Reader Case Study: Londoners Wonder About Buying A Property
We’re headed across the pond for this month’s Reader Case Study as we delve into university lecturers Betty and David’s query on whether or not to buy a home in an expensive area near London, England. Case Studies are financial and life dilemmas that a reader of Frugalwoods sends to me requesting that Frugalwoods nation weigh in. Then, Frugalwoods nation (that’s you!), reads through their situation and provides advice, encouragement, insight, and feedback in the comments section. For an example, check out last month’s case study.
I also provide updates from our Case Study subjects at the bottom of each Case Study several weeks/months after their story is featured. To see what past Case Study participants have decided to do, check out the Case Study section and scroll to the bottom of the individual posts.
P.S. Another way to get support on your financial journey is to participate in my free Uber Frugal Month Challenge, which we’re taking as a group in January 2018! Sign-up to join the over 22,000 fellow frugal sojourners who’ve taken the Challenge and saved thousands of dollars.
I probably don’t need to say the following because you all are the kindest, most polite commenters on the internet, but, please note that Frugalwoods is a judgement-free zone where we endeavor to help one another, not to condemn.
With that I’ll let Betty, this month’s case study subject, take it from here!
Hello, Frugalwoods nation! I’m Betty, age 30, and my husband David, age 29, and I are both British university lecturers in psychology, although in different fields. I work in developmental psychology, while David is in cognitive neuropsychology. We met in 2010 when we were studying for our PhDs at the age of 22 and got married in 2015. We’re both outdoorsy types who love hiking, biking and anything active. David is also a keen squash player.
Both of us are vegetarians and we have a shared interest in ethical issues more broadly. We spend our weekends getting out and about, visiting friends and family, going down to the pub, participating in various outdoor activities, taking trips and failing to keep up with the housework. We are always busy doing something or other and we are often guilty of ‘burning the candle at both ends,’ so to speak.
Betty and David’s Travels
After finishing graduate school, we caught the travel bug and enjoyed lots of trips around Europe as well as an epic four-week USA road trip in 2014, which included a marriage proposal at sunrise at the Grand Canyon! Our wedding was in the spring of 2015 (frugal but fun), after which we embarked on a two-year adventure of living and working in Asia. During those two years, we managed to build up our savings significantly, despite not being very high earners, and we saved around 50% of our salaries.
We could have saved even more but our main priority was travel, and we managed to do A LOT of it on a modest budget – we spent next to nothing on clothes, books, tech and other luxuries during this time. From 2015 to 2017, we took over a dozen trips around Asia and beyond and were fortunate to enjoy numerous amazing experiences such as visiting temples in Japan, hiking in the Blue Mountains of Sydney, climbing a volcano in Indonesia and traveling by sleeper train through Malaysia, Thailand and Vietnam. We don’t regret any of the money we spent as it gave us priceless memories and was a wonderful way to begin married life together. Our friends often refer to it as our “two-year honeymoon,” although I promise we did do some work!
Betty and David’s Careers
In July 2017 we returned to the UK as we managed to secure permanent (i.e. tenured) faculty positions at the same university. This was a huge relief for us because those positions are increasingly difficult to come by for junior academics (as anyone familiar with the ‘two body problem’ will understand). Now that we’re home, we’d like to continue to travel but will focus on areas close by, such as Scotland where David has yet to visit despite living only a few hours away!
The downside of our relocation is that we’ve moved to a very expensive area near London, because this is where our work is located. We want to purchase our first home, but the average property costs around £350k and houses are very small, especially by US standards!
The area is highly urbanized, which we are not keen on–we are outdoor folk at heart–but living in rural areas is even more expensive as it’s mostly highly desirable country villages. Where we live, the traffic is horrendous, public transport is eye-wateringly expensive, and the roads are not kind to cyclists (we know several people who’ve been seriously injured while bike commuting). Additionally, in our current roles, working from home regularly is not an option. Therefore, we think we can make the most of our situation by living somewhere within 2-3 miles of our workplace so that we can walk each day. However, it’s difficult to resist the idea of living in the countryside, even though that would entail a hellish commute.
