How much of an Emergency Fund should you have

So now you know how my Emergency Fund is structured, I thought I would do the customary post on how much you should have in it!

There is always a lot of talk about how you should have an Emergency Fund, and then how much should you have in there. The normal guidance is 3 – 6 months living expenses in case anything comes up. I tend to flip around quite a lot on this – at one point I have held virtually no emergency funds (as things came up), and slowly built back up. Right now, if I take just cash and cash equivalents, I have just over 3 months of income available to me (having put half of my cash ISA into CTY). I chose income rather than expenses, as I want to make sure I can still fire off my regular savings investments, and to date the only time I have needed to go into my true emergency fund is when I have taken time off between jobs (it has been up to 3 months) so I always question the validity of this. If I was FIRE then I would probably maintain some form of emergency fund to balance out downturns (likely a year or two’s worth), but right now too much cash seems a waste.

I am experimenting with the Go T’ Pub ISA to see how long I need to keep my emergency cash in the stock market before it becomes a no brainer. Given the returns on cash are so low, automatic reinvestment of dividends from an IT should allow it to grow faster, and I need to be prepared for an up to 50% drop in the price and still be able to sell it. Under no circumstances should you consider this without doing enough suitable research, planning etc. This is most definitely not a recommendation for you!

In essence it comes down to how you want to play it. If you earn £10,000 a month (I wish!) and only spend £2,000 a month you probably don’t need much of one, but if you earn £2,100 a month and spend the same £2,000 a month I would suggest you build one, fairly fast! I take the view that I can cope with “small” emergencies quite easily (e.g. an unexpected car repair bill or boiler repair etc.) on the day to day approach, although that means going into the Cash Flow Fund.

Recently I have found myself questioning what would I need the emergency fund for, exactly. Yes an emergency, but that is a rather flippant comment. What is an emergency that I can’t cover normally. Losing your job is the obvious one, so not living pay cheque to pay cheque will help, and you will need some cash, but how fast realistically can you start work in some form again, be it an Uber drive, shelf stacker or another company in the same career (or even freelance).

I am lucky in that I get paid in arrears (so for the work I do in say April, I get paid at the end of April), and that pays for the next month’s expenses (so May) so I am in a strong cash flow from that point of view, or a bad one that I still need to work! I have yet to lose a job, I have always quit on my terms, so I have been able to build up cash so it didn’t come as a surprise.

I’ve held several parts of my emergency cash for years, and never needed it (granted at one point I did use my overdraft for a month or two).

Why am I moving some of my emergency cash into stock? Well, I want my money to work hard for me. Each £10 a month the portfolio generates, that’s £60 less I need to save into the emergency fund. It’s going to be an interesting experiment, and will take a good 3 or 4 years before it bears any real fruit, and it certainly isn’t for most people, but I work on the principle that I can cover most emergencies as is. Even when we moved home, I only used on fraction of my emergency cash even then – my cash ISA didn’t get touched.

That said – the comfort of knowing I can last a few months, continuing to invest, without a thought is a comfort, although taking money out of premium bonds or a cash ISA would be hard for me… but each to their own!

I certainly wouldn’t be happy with less than 1 or 2 months cash readily available but I don’t feel the need for much more than 3 months whilst I am in accumulation phase – the more that I can get into investments, the better!

How much do you keep in your emergency fund?

Discussions in the pub

Inevitably at work, you will find situations where you end up in the pub with a number of your work colleagues (if you are lucky, you may even get a tab or expense account in play which makes it an even greater pleasure!). Hopefully these are at least some form of fun and you have something in common with your colleagues. It normally ends up talking about work, but when its someone’s leaving drinks, then plans for the future often come up, and occasionally, very occasionally, the money or finance discussion starts up. This happened to me when we went out for drinks a little while ago, with a large variation of ages represented in the group, and there were a couple of key items that came up, from two different perspectives. It was the similarity in the view of money however is what struck me – since when did it become a big thing to be proud of the amount of debt you have?! [Note: You may need to subscribe for that link but it is talking about Kanye West’s $35 million debt]. Whilst people in the UK seem to have an aversion to talking about wealth and money (I hold my hands up of being guilty of this as well – only a very few know roughly what I earn, never mind the exact amount), let alone any form of wealth – should we be? Surely being able to say you have £X,000 in a pension account should be something to be proud of?  I’d certainly rather have an ISA producing me £1 a month than the latest Apple Watch, that’s for sure (especially watching people trying to use it to pay for a bus ride in London!).

