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 1||Year 2||Year 3||Year 4|
|Net income||£955/m (220/wk)||£1250/m (288/wk)||£1666/m (384/wk)||£2083/m (481/wk)|
savings rate 52%
savings rate 50%
savings rate 50%
savings rate 50%
|Essential expenses||£237/m (55/wk)||£237/m (55/wk)||£237/m (55/wk)||£237/m (55/wk)|
|Non ess. expenses||£48/m (10/wk)||£48/m (10/wk)||£48/m (10/wk)||£48/m (10/wk)|
|Remainder||£170/m (40/wk)||£345/m (80/wk)||£551/m (127/w)||£758/m (175/wk)|
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.