There is a wealth of information on financial independence online and in books and I have been devouring as much as I can over the last few months. It can feel a bit overwhelming so I wanted to come up with a plan in terms of where to start.
Most advice suggests taking stock of where your finances are right now. In The Rules of Wealth, Richard Templar’s rule number 19 is “You’ve got to know where you are before you start”. The Feminist Financier starts with “Inventory your Finances” as step one of her “5 Fabulous Steps to Financial Freedom”.
So I started with my assets as at the end of August 2017:
Flat – valued at £82,000 using Zoopla
Car – just purchased at £8,500
Savings account – £315 pretty measly but better than the zero I had a year ago
Current account – £2,035 I get paid at the end of the month so this looks a bit inflated; I don’t usually have much left at the end of the month
DB pension – £53,425 estimated by taking the current annual pension accrued and multiplying it by 25
Not bad! But obviously my liquid assets are somewhat lower at only £2,350. The flat and car I would need to sell to get my hands on those funds and the DB pension I can’t access until age 55 at the earliest and then with some early retirement penalties.
Moving on to my liabilities again as at the end of August 2017:
Mortgage on the flat – £56,081 at a very low tracker interest rate of 0.58% above base rate for another 25 years on an interest only basis. I already pay some of the capital off monthly and I intend to raise this amount to get it paid off completely within 10-15 years.
Loan for the car – £7,080 at a reasonable interest rate of 2.1% over 3 years
Sofa loan – £980 on interest free credit
Credit card – £2,131 this has just finished the interest free period and WILL be paid off in the next two months
Net worth £80,003
I’m quite happy with this as a starting point and it gives me my first few action points on my journey to financial independence.
- Clear the credit card debt first as it’s now the most expensive (September and October 2017)
- Then save up to pay off the car loan being the next most expensive (November to April 2018)
- Then make more overpayments on my mortgage whilst the base rate is so low (from May 2018)
The question while I’m working on the actions above is when to start saving and/or investing and at what rate given my other budget constraints. This requires looking at my monthly income and expenditure in some detail which had the added benefit of finding some costs that I could cut out completely – win!
So far this year, I’ve cancelled:
Gym membership – £15 per month
TV subscription – £40 per month
Boiler insurance – £24 (useful for some households but I have sufficient cashflow to pay for repairs or a replacement if necessary so I think it’s cheaper for me to self insure)
Total £79 per month or £948 per year
Wow! Almost £1,000 per year saved just by a quick review of my outgoings, well worth taking the time for.
After these cancellations and before anything goes to debt or savings, I’m left with regular bills of just under £300. Adding in £100 for annual bills (car insurance) and some contingency for house maintenance plus estimates of £300 for food, £200 for fuel and £200 for entertainment totals £1,100. With my net monthly income at £2,800, this leaves me with £1,700 to split between reducing my debts and increasing my savings/investments.
I’ve decided to aim for a 50/50 split but there’s no hard and fast rule for this. My debts aren’t particularly expensive so I don’t feel the need to focus all my extra money there but perhaps if you had more credit card debt with high interest rates it would be more beneficial to hold off saving until you’ve got it under control.
I will reduce my debts in order of most expensive (with the exception of the sofa loan; although it’s interest free I don’t want it hanging over me for another 3 years) — credit card, car loan, sofa loan, mortgage as per my action plan above. Another point for the action plan then:
4. I will split the amount for savings/investments by adding £400 each month to a regular saver account paying 3% interest with the remaining £450 going to a stocks and shares ISA (more on that later). The regular saver account will be used to fund holidays and will act as my emergency fund.
A note on emergency funds – The Feminist Financier’s suggests saving the equivalent of 3 months of expenses so here’s one more point for my action plan:
5. Get my regular saver account up to £3,300 as a baseline and then use the excess for holidays (and get better at sticking to a budget when booking holidays!). I think it will take at least 12 months to achieve this as I don’t want to give up holidays in the meantime.
I’m always happier with a plan and although there is a long way to go I’m excited to know I’m starting my financial independence journey with clear initial goals that I can monitor and review as I progress.
I’m always interested to hear from you! What do you think of my 5 initial goals? Where are you on your journey to financial independence? What advice would you give to someone just starting out?