Some anxiety

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The past three weeks have been rather difficult for me. Despite my genuine excitement at being able to ‘see the light at the end of the tunnel’ for my debts, some external forces have upset this happy FIRE ship.

On Tuesday shortly before Easter, when I arrived at my company’s office, there was a bouncer on the door and a notice saying we could not go in. Rather perturbed, myself, the Chairman and other employees didn’t really know what was going on.

I work for a small consultancy business with big ambitions, and one that has taken some big risks. Apparently, historic projects had lost some money and the company had not paid the rent in a misguided attempt to juggle cash flow. Big mistake; the landlord had kicked us out.

After several days of working from home, we were allowed back in at greatly unfavourable terms and I believe the company had to pay rent in advance.

Clearly, this caused a great deal of anxiety and stress for myself and everyone else. The kind of thoughts running through everyone’s head were did the company have enough money to pay bills? Would we be paid? Was the company going bust? They assured us it would be fine. I wasn’t convinced.

I am delighted to say that I got paid on the 30 April and I am feeling a bit better about it all. I may still look elsewhere for a job, but as I have just won my first new client, I am reluctant to pack in all that hard work. I left the security of big corporates to experience risk and reward and while I never expected to hit these lows, it is not always going to be plain sailing.

This remains an ongoing saga.

The fall out

What does this mean for my journey to financial independence? The answer to that question is threefold.

Firstly, It has somewhat knocked my confidence in what I am doing. The aggressive approach to paying off my debts effectively is pushing me to my limit. By the end of the month, I had £5 left in my account. I am refusing to spend on a credit card or take an overdraft. I made it to the end without breaking or missing any bills, but it didn’t feel great. I desperately needed the paycheck to stay afloat.

Secondly, I knew that using all my savings to pay off my debts was risky as it left no room for manoeuvre. I only have £200 in my savings which is not very much at all. I was feeling good as I was making such fine progress in paying off my debts, but it is a stark reminder to leave enough for emergencies. I had thought about this and reasoned that if something bad happened, I could use my credit card. However, my mentality has changed so much since starting FIRE that the thought of adding to my credit card and undoing the good work so far almost made me feel ill.  Perhaps leaving a months salary in the bank may have been smarter and letting the process take a couple months longer might have been a better move.

Thirdly, and most importantly, the whole episode has made me more determined to succeed at FIRE. The timing of this event was particularly bad as I have taken a big risk to clear debt leaving me with no reserves, but if this happened in 12 months time, I would have a large cushion of savings and investments on which to fall back. That thought alone is motivation for me to keep going. It is the quintessential reason that I am doing this so that I don’t need to rely on my job and other people who may be inept at running a business, for my livelihood.

To conclude, it seems that in taking a risk to clear my debts, I’ve accidentally put myself in the exact position that FIRE aims to get me out of. I always viewed this phase as the most painful part of gaining FI and it has been more painful than expected for reasons both within and outside of my control. I will persevere, but perhaps with more caution until I have a significant buffer behind me.

Housing in London

London, Londra, Londres. What a city. Home of The City, Big Ben and Buckingham Palace. Hub of culture with galleries, museums and stunning architecture. Home to culinary delights and thriving nightlife. It is indeed a great place to live, but I’m not alone in that view.

The result of this popularity is many, many, people arrive from around the UK, Europe and the wider World come to experience what the exciting cultural melting pot has to offer.

My girlfriend came from Melbourne, the world’s most livable city for seven years running, to live in this city. I have many friends here from Spain, Hong Kong, Sweden, and the USA who love this city. I love this city and have lived here for 10 years in total (I myself came from Scotland to live here).

The downside to all this is of course that it is expensive to live in London. No shocks there I hear you say. However, what does this mean for my ambitions for financial independence?

High costs

I have been reading Mr Money Moustache’s (MMM) blog this weekend and I note that he lives in a rather dreary small town in the middle of nowhere in America. Although I love his blog, I am in no way ready to move to a place without the benefits of a world-class city.

To live in the UK in a similar place, I believe one would have live in a small suburb of Leeds or Norwich.

It led me to question, is my love of London hindering my development towards financial freedom?

