months.

If you look at the chart above, for example (click for a bigger version), you’ll notice a few things:

  • We use a lot more KWh of gas than electricity (note that’s not units of gas: our gas meter measures in cubic feet, which means we have to multiply by around… 31.5936106… to get the KWh… yes, really – more information here), but electricity is correspondingly 3.2 times more expensive per KWh – I have a separate chart to measure our daily energy costs, and it is if anything even more exciting (can you imagine!) than this one.
  • Our gas usage grows dramatically in the winter – that’s what the big pink “lump” is. That’s sort-of what you’d expect on account of our gas central heating.
  • Our electricity usage has trended downwards since the beginning of the year, when the solar panels were installed. It’s hard to see with the gas scale throwing it off (but again, the “cost per day” chart makes it very clear). There’s also a bit near the end where the electricity usage seems to fall of the bottom of the chart… more on that in a moment.
Solar panels pay for themselves by (1) powering your appliances, thus meaning you buy less electricity from the grid, (2) selling electricity that is generated but not used back to the grid, and (3) through a subsidy scheme that rewards the generation of green electricity.
Solar panels (slowly) pay for themselves in three different ways. People often find it surprising that there aren’t only one or two.

What got me sold on the idea of installing solar panels, though, was their long-term investment potential. I had the money sitting around anyway, and by my calculations we’ll get a significantly better return-on-investment out of our little roof-mounted power station than I would out of a high-interest savings account or bond. And that’s because of the oft-forgotten “third way” in which solar panelling pays for itself. Allow me to explain:

  1. Powering appliances: the first and most-obvious way in which solar power makes economic sense is that it powers your appliances. Right now, we generate almost as much electricity as we use (although because we use significantly more power in the evenings, only about a third of what which we generate goes directly into making our plethora of computers hum away).
  2. Selling back to the grid (export tariff): as you’re probably aware, it’s possible for a household solar array to feed power back into the National Grid: so the daylight that we’re collecting at times when we don’t need the electricity is being sold back to our energy company (who in turn is selling it, most-likely, to our neighbours). Because they’re of an inclination to make a profit, though (and more-importantly, because we can’t commit to making electricity for them when they need it: only during the day, and dependent upon sunlight), they only buy units from us at about a third of the rate that they sell them to consumers. As a result, it’s worth our while trying to use the power we generate (e.g. to charge batteries and to run things that can be run “at any point” during the day like the dishwasher, etc.) rather than to sell it only to have to buy it back.
  3. From a government subsidy (feed-in tariff): here’s the pleasant surprise – as part of government efforts to increase the proportion of the country’s energy that is produced from renewable sources, they subsidise renewable microgeneration. So if you install a wind turbine in your garden or a solar array on your roof, you’ll get a kickback for each unit of electricity that you generate. And that’s true whether you use it to power appliances or sell it back to the grid – in the latter case, you’re basically being paid twice for it! The rate that you get paid as a subsidy gets locked-in for ~20 years after you build your array, but it’s gradually decreasing. We’re getting paid a little over 14.5p per unit of electricity generated, per day.
A graph showing the number of units per day we've generated, peaking during that  sunny spell in late April.
Late April was bright and sunny and we were able to generate up to 19 units per day (for contrast, we use around 12 units per day), but May has so-far been rainy and grey and we’ve made only about 13 units per day.

As the seasons have changed from Winter through Spring we’ve steadily seen our generation levels climbing. On a typical day, we now make more electricity than we use. We’re still having to buy power from the grid, of course, because we use more electricity in the evening than we’re able to generate when the sun is low in the sky: however, if (one day) technology like Tesla’s PowerWall becomes widely-available at reasonable prices, there’s no reason that a house like ours couldn’t be totally independent of the grid for 6-8 months of the year.

Two SSE engineers head back to their van.
These guys came and replaced our electricity meter, because it was… umm… running backwards.