What Kind Of House To Buy?
Added to this, we are unsure of what type of property to buy. There are some cheaper urban areas in our town, but these are quite sketchy (by UK standards) and I’m not sure I’d be 100% comfortable raising a family there, which we hope to do in future. However, they do offer more affordable properties and some areas are becoming improved with time.
The more desirable areas are fairly suburban–which we aren’t sure we are ready for yet–but they offer larger properties with bigger gardens. The house prices there are mostly driven by the good schools, which are currently irrelevant for us, but which we might care about more in the future if we do have kids!
Finally, I’ve struggled with a few health issues over this past year and was diagnosed with celiac disease. I’m also having further tests and investigations done for a potentially more serious illness, which makes me worry about our longterm financial security. We currently have a good amount in savings, but if we were to buy a house we’d need to use much of that for a downpayment in order to get a good mortgage rate. Our jobs are contractually secure (assuming Brexit doesn’t destroy higher education in the UK!) but I worry about where my health might be in the future. It would be very difficult for us to live on one salary in this part of the country.
Where Betty and David Want To Be In 10 Years:
- Finances: We’d like to be financially stable enough that we could afford to work part-time if we had kids, or if my health conditions necessitated. At the moment neither of us are motivated by early retirement, as we both enjoy our work, but it would be nice to be less financially dependent on our 9-to-5 jobs.
- Lifestyle: We would like to own a property of our own, somewhere that enables us to spend lots of time outside, but also very little time in traffic. We’d like to have children if my health condition allows, but I am conscious that I don’t want to plan my future around hypothetical children that we may or may not have. We would both like to continue to travel with some regularity, and one of the perks of our jobs is a lot of vacation time (8 weeks paid per year!) so we’d like to make the most of this within a sensible budget. Our parents live about 3.5 hours apart from each other, and we currently live right in the middle. We’d ideally like to remain no more than a 2-3 hour drive from both of them, but this would limit our movement in future. We would be open to more flexibility if needed, however. I think that while our parents are still around we will stay in the UK. We plan to stay in the same city for at least the next 5 years, as we have a lot of development opportunities in our current jobs. Ultimately I think we’d love to live somewhere more rural, with easier access to hiking and mountains and countryside. However I don’t think either of us would like to live very remotely, as we really like being able to have everything we need nearby without needing to drive everywhere.
- Careers: Neither of us are 100% sure that we see ourselves continuing in our current fields for the foreseeable future. I am quite motivated to move into a management position, but I’m not sure how this would fit with my other goal of being able to work part-time. David would consider doing some further training to enable him to move into a slightly more specialized field, but this would require taking a significant pay cut for three years while completing the training.
Betty and David’s Finances
|Betty||£28,446.72||After taxes, national insurance, pension contribution (optional, 8% before tax) and student loan repayment|
|David||£27,249.00||After taxes, national insurance, pension contribution (optional, 8% before tax) and student loan repayment|
|Rent||£1,050.00||This is average for the type of property we have (2+1 bed terrace with a small garden) in the area where we live. A 2+1 bed means that technically there are three bedrooms, but you walk through the second bedroom to get to the third as they’re adjoined.|
|Fun money||£340.00||This is our money (£170 each) to do what we want with. We could probably cut back! It includes most hobbies and entertainment/leisure (cinema, drinks out) as well as occasional stuff like gigs. David spends more at the pub and on events like rugby matches and I spend more on dinner with friends and non-essential clothes or make-up. It also supplements special events (see below) as well as some of David’s other squash costs (rackets, shoes, strings).|
|Vacations||£250.00||I save each month towards our travel fund to enable us to take one or two trips each year.|