MMM’s article points out, and rightly so, that your house is a place to live and not an investment. I have taken that view for many years now, but at the same time have benefitted from London’s surging property prices. I now have around a 60/40 ratio of debt to equity ratio.

MMM extolls the benefits of reducing costs to a minimum. Again, I completely agree and I am still on that journey and have made good progress. I was doing this before I’d heard of FIRE as I was simply broke for some time. I will continue to seek savings.

My elephant in the room is the cost of my mortgage and service charges on my flat.

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What can I do?

I could move out and sell my flat. The main issue here is I will have to rent or buy somewhere else. I believe renting a similar place would now be more expensive than paying my mortgage. I could go back to share housing, but I’m going to reference MMM’s article that a house is meant to make you happy and I’m not sure that this would achieve that! I’m 35 and while I loved sharing a house in my twenties, there is value in having my own place.

Having said that, I rent out my spare room for a few nights during the week to a friend. That nets me £500/month which helps me pay my £838 mortgage. The income is tax-free on the ‘rent a room scheme’ the UK government runs. Apparently, this is called ‘house hacking’. I did not realise this until recently either so well done me as I’ve been doing it for 5 years.

I have £350 service charges per month this year so still, suffer massive expense. I hope this will reduce back to something more reasonable next year.

I remortgaged last year to the lowest possible level at the time so I think that I am getting good value (but one I would highly recommend you do yourself).

My girlfriend moved into my flat in November 2018. and that too has been great, but it has the plus side of saving us both money. It’s allowed me to seriously pay off some debt, and also to allow her to fulfil her ambition of being a yoga teacher by paying for the expensive training.

However, today, I am wondering what more I can do. At some point, I may want to have a family and we may need to move to a bigger place. I can’t stomach the idea of getting an even larger mortgage to make that move to a bigger flat or a house (We could manage up to £650,000 which would mean a large 2 bed flat in the area we live in or a shitty house out in the sticks). I won’t even mention the Stamp Duty tax I would pay on that… Too soon for that.

I think I will stay put for now and find ways to reduce and reach the % savings I want. MMM’s article on the percentage you need to save is mind-blowing in its simplicity and is what is leading me to improve my ‘ratio’. If I stuck to my budget I could get about 46% presently, so much room for improvement. Once I sell my car I could get up to 55% (ok I admit I’m dragging my feet on that one!).

The biggest expense I currently have is my home and therefore reducing this will increase my percentage by the largest margin. Perhaps the exercise of exploring options has been useful to see that I actually have an OK deal. Perhaps it is more the exercise of patience on my part that is the real thing I need to do. Either way, I would probably have to do something drastic to make a significant difference. The dramatic thing may be a step too far (for me).

I would really appreciate any ideas from the FIRE community to help me with this conundrum.

 

 

Monthly update April 2019

I have been quite busy the past few weekends so have not had time to update my blog. After doing my calculations on the best way forward with paying off my mortgage or investing  (Calculations and calibrations ), I felt much better and have a direction to divert my efforts to post becoming debt free.

Last weekend I paid £1500 onto my credit card bringing the balance down to £3300. I decided not to go for the full £2000 as my lodger has not paid his rent yet (yes a continual problem – he does pay it but never on time!!). Again, the purpose of this was actively managing cash flow so I don’t need to spend on a credit card and can live off actual money in my account. Remember, I have deactivated my overdraft to prevent me from continually dipping into the red.

By putting constraints on my spending, I initially found it scary as I had become used to having money (debt) available no matter what. The end of the month seemed a long way off.  I now realise I was paying to have that ‘piece of mind’ which was actually just stress as I kept having a negative balance. The encouraging thing is I know it is temporary and I am going to get out of this rut and will have savings in the next few months.

Assets:

Flat: £450,000

Pension 1: £96,990

Pension 2: £4,506

Pension 3: £518

Investment: £1,800

ETF: £1007

Savings: £300

Debts: £3300

Mortgage: £259,000

Car loan: £12000

 

 

 

 

 

Calculations and calibrations

Last weekend shortly after making my blog post, buoyed by the confidence that I am approaching debt freedom, I spent several hours calculating whether it would be better for me to save money or to pay off my mortgage.