Individual 1: They have fairly recently retired, and so enjoying their time out of the office – mostly doing things with friends “for free” – something that anyone can do even when working. Asked what the biggest transformation was going into retirement, the answer was the inevitable “cut in income”. What amazes me is that this doesn’t come as a surprise (before retirement they had mentioned the same), but that rather than try and do something about it, they just shrugged their shoulders and ignored it. It was just accepted that you have to take a pay cut in retirement, and so need to be prepared for it. Surely its better to try to not have a cut in income? If you knew this was coming why not try and scale back a little? Granted I don’t know if the individual still has a mortgage or not, or any more details of what they may get up to in their private life, but I for one don’t intend to take a cut in expenditure (i.e. my lifestyle) when I retire – if anything I want it to go up!

It never ceases to amaze me that people think that you don’t have an option but to take a pay cut when you stop working. If you know you will take a pay cut why not get used to it? Lets face it, when you retire you should have no need for a Starbucks (unless you need to rest those tired legs and put your walking stick somewhere, but there are plenty of free benches around the world…). It was a great reminder to me as to why I am tracking my spending and generated returns to make sure that the lifestyle I have in retirement will be, at worst, the same as I have now. Simple spreadsheets can give you all the predictions, and yet so many people seem to stick their head in the sand when it comes to money.

I really struggle to get my head around why people are happy to assume that they will have to take a massive drop in income when they retire – especially when they seem to know this is coming 40 years or so away! Maybe the human mind is not able to grasp that concept in general and it is us freaks in the FI community who can?

Individual 2: They were moving home – granted for a sensible reason (to be closer to work), but it was interesting to hear about the impact this would have – higher mortgage (although no idea the exact numbers, and didn’t ask, it could be £2 a month more or £500, I will never know!) and less outdoor space, and a smaller property. The interesting thing was the view that the bigger mortgage was required, “and you have to do it, don’t you”. Do you? Why? Who says so? I totally get the needing to be nearer work, but I honestly can’t see that there wasn’t somewhere cheaper that would have fulfilled what they were after. I think London can be seen as the exception as if you work in central London and want anything less than about an hours commute then its likely to be over £500k for something reasonable both in terms of a place to call home and a location – but that is my opinion 🙂 For me, I tried living outside of London and commuting it. Yes it saved me money – but 5 hours a day on the trains and tubes, no thank you. I lasted one month at that before I decided to move up to London.

Why is taking on a much bigger mortgage a badge of honour?  You hear a lot about people buying McMansions (ok, partly guilty) and having more space than they “need”, but its finding what you need – for us, technically we could downsize. We won’t, and we will work longer for it, but we have the space we want. We lived in a 2 bedroom flat for some time, and it was just too small for what we wanted. Now we have a much better place – it’s still not what I would want from the bottom of my heart, but in London for that sort of pad, that may well even be out of reach of FvL!

Individual 3: This was probably a more eye opening one. They are a successful person within the company. Over beers one evening (I can’t remember now how we got onto the topic!) we had got onto the topic of retirement (the others around were somewhat older than I am – at a guess at least a decade or more). They were talking about having a dream of retiring by 50 when they started out, but then work, home expenses, kids all prevented this, and here they are still working. I managed to keep my mouth shut and nod along, not revealing that actually they could still have retired at 50 despite everything else. It seemed that once the “M” word happened then things went off the rails. I have no idea why, and they didn’t elaborate, but they are still working now a long way the other side of 50!

