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READER CASE STUDIES: We Make Six Figures & Struggle to Save Money. Help!
Welcome to the 7th Reader Case Studies on The Humble Penny.
The goal of these case studies is to solve real problems.
If you’re new to this, the case studies are a way for me to better interact with the subscribers of this blog.
I refer to the subscribers as The Fearless Generation because they’ve got to a stage in life where they’re seeking another path.
This generation wants to be debt free, create multiple incomes ethically, become financially independent, live fulfilling lives and ultimately Create Financial Joy.
These case studies are a way in which I can help to solve their problems via free coaching.
Solving such problems is what The Humble Penny was created and exists to achieve.
In addition, they get crowdsourced responses from other readers in the comments below.
Together, we can help ourselves and each other.
As these case studies are real-life situations, I commit a fair amount of my time to consider them and respond.
If you want your problems solved, simply write to me and tell me how I can help.
The key requirement is that you must be a subscriber of The Humble Penny.
Your problem has to be within one of the categories of this blog.
I.e. Money Making, Money Saving, Investing, Side Hustles, Debt Free, Financial Independence, Blogging, Relationships, Life, etc.
You can also choose an alias for privacy reasons if you prefer.
If your case is chosen, I’ll write to you immediately and let you know.
Simply write in and I’ll attend to you personally.
Now let’s dive into this month’s case study:
Letter from Vivian:
Thank you for considering our case study. I have read the previous ones and thought you might be able to help us.
My name is Vivian (36) and I work as a Social worker. My partner’s name is John (37) and he is a Business analyst.
We have two children below the age of 7 and we live on the outskirts of London.
We are currently in a situation whereby we make good money each month but still struggle to save money.
In fact, it feels sometimes like we’re actually getting poorer as there is so much to pay for and we just struggle to balance things.
Together we make a joint income in excess of £115k which is ok I guess, but it just feels like we are still struggling to balance saving, managing debts and having some luxury.
We have savings of approximately £10k but have struggled to increase this for a while.
Our debts are approximately £10k and are a combination of credit cards.
We like to go on one couple’s holiday and one family holiday every year which can total to £5/6k depending on where we go.
Our recent one was to Jamaica.
It all seems quite straightforward and easy but as aforementioned, getting that balance just seems so difficult.
Here’s a brief of our income and expenditure:
Income after tax etc totals up to approx. £6,200 per month
Our monthly expenditure is as follows:
Council tax £200
Credit cards £400
Insurance on two cars £140
Mobile Phones £40
TV license (paid yearly) £140
Building and contents £50
Electricity / Gas £100
Sky digital £51
Music Classes for Child 1 – £65
Ballet Classes for Child 2 – £40
Athletic Classes for Child 2 – £46 (every 6 weeks)
This totals up to £3,529
This leaves a surplus of around £2,671 and on most occasions, we can save £1k per month, however, the rest is eaten up by a range of things from home improvements, car expenses, other child expenses or eating out…
Things always come up, it seems!
We own our home that’s currently worth £375k. It has a mortgage of £227k and we have 26 years left to pay off the mortgage (1.69% rate).
So in view of the above, we have the following questions:
- We are both contracting, however, how important is it to pay into a pension? I pay into one but John doesn’t think it’s important as his emphasis is to save and invest himself (he currently trades).
- Is it good for us to both be contracting or should one of us be permanent for security?
- Is it best to use our savings to pay off our debts or pay off our debt separately?
- How do you balance debts with important luxuries? E.g. family holidays, Or even things that come up with the children?
To conclude, John is very disciplined with money however I struggle from time to time in this respect as my ethos, like most are to work hard and treat yourself (not all the time).
Whilst our goal is to be debt free and financially independent, to be so frugal with money almost feels like I am denying myself every pleasure and this often leads to me being disciplined for short periods and occasionally binging on luxuries…HELP!
More about Vivian and John:
1. What are your dreams for the future?
Our dream is to be completely debt free in the next 10 years.
2. What are your hobbies?
We enjoy going on holidays around the world. Every year, we try and go on at least one big holiday.
3. What is your biggest money-related concern?
Being in debt is an ongoing fear and our worry is about how we would cope if one of us becomes unwell long term.
I say this because I had a cancer scare recently and thankfully I am well.
However, it has enabled us to reflect on how easily it could happen to anyone. This is also why I think it is better for one of us to be in a secure job.
4. Please share either a picture of yourself or something precious to you or a dream holiday
Our dream holiday is to Mauritius:
Ken’s response to Vivian and John:
Thank you for taking the time to write in. I hope you’re both well.
I really enjoyed reading your case study as it is one that many people will be able to relate to.
The challenge of trying to save money at any income level is a common one and is made more interesting where the income level is as high as yours.