Firstly, there are several viewpoints on whether mortgage debt counts as ‘debt’. Of course it is different to a credit card or a car loan as you have purchased an asset that will appreciate in value and give you ‘equity’, and you pay off a chunk each month which also contributes. However, as that equity is tied up in the home, and when it comes to selling that house, all other houses will have increased a similar amount, is it really an asset?  It’s not like you can shave off a piece of the wall and spend that money right? And it doesn’t generate you an income, so many argue it is a liability.

I am on the side of thinking that a mortgage is a debt, but as you must live somewhere, you might as well be paying your own mortgage, rather than a landlord’s. Eventually, you will own the property.

I have been lucky as I bought my flat for £237,500 in 2012, and now would be able to achieve £450,000 for today.  I would not have achieved this gain had I rented for the same period.

Pay off mortgage or invest?

I couldn’t find a comparison online to see whether investing spare money in an ETF or making increased payments on the mortgage was better. I decided to have a go.

I made a couple of assumptions. Firstly, I will not start investing until June 2019, as, until that point, I will be paying off my actual debts. Secondly, I will be able to find £2000 per month to do this. Thirdly, that I assumed an annual rate of return on ETF investing of 10%. I based this on reading around blogs to see what other people thought and based on past performance of the stock market.

The assumptions I made about my mortgage were that my interest rate would remain the same as it is now at 1.69% (unlikely I know, but it is the current situation and I am unable to predict the future).

The method

I built the spreadsheet with three different options:

  1. Put £2000 into my mortgage every month, on top of my normal payment and save nothing;
  2. Put £1000 into my mortgage, and £1000 into an ETF; and
  3. Put £2000 into an ETF.

I calculated the monthly interest in each case and then added up so I would see the effects of compound interest accurately.

I don’t claim that this is a pinpoint accurate way to calculate it, but it gives me a picture of where I might end up in the future and the best way to start my FIRE journey.

The results

I was very surprised by the results of this exercise as the overwhelming long term best way to go was to put the maximum amount of money into an ETF. I believe this is for several reasons; firstly, the rate of return assumed of 10% is much higher than on my mortgage. For each £2000 I would make £200 annually compared to the £34 cost to borrow at 1.69% rate I pay. That’s a £166 annual difference for each payment without taking into account compound interest.

When it is shown like this, it is an absolute no brainer, but I still find it shocking. I had always believed that paying down a mortgage was the best way to go. In some ways, if you are in your forever home then it may be a good idea, but really I can’t see any way it makes sense to do it.

Should interest rates increase and the rates of return for the ETFs drop then it may make sense to switch over to repaying the mortgage faster.

The other exciting thing I realised was I will have £1,000,000 in savings by age 50. After that, thanks to compound interest, it really takes off.

The graph below is my total net-worth which includes house value, pension, ETF, and mortgage liability.

Screenshot 2019-03-31 at 14.47.59

 

The end in sight

It’s been a long month for me. I’ve had some ups and downs with job applications (mainly downs) but have enjoyed going to various sporting events such as England v Scotland at Twickenham.

The best thing about the rugby game was it didn’t cost me a penny as my company paid. I can’t think of a better way to save money and have fun!

Debt

The end of the month is approaching and I’m actually looking forward to getting my paycheck and paying off more of my debt. I should be able to pay £2000 this month which will bring my credit card debt down to £2800. It is becoming addictive and is very satisfying. I’m taking control of my life away from the banks.

That figure of £2800, in my head, is monumental. It seems insignificant, almost like the end is in sight. I’ve been focused for the past two months where I have cut my spending and controlled my behaviour. It feels good. I’m wondering why I didn’t do it sooner.

I should remind you that I put all that debt onto my credit card onto a 0% interest offer. Previously this was on a loan at 7%.

Car

The feeling of taking control has led me to seriously consider selling my car. As it would remove the outstanding debt and give me more control of my outgoings I want to get rid of it. The feeling of taking control is overwhelmingly good. I would then only have the £5700 to pay to my landlord. That total is disputed and I am withholding it while there is a court case to decide if the costs are reasonably incurred.