So: what are we saving/making? Well, looking at the last week of April and the first week of May, and comparing them to the same period last year:

  1. Powering appliances: we’re saving about 60p per day on electricity costs (down to about £1.30 per day).
  2. Selling back to the grid: we’re earning about 50p per day in exports.
  3. From a government subsidy: we’re earning about £2.37 per day in subsidies.

As I’m sure you can see: this isn’t peanuts. When you include the subsidy then it’s possible to consider our energy as being functionally “free”, even after you compensate for the shorter days of the winter. Of course, there’s a significant up-front cost in installing solar panels! It’s hard to say exactly when, at this point, I expect them to have paid for themselves (from which point I’ll be able to use the expected life of the equipment to more-accurately predict the total return-on-investment): I’m planning to monitor the situation for at least a year, to cover the variance of the seasons, but I will of course report back when I have more data.

Electricity meter with red light showing.
Our new electricity meter, which replaced the old one – one of those with a “wheel”. The red light indicates that fraud has been detected. Yeah, about that…

I mentioned that the first graph wasn’t accurate? Yeah: so it turns out that our house’s original electricity meter was of an older design that would run backwards when electricity was being exported to the grid. Which was great to see, but not something that our electricity company approved of, on account of the fact that they were then paying us for the electricity we sold back to the grid, twice: for a couple of days of April sunshine, our electricity meter consistently ran backwards throughout the day. So they sent a couple of engineers out to replace it with a more-modern one, pictured above (which has a different problem: its “fraud light” comes on whenever we’re sending power back to the grid, but apparently that’s “to be expected”).

In any case, this quirk of our old meter has made some of my numbers from earlier this year more-optimistic than they might otherwise be, and while I’ve tried to compensate for this it’s hard to be certain that my estimates prior to its replacement are accurate. So it’s probably going to take me a little longer than I’d planned to have an accurate baseline of exactly how much money solar is making for us.

But making money, it certainly is.

How my poly family organises our finances (aka. means-assessed money management for multi-adult households). [x-post /r/polyamory]

This self-post was originally posted to /r/polyfamilies. See more things from Dan's Reddit account.

by an author

Hi /r/polyfamilies. After much pestering by people who know us, I finally got around to writing about how my polycule and I organise our finances, and I thought that you might be interested to. The whole thing’s described behind that link, but I didn’t want to be seen to be gathering karma or self-promoting, so I thought I’d make a text post to briefly explain it:

Us: My partner, her husband and I are three adults sharing a home (plus, this year, their baby girl!). We rented together for several years, and now we’ve got our first mortgage together. We wanted to come up with a fair way to share our costs (rent/mortgage, bills, shopping, etc.) that wasn’t just “split it three ways”, which didn’t seem fair given that we all earn different amounts – variable even from month to month as my income fluctuates depending on how many days I spend looking after the baby and what kind of freelance work I get, and as my partner gradually returns to work (part-time for now) after her recent maternity leave.

Our system: We use a system of 100% means-assessment based on gross income. So in other words, if Alice, Bob and Chris live together, and Alice earns twice as much as Bob, then she’d be expected to pay twice as much towards their collective household costs, too. And somebody who didn’t earn anything wouldn’t be expected to contribute anything. We didn’t always use 100%: early on, we used 75% – in other words, a quarter of our costs would be simply “split three ways”, and three-quarters of our costs would be split in accordance with means-assessment. Make sense?

It’s really easy: The good news is, it’s really easy to do. I’ve made a spreadsheet on Google Docs that’s a simplified version of our sheet, and you’re welcome to take a copy and use it yourself. Just put in everybody’s salary and what percentage “means assessment” you want to use (0% means ‘simply split X ways’; 100% means ‘split completely according to means’; anything in-between is a balance of the two). Then put in each cost and who paid it (Eve paid the rent, Alice paid for this week’s shopping, Bob paid for last week’s shopping, etc.) and it’ll tell you who owes money to whom in order to square everything up again.

It’s universal: You don’t even have to be a polyfamily to make use of this, I reckon. It works with as little as two people, and it’d work with any household of multiple adults, if you wanted it to. It provides a simple, fair, and slightly-socialist way of splitting up the living costs of a group of people who live together and trust one another.

