Author Topic: Case study: How do I cut expenses and start investing?  (Read 492 times)

aoedae

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Case study: How do I cut expenses and start investing?
« on: December 18, 2016, 07:25:23 AM »
Life Situation: I'm a UK-based reader, 24 years old (just!), normal tax code (1100L), with no dependents.

Gross Salary/Wages: 23,500 per annum before tax (first year salary), including overtime. I have a salary negotiation coming up in which I hope to increase to 26,500 per annum (for January); performance review has already been done, and was flawless; I have made the company a lot of money this year through projects I have managed and clients I have won (>x15 my salary), but overall the business is doing quite badly relative to previous years (or so I am told by old-timers).

Pre-tax deductions: I do salary sacrifice at 100 per month, hoping to raise this in the New Year; employer matches a piddling 1% of my qualifying earnings.

I also have a Plan 1 Student Loan, at 1.25% APR interest, which automatically takes 9% of my earnings over 17,495.

Other Ordinary Income: Additional 100 for month contribution towards medical expenses/therapy

Qualified Dividends & Long Term Capital Gains: N/A

Rental Income, Actual Expenses, and Depreciation: N/A

Taxes: Personal allowance before tax is 11,000; I pay National Insurance tax at 12% and Basic Income tax at 20% on everything over 11,000.

Adjusted Income (after tax): 1,490 take-home per month

Current expenses:
Rent - 550 per month (I live in a shared house in central Cambridge with my partner, which is one of the most expensive cities - partner does not want to move because he owns most of the house, I pay him rent; otherwise our finances are separate. I am trying to negotiate biweekly 3 hr cleaning, which I do quite a bit of anyway, in exchange for 50 pm reduction, but partner is reluctant to cut hours of existing cleaner, who is a friend and not very well off. )
Groceries - 100 per month (Breakfast - 50p for a low sugar homemade breakfast nut bar or almond muffins with spread; My lunch - 50p per day for half a carton of soup bought on discount in bulk; I fast two days per week. Dinner is where the majority of my cost is - I try and get as much as I can discounted and freeze for later use. I cook for my partner often as well, so my costs are higher. He does contribute towards household basics like milk and butter etc.)
Commute - 170 per month (to Letchworth Garden City, a nearby town; this part of the world is bad for my career as there aren't many companies in my field, so I chose to commute c. 55 minutes a day, 20 mins bicycle + 25 minutes train + 10 minutes walk to a nice small company that respects its workforce and pays overtime. I am considering asking if I can work on the train to cover some of the costs, as they would pay that as overtime 1h per day)
Phone - 12.50 per month (contract, expires in June and will reduce to 8; handset was bought second-hand with cash)
Petrol - 45 per month maximum (all other expenses paid out for this year, and will not be going out next year as I am selling the car and keeping it off-road under a SORN until then)(After selling car, this is planned as travel budget)
Therapy - 90 per month for 3 sessions; I get 100 in to cover this each month, and see a therapist who gives discounts to low income households (i.e. I qualify)
Miscellaneous - 100 per month for personal spending, Spotify subscription (keeps me sane in an open-plan office!), gifts, charity, additional travel costs to visit parents and friends, etc.

Assets:
I have:
- 13,000 in a fixed-rate ISA (2 years) which expires in March 2018, paying 1.6% interest (argh!) - it charges quite a bit for withdrawal, 180 days interest value on the amount taken out
- 2,000 in a 5% interest + 1% cashback current account, dropping to 3% from January
- 2,000 in a 5% interest monthly saver account
- 7,000 in a 1% savings account (needs to be drip-fed into some sort of investment)
- Car worth 5,000 which I am in the process of selling (was bought 3 years ago in cash for 9,000 back when I lived in the middle of nowhere, ouch!)
- 600 in an untouchable pension pot, which does not appear to pay any dividends that can reinvest; this goes into Standard Life Platform Pensions at 0.76% fee [I have no option to move this elsewhere as it is an employer-run scheme with salary sacrifice]; I get full tax relief putting money in, cannot access until retirement (currently >55).
- All the clothes, furniture, technology, good bikes, hiking gear etc. that I could possibly need, as I've accumulated a lot of good things cheap and second-hand over the years. Looking at selling off some of my excess stuff to raise c. 300.

[This is not an asset, but I have access to 4.5k 24 month 0% APR on a credit card, which I am using to pay groceries and paying off each month in order to build credit history.]