Since I first drafted this post, I was lucky enough to meet up with a group of friends we often go pub crawling with. To be clear – this isn’t a run as fast as you can and throw a pint down your throat type of pub crawl, but usually some really good ales, and some historic and interesting pubs or walks. With the amount of time we spend on the crawls (usually a good 12 hours), we tend to eat in the pubs as well, so it isn’t a cheap day but it is huge fun. Last time I had a long chat with the youngest member of the group who was having some challenges and we had a long chat about life in general. When we met up this time, it was clear that this message had sunk in and he has acted on it – he has really turned things around, thinking about setting up his own business and was generally much more “with it” and focused. I don’t know if this would have happened anyway, or if it was because we chatted and I wasn’t a family member or close family friend, I have no idea but it was a huge buzz to see their change. This time I dropped in the idea of savings 50% of every pay rise they get. Will they take that on board? I have no idea, they really are just at the start of their journey (still under 21, so some pubs are a bit of a struggle), but I will find out next time – I really hope they do!

Its always interesting to see what conversations come up when you are down the pub, and its interesting how fast you can clock who is clued up on their money, and who is the one blowing it. What about you – what do you ever cover off in discussions in the pub around money, if any? Or is it limited to who is getting the next round in?

2017-2018 (Tax) Year ahead and Goals

So as I continue to be an outlier in the personal finance space, and do everything based on the tax year, it’s time for me to start thinking about what I want to do in the coming financial year. I haven’t ever bothered putting down goals like this before, so this is quite a new one for me, so be gentle 🙂

It did occur to me the other day that I may be missing a trick as this combines the year end and tax side of things to the same time, so maybe I wont get as many posts out of it, but who knows.

In terms of looking forward to the new (tax) year, I am very optimistic. I think it is going to be an absolute corker of a year, but not without some challenges. Why am I so positive?

  1. Work. I continue to be employed and I am throwing myself into trying to setup for my next promotion. This is a multi-year task / investment and my most optimistic guess is that I will get there by 2020. Like investing, it takes patience and time to get there, but the rewards will be worth it. This will mean my time is even more taken up by work, but it’s an investment I am willing to make
  2. Pay rise. Ok, so I got a 0% pay rise this year. The silver lining is that this month I finish paying back taxes from the 14/15 year so I will actually get a reasonable increase in take home pay from that which will make things a little easier
  3. Assets / Net Worth. The last year was truly spectacular, however this was not due to any particular skill on my side really, but mainly due to overall rising market conditions. This makes me positive on two counts. Firstly, if markets continue to rise (I doubt) then my investments will continue to go up (and hopefully my dividends). Happy days! Secondly, if markets crash, I will be buying even more for my money in the knowledge that at some point they will go up again. Happy days again
  4. Increasing dividends. My other half’s portfolio will continue to throw out increasingly larger dividends which will allow me to pay more and more off the mortgage, or reinvest further. Already it is really starting to throw in some non negligible additional income so this really is starting to be beneficial
  5. Go T’ Pub Portfolio. I am really super excited for this to get started, especially having seen the income grow from my other half’s portfolio I really can’t wait to see this starting to kick out some serious cash. If I can get it to cover my yearly ski trip I will be really chuffed!
  6. Tax Refund. As I am going to put my entire bonus into my pension before the tax year end (assuming it arrives in my March pay!), this means once I have filed my tax return I will get another bonus on it in the form of tax rebate further in the year. This will go straight into my other half’s ISA and further build that income stream

So I have lots of reasons to be positive, and also I think positiveness breeds positiveness. It would be easy for me to look at my dry run goals and say I have failed on them (pending March update and reveal, maybe not), what is the point of even trying and drown myself in a sea of cheap lager and re-runs of Dads Army (or something similar, take your pick). Rubbish I say – look on the positive, I know this should be possible, it will be short term pain potentially, but then I may get a quarterly shop paid for in dividends. Or that trickle of wine will slowly grow in to a full blown river 🙂

With that in mind I started noting down a bunch of goals to come back to and fill out exactly what I would target on them and how to measure them. As I started writing up all the different goals (all financial), it became very clear that a lot of these are really rather similar – increasing my ISA values, reducing my mortgage, increasing my net worth etc. etc. They all boiled down in effect to one thing only.