|Groceries and household||£185.00||We save money by being vegetarian, but due to my celiac disease I have to buy some special (read: expensive) products. I try to limit these and we cook from scratch.|
|Council tax||£112.00||This is like property tax (the amount depends on the size/value of your house) and it pays for local services such as trash collection and the fire service.|
|Car costs (including insurance)||£95.00||We have one car between us. I budget this towards the annual costs of running a car (insurance, vehicle tax, service, parts) as well as saving towards replacing our car around every 8 years if/when needed.|
|Petrol (gas) for car||£75.00||We live fairly close to our workplace, so try to walk as much as possible. Cycling is not really safe where we live. We spend ~ £25 per month on gas to get to work and the rest is on travelling to visit our families.|
|Gas and electric||£59.00||We recently switched our supplier to renewable energy, which is cheaper than the standard supplier in the UK.|
|Charity||£50.00||We give monthly to three charities.|
|Gifts||£45.00||I budget a monthly amount to spend on birthday and Christmas gifts (I have a large family including 12 nieces and nephews).|
|Gym membership||£44.00||David has a gym membership for their unlimited squash court bookings. He plays 4-5 times per week, and courts would cost £7 each time, so this is the most economical option.|
|Squash club/match fees||£40.00||This is the cost of participating in individual and team leagues. It also covers dinner after each team match.|
|Personal care (including haircuts and contact lenses)||£40.00||David gets his hair cut once per month, I don’t cut mine often enough. We experimented with me cutting David’s hair but he likes it a certain way and it takes me FOREVER. Contact lenses are £20/month.|
|Eating out||£35.00||We typically eat out once per month together as a couple, but always using discounts or coupons. We might also eat out again with friends or family, but this comes out of our separate ‘fun budget.’|
|Essential clothing||£30.00||This is for stuff like new underwear or a raincoat. Basics only, no luxuries.|
|Special occasions||£30.00||We are in a phase where lots of our friends are getting married and the weddings are all over the country, which means travel, hotel stays and wedding gifts. We try to save money by using AirBnb and sharing with friends. The bachelor/bachelorette parties can also be expensive, as well as baby showers! We like to attend because we want to support our friends but the costs can spiral. This isn’t enough to cover the costs so we supplement with our monthly fun money.|
|Water||£28.00||This is a fixed tarrif, regardless of how much water you actually use.|
|Household||£20.00||Exciting stuff like laundry detergent and basic toiletries such as toothpaste.|
|Miscellaneous house expenses||£20.00||If anything major breaks (shower, roof, boiler) it is paid for by the landlord.|
|Internet||£20.00||Cheapest available plan, includes line rental.|
|Medical and dental||£20.00||Prescription charges and routine dental work (government subsidised).|
|David cell phone||£17.99||David has a monthly plan. He is tied in for another 20 months.|
|House insurance||£10.00||Basic buildings and contents insurance|
|Betty cell phone||£10.00||I recently bought a (cheap) used phone from a friend after having my iPhone 4S for 5 years! I now have a £10 per month pay as you go deal.|
|Joint Savings||£89,451.58||This is split across two different ISAs that are making insultingly small interest rates (0.5%) but the interest is tax-free.|
|Monthly Savings||£3,000.00||This is kept separately because it is earmarked for travel and car expenses.|
|Pension and Life Insurance||?||We both pay into an employer’s pension, the USS, (8% pre-tax salary, which they match) but it is almost impossible to know how much is in this and I am ashamed to admit I don’t understand how it works. I have tried but failed! It also includes life insurance.|
|Car||£7,000||2014 Ford Focus, bought (second hand) with cash, own outright|
|David’s student loan||£17,500||The amounts on our loans are approximate as we only get a balance update at the start of each financial year. They are at 1.5% interest and we pay them down directly from our employer via our salaries. Everything I’ve read says we should not pay these back at a faster rate.|
|Betty’s student loan||£6,000|
Betty and David’s Questions For You
- Should we even try to buy a house in such an expensive, and arguably unpredictable, market?! Prices are still increasing, so we don’t want to miss the boat, but we’re worried about purchasing at the peak of the market. Mortgage interest rates are currently low (1.5 – 2%), but Brexit is causing a lot of uncertainty. There are also my health problems to consider.
