Little FU#1 – Step 2 The Budget

I’m putting in place a quite simple budget plan for FU#1 that doesn’t need a lot of tracking and doesn’t require every little transaction to be logged.

I have broken the budget down to 3 main areas. These are Savings, Essential Expenses, and Non-essential expenses.

The goal of putting a budget in place is to enable FU#1 to save enough to buy a house in approximately 5-6 years when he is around 25 years old, and also to become FI in his 30’s.

The key to this is to automate savings so that they immediately come out of net pay, meaning that the money will not be missed and cannot be spent on other things.

As FU#1’s bank account does not have an overdraft facility this will force him to manage on the remaining money, and this then becomes his budget.

First, we need to know how much net pay he will receive in this coming tax year, April 2018 to April 2019.

This is going to be £11500/year or £955/month, as he is getting paid minimum wage for his apprenticeship at £5.90/hour for an 18-20 year old.

To get to a 50% savings rate he is going to have to save at least £478 from his earnings each month. Is this achievable on such a low wage?

Well, over the last 18 months since starting work he has saved £2500 on £10000 of earnings, giving a savings rate of 25%. This means his average spend per month has been £7500/18m = £417/month.

Therefore, yes, he will be able to achieve the 50% savings rate if he maintains his current spending levels.

In the formulation of the budget, I have conservatively assumed that he will get a pay increase of £5k a year, up to a net income of £25k in year 4.  I have also ignored his auto-enrolment pension contributions taken out his pre-tax pay.

So in year 1 he is earning £11.5k (actual), year 2 £15k, year 3 £20k, and year 4 £25k.  After year 4 I have assumed things will stay the same for now.

I have also assumed his expenses will remain similar over this period as he will still be living at home while he saves a deposit for a house in a LISA. (might have to increase his board due to the food he eats :0)

 

Little FU#1 Budget Year 1-4

 Year 1Year 2Year 3Year 4 
Net income£955/m (220/wk)£1250/m (288/wk)£1666/m (384/wk)£2083/m (481/wk)
9-5 job955125016662083
Savings£500/m (115/wk)
savings rate 52%
£620/m (143/wk)
savings rate 50%
£830/m (192/wk)
savings rate 50%
£1040/m (240/wk)
savings rate 50%
LISA333333333333
ISA167287497707
Essential expenses£237/m (55/wk)£237/m (55/wk)£237/m (55/wk)£237/m (55/wk)
Housing/board100100100100
Travel -bus100100100100
Phone30303030
Dentist7777
Non ess. expenses£48/m (10/wk)£48/m (10/wk)£48/m (10/wk)£48/m (10/wk)
Gym25252525
Spotify15151515
Amz. prime8888
Remainder£170/m (40/wk)£345/m (80/wk)£551/m (127/w)£758/m (175/wk)
Fun money????

 

The above illustrates that it is possible, on a relatively average income and with careful planning/spending and discipline, to save 50% of your income with the goal to buy a house in your mid-20s and become FI in your 30s.

In my next post, Step 3, I will show the figures in a portfolio spreadsheet that I have set up. This post will explain the strategy of the choice of investments to be made, to show how the goals will be achieved, and to track the value of each type of investment made.

I am aware the budget figures may need adjustment as time goes on but I think anyone starting the FI journey needs to start somewhere. Don’t over obsess about getting exact figures.

After working through this exercise I feel that without a budget it would be difficult to understand where money is actually being spent, and to identify and automate the savings required if your goal is to achieve FI.

Any thoughts and comments welcome as always.

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3 Responses to Little FU#1 – Step 2 The Budget

  1. weenie says:

    “I have conservatively assumed that he will get a pay increase of £5k a year”

    I’m not sure that a pay increase of £5k a year is a ‘conservative’ estimate, unless he’s going to be switching employer after a year to get that hike in salary each time, or unless he’s on fixed salary bands?

    Average UK pay rise is only around 3%.

    • FU MON CHU says:

      Hi weenie

      Thanks for commenting. Good point you raise, and I probably could have explained in more detail but I have tried to keep the post easy to follow.

      Next year (year 2) when FU#1 completes his apprenticeship I have assumed (by law) he will be earning minimum wage, which is currently around £16k/year. He will probably be earning more than this, going by what similar colleagues are earning, but I wanted to keep it on the low side.

      In year 3, again, comparing his work colleagues, and jobs advertised for that level, they are earning around the £25k mark. I have kept it down to £20k

      In year 4 I have assumed he will reach the £25k mark a year later than he probably will?

      Does that make sense now, or do you think that is unreasonable? I’d appreciate further comment.

      I’m glad that you have questioned my assumptions as I am learning my way through this process and will inevitably get things wrong, so if people can point out any mistakes or put me right on anything I will gladly receive that.

      Thanks

  2. weenie says:

    Ah, that makes more sense, thanks for explaining!

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