Reader Case Study - 30 year old man wants financial Independence

[Mrmoneychili]

I am a self employed writer for TV from London who has just moved to Wales for a job.
I own a 2 bed property in London which i am now renting out (despite keeping it as my residential mortgage) while I now rent in wales so i’m near my current work.
I wish to be financially independent. I have cut out some crazy spending habits from my life having discovered MMM, the simple path to wealth etc a few months ago.
I am single and free and up for doing what must be done. Be firm with me, i can take it!

I have no debt except for my mortgage. My job is the biggest problem re reliable income stream, but when it does come , they are always nice lump sums. I am in a rare position now in that i know what i’ll be earning this year and next.

My breakdown is as follows:


Earnings (pre tax)

2019/20
£80,000

(2020/21 - £85,000 (same job with increase) )

these are both guaranteed minimums. I may get more jobs in between, (voice overs, development deals but nothing yet..)

Taxes
i pay 40% tax on income as i am in the higher bracket for this year and next year

Rental Income
1600 per month (they pay all utilities)

I have no debt except for:

Mortgage (a 2 bed in London - bought for 330,000 in 2015, recently valued at 450,000!)
£239,850 remaining

Insurance
Builiding insurance
£800 roughly per year

Maintenance
£200 per year

Expenses - per month

Mortgage payment
883

Rent
575 (all bills incl)

Eating/drinking Out
£250

Groceries
£150

Transport (no car, i cycle everywhere and use public transport when i need to be in london)
£150

Entertainment/subscriptions
£20

Phone
£20

Other
£40

Medicine
£75


Investments
I have just opened a Vanguard lift strategy(80% stocks 20%bonds) tax free ISA and have maxed it out with  £20,000. I will do the same next tax year so will have 40,000 in their by april 2020

Questions

What to do about my living situation? I know i don’t want to live in london, i love the rental income i receive but obviously rent eats into this.
Should i try and buy another place in the much cheaper wales ( 2 beds are the on market for 200k) and change my london property to buy to let?
or should i keep treading water with my cheap rent until, i dunno, i get a girlfriend lol

should i open up another investment account with vanguard and contribute the rest of my available income?

How can i speed up my journey to financial independence?

I appreciate all help, advice and opinion

Thanks,
Steve

[MrThatsDifferent]

Am I reading this right, that the rental income covers your mortgage and rent? If so, that’s great. I think you’re doing well and just keep doing what you’re doing. Have you worked out what your target amount is?

[Mrmoneychili]

Thank you for your responses. @MrThatsDifferent yes, the rental income covers my two housing payments so i barely have to dip into my income/savings. my figure is a million.. thats what i mean about opening another vanguard stocks and shares account alongside my maxed out tax free isa.. to help speed up the process..? but i probably need some cash incase my tenants leave suddenly and i have to foot the bills etc..

@lhamo i do agree, i have spent lots of time in wales over the years so am ok with the climate, but i think its more the life situation that sgould determine whether i stay longterm. i just know i definitely dont want to live in the 2 bed flat, as i hate the area etc, so if i moved back, it would be to rent cheaply again just outside london. i just wonder whther i should sell and invest the equity instead..

[former player]

Welcome to the forums, and congratulations on getting to a good place so far.

1.  You should I think be looking at making pension contributions, in order to reduce your income tax.  Try The Money Advice Service and Moneysavingexpert for a start on advice on this - you can invest up to £40k a year and set most of that against your higher income tax rates.  You need to look for a personal or self-invested pension with low fees and low cost index fund options, but I don't have enough knowledge to advise on details - time for you to do some research.

2.  You have 90% of your net worth invested in property.  It's done you well, as has property in the UK for a lot of us, but I think what you should be looking at adding are investments which will produce more income to see you through any future lean periods and into early retirement.  So if you have any money for investment left over after ISA and pension, you could put it into a taxable low cost index fund.

3.  Given how much of your net worth is currently tied up in property, and given your personal situation (free to live and work anywhere you want, future income lumpy personal situation subject to change) I don't think buying more property is the way for you to go at the moment.