Liabilities:

Student (bloody) loan - Plan 1, UK.
I owe 23,724.09, currently at 1.25% interest (this rises with inflation)

Specific Question(s):

I think I need to answer three questions:

-What do I do about the student loan?. It's only inflation linked, but should I pay it down and reduce my assets, or invest those and put dividends towards it, or do something else? It seems to have no real cost of borrowing vs. for example, a mortgage.
- How do I invest to make the best of what assets I already have? I'm a newbie when it comes to investing (hence the terrible ISA commitment), but I was thinking some sort of stocks and shares ISA and a platform (Hargreaves and Lansdown) to buy one of the Vanguard funds (no idea which) that I drip feed (for pound-cost averaging?). I'd like a better strategy than simple averaging if possible, maybe something like a threshold value below which I would buy in future to take advantages of sales
- How can I trim my expenses?
« Last Edit: December 18, 2016, 04:15:44 PM by aoedae »

cincystache

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Re: Case study: UK - how do I cut expenses and start investing?
« Reply #1 on: December 18, 2016, 08:42:39 AM »
aoedae; I'm not in the UK but I'll try to help.

1. At that low of an interest rate, I would probably make the minimum payments. If the interest rates go higher, I'd start paying it off more aggressively.

2. From the assets you already have, I would set aside 3-6 months of expenses in cash and invest the rest in whatever tax advantaged accounts you can. In terms of what to invest in, I would go with vanguard and pick an index tracker fund such as the ETF with the symbol VEVE. This will track the large and medium size companies across the world. There are other index funds that will work but this is a decent option available in the UK. I strongly encourage you not to try and time the market but rather just start investing as much as you can each month and ignore the market news as much as possible.

3. I'm not sure how you can trim your expenses further. It seems like you are already doing a pretty good job here. Great decision to get rid of your car, that will cut your petrol and maintenance expenses. Perhaps see if you employer will help pay for your commuting expenses like a train pass?

I think the biggest change you can make is increasing your income as much as possible. Can you pick up a side gig? Work more overtime, or look for a higher paying position in your field? I hope the raise comes through!

Good luck

cerat0n1a

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Re: Case study: UK - how do I cut expenses and start investing?
« Reply #2 on: December 18, 2016, 08:51:28 AM »
Hi - there's a couple of others on here who also live in Cambridge. The obvious thing to do would be to live in Letchworth which is far cheaper in terms of property and have your partner commute instead, but that's a non-starter from what you said.

Not sure I have much to add; you seem to have a pretty good plan, just need to stick with it. VWRL is the Vanguard World Shares tracker available for UK residents.

I think for us it makes sense to treat Student Loans differently to US posters (or to other kinds of debt) in the sense that it's a low interest rate and if you never earn enough to pay it all, it will be written off. I tend to view it more as an extra tax on the young & well paid than a real loan.

aoedae

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Re: Case study: UK - how do I cut expenses and start investing?
« Reply #3 on: December 18, 2016, 09:05:31 AM »
Thanks to everyone who replied thus far!

The investing question - seems like the plan is set aside  3 - 6 months expenses in cash (already done through accessible current + monthly saver) and put the 7,000 straight into the VWRL. Are there any really good UK platforms? Hargreave and Lansdowne is the one I hear raved about, but that makes me a bit suspicious that good marketing might be at work. Also (newb question) does this give dividend payments, or does that not matter in my investment plan?

New question: should I close the ISA early and invest it ASAP? I'll take a 0.8% charge (180 days at 1.6%) for doing so.

RE housing: Letchworth is tempting, but I do get a good quality of life bonus from being in Cambridge, as there's so much free entertainment around; that and the partner is here, so I'd just end up commuting back from Letchworth and would barely see the place where I lived. He's been in Cambridge for >20 years, so I don't think he's likely to move!

RE student loans: It's really good to hear a UK perspective, and nice to hear there's some fellow Cantabrigians about - I was so lucky to get in on plan 1 in 2011, as the new post-2012 students seem to be really screwed with the new interest structuring.

RE train pass - I have a season ticket (170 a month averaged) but I can pay for this in cash, so I'm not sure my employer loaning me the value to cover it out of my salary up front will help - I checked already and there's no tax benefit to that approach.

RE side hustle - I'm a director for a non-profit biology lab in the area, which has been started this year and takes up a lot of my free time, and I'm organising a local medical sciences conference, so I'm a bit squashed for time. In addition, my partner is chronically ill so the burden of household tasks falls almost entirely to me (luckily these are fairly light as the house is set up to run efficiently!)
« Last Edit: December 18, 2016, 09:17:48 AM by aoedae »