Drawbacks

This month I really wanted to go skiing. However, I’ve spent a number of weekends at home playing PS4 and not moving a lot. It’s a sacrifice I’ve made for the cause of financial independence. I keep thinking, next year I’ll go and it will be using the money I will have saved and not a credit card. I will deserve to go on the trip and that is something I can look forward to.

Feeling the pain

Last week I paid off £1200 of my credit card. It felt good to be making progress, but also scary.

I’ve taken the approach that I must clear these debts as fast as possible with a target of 3-4 months being a stretch target. I’m anxious that I may be biting off more than I can chew. I now only have £1172 in my account to last me the month. I know I have at least £650 of payments coming out before the next paycheck.

However, I am owed £500 in rent and have £400 of expenses to clear. In theory, this is a cash flow problem. But because I have cleared my entire savings to clear the debt last month, I have no buffer. It also occurred to me that when I switched bank account I opted not to have an overdraft. That means that I paid off about £400 of overdraft.

I also had the expense of getting my car serviced which set me back £550. It needed to be done to keep the plunging value of my vehicle from going into free fall.

So yes, I have made this difficult for myself. I’m hoping that self-discipline will get me through. I also wish I’d done my sums better. I also believe that this is a short term pain for a long term gain.

Once I have cleared these debts, I will be saving £1200 per month. By Christmas I should have £10,000 at least in savings. I look forward to the day I can relax about my finance.

Keeping my eyes on the prize of being debt free and being able to invest is keeping me going.

Money management

I have never been great at money management. I think living in a city such as London, you are so stretched at all time, it is hard to motivate yourself to save. There is always something you can do, someone to meet up with, some dinner to go to. Living that lifestyle eats up money that could be saved, and critically, eats up your will to save.

If each month, you are struggling to get through the last week (or sooner!), you need to reconsider how you are living. All these fun things you are doing are costing you money. I know, I spent 7 years doing it and wondering why I ended up broke each month!

Even when my salary had risen to a reasonable level, I still ended up broke. The trap you fall into is saying to yourself “I work hard for this money. I deserve to treat myself”. When you are eating out two or three times a week, is it really still a treat? It becomes a habit. One that is hard to break too.

A midweek dinner with a friend costing £30 here, a Saturday night out costing £80 there, followed by a £40 on a Sunday roast and drinks and you’ll find yourself spending £150+/week on eating out and drinking. Not to mention Uber fares and takeaways. That’s £600/month, and £7200/year!

I’m not saying don’t enjoy this fine city, but just question yourself when you are spending money as it adds up rather quickly. Say no to going out a few times. Lose the fear of missing out. Cook for friends at home and have people round for dinner and drinks. There are ways to save and still enjoy life.

 

 

January/February 2019 – financial situation

I want to track my progress publically for two reasons; one, tracking will allow me to see the progress I have made, and two, it will motivate me and hold me to account knowing I have told people what I am planning to do.  I know it’s February, but I wanted to start at the beginning of the year.

Assets:

Flat: £450,000

Pension 1: £94,000

Pension 2: £4,382

Investment: £1,800

ETF: £961.00

Savings: £8000

Debts:

Mortage: £259,000

Professional studies loan: £7000

Bank loan: £8000

Car loan: £12000

As you may see, I am swimming in debt. It’s not big and it’s not clever.

So what did I do about this precarious situation?

I contacted my bank for settlement figures for both the loans. I used my savings to pay off the professional studies loan. I then used the remaining £1000 in my savings, money from my current account, and £6000 on an interest-free deal on my credit card, to pay the bank loan off.

As of 16 Feb 2019 my situation is:

Assets:

Flat: £450,000

Pension 1: £94,000

Pension 2: £4,382

Investment: £1,800

ETF: £961.00

Savings: £70

Debts:

Mortage: £259,000

Credit card: £6000

Car loan: £12000

 

 

 

 

Why am I doing FIRE?

I am in my mid-thirties. I didn’t really think much about the future when I was in my twenties and I think my interest in FIRE is part of a realisation that life is rather short and there is a limited time to do what you want. Of course, I thought of the future, but it was perhaps a fantasy future which was what we were taught to aspire to, rather than the reality.

