Where has the time gone?
I hope you had a good weekend. Can you believe it has been two years since my last proper numbers post where I shared our income and expenses?
There’s not been a specific reason why it has taken me this long to write about our 2018/19 (Tax Year) numbers. That’s not a typing error. I’m not talking about the tax year just gone but the one before that.
I think I just found other posts more interesting to write. Also, I wasn’t sure sharing my numbers would actually be that useful to anyone.
I haven’t hidden the fact that our household income has been growing over the years, but more recently due to an unexpected inheritance, there had been a growing sense of guilt. Maybe that has made me more conscious of sharing.
One of the main reasons I started the blog in the first place was for it to act as a diary for my kids to read back on – to see how we managed our money.
However, secondary to this was for it to act as a place for me to record our progress, keep us motivated, see how my views change over time and allow anyone else interested enough to read about our journey.
Also, I personally find reading how people manage their money interesting and the numbers help to add context.
Remember, this is a snapshot in time during the tax year 2018/19.
Without further ado, here are our numbers.
Gross Household Income
Our joint gross (pre-tax) income from our jobs (Police & RAF) increased substantially compared to last year – to £101,500. This was mainly due to two reasons.
First, Mrs. CfC took nine months off on maternity leave the year before (2017/2018 Tax Year).
Secondly, Mrs. CfC reached a point in her service where she received a taxable retention bonus.
Our rental income also increased substantially. This was all down to Mrs. CfC receiving an unexpected inheritance. We also sought some tax planning to ensure one of the gifts she received many years ago didn’t fall foul of inheritance tax rules around an imperfect gift.
The summary of all this is that from tax year 2018/19 onwards, we would have two additional properties added to our portfolio which provided rental income.
One we let out as a single let; usually to a family or a couple.
The other my mother-in-law lives in but pays us rent at 50% of the market rate (the portion of the gift which would be deemed as imperfect).
Reds across the board here.
It’s true, children do cost money. This was when we still had one child and didn’t even pay for childcare!
Towards the latter end of the financial year, we moved to a three-bed due to a second child on his way. This meant a small increase in the cost of our military quarters taking the total annual subsidised rent to £2,975 (£248 per month).
With the eldest being a year older, we ate out more. We just got tired of cooking and prepping so much. For most of that year, Mrs. CfC was also pregnant with our second child, so we just wanted to eat out a bit more before the second one arrived which makes it even more difficult to go out. This meant that our eating out costs ballooned to an average of £145 per month (£1,743 per year).
What’s consistently low is that as a family, we don’t generally spend much on clothing (£109 for the year). We wear them out until they are completely worn and then repair them.
Also, I tend to mainly wear hiking clothes and footwear because they are more durable. I still have t-shirts I bought whilst at college which I wear to this day.
The children’s clothes mostly come from charity shops.
Our life and work related insurance also includes critical illness cover for each of us as single policies which are written into trust.
No travel abroad for this particular tax year so a massive drop in our miscellaneous expenses, down to £302 for the year.
Overall not much else to say apart from having children is both rewarding and draining (physically and emotionally) at the same time. As a result, we loosened the purse strings in areas which might make our life a little easier.
As we progressed towards paying off our mortgage debts, our annual mortgage interest continued to reduce substantially every year; costing £6,741 in total. We’d decided to change our strategy a bit, but more on that when I get around to updating our FI Plan (see original here).
The utilities cost is for our residential home where I base myself when working in the South East. We have lodgers in that property which explains why I consider that as a ‘business expense’. For tax purposes, this makes no difference because we simply make use of the ‘Rent a Room’ scheme where we can earn up to £7,500 tax-free per year.
Over £4k on letting agent fees for the fully managed option is quite a significant amount of money.
I’m not convinced it is good value (it definitely isn’t).
The reality is that with a young family, both working full time and the properties we own no where near where we live; the slight reduction in stress is something we are willing to pay for at the moment. We’ll decide closer to the time if we will return to fully self-managing once FI.
With our living and business expenses, this brings our total expenses to £41,378.
We made £46,429 of capital payments towards our mortgage. There’s the age old debate of overpaying mortgage vs. invest the money. For us, we want the peace of mind of having a low LTV (loan to value) across our property portfolio; with the original aim of paying off all the mortgages by the time we consider ourselves FI. Having said that, as mentioned above, we’re tweaking our plan slightly.
Another thing which stands out from our investment that year was how little we paid into our ISAs compared to our SIPPs.
With changes in BTL mortgage interest tax relief, we wanted to reduce the amount of income which fell into the higher rate tax bracket. We’re also not used to be higher rate tax payers where we feel the sting more acutely because we keep such a close eye on our finances.