[Mrmoneychili]

@former player i appreciate this thanks.
ye i think i need to be resigned to just renting very cheaply wherever i am for the foreseeable and look at adding to investments.

Re pensions : My current employer has enrolled me into NEST, a oension scheme which puts my money into a retirement date fund, employer contributes like 3% or something minimal. i really need to look into if this is the best option for me, i will get researching

i was also wondering whether i shoudl refinance the london property and invest the equity?

Thanks!

[actonyourown]

I agree with @former player and think you should hold off on purchasing another property. 

I was recently reading about the possibility of a breakup of the UK over Brexit.  I have been following the process from the beginning, however, I do not know how likely that is and it probably would really affect property prices so you don't want to lose tons of value when you are on a path to FI.

[Watchmaker]

Agree with the above posters that more real estate is probably not wise right now. I also second the idea that you need to look into pensions to see if there are more tax savings available to you.

Regarding your spending: are the numbers you provide actual spending, and do they cover every dollar you spend? If so, you're doing great on the that front.

Regarding income: You say your income has been lumpy. Does that mean that sometimes you earn 30k and sometimes 80k, or sometimes 0 and sometimes 300k? You need to think about how much of an "emergency fund" or cash cushion you should have.


 

[Mrmoneychili]

@Watchmaker

hey, thanks for your response, yes, apart from an occasional extra 50 quid on clothing once every few months that is my monthly spending. 6 months ago i was averaging £600 a month on eating out alone!! Ive managed to make it that so long as i have tenants in the rental, i only need 6k of my saved income to sustain my current lifestyle

re income, exactly, i can earn 20k one year and 80k the next, this is why the pension might be tricky as i need to keep about 20k in a savings account as my emergency fund.. or do you think i can put 10k into a pension ? and just keep 10 as emergency ?

thanks

[former player]

On the pension, you have said that your income is stable at £80k/£85k this year and next, so you have scope to put more into a pension this year.  On the other hand, you need to allow for changeovers, repairs and tenant problems on the London rental - although hopefully not long voids - so you do need to make some allowance for that.  In the end the only person who can determine the line between cash accessible in savings accounts and cash invested long-term on the stock market that feels comfortable for you is you.

On your other question, I wouldn't borrow against the flat to invest- it's a lot of risk that you don't need, and I'm not seeing that the returns on index fund investing would justify it.

[DadzillaGorilla]

Hi, I am from Cardiff and it is a great place for FIRE, especially when houses in surrounding areas are so cheap. I bought one in the valleys recently for £20k :) 2 bed, 2 reception :) We have beautiful scenery and a LCOL :)

I wonder why you are paying such high tax? Are you an employee or not under IR35? I suspect if you are "employee" then you work for the big broadcaster down the bay. There are ways to effectively reduce your tax rate including pension contributions tax free up to £40k for employees, or you can be limited company and reduce tax rate (assume if working for big one they determine IR35 status?

As an employee in higher tax bracket I put the max £40k into my pension every year and given tax breaks and employer benefits every £1 I don't take into post tax pay is worth approx £2.50 in my pension pot.

I am a chartered accountant but seek advice from an IR35 specialist if already haven't done so (have to say that just in case you take my word as gospel :))

[Watchmaker]

@Watchmaker
re income, exactly, i can earn 20k one year and 80k the next, this is why the pension might be tricky as i need to keep about 20k in a savings account as my emergency fund.. or do you think i can put 10k into a pension ? and just keep 10 as emergency ?

thanks

Some of your circumstances point to a small emergency fund need (no dependents, low expenses), and some suggest a higher emergency fund requirement (owning a rental property that could need repairs, having variable income). If your London property is in good shape (and given that you know your income for the next two years) I'd say 10k is sufficient for now, but should be re-evaluated in a couple years.

[Playing with Fire UK]

What are you wanting from FI? Do you have an idea of when you want to stop working?