My Savings Rate.

Yes I can pay down the mortgage or put more in to ISAs or pension, but that is only possible based on the savings rate. Why say I will over pay X on the mortgage and put Y into an ISA. Lets just go back to there is only one target.

I decided that I would put three levels for the goal:

  1. Base. This is the minimum – so what I should hit if I don’t change anything at all, anything below would be an abject failure!
  2. Goal. This is what I would like to achieve, what most would put down as their standard goal, and whilst a challenge shouldn’t be impossible
  3. Stretch. This one really should be something that pushes and hurts to try and achieve, but will have major impact if successful

Goal: Savings rate

My average savings rate over the last year or so has been pretty lousy – I can justify this due to some personal circumstances that has meant I haven’t always been able to plan as well as I would normally, and some special holidays and some unexpected purchases, but there is no getting away from it. If you want to FIRE you need a high savings rate. What I would say is this savings rate excludes my salary sacrifice into my company pension, and the tax uplift I get when money goes into my personal pension, hence it looks lower than it actually is.

I won’t include any bonus payments in this (even though they will go straight into my pension), nor will I include any tax refunds (that will go straight into various ISAs), so this is purely on my normal monthly pay.

Why not include them? Simple, the bonus I feel will warp my savings rate, and I wont get a bonus in retirement (I suspect). My overall retirement savings will continue to jump up and knock months off my retirement date from the added savings, but the amount I save / spend out of the regular income will remain there.

Base So, I know what I have spent over the last 18 months and what my savings rate has been, so I am going to set my base at a 20% savings rate average for the year. If I can avoid some unexpected big bills then this shouldn’t be hard but famous last words and all that.

Goal: Achieve a 30% savings rate average over the course of the year. Whilst I know this should, in theory, be easy to do, it is something I have failed to do over the last year – in fact only 3 months was it above this rate. If I can hit it I will be super chuffed!

Stretch: Achieve a 40% savings rate average over the course of the year. So I showed that I could do this as a one off back in January, but that was not normal circumstances. Will I be able to do it over the year? I honestly doubt it with a few big things this year, but this will hopefully drive me towards the higher 30s rather than the lower 30s

When I refer to savings, this is any money that is put away into one of the following:

  • A regular cash reserve fund
  • My ISA
  • My other half’s ISA
  • My Pension
  • Overpaying the mortgage

So… how will I do? Who knows – watch this space to find out!

What about you – what are your plans for the new tax year, if any?

Why I couldn’t ever match MMM low lifestyle cost

So this post is most likely to get people labeling me as a complainypants and telling me to drink a cup of cement and harden the f**k up – or something along those lines 🙂 Well I don’t think I am the first, but I can accept some of the second! I accept that this means I won’t be able to do the magical retire in 10 years, but you know what, I can accept that. I have suffered from huge lifestyle inflation, but I also know that retiring to a shed in the wood and foraging for mushrooms to eat every day just isn’t me 🙂

There are a number of things that for me are not negotiable, and I accept that this will add on a good few years to my working life. Would I like to retire earlier, or even be financially free tomorrow? Yes I would. Am I willing to give up the things I do now to allow for it? No. So, no change then. I do want to keep an eye on my spending and see if I can shave an extra £50 or so a month out of it, but so far I don’t think that’s too realistic. I thought to share my view on things here to show that early retirement is still possible even if you choose to not go for an uber frugal lifestyle – you just have to recognise that the more you spend, the longer it will take.

So why am I so sure I couldn’t even touch the MMM / Frugal extreme lifestyle? I am not willing to make the sacrifices that some of the guys and girls out there do every day. So what are the key elements that are always batted around?

Housing Costs

The typical is buy as small a home as you can and keep it as cheap as possible and make it a doer-upper. So where to even start on this.