- If we buy a property, should we buy urban or rural? In a sketchy area that’s cheap? Or a safe, suburban spot that’s expensive? Should we buy small (we only need two bedrooms right now) or bigger to prepare for if/when we have children? Somewhere that needs renovations, or shiny and new? It feels like such a big decision and there are so many factors to consider. Realistically, we are going to be living in our current town for a minimum of 5 years, but likely longer.
- How can we move towards being more financially independent while living and working in such an expensive area?
- If we don’t buy a home now, what should we do with the money we have saved? Interest rates in the UK are very low but I’m reluctant to tie our money up in accounts or bonds that are difficult to extract from in case of emergency. I am generally very risk-averse, and I would only want to make ethical investments (i.e. no tobacco or armaments). An option would be to stay living in a rented property in our expensive town, but then purchase a place in a cheaper area of the country (perhaps near my parents) to rent out. This could allow us to get on the housing ladder without committing to high mortgage rates and also provide some security for the future.
Mrs. Frugalwoods’ Recommendations
Let’s start off by pointing out the obvious: Betty and David are doing FANTASTICALLY well with their finances! I am so happy to see their robust savings account and thrilled that they’re so mindful with their spending. A huge and hearty round of applause for a job very well done up to this point!
It’s Not About The Money
Now that we’ve gotten the money thing out of the way, I’ve got to break it to Betty and David that most of their questions–and their Case Study in general–is not about money. And that is perfectly OK! We tackle all kinds of quandaries here on Frugalwoods and I just so happen to LOVE the question of “what do I want to do with my life?” Because that’s what I think Betty and David are asking here. In reading through Betty’s description of their lives and her questions on home buying, the sense I get is that they’re unsure about exactly where they want to be in the future. Given that, I think the most significant piece of advice I can offer Betty and David is to spend time doing a serious, thorough soul-search. They should ask one another the following questions and truly meditate on each answer:
- What are your longterm life goals?
- Where do you want to be in 10 years? In 20 years? In 40?
- What about your current lifestyle might prevent those goals from coming to fruition and what can you do about it?
If you recognize these questions, it’s because I ripped them directly from the first step in my Uber Frugal Month Challenge (which, by the way, we’re taking as a group during the month of January 2018 and which you can sign-up to join here). In this Challenge and in life, what to do with your money must be calibrated based on what your longterm goals are. Not the other way around. Money is what can enable your goals to come to fruition, but money cannot tell you what your goals are.
Another set of exercises I recommend for Betty and David are the prompts I have for creating your dream bio and envisioning your lifelong accomplishments in this post: How I Figured Out What I Want To Do With My Life (And How You Can Too!). I encourage Betty and David to do these exercises together and talk through what they’re hoping to do in the long run.
And now for some more good news for our Case Study couple….
Betty & David Are In A WONDERFUL Position
Betty and David are in an optimal situation from which to figure out their longterm goals. Let me tell you what, people, nothing is better than saving a bunch of money while working to determine what you want to do with your life. It’s pretty much the best position you can be in. Scrooge McDuck aside, NO ONE has EVER regretted having money saved up–even if they’re not exactly sure what they’re going to do with that money.
Working from a place of financial security provides Betty and David with the opportunity to think broadly and truly consider the type of life they’d like to construct. I can tell you from personal experience that NOTHING is more liberating that realizing one day (it was March 29, 2014 for me) that you want to pursue an unusual dream and realizing that you have the financial ability to do so. Trust me, it’s the best. From this standpoint, I want Betty and David to feel really good about the opportunity they have to consider their longterm plans. Saving up a bunch of money is an excellent plan no matter what you want to do with your life.
And, as Betty noted, the unpredictability of her health problems is yet another reason why the couple is extremely wise to have saved up so much money. Betty and David are creating a financially stable platform from which they can figure out what’s going to be best–and most feasible–for their future. If Betty needs, or wants, to stop working for health concerns (or any other reason), they’re well on their way to making that a very real possibility. Having that option will alleviate stress and will hopefully make them feel confident about whatever decisions they need or want to make in relation to their jobs.