There'll be a balancing act for you regarding how much you should put in pensions/ISAs. The later you want to retire, the more you should push into the pension and the sooner the more to ISAs or investment accounts. Do your earnings align with the tax years? If not, you'll have more scope to reduce the tax you pay in high earning years.

You have some time to think about the SIPP, you could open one now and then decide how much to contribute towards the end of the tax year.

[Mrmoneychili]

@DadzillaGorilla

Hey dadzilla, great to meet another cardiff moustachian! Thank you for your reply. You are going to have to bear with me as im very dim when it comes to tax chat, but here goes. So i am self employed but have a great accountant who does my taxes and specilises in writers/actors etc.  Mu current employer (not the beeb) has enrolled me in NEST pension - this is basically the first pension ive ever had, do you know it at all?

I know previously, i created a limited company but that is now dormant.. i clearly need to speak with my accountant and see if its worth using it again. and ofcourse getting vat seems to be a huge thing every quarter..

im wondering if i should forget about the nest pension and start my own SIPP one , i welcome any further thoutghs, or feel free to message me!

Cheers

[Playing with Fire UK]

You should take the NEST pension, you'll have some employer contribution to it that you can only get if you stick with it. You should probably also open a SIPP.

The only thing reason you might not want to put huge amounts in your SIPP to reduce your tax rate this year and next is if you were planning to FIRE in the next five years or so. In that case, you'll need so much in ISAs/taxable accounts that it should see you through to retirement anyway. Even if that is the plan, having some extra money in a NEST and state pension to pay for care or higher spending in older age wouldn't be a bad thing.

[DadzillaGorilla]

@Mrmoneychili

 

The nest pension is a good start, it was an auto enrollment for everybody who is employed. I suspect that your company are putting in 3% (the minimum contribution under current rules), you are putting in 4% (default amount when signing up) and then you get roughly 1% from the government. This is good to make sure all those of working age are contributing to their future, but the value would only be substantial if you plan to work to 67.

 

A higher income earner, looking to FIRE can make better use of the allowance that the government gives for pension contributions (currently £40k per year).

 

Ltd company and self employed will have different planning considerations, benefit of LTD includes paying dividends, a VAT benefit (although getting smaller year on year) as well as being able to write off valid expenses against income. Biggest benefit of the self employed is to contribute to your pension out of pre tax pay, but this locks money into the pension until 57 years old for our age (although you can withdraw and pay your tax rate, but then your yearly allowance drops to a few thousand a year).

 

Happy for you to drop me a message with specific questions, but make sure you check any info online, and run through it with your accountant (a lot of accountants don't understand the benefit of the £40k pension limit as not many general workers want to max it out - not saying your accountant but maybe talk to them about it and see what they think?)

 

[AnswerIs42]

The Nest pension is OK with the matched contributions you're getting, but probably worth opening up your own pension for additional contributions - which are well worth it, given the amount of 40% tax you pay.

You'll effectively be dividing your stash into two parts - post-age-58 (in pensions), and pre-age-58s (in S&S ISAs, etc).

There's an extensive thread on how to divide these contributions here: https://forum.mrmoneymustache.com/uk-tax-discussion/balancing-pensionssipps-(etc)-and-isas-(etc)/

Although you don't need to overthink it now - if you divide your contributions 50:50 between pension and ISA then you won't go too far wrong, and you can always tweak the percentages in later years as need be.

[Mrmoneychili]

@DadzillaGorilla @Playing with Fire UK @AnswerIs42

these have been so helpful, am getting on to my accountant now!

Thanks

[Mrmoneychili]

@DadzillaGorilla

Update:

having spoken with my accoutant, he says yes i am definitely in company terrotory but the issue is it will muck up a mortgage application as most of the income will be in the company.. can i ask your opinion on this ??

as mentioned previously  i am currently renting out my own flat and just renting elsewhere (the rental income just about coveres my mortgage and rent payments) i am effectively treading water

im assuming that if manage to save more income thrught a limited company im unable to put that into a taxable stocks and shares account either?

Thankyou in advance!