Summertime is coming (allegedly)

Here we are in mid-June already. The 12C and pouring rain would lead anyone to believe it was mid-March, but that’s the UK for you.  It’s been a busy few weeks for me as I have travelled to Luxembourg several times for work and also had numerous new ideas and ventures come my way.

Firstly, the debt situation has continued to improve. I now only have £1440 of credit card debt left to pay. I was immensely proud of myself for getting this far and feel like this period of hard-core debt reduction is nearing its conclusion. That is getting me excited about starting to invest and save money.

I have been sitting back and reflecting on the journey since January this year. I had roughly £17,000 of loans, credits card and overdrafts. Now, of that, only £1440 left. I can’t believe it. I will write a dedicated article to mark the day I become debt free which I hope is fast approaching.

Secondly, I have started a side hustle. After the bitter disappointment of having 20+ rejections for pupillages, I realised there was nothing stopping me from setting up a legal advice consultancy. So, along with a former classmate, that’s exactly what I did. I have set up a legal consultancy specialising in construction law. I’m hugely excited about that and look forward to our first clients. Fingers crossed!

Lastly, in parallel, I have been quietly sending out my CV to various companies which have yielded me several interviews. It is always hard to know how much to ask for, but I think asking for at least 20% more than what I am currently on was a good guide. There are other factors to consider such as job security and type of work I will do. However, I do think it is my time to maximise my return and cash in. The more I earn, the quicker I will reach financial independence.

The situation at my current work has barely improved and I think I don’t need the stress of not knowing whether the company will be around much longer in my life. Working somewhere you are almost surprised when you receive your paycheck is no way to live.

So it’s been a very productive few weeks for me. I truly believe that focusing on the fire goals has allowed me to focus on other areas of my life for the better.

May update

May has been a long month by all measures. Many things have come to a head and I’ve felt both directionless and demotivated at times, and extremely excited about the future at others.

Firstly, the issues with the company have made me reassess what I am doing career-wise. I think I’ve mentally checked out of the company, and although I have half-heartedly applied for new jobs, it’s only a matter of time before I do so properly. I just feel there is no point in working hard for a company that is on the brink and is being run so irresponsibly. The atmosphere in the company has become rather unstable and certain individuals are attempting a power grab (the chairman’s son-in-law). As he is a deeply unpleasant man and is unlikely to be going anywhere, it only leaves me with one choice long term. In the meantime, I will keep working and collecting the dough.

Secondly, a visit by some antipodean friends of my girlfriend gave me some great ideas. They had given up their jobs and were planning on travelling round Europe in a camper van. It will be 3-4 months of adventure and fun. Although they were not officially doing ‘FIRE’ they were certainly far more financially free than me. It goes to show that at age 28 and 26, with careful saving, they were able to undertake this great adventure. They don’t do very high paid jobs but decided this was a goal and lived a lifestyle that would allow them to reach the goal. They lived in a shared house in Melbourne and didn’t eat out much. Now they have enough money to give up work, buy a camper van and live carefree for a bit. Well done them.

The great idea was the result of a side hustle that my friend had where he ran a website and provided services to contractors making £16,000 in the process. I realised that I could do exactly the same thing with my skills albeit, providing a different service. So I plan to set up a company of sorts and do it part-time. Should it take off, I would do it full time. Watch this space…

Debt progress

I have been paying off my debts steadily. I have to confess that I didn’t mention a £700 credit card bill that I let sit since February in any of my previous posts (mainly because I was ignoring its existence). So that was disappointing, but it was there and is now paid. I also paid £300 to my other loan which got me below the £3000 mark. This was a huge achievement and the end really is in sight.

I feel like I am 2-3 months away from clearing my debt. This is slightly longer than I had anticipated but I have felt the need to splurge a bit this month. A trip to Bath for the weekend, eating out a fair bit, and a trip to Scotland to visit my mother have eaten into my balance. However, they were all needed and enjoyable. I didn’t use a credit card to pay for any of them and I still have money in my account at the end of the month AND I paid £1000 of debt off. Not bad.

I do feel I will have to reign it in a bit this month however and really get to the end of the debt, but overall I feel that my finances are under far greater control than they ever were before.

OSV18_01_PowerStation_Hero.0.jpg
Dream campervan

 

 

 

Some anxiety

anxiety.jpg

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.

IMG_6653.jpg

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.

Another week has passed

I’ve had a good week. My work treated me to tickets to England v Scotland at Twickenham. It was an astonishing game which will stick with me for the rest of my life. I really do wish my Dad had a chance to see it. It would have been an expensive day save that my company will pay for it. Can’t get better than that?!

As for my FIRE quest, I’m feeling much better. My cash flow has improved, people have paid their bills to me and I have the cash to get me to the end of the month.

One crazy development is that I’m now seriously considering selling my car. I absolutely love my car. It’s a BMW M135i which had a 3.0l twin turbo straight six engine. It is terrifyingly quick and I enjoy burning away at traffic lights and surprising the hell out of Porsche Boxter drivers and the like. I bought the car the week my father passed away almost as a distraction from the extreme grief I was feeling. I was thinking about getting a car but never could bring myself to do it. I think Dad dying made me think ‘fuck it life’s too short’.  I got it on a PCP finance deal and have paid £299 per month since then. That has been ok generally. However, I realised this week that the total cost of the car is around £470 a month once insurance, tax, servicing and fuel are taken into account.

That got me thinking, even if I got an Uber twice or three times a week, there would be no way I would spend that much. This car has always been a luxury, and one I very much enjoy, but looking at the hard facts of the money it is costing me, it is very hard to justify keeping it under the new FIRE routine.

One of the first FIRE blogs I read talked about a chap who had to talk his wife out of keeping their BMW. He explained that this was very challenging to do as she did not wish to give it up. I now find myself in the same position. It’s hard and I don’t want to get rid of it, but I know doing so will accelerate my goals. I have driven that car across Europe, to Scotland and Deven. It’s part of me. It’s freedom. I’m giving up more than just the monthly payment.

So I could sell it to webuyanycar.com or similar. I don’t know what to do at this point. I believe the outstanding loan is about £12500, and the value they would give is around the same. I could also leave it until the finance runs out in a year and hand it back. However, that may also have costs that I haven’t anticipated such as servicing etc.

Ultimately, it’s just a car. I can always get a different car later. Or I could just use my bike. Anyway, I’d be interested to hear what people think about this.

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.