I have led a fairly interesting life and have experienced things that the majority of people my age may not have (marriage, divorce, living overseas, loss of a parent). I have also had some extremely positive things happen to me such as returning to university to follow my dream of becoming a barrister (that is an ongoing dream!).

By stopping work for a year, I stepped off the treadmill that so many people my age are on. That feeling of constant pressure to get to the next stage of life. The route set out for us which is seen as a success (school, university, job, marriage, house, car, kids… then what? slow death?).

I was blown off course by becoming divorced at age 30. I won’t dwell on that, but at the time, it felt like a massive step backwards in what had until that point, been a life that felt like I was boosting forwards. I was depressed for some time, but as they say, it made me stronger and a better more compassionate person.

I think realising that taking a step backwards wasn’t the worst thing that could happen was a real eye-opener for me. I realised that I could recover from it, and come back stronger. I also believe it gave me the confidence to take action and pursue an alternative career at a later stage in life.

More recently, finding out about FIRE, which is essentially a movement that encourages people to minimise expenses and live frugally, was appealing as I had given up a well-paid job to return to University.  I had no money and had become used to living the frugal life. When I got a job, I thought, what if I keep living this way? I have kept things under check and found that I am not missing out at all. Most of my friends these days have bought houses and are mortgaged to the hilt with kids in tow.

In the past, I would be eating out 5 times a week, going to the pub and spending £50 a time 2-3 times a week. Did I have an alcohol problem? I may have, but if I did, I don’t now.

I have a mortgage, but no kids, and feel my salary is more than ample to live off. I don’t eat out that much anymore. I don’t eat takeaways. I learned to cook and eat reasonably healthily. I go to the pub and drink moderately. All these subtle changes have reduced spending compared to what I shall call ‘pre-university’.

So I am not doing a full FIRE thing yet, but I am attempting to follow its philosophy. The basics of minimising spending and saving as much as possible are no-brainers.

I’m at the beginning of the journey, but find it has given me a more disciplined outlook. I am looking forward to paying off my debts, followed by building up savings and investments. That is the way forwards!

 

 

Playing with FIRE

Introduction

 

Hi, and welcome to my blog, Playing with FIRE.

I have been reading a lot about the FIRE movement since I came across it in September 2018, and I have started to dabble in the philosophy a bit. There are a great many resources out there, and many are extremely useful. The main thing about these resources is they are very US focused. As I live in London in the UK, I decided that it may be helpful to document my experiences with using FIRE in a UK context. There do not seem to be many blogs that are UK focused out there that I can find.  So here goes nothing…

Philosophy. 

 

The most famous FIRE advocate is Mr Money Moustache. His blog is a treasure trove of good advice. I have started to follow some of it, but I must admit I’ve been rather a scattergun in my approach.

My situation

 

I will start with my position in October 2018. I was one month into a new job and wondering what to do with my new found earnings. I came across an article in the New York times on the FIRE movement, and it sounded good to me.

Firstly, I would like to give you some further context.

In 2018, I had decided to undertake a period of study so was out of work for 10 months.

In studying, I had to make some significant adjustments to my lifestyle. Going from earning £75,000 to £0 was a shock to the system. I cut back on social life and going to the pub.  I also rejigged my finances so that my mortgage payments were as low as possible. I also planned to sell my car. However, my plan to use the re-mortgage to pay for the fees and pay off a loan I had from my last degree and some house bills, failed.  I was lucky to get a scholarship to part fund the fees for the course.

My plan failed, partly due to my lackadaisical approach to managing my finances, and also my not wanting to give up the feeling that having a fat bank account gave me when I had no income. I didn’t sell the car, because I had it on a PCP deal which was more than I could sell the car for. I couldn’t believe how stupid I had been, but faced with paying £2500 to sell the car, or just keep paying the £299 for 10 months, I thought at least I will get the use of the vehicle in that time. Plus, I love that car, and yes that is a weak point of mine!

I got through the year by renting out my apartment on Air-BnB and to a friend mid-week. This was a very efficient method of obtaining income compared to working in a bar. The return to time was high.

By the end of the course, I was in desperate need for employment. I tried to get an entry-level legal job, but in the end, I decided to go back to project management where I could capitalise on my 12 years experience. Financially this was the best option.