Buy a small home. This is bad enough in the UK, even more so in London given the costs of housing here. We moved from a 2 bedroom flat to a larger property – the 2 bedroom flat was too small for us, which sounds rubbish to most people I am sure, but to us it was cramped. I have absolutely no regrets about that, and in fact I am actually saving more money now than I did before, despite such a massive increase in my outgoings (i.e. mortgage). When we are not at work we do spend a lot of time at home, so comfort and space is important (don’t get me wrong it’s not a 10,000 square foot mansion in Kensington!). We like to entertain and have friends and family over, so again space is important and we can do that now.

I would still love to own a country estate don’t get me wrong, but that is highly unlikely 🙂 For now I will stick with where we are and continue to chip away at the mortgage.

The additional knock on effect is that the insurance to cover me (illness, income protection etc.) has also shot up due to the increased mortgage – but I wouldn’t want to leave our home. As I chip away at the mortgage, and my savings increase I will in the future be able to drop this insurance. So yes, I suspect I could slash my monthly outgoing on this section by 50%, but I wouldn’t want to as I wouldn’t be happy, and I do like being happy 🙂

So if you want the space, why not buy a really rundown doer-upper? Simple – I hate DIY and I am not good at it. Yes I could probably start learning YouTube clips and practice (and pay someone to come in and fix it when I make it go wrong), but honestly, that isn’t me. I’ve tried some and each time I think it will be a good idea I regret it. Really regret it.

Bills

Ok, I do keep an eye on the bills, although they are still relatively high compared to other FI’ers out there. Hands up, I don’t hustle through to find the cheapest energy rate (we haven’t changed in over 3 years), because the savings would be so minimal based on our current bills. Our Gas and Electricity bills are pretty low, and so the hassle of switching for me is not worth it for saving £10 a year. Yes, I could add that £10 into my savings, but in the scheme of things, I would rather have the hour or so back. Then you see news of some of the more minor providers going bust, I don’t worry about that. I could probably cut my mobile bill, but on a recent holiday I realised why I paid a slight premium (ok, it’s still only about £20 a month). Out of 5 mobiles, only my personal mobile worked with any consistency – others on different networks had trouble.

Groceries

I will look with interest to see how much the food for home has cost over the year, but I know of many others who live and eat far cheaper. I tend to buy in bulk (especially from farms when I can) so food tends to fluctuate, at the minute the freezers are fairly full after a recent top up, but otherwise we are generally reasonably cost efficient. Could we do it for a lot less? I suspect yes we could – I could give up meat (HAHAHAHAHA yeah right!). We do need to cut down on the amount we eat and that’s something we have been working on to a degree so that will also reduce the bill somewhat, but I suspect we are close to a level we are happy with. Even still at least it is not a huge obscene monthly bill.

Alcohol at home

Ok so a lot of the talk in the FI community is around home brew and limited alcohol intake. I know I could save an absolute fortune if I reduced the amount of alcohol I drank, and used home brew instead. Next year I do want to cut down the amount we spend on alcohol, however there is no way I will cut it out.

I tried home brew once. It didn’t work. It *really* didn’t work. It was so bad I poured it away. I also now don’t really have anywhere to put it so that’s another reason I probably wouldn’t get around to it. I do get a lot of pleasure from the wine we drink, so again that’s something I wouldn’t cut back. Could I save substantially more if I cut out booze? Yes. I would also be an incredibly miserable bastard 🙂

On the plus side I have tried to reduce the whisky and brandy we drink, so save the good bottles for a less frequent occasion, and now stick to more standards if we have already had a drink before.

By timing the offers that come up I can get some pretty good wine at a very reasonable price, but it does mean every so often I get hit with a large bill.

Eating Out

So within this I include the cost of buying my daily lunch. I don’t always buy the £3 meal deal (when I make my own lunch), but it’s definitely far more often than not, but does go part way to explain why this is higher than it may normally be. I don’t go out for meals that often, I think maybe a couple of times a month on average, so I do tend to enjoy it when I go out.