I’d like to start off by directly answering the questions you’ve sent me, and then I’d like to comment on other observations.
As usual, please note that none of what I share below should be taken as financial advice!
Before we dive in, I’ve taken the information you’ve given me and created a couple of tables for more insight:
You can see from the above some important metrics about your current Financial position:
Your estimated net worth is £148,000.
You have around 2 months worth of expenses covered by your savings.
This implies you’re in between the stages of Financial Solvency and Financial Stability on the money journey.
Your net worth currently covers 2.4 times your annual expenses. You need this to be 25 times or more to be Financially Independent.
The ratio of your Liabilities to Net Worth is 1.6 times. You ideally want this to be 1.0 times or less to know that your lifestyle isn’t mainly being financed by debt.
Ok, let us dive straight in, starting with your direct questions to me:
1. We are both contracting, however, how important is it to pay into a pension? I pay into one but John doesn’t think it’s important as his emphasis is to save and invest himself (he currently trades).
Contracting has become a way for many people to increase their gross incomes quite quickly, but this often comes at a cost.
One such cost is the lack of a pension. The one obvious benefit of going permanent is the benefit of an employer pension.
Given auto-enrolment, your employer is obliged to pay in at least 3% into a pension for each of you, and you have to pay in 5%.
So you both have the potential of at least 8% contribution per annum.
Most employers do better than the minimum and some of them match your contributions up to a certain maximum.
The key point I’m making here is that you’re potentially leaving free money on the table by contracting.
This is made worse because although you are contributing something as a contractor, your husband is not at all.
Other benefits of going permanent include health insurance and possible life cover. Having looked at your expenses, I did not see any expenses towards these insurance covers.
As such, you’re opening up yourself to a potential problem without certain covers in place, especially given your recent cancer scare.
Focusing on your actual question, pensions are important not just because they help you to save and consider the future, but they also offer you important tax benefits.
E.g. For every £8000 you contribute, you get back another £2000 within a month or so, and then another £2000 through your tax return.
These rebates indirectly help you to reduce the tax you pay annually, whilst boosting your pension pot.
NOTE: The need to save money into a pension is important. But it has to be balanced with your need for liquidity as you can’t touch your pension till you’re 55! If you need access to your money, saving into your ISA and using up all your annual allowances might be a preferred route.
I noted also from your question above that your husband prefers to “save and invest himself (he currently trades)”.
Whilst this is interesting, it is not the ideal path to guaranteed wealth creation.
Most people who trade don’t make money and this could become an expensive experiment over time especially if you have goals such as Financial Independence.
Is he making any money from trading? And how consistently?
Capital will always make more money than labour especially if positioned properly.
So I’d highly question the use of his time to trade if, on review, you aren’t making money overall.
2. Is it good for us to both be contracting or should one of us be permanent for security?
The path you take should be guided by which one gets you to your goals quickest.
Your immediate goals are to become debt free and then your long term goal is to become Financially Independent.
If contracting gets you the most money, then you need to use that money better in order to get closer to your goals.
Focusing on ways to save money better coupled with putting in place the right controls will help you curb spending.
Choosing the path that makes you the most money is not all you should think about. Putting in place certain protections (usually insurance) will also help to give you peace of mind.
3. Is it best to use our savings to pay off our debts or pay off our debt separately?
You have £10k in savings and £10k in credit card debt.
Given you currently have 2 months worth expenses saved, I’d say that the level of financial stability you have is more important than the immediate need to pay off the full balance of your credit cards.
Credit cards debt is certainly one to prioritise and spend more on.
Especially with some of your money going towards things such as home improvements, which can wait.
I'd simply save money from other areas and allocate more to paying it off each month.
Alternatively, pay part of it off from savings to accelerate things.
4. How do you balance debts with important luxuries? E.g. family holidays, Or even things that come up with the children?
Your debts are not as bad as you might feel they are.
Given your current earnings of £6,200 net p/m, there is absolutely no reason why you can’t clear a £10k credit card debt in 5 months or less!
Your essential spend is circa £3,307 p/m (see above) and that includes childcare fees.
If you want to be free of debts, the word “luxuries” shouldn’t be in your vocabulary at all.
At least for the short term.
The debt you have now and how you approach dealing with it is a good test for how you’d approach longer-term goals such as Financial Independence.
Rather than try to balance luxuries with other expenses, you should instead put a line through luxuries (for now) and focus on key essentials to clear your debts.
1. Bingeing on Luxuries
You mentioned earlier that denying yourself of luxuries means that you are disciplined for a short period and then you find yourself binging on luxuries.
This is partly a self-control issue, which does take some time to get better at.