Let me know what you think!

tl;dr: My polycule and I use a use a spreadsheet to divide up our monthly costs in accordance with our relative incomes, which then tells us who owes money to whom at the end of each month.

How my poly family organises our finances (aka. means-assessed money management for multi-adult households).

This self-post was originally posted to /r/polyamory. See more things from Dan's Reddit account.

by an author

Hi /r/polyamory. After much pestering by people who know us, I finally got around to writing about how my polycule and I organise our finances, and I thought that you might be interested to. The whole thing’s described behind that link, but I didn’t want to be seen to be gathering karma or self-promoting, so I thought I’d make a text post to briefly explain it:

Us: My partner, her husband and I are three adults sharing a home (plus, this year, their baby girl!). We rented together for several years, and now we’ve got our first mortgage together. We wanted to come up with a fair way to share our costs (rent/mortgage, bills, shopping, etc.) that wasn’t just “split it three ways”, which didn’t seem fair given that we all earn different amounts – variable even from month to month as my income fluctuates depending on how many days I spend looking after the baby and what kind of freelance work I get, and as my partner gradually returns to work (part-time for now) after her recent maternity leave.

Our system: We use a system of 100% means-assessment based on gross income. So in other words, if Alice, Bob and Chris live together, and Alice earns twice as much as Bob, then she’d be expected to pay twice as much towards their collective household costs, too. And somebody who didn’t earn anything wouldn’t be expected to contribute anything. We didn’t always use 100%: early on, we used 75% – in other words, a quarter of our costs would be simply “split three ways”, and three-quarters of our costs would be split in accordance with means-assessment. Make sense?

It’s really easy: The good news is, it’s really easy to do. I’ve made a spreadsheet on Google Docs that’s a simplified version of our sheet, and you’re welcome to take a copy and use it yourself. Just put in everybody’s salary and what percentage “means assessment” you want to use (0% means ‘simply split X ways’; 100% means ‘split completely according to means’; anything in-between is a balance of the two). Then put in each cost and who paid it (Eve paid the rent, Alice paid for this week’s shopping, Bob paid for last week’s shopping, etc.) and it’ll tell you who owes money to whom in order to square everything up again.

It’s universal: You don’t even have to be a polyfamily to make use of this, I reckon. It works with as little as two people, and it’d work with any household of multiple adults, if you wanted it to. It provides a simple, fair, and slightly-socialist way of splitting up the living costs of a group of people who live together and trust one another.

Let me know what you think!

tl;dr: My polycule and I use a use a spreadsheet to divide up our monthly costs in accordance with our relative incomes, which then tells us who owes money to whom at the end of each month.

Means-Assessed Household Finances (Socialism Begins At Home!)

For the last four years or so, Ruth, JTA and I (and during their times living with us, Paul and Matt) have organised our finances according to a system of means-assessment. I’ve mentioned it to people on a number of ocassions, and every time it seems to attract interest, so I thought I’d explain how we got to it and how it works, so that others might benefit from it. We think it’s particularly good for families consisting of multiple adults sharing a single household (for example, polyamorous networks like ours, or families with grown children) but there are probably others who’d benefit from it, too – it’s perfectly reasonable for just two adults with different salaries to use it, for example. And I’ve made a sample spreadsheet that you’re welcome to copy and adapt, if you’d like to.

How we got here

JTA and Ruth at the supermarket after shoping before Murder... At The Magic College
That’s a long receipt!

After I left Aberystwyth and Ruth, JTA, Paul and I started living at “Earth”, our house in Headington, we realised that for the first time, the four of us were financially-connected to one another. We started by dividing the rent and council tax four ways (with an exemption for Paul while he was still looking for work), splitting the major annual expenses (insurance, TV license) between the largest earners, and taking turns to pay smaller, more-regular expenses (shopping, bills, etc.). This didn’t work out very well, because it only takes two cycles of you being the “unlucky” one who gets lumbered with the more-expensive-than-usual shopping trip – right before a party, for example – before it starts to feel like a bit of a lottery.

