Okay, the numbers are in and our tax returns have been finalised by our accountant. This tax year (2017/18) has been focused on improving our financial position which judging by most of the measures, it has been successful and we are both very pleased. Overall, our savings rate worked out to be 60.96% or 85.47% depending on the measurement. In terms of non-financial measures, our little boy turned one and is now quick on his little feet. He is still a tiny thing (in the 2nd centile on the growth chart). However, our GP is not concerned as he is healthy and will just catch up later on. He’s a greedy wee thing so he must take after his dad. We are still living in the South East of England, but currently preparing for a move up to the Midlands due Mrs. CC’s change of work placement. I have moved to a different Police Station which means I can walk to work on most days but still do long drives back on rest days to be with my family.
A table summarising our numbers is at the bottom. I will go through some of the main points first.
Our joint salary reduced this year by 2.35%. This was due to Mrs. CC taking nine months off (from April to December) for maternity leave and me taking seven weeks paternity leave. She received full pay (or near full pay) for six months and statutory maternity pay (£145.18 per week) for the remaining three months. I took five weeks off on full pay and the other two weeks off on statutory paternity pay (also £145.18 per week).
Our rental income increased by 41.25% due to Property 3 being fully let and minimal void periods across the portfolio.
In total, our pre-tax income rose by 8.17% to £108,829 this year.
Main Living Expenses
The cost of our military quarters increased significantly this year to £210 per month (rent and water bill) because we moved into family quarters (two-bed semi-detached) now that we have a child. I’m not complaining though, the cost is still much less than market rate so we are very fortunate. A similar property in the area would rent for about £1,200 a month.
We spent 6.41% more on groceries so that we ended up spending just over £300 per month. This increase is not ideal, but we decided as we were frugal elsewhere, being able to treat ourselves on certain food items is definitely worth it. We need to enjoy the journey as well right?!
We ate out much less, a drop of 69.89%. This is all down to having a baby; makes going out to eat far too much effort!
We hardly spent any money on new clothes and children costs mainly consisted of nappies, creams, bits and bobs. We expect children costs to increase significantly over the coming years as we will need to pay for childcare. At the moment, mother-in-law helps us out with free childcare when both of us are working, but when we decide to have another child, it will be too much for one person.
Although the amount we spent on fuel dropped slightly this year, I would like to reduce this further. However, it is difficult because our families are spread out hundreds of miles apart which makes driving to visit them inevitable. In addition, when I am at work, I live away from home due to where Mrs. CC is based so I am on the road quite a lot. This is unlikely to change but we’ll see if we can trim our fuel expenses even if only slightly. Also, our Misc. expenses were still much higher than I like because of a solo trip to Singapore and Australia this year.
Overall, our expenses dropped by 28.91%. This is mainly due to no wedding cost to include this year.
Overall, total business expenses increased slightly despite a sharp fall in Repairs and Refurb expenses. Property 1 needed a new boiler so whilst I had the plumber in, I also changed all the radiators, otherwise, the Repairs and Refurb expenses would have been much less. Also, the mortgage interest on Property 3 started to take full effect. Although over the next couple of years, the mortgage interest on Property 1 will begin to fall quite steeply as we approach paying it off (yay!).
We made £9,384 net profit from our property portfolio. We recognise that for an easier life, we could eventually sell up and invest all the money into index funds which could potentially yield better returns. However, for us, we like to have our wealth split between the stock market and property. Call me old-fashioned, but I just like to own something physical. Afterall, everyone needs a roof over their heads.
The amount of money we invested increased across all our holdings, in particular, our SIPP and additional work pension contributions. This is because we want to remain basic rate taxpayers which also means the new BTL tax rules would not affect us. This is why despite our joint income being over £100k, our overall tax rate remains quite low (11.46%). As a side note, we are both public service workers and completely understand that a properly run society requires taxes to be paid. We are not against paying tax. Our low expenses mean we don’t need the extra money at this point in our lives. Rather than have it taken away from us through tax, it just makes financial sense to plan our money in a way which maximises what we get to keep.
Our employer pension contributions reduced this year due to our maternity and paternity leave.
As discussed in a previous article, Mrs. CC will inherit two properties which will increase our income from tax year 2018/19 onwards. As a result, we plan to aggressively pay even more towards our work pensions and SIPP going forward.
We continue to overpay our mortgages and reduced our total debt by 12.83%. We now owe £255,538 across our mortgaged three properties. At our current rate of overpaying, Property 1 will be fully paid off by January 2020.
Our property tax this year came to £2,478. However, this included £1,548 of tax we owed from previous years because HRMC gave us incorrect tax codes. This means that from our £32,153 rental income, the tax we paid on that was £930 (2.89%). Why so low? This because not all rental income is taxable income. There are reliefs and allowable expenses which could be deducted before the final profit figure (taxable income) is determined. If we use the rental profit before tax (£9,384 + £2,478), then the tax rate on our property investment was 7.84% (£930 / [£9,384 + £2,478]).
So, the goals I set myself as we entered into this tax year was:
- Reduce our eating out expenses.
- Reduce our miscellaneous expenses.
- Ensure that Property 2 and Property 3 start cashflowing.
- Increase our FI Ratio.
How did we do?
Goal 1 – reduced by 69.89% = Achieved.
Goal 2 – reduced by 45.54% = Achieved.
Goal 3 – gross rental income increased by 41.25% and net profit increased by 178.04% = Achieved.
Goal 4 – increased to 54.14% = Acheived.
We think the most exciting numbers for us is our FI Ratio (shows how much of our passive income covers our expenses). Last year, this was 23.38% (excl. Misc. expenses) and 13.84% (incl. Misc. expenses). This year, it has jumped to a level we didn’t expect: 78.74% and 54.14% respectively. This means according to the maths, we are already at least half way towards FI. This is way ahead of our FI plan where we thought our rental would only cover 20% of our expenses at this point. This all boils down to two things: 1) we maximised our rental income by limiting void periods; and 2) reduced our expenses. As we continue to pay off the mortgage debts, I would expect the income to increase further. The question is, can we replicate this next year and perhaps even improve it? I’m not sure, especially as we plan on growing our family which might increase our expenses.
Perhaps we need to set tougher goals for the new tax year (2018/19). So here goes:
- Maintain or increase our FI Ratio.
- Reduce Misc. expenses.
- Increase our savings rate.
- Remain as basic rate taxpayers.
There you have it. Another year over and another year closer to FI. Would you do anything differently in our shoes? Also, please let me know if you spot any mistakes in my calculations (I’ve already had to correct some Excel formulas).