Our work pension personal contributions total came to £17,114. This was made up of the following:
- My Police pension, minimum contribution of 13.44% plus additional contribution of 21.56% for added pension. Total employee contribution of 35%.
- Mrs. CfC’s MoD (RAF) pension does not require a minimum contribution. However, she made an additional contribution of £2,200 for added pension.
We opened a SIPP and JISA for our eldest son within the first month he was born (we did the same for our second child in 2019). The contributions here were just for our first child because the second hadn’t arrived yet.
I’ve been asked a few times: why the relative focus on the children’s SIPP instead of their JISA? I’ve written about why we invest invest for our kids. The proportion between SIPP and JISA has shifted since then, but they continue to be weighted towards their SIPPs.
In summary, once they are 5 years old, the focus will shift. The main reason behind this is because I want their pension to benefit from the magic of compounding (70+ years worth). I totally understand the view that at 70, this money is less valuable to them than if it was available to them earlier in an ISA. I will explain more of our personal view on in a future post.
Our employers contributed £28,727 towards our work pension for this particular tax year. My Police pension is clear with the amount written on my payslip: the Police Authority contributes 21.3% of my pensionable pay (31% from 1st April 2019).
For the MoD pension, their contribution was 49.6% of pensionable pay. Seems high, but it makes sense because it’s non-contributory so the money needs to come from somewhere.
From April 2019, the MoD contributes a whopping 63.5% of pensionable pay:
“However, the part of the 2016 actuarial valuation which calculates the employer contribution rate required from April 2019 to meet the cost of the Scheme benefits has been completed. The MOD has recently laid Scheme Regulations confirming that the employer contribution rate will be 63.5% of pensionable pay from April 2019.”
It should be noted that although our employer contributions have increased, our defined benefits remain the same. The increase is due to ensuring that the cost of the schemes continue to be met.
Our total gross savings (including LISA bonuses, SIPP basic rate relief which is reinvested and employer pension contributions) was £115,928.
Once you take our employer contributions out of the equation, we contributed £82,202 towards our ‘savings‘ that year. I write savings in quotation marks because it’s a mixture of different forms of investments, but you know what I mean.
Quite a significant increase in taxes compared to the previous year. I didn’t include our National Insurance contributions in 2017/18 summary so it’s not a fair comparison. It would have been a big increase nonetheless.
We had to repay all our Child Benefit which is understandable. In the future, we will try harder to plan so that our taxable income remains under the higher rate tax bracket. This way, we won’t lose the Child Benefit.
Our net (after tax) household income came to £125,095; an increase of 20%.
I’ve included a separate calculation for our total expenses (living + business) with the property expenses added in. This is to calculate our FI Ratio below.
This is probably the most difficult part to report on.
It’s fraught with danger and assumptions, but I’ll try my best to explain.
I’m certain the estimated time to the Target FI I calculated (using simple Excel NPER function) is not accurate due to the how complex my situation is – property income, ISAs, SIPPs, savings bonds with different maturity dates and defined benefit pension schemes are to name a few.
With simple FI (I define as non-employment income >= expenses), then apparently we were financially independent at the end of tax year 2018/19 – according to our FI Ratio at the time.
I calculated this by:
Gross Rental Income / (Living Expenses + Business Expenses + Property Income Tax)
I took this approach by answering the question: if both of us were to quit (or lose) our jobs, would our rental income alone sustain us? (1)
The answer to that is yes; with 6% of our income to spare.
However, there are a number of important assumptions (not an exhaustive list):
- We maintain the same level of occupancy rate, which for 2018/19 was 93% (i.e. 7% void period).
- We maintain the same level of rental income. Rents can go down just as they can go up.
- We no longer make any regular investment contributions.
- We don’t go on holiday.
- We still have our military quarters / similar level of rent. This won’t be possible because once Mrs. CfC leaves the RAF, we intend to rent for a while. We could move into the house we have lodgers in, but that would mean less income.
- We pay interest only on the remainder of our mortgage balances.
I could go on.
Whilst we could make it work by budgeting our living expenses differently (e.g. less fuel due to no more commutes!), we’re not ready to call it a day yet. Also, bear in mind that we were higher rate tax payers that year so once we take employed income out of the equation, our property income tax would reduce to give us more money to live off.
There is also the option of liquidating our property portfolio and investing it in the stock market. The returns (historically) have been greater than property investment generally speaking. This is not something we want to do, especially given the current uncertainty and volatility in both the stock and property markets.