Our solution, then, was to replace the system with a fairer one. We started adding up our total expenditures over the course of each month and settling the difference between one another at the end of each month. Because we’re clearly raging socialists, we decided that the fairest (and most “family-like”) way to distribute responsibility was by a system of partial means-assessment: de chacun selon ses facultés.

JTA and Paul pack bags at the checkout, before Christmas 2010.
Another enormous shopping trip.

We started out with what we called “75% means-assessment”: in other words, a quarter of our shared expenditures were split evenly, four ways, and three-quarters were split proportionally in accordance with our gross income. We arrived at that figure after a little dissussion (and a computerised model that we could all play with on a big screen). Working from gross income invariably introduces inequalities into the system (some of which are mirrored in our income tax system) but a bigger unfairness came – as it does in wider society – from the fact that the difference between a very-low income and a low income is significantly more (from a disposable money perspective) than the difference between a low and a high income. This was relevant, because ‘personal’ expenses, such as mobile phone bills, were not included in the scheme and so we may have penalised lower-earners more than we had intended. On the other hand, 75% means-assessment was still significantly more-“communist” than 0%!

When I mentioned this system to people, sometimes they’d express surprise that I (as one of the higher earners) would agree to such an arrangement: the question was usually asked with a tone that implied that they expected the lower earners to mooch off of the higher earners, which (coupled with the clearly false idea that there’s a linear relationship between the amount of work involved in a job and the amount that it pays) would result in a “race to the bottom”, with each participant trying to do the smallest amount of work possible in order to maximise the degree to which they were subsidised by the others. From a game theory perspective, the argument makes sense, I would concede. But on the other hand – what the hell would I be doing agreeing to live with and share finances with (and then continuing to live with and share finances with) people whose ideology was so opposed to my own in the first place? Naturally, I trusted my fellow Earthlings in this arrangement: I already trusted them – that’s why I was living with them!

Louis Blanc
Louis Blanc had the right idea, but his idealism was hampered by the selfishness inherent in any sufficiently-large group. Had he brought socialism to his house, rather than his country, he might have felt more successful.

How it works

We’ve had a few iterations, but we eventually settled on a system at a higher rate of means-assessment: 100%! It’s not perfect, but it’s the fairest way I’ve ever been involved with of sharing the costs of running a house. I’ve put together a spreadsheet based on the one that we use that you can adapt to your own household, if you’d like to try a fairer way of splitting your bills – whether there are just two of you or lots of you in your home, this provides a genuinely equitable way to share your costs.

Means-assessed household finances sample sheet. Click to see the actual sheet.
Click on the sheet to see a Google Drive document that you can save a copy of and adapt to your own household.

The sheet I’ve provided – linked above – is not quite like ours: ours has extra features to handle Ruth and I’s fluctuating income (mine because of freelance work, Ruth’s because she’s gradually returning to work following a period of maternity leave), an archive of each month’s finances, tools to help handle repayments to one another of money borrowed, and convenience macros to highlight who owes what to whom. This is, then, a simplified version from which you can build a model for your own household, or that you can use as a starting point for discussions with your own tribe.

Start on the “People” sheet and tell it how many participants your household has, their names, and their relative incomes. Also add your proposed level of means-assessment: anything from 0% to 100%… or beyond, but that does have some interesting philosophical consequences.

Then, on the “Expenses” sheet, record each thing that your household pays for over the course of each month. At the bottom, it’ll total up how much each person has paid, and how much they would have been expected to pay, based on the level of your means-assessment: at 0%, for example, each person would be expected to pay 1/N of the total; at the other extreme (100%), a person with no income would be expected to make no contribution, and a person with twice the income of another would be expected to pay twice as much as them. It’ll also show the difference between the two values: so those who’ve paid less than their ‘share’ will have negative numbers and will owe money to those who’ve paid more than their share, indicated by positive numbers. Settle the difference… and you’re ready to roll on to the next month.

Now you’re equipped to employ a (wholly or partially) means-assessed model to your household finances. If you adapt this model or have ideas for its future development, I’d love to hear them.