It's also partly because you either:
- Have no controls in place (e.g. detailed and workable budgets), and/or
- You aren’t communicating with John (who is meant to be disciplined), or
- John is not that disciplined to consistently curb ad-hoc bingeing.
I’d highly recommend removing any proximity you have to your savings or credit cards.
Make it hard to spend money, so this way you aren’t digging a bigger hole for yourself.
I’d also suggest you put a better control in place as accountability for all expenses.
When you binge on luxuries, do you have to run expenses past John? Or do you have separate finances (i.e. bank accounts etc)?
I’d suggest having some materiality in place E.g. ALL expenses above a certain amount (e.g. £20) has to be run past each other.
This might sound a bit drastic, but you’d be amazed by the results especially when you can veto each other’s expenses.
2. You want to be Debt Free in 10 years
Becoming debt free including mortgage free in 10 years is entirely possible.
It does require a big commitment to overpaying on your mortgage and adjusting your lifestyle for the necessary savings.
You currently pay £893 per month and have a mortgage with 26 years left.
To get rid of that in 10 years, assuming your mortgage rate remains fixed, you’d need to pay £2,057 a month towards your mortgage.
That’s an extra ~£1,164 a month.
Given your level of income, this is actually possible with certain adjustments.
However, there is an opportunity cost too as it might mean you aren’t saving enough to invest in other asset classes outside your home.
Although paying down your mortgage increases your net worth naturally, it also increases your net worth concentration in one asset.
And then you throw in the fact that your house is also highly illiquid and it is unlikely you will sell it to realise some money towards other goals such as retirement.
Hopefully, my point here is clear – overpaying on your mortgage is a good thing but it depends on individual circumstances.
You need to balance this well with the need to invest in other more liquid asset classes.
This balance is particularly important with your lack of pension savings.
Prioritising paying off the mortgage helps because:
- It means your monthly expenses drop massively without the mortgage. The pot you need to achieve Financial Independence drops massively too!
- You are freer and can take more risks in life without fear of home repossession.
You can’t really go wrong if you get the balance right.
Related post: How To Pay Off Your Mortgage Early & Why You Should
A practical point about overpayments:
Be aware that most mortgages have a 10% overpayment penalty. i.e. you can't overpay more than 10% of your mortgage debt per year!
It's highly unlikely that you'd hit this any time soon, but just worth mentioning.
Also, if you ever want to make overpayments, all you do is:
- Call your bank and ask them for the Account Number and Sort code for overpayments.
- When you have this, set up a recurring standing order for the amount of overpayment.
- Then 3 or so days after you overpay, you'd notice the reduction to your debt when you log in online.
3. You’d like to become Financially Independent
I thought it would be helpful to run some numbers for you.
You make £6,200 a month and save £1,000 a month most of the time. That’s a 16% savings rate.
This implies you spend £5,200 a month or £62,400 per annum.
To become financially independent, you’d need a net worth of at least £1.56million i.e. £62,400 divided by an assumed withdrawal rate of 4% per annum.
To stress this further, if we assumed a withdrawal rate of 3%, you’d need a pot of just over £2 million.
The reason for this is because your current level of expenses per month is very high.
My calculations show that it would take you 31 years to become Financially Independent if you:
- Maintain your current level of expenses
- Keep your savings rate at 16% or £1,000 a month
At that point, you’ll be hitting the age of 67.
This assumes that the £1,000 per month is invested and generates you a real return (i.e post inflation) of 5% per annum on average.
Relatively, this is not a terrible place to end up because most people who hit retirement age barely have enough to sustain them and have to rely on the state pension.
The interesting thing about your savings rate is that it has a really big impact on when you can achieve Financial Independence.
I sensitised your savings rate and assumed a scenario where you saved £2,000 (32%) rather than £1,000.
The results are pretty dramatic!
You move from 31 years to 21 years to achieve Financial Independence, and you get there aged 57!
If you pushed things further and saved (and invested) 45% of your net income i.e. £2,790 per month, it would take you 15 years to become Financially Independent.
There are ofcourse other ways to get there a lot quicker beyond just savings.
However, getting it right with what you currently make is a massive step in the right direction.
You’re in a good place financially as far as your income is concerned. However, you aren’t putting that money to work for your future in the best way you can.
Yes, you want to live for today and enjoy some luxuries.
I would argue that a life of future financial independence requires significant trade-offs today.
Given you now know this, it is in your best interest to take further stock of your financial position and come up with a clearly defined plan (in numbers) for your future goals.
This should include putting in place necessary protections given you’re a young family with a large mortgage.
You currently have the advantage of being in your mid-30s. If you take this seriously enough and take action today, you’ll have a bright financial future ahead.
What are your thoughts on Vivian & John’s situation? How can they save money better? What other tips can you offer them generally?
Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.