As a result of the inheritance, it has reduced our Years to FI by two and estimated that our Years to Target FI will now be just over four instead of nine (2). I’m treating these numbers with a pinch of salt because a lot can change within those time periods. Also, none of the free calculators I’ve found online (including my own) were sophisticated enough to model my situation so I don’t believe them to be accurate.
The numbers I am confident on in the FI section above are our savings rate and current FI ratio. This is because they were obtained taken from the raw data without any assumptions.
So even though the numbers suggest that we’re financially independent, in our heads we don’t feel quite there yet.
To quote Retire In Progress in a great article about the 4% SWR:
The truth? You decide when you’re FI.
So, we have decided that we’re NOT FI, because we still have some work to do.
I’ve even changed our site widget countdown to reflect it will be ‘our’ FI:
I’ve set our Target FI Ratio to be 200%; i.e. our income to be double our expenses. This will be achieved by increasing our rental income or reducing our anticipated expenses (post Target FI) whilst maintaining our savings rate of around 60% leading up to Target FI.
This means, if we continue to do what we’re doing, we might reach our desired Financial Independence level before I’m 39 – in three years at time of posting.
As I’ve mentioned in some of my earlier posts, we will continue to work and save until I’m 40 in 2025 – our original FI date which was set prior to receiving the unexpected inheritance.
So we have five more years to build our nest (2025 = Our FI Date). It’s not OMY (One More Year) Syndrome we have, but Five More Years Syndrome (FMY).
I know this goes against what many in the Financial Independence community believe (e.g. OLY – One Less Year).
For us, five more feels right at this moment in time.
Here is my FI Score Card (3). It was taken on version 2.6 of my FI Score Test [FIST] – I have updated it from version 2.5 to allow passive / side hustle income (including rental) to be taken into account in calculating the FI date.
It needs to be tested with a range of numbers and scenarios, so let me know if you come across any problems.
Always treat any free online calculator to work out when you will be financially free with extreme caution.
This includes my own!
Not least the assumptions and limitations; but there may also be bugs or errors in the formulas used (especially if created by a non-coder like me!).
Thoughts and Feelings
We now have a financial planner to help us with some cash flow modelling which also factors in tax considerations. The financial planner is also a general sounding board for us to discuss various ideas due to our not so straight-forward financial affairs. This is to ensure that our numbers are correct as we approach the point when we feel comfortable enough to leave ‘traditional’ employment.
2025 is also the date our financial planner was also confident with after checking our numbers. Although to be transparent; we asked if 2025 would be okay, rather than when would be the earliest date.
If were you to take away three things from this post, it would be:
- Don’t compare your progress towards FI against me, or others. Judge your progress against your own performance from previous years.
- The numbers are just a part of FI; when the time comes, you need to be comfortable with it in our own mind. Define it on your own terms.
- Don’t rely on online calculators – seriously consider getting a professional opinion when you believe you’re close to FI.
Finally, you’re probably wondering how we are feeling with numbers like above?
Muted excitement is probably the best way I can put it.
We are cautiously hopeful about our future coupled with a sense of nervousness. I’ve read this is actually a pretty normal feeling when people approach “traditional retirement”.
Heaven forbid, we are definitely not calling ourselves “retired” once we consider ourselves FI. The circumstances that have enabled us to fast-track our way to FI plays a large part in dampening any excitement we feel.
In relation to the nerves, they are more to do with unchaining ourselves from our secure stable employed income, paid holidays, sick leave, nice pensions and other perks.
It seems ridiculous to even consider giving them up in the current environment where many people are losing jobs and struggling.
There is also a part of me which wants to see how far I go in Policing.
I don’t think we have fundamentally changed as we become more financially free. If anything, the inheritance has heightened our responsibility and careful attitude towards money.
For us; sure, we’ve changed slowly over time in some respects, but the day when we were 10+ years from FI compared to now feels no different. These are merely numbers on a spreadsheet. What matters is how we feel about them and what we do with them.
I think we’ll become more excited once the abstract numbers actually makes a difference in our day to day living by giving us our precious time back once we leave our jobs.
Anti-climatic I know, but we are remaining very positive about our future and grateful for the financial position we are in.
(1) Being a full time property investor once we pull the plug can be another full time job in itself, one which we don’t think we want to do in the future. That’s a topic for another time.
(2) This is based on the Excel function NPER assuming our current savings rate, applying an inflation adjusted growth rate of 7% and taking into account our rental income in calculating our required FI number using a 3% withdrawal rate.
(3) Our savings rate is different from my personal spreadsheet (=59%) to the one on the FI Score Card (=58%) due to a slightly different methodology.
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