Why don’t I make every lunch meal at home? There are a couple of factors. Right now I have no fridge or microwave etc. at work, so have to take things in to work in a mini freezer bag which limits me generally to just sandwiches and pasta or rice salads (let me know any other suggestions if you have them!). I also calculated how much it cost me to make them – ignoring my time. I actually found making my own sandwiches was more expensive – albeit a lot nicer! Now I grant you my sandwiches have been legendary in size (they tend to be a four finger depth) as I need it to keep me going, so there tends to be a huge chunk of meat (expensive), some cheese, salad, chutney etc. in there.

In addition I get the supermarket reward points, and my credit card reward points at the same time! Every so often I will also get meetings over lunch where lunch is provided, so I get a free lunch then – but often I won’t know when that is so I may get it put in the diary the same day, so I get my homemade food for dinner!

I’m always happy to hear suggestions from others on this so please do let me know what you do for homemade lunches especially with no access to a fridge or microwave.

Alcohol Out

Ok so this tends to be quite a large spend, and I accept this – one reason I have tried to reduce just how much I go out. I have found I can blow through money like you wouldn’t believe by the time you have a few pints, maybe some wine and add in a bite to eat – it can soon add up. Again, I could drink tap water, but I do love the social environment and interacting and meeting new people, and here in the UK, what better place than the pub (or maybe a great little port bar?).

I have reduced the amount generally, although it is still important from a work and career approach for networking so I can’t always avoid going out, and I would say that roughly 50% of my meet ups are work related in some way or shape, but that is an investment in myself and my career.

Could I slash this budget? Yes. Am I willing to? Not completely, although it is definitely down over the last 12 – 18 months.

Transport & Cars

Living closer to where I work is not really that realistic (the apartments within a short walk are in the millions for a two bed one!), so I accept that there will be some commute, especially as my work location can change frequently.

In theory I could cycle into work (I say in theory – this is for another post!), but in reality I commute on public transport. It ought to be cheaper to buy a season ticket for the year but given the nature of my work this may not actually be the best, so I usually by a month travel card (if I am not going on holiday or there are multiple bank holidays) otherwise its pay as you go, and walking! I think the cost side of the public transport in that sense is pretty well optimised (other than cycling / jogging).

Yes, I could ditch public transport and start cycling in, but where I am at the minute that isn’t going to happen.

I do now own a (second hand) car after over 10 years without in London. Now it’s time to build up the no claims bonus. More recently we utilised Zip Car which was great, and a lot cheaper than owning a car, or we would hire one if we needed it for more than a few hours. Given the circumstances, we do now have a car although it doesn’t get used that much it is convenient to have from time to time.

I could sell the car as financially this would make sense, however for personal reasons this isn’t an option.

Holidays

So technically, is a holiday a necessity? No, in the scheme of things required to live it isn’t. For me though, FI is not just about “hitting the number”, but also how you get there. I would far rather take a few more years and explore places whilst I am physically able to (never underestimate how much hard work some holidays can be – even for a 40 year old, so I am glad I did some when I was in my 20’s and 30’s).

I love to switch off, explore new places and sites, as well as some more physical holidays, but of course these come at a cost.

Yes, I could not go on holiday for the next 5 years and really smash my savings rate but I would be such a grumpy bum it wouldn’t be worth talking to me! I try and tailor them down a little bit and certainly a lot less frequently than before but I would never take a year without a holiday.

“Other”

So this is the bucket catch all of things, anything that basically doesn’t fit in one of the above categories. Over the years I will be keeping an eye on it, and see if there are any trends (for example taxi’s I put under other) that should mean I need to break this out into more detail but for now, no.

Conclusion

Yes, there are plenty of places where I could optimise my costs and save a bit extra, but as it is I am as happy as I can be with the journey to get there. I could half all of the costs above I am sure, and knock a couple of years maybe off my retirement date, but the thing with FIRE is that it is a very personal journey – I am not willing to make the trade.

So, are you going as frugal as possible or are you taking the longer road?

What do you do for your lunches – any suggestions and recipes I should try?