Betty’s Specific Questions
I want to tackle Betty’s specific queries on house buying, so let’s take each of her questions in turn.
#1: Should we even try to buy a house in such an expensive, and arguably unpredictable, market?!
I have no idea. Honestly, there’s no way for me (or anyone else) to predict what the market is going to do and I agree with Betty wholeheartedly that the looming Brexit makes the entire situation even more unpredictable. Unfortunately, there’s no way of knowing how Brexit will impact the UK’s economy and housing prices and I’d be lying if I said I knew what will happen in the wake of the UK leaving the European Union. Interest rates are never guaranteed to remain static–nor are they guaranteed to increase or decrease. It’s a challenging thing to accept that you’ve got to either dive in or hold off and that there’s no amount of prognostication that can tell you if it’s “the right” time to buy or not.
I am much more concerned with Betty and David’s own uncertainty about where they want to live than with the economy since we cannot control world markets, but we can help Betty and David control for the variables of their longterm goals. I’m all about isolating and controlling the variables I can control and letting go of the things I can’t.
#2: If we buy a property, should we buy urban or rural? In a sketchy area that’s cheap? Or a safe, suburban spot that’s expensive? Should we buy small (we only need two bedrooms right now) or bigger to prepare for if/when we have children? Somewhere that needs renovations, or shiny and new?
This question really gets at the heart of Betty and David’s conundrum. They are unsure of where they want to live and what type of home they want and there’s no way that I can answer these questions for them. There’s very likely no one right–or wrong–answer here. It’s all about how they want to structure their lives.
The advice I will give is that if Betty and David are this unsure about what type of property they want to buy, then they are not ready to buy.
Ideally, when you decide to buy a home, you have a set budget, a list of criteria that you’re hoping for, a list of factors you’re willing to negotiate on, and a clearly articulated list of potential neighborhoods. For example, when Mr. Frugalwoods and I bought our city home (which is now a rental property), we knew we wanted something within walking distance of public transit, in an up-and-coming highly urbanized neighborhood, with a solid school district, and a single family home with a low price per square foot. Having all of these decisions made ahead of time made our choice of home much smoother and easier.
To get to this place of knowing where and what they want in a home, I encourage Betty and David to do the following:
- Start going to open houses. I confess I am not familiar with how open houses work in the UK (UK readers please advise in the comments section!!!), but attending open houses is how Mr. FW and I taught ourselves about real estate and ultimately were able to purchase our two homes. Here’s my post on how to open house: Our 12 Tips For Visiting Open Houses: We’ve Been To Over 270.
- Make a list of what they value in urban areas and rural areas. Compare pros and cons.
- Perform a “test commute” from a more suburban/rural area into work. I find the test commute to be incredibly illuminating. Betty and David should find a suburban/rural property they like and then drive from there into their university at rush hour on a weekday to see how it feels. Is it awful? Not as bad as they expected? The test commute is how Mr. FW and I ruled out every single suburb we’d ever considered living in–we just couldn’t stomach the daily drive. This could solve their dilemma quite quickly and help them refine and hone their house search.
- Familiarize themselves with crime stats. Betty mentioned that some of the urban areas they’re interested in are “sketchy” and so I recommend reading police reports and crime statistics to get a true sense of the type of crime the neighborhood is experiencing. Cold, hard data was very helpful to Mr. FW and me in selecting our neighborhoods.
- Spend vacations visiting places they might want to live. If they’re interested in moving farther afield, they should utilize their ample vacation time to explore other parts of the country and investigate the local real estate options. This type of in-the-field research could help them realize that they want to live exactly where they currently are! Or, they might find the country town of their dreams.
To Betty’s question on purchasing a home that needs a lot of work–here are a few factors to consider: Do they enjoy doing renovation work themselves? Would it be a fun project to rehab a home together? Or an epically stressful, hated experience?
If they’re not going to do the work themselves, they should price out contractors and renovations and tack those expenses on top of a home’s price. Buying a fixer-upper can certainly be cheaper at the outset, but might end up costing more in terms of renovation work in the long run. However, if they do much of the labor themselves, it could be a financial goldmine.
