OK folks the situation is as follows.
I'm buying a flat in a notoriously expensive area. No need to berate me on this, I know throwing all your money into housing is not the most mustachian thing and living in a cheaper area would be a more sensible decision in many ways. However living here does allow me to walk/bike everywhere, own zero cars, buy cheap but excellent groceries, enjoy local inexpensive hobbies, and spend time outdoors. I've made some personal and financial calculations and I'm taking the plunge.
Household: just me. I'm 31.
Income: £38k per year. £2250 take-home per month as a base. On track to increase with time (at least £200/month extra next year), bonuses occasionally.
Savings: cash savings pretty much all going into house purchase. Good pension with employer matching.
Debt: none, only mortgage related.
Expected monthly stats
Bills: estimate of £350 per month (utilities, taxes, etc. I'm hoping it will be a little less, but probably not by very much).
Living expenses: £300 (food, household expenses, hobbies, all shopping, etc. This is set at a sustainable level. In mega savings mode I can reduce it, but around here seems to be my personal happiness/value for money sweet spot)
Short term savings: £200 (occasional holidays, replacement electronics, etc. Can definitely be skipped entirely in belt tightening times, but will make me antsy in case something essential breaks or I can't afford to go to someone's wedding or whatever).
Total outgoings: £850. Leaving £1400.
Now the housing costs. Please put down your face punchers.
I got a 30 year mortgage for £175k, fixed at 1.41% for two years. This was the maximum I could qualify for. At the initial interest rate, monthly payments will be £600.
That mortgage + my savings was not enough to buy squat around here. To make up the additional moneys required, my parents are taking out a remortgage on their place in their name, for £80k. This will be a 10 year fixed rate loan at 2.49%, so payments of £750 per month. In theory, that is pretty much all of my remaining monthly moneys, which is insane. However there are mitigating factors (or I wouldn't be doing it):
- The bright side to living in an expensive area, is that I intend to rent out my second bedroom, which would bring in around £550 / month net. This goes most of the way towards covering the extra payments.
- My parents are OK for my payments to them to be flexible, say if my interest rate on my main mortgage increases. However I don't intend to lean on this generosity except in case of emergency.
Paying my mortgage(s), bills, and feeding myself are obviously not optional. What I need to figure out is where to set the dial on everything else. Should I put a bit away in investments a month even if it's a relatively small, 'token' amount? With the rental income I'm about £500 per month up, where should that go? If I get a bonus of £1k one month, where should that go?
Possible options, in my current thinking of order of priority:
- Building up an emergency fund. I hope to have a tiny bit of cash left over after dealing with the new place (fees, furniture etc) but it won't be a lot, like £1k. If I had more I'd have put it in the deposit :)
- Building up a buffer with my parents worth n number of payments, in case of unexpected expenses or tenants fucking off with no notice or whatever
- Make some home improvements (probably about £5k total work needed)
- Rebuild my long term investments (FIRE? You never know)
- Lifestyle inflation/relax on the obsessive tracking of small change
- Overpaying on my mortgage (up to 10% allowed with no penalty)
- Overpaying on the remortgage (up to 10% allowed with no penalty)
Questions for the MMM hive mind:
- What number of payments should my buffer cover?
- How big should my personal emergency cash fund be? £5k? Should I set aside anything more for unexpected expenses of home ownership?
- How do I even begin to prioritise the home improvements against the financial considerations? They're not hugely urgent, the place is totally liveable, but the kitchen is starting to fall apart and the layout is poorly thought out. At what point am I rich enough to justify the expense of rearranging it?
- Is it really a better decision to put extra cash into index funds instead of my mortgage? Pls help convince my brain that I should be as excited about making use of my ISA allowance as paying off the mortgage. All this debt feels like a red hot emergency more than the loss of potential profit does.
- At what point down this checklist can I relax on keeping the room at maximum occupancy, and e.g. only rent to people I like (I expect MMM says: when you're retired...).
I need a gameplan with some concrete targets to work towards.
Edit: And if anyone wants to talk frugal living and tips for squeezing my outgoings further I'm game, and happy to post a more detailed breakdown of what I spend my money on. But on the scale of things it seems clear to me that I need to prioritise increasing my income rather than stressing too much about decreasing my discretionary spending further.