So, knowing I had really failed to stick to my financial plan, with two large outstanding loans (£9k and £10k), a car payment of £299 per month, and a student loan from my first degree, things had to change.

First FIRE move.

After reading up a few blogs about FIRE, I came across the philosophy of investing in low fee ETF funds. This seemed like a straightforward idea. I was so excited by the idea of retiring early that I opened an Interactive Investor account and bought £1000 of ETF fund in a stocks and shares ISA account. Great! I’m on the way to financial independence. What could go wrong?

Realisation.

 

This plan was great, except I had forgotten one key element of FIRE.

My new job was paying £70,000 which I consider is a very good income. However, it was being gobbled up by the debt payments. I had about £8000 in my savings account at this point which made me feel very secure.

I went on a holiday to Australia with my lovely girlfriend who is from Melbourne. This distracted me and used up some money that I had earmarked for my ETF. Christmas came and went.

I then went to a yoga retreat (not my idea, but was very useful). During the retreat, we were challenged to consider our goals for the year. It became clear that the debts hanging over me were causing some anxiety. I decided to take action.

I also read a post on a FIRE blog or forum where someone was heavily criticised for investing in an ETF before paying off their debts. Oops. Looks like I had fallen into that trap from day one.

What did I do? 

 

The first thing I did was to pay off the £2500 remaining in my government student loan. This meant that my salary was not deducting student loan payment of 9% above £25000. In my case, that would have been about £340/month.

I did a review of my budget and realised that I needed to pay off my debts as quickly as possible. How was I do this? I had £15,000 in debt at around 7%. It seemed impossible. Some weeks passed and then I started to seriously look into this.

With some clever maths on a spreadsheet, I first realised that I could pay off one loan which was now around £7000, with the savings in my account. I was reluctant to do this as it would remove the nice comfy buffer I had. It scared me a little.

Secondly, I would use an old credit card which was offering 0% rate on money transfers to pay off the other debt which had gone down to £8000 along with the remains of my savings. This meant I have £6,000 on 0% interest until August 2020. It was a fee for £129 to do this. Only about 1.5%. This is much better than the 7.2% interest I was paying on the loan.

I did this last week. As soon as I did it, I immediately felt better. Almost like a weight was lifted. I also made a plan to pay this debt off within 3-4months.

That brings me to where I am now.

 

Bank account

 

I reviewed my accounts, and decided that the £20/month I was paying for a bank account was too much. It should be said it includes benefits, but I could get the insurance benefits elsewhere for a lot less. I, therefore, switched my account to Barclay’s account which had no fee. I went for their Premier account as my income was enough and also because I wanted to feel fancy.

Mobile phone

 

My phone contract with Vodafone cost me £52 a month. It was for an iPhone 7 which I got when it was new in 2017. The contract was coming to an end and the phone works fine so there was little point in getting a new iPhone. They have a new offer of £20/month which includes Spotify. That saved me total £42 a month if you include the £10/month Spotify costs me.

Contact lenses

 

I was paying £17.50/ month for contact lenses. I have cancelled that as I stopped wearing them. I will order dailies and wear my glasses.

Total

 

Total savings for the weekend:

Mobile saving: £42/month

Bank account: £20/month

Lenses: £17.50/month.

Total: £79.50/month for about 2-3 hours of work. Not bad.

Add that to the £395/month loan payments that I stopped, then this means I have roughly £500 a month to pay into the credit card to pay down the debt. At that rate, it would take 12 months to pay off. However, I am going to put money from my lodger of £500 to make it £1000/month. I will then find more money to pay it quicker. I want to pay £1500/month to get rid of it within 4 months.

Conclusion

 

The message here for those starting, like myself, is not to get too excited by the end goal of having £££ and getting a return. First things first, pay down your debts and reduce costs. Its boring but I have realised it is an important first step. This can be done gradually by looking at each expense you have in your account and finding a way to reduce it.

You will see that I have a poor financial history and have lacked the motivation to do things properly. However, I am determined to change and follow the FIRE philosophy. I also want to blog about it to make me stick to my plans and help people in the process.