At this stage, I’d say there’s no point in buying a home quite yet. But there’s a lot of legwork Betty and David can do to determine what type of home they ultimately want to own.
I’ll also add that buying a home is not the end-all, be-all of financial security. In fact, it’s often not a great financial decision at all! So I don’t want Betty and David to feel like they’re missing the financial boat by not buying a place right now. It is but one option of how your can allocate your capital, but it is by no means the only (or even necessarily the best). Plus, their rent is so very inexpensive that I’m not concerned they’re losing out on a cheaper mortgage–to the contrary, I imagine their mortgage would be quite a bit more every month. We’ll get to other options for their money shortly.
#3: How can we move towards being more financially independent while living and working in such an expensive area?
Betty and David are already doing an excellent job at this! Mr. FW and I reached financial independence while living in the astronomically expensive Cambridge, MA and so I can tell you it’s very possible to do so in an ultra-urban, ultra-expensive part of the world. In fact, in some ways, living in a city facilitates frugality quite well. Here’s why:
- Public transit and walking options. Betty and David are already availing themselves of the public transit/walking conveniences of city life. Mr. FW and I used to walk or bike most places in the city and owned one car between the two of us, just as Betty and David do. Now that we live rurally with no public transit or walking/biking options, we spend a lot more on gasoline!
- Free entertainment. Cities are notorious for their amazing free entertainment options. From free-to-the-public days at museums to street festivals to complimentary beer and wine tastings, cities are rife with excellent free things to do. Plus, just walking around people-watching is fabulous! Having a $0 entertainment budget was not a hardship for us at all back in our urban days.
- More competition = better prices. We spent far less on our groceries and other necessities in the city for the simple fact that there were more stores to choose from. We found the dirt cheapest grocery store and only shopped there. Based on how little Betty and David spend on their groceries, I’d say they’ve already figured this one out!
- The used market is on point. I can’t lie, I miss my used market in Cambridge. People sold/gave away/threw out the BEST stuff!!! Since cities are often transient and since residents often live in small apartments, people give away their used stuff like nobody’s business. We rarely had to buy anything new back in the city for the simple fact that Craigslist, our Buy Nothing group, thrift stores, and the side of the road were glutted with excellent second-hand items.
In my experience, one of the only things that’s more expensive–and unavoidably so–in a city is housing and Betty and David have done a great job of finding very affordable rent! I’m actually shocked at how little they pay–they’ve found a great deal! For a reference point, our mortgage in the city was $2,238.50. I could go on and on and on about how great it is to be frugal in the city, but instead I’ll just refer you to these two posts on the topic: How We Live Frugally In The City and The Ultimate Guide To Frugal Boston Living (works for other big cities too, I promise!).
#4: Part 1: An option would be to stay living in a rented property in our expensive town, but then purchase a place in a cheaper area of the country (perhaps near my parents) to rent out.
I’m breaking question #4 up into two parts. First let’s address Betty’s question on buying a rental property. This might be a great decision or it might be an absolutely terrible one because not all rental properties make money. Not all rental properties break even. Some rental properties are literal money sucks. Others are fantastic revenue-generating opportunities. It all depends upon the property itself and–even more importantly–the rental market in question. Some areas offer fantastic real estate investment opportunities–and support a well-qualified, responsible pool of tenants. Others, not so much.
There’s no way for me to advise on whether this would be a good decision or not without having in-depth knowledge of the area and market in question. However, Betty and David can totally figure this out! They can begin researching other rentals located in the area in question, the amount they rent for, what the tenant population is like (for example: is there a university nearby and hence lots of students needing rentals? Is it a popular vacation destination, etc?). What is the percentage of homes that are rented vs. owned in the region? If most homes are owned, who is going to rent this house out? Are there qualified property managers operating in the area? If not, would Betty and David manage the property themselves? What are the local laws/ordinances governing landlord/tenant relations? What are the prerequisites for obtaining a mortgage on a non-owner-occupied home?
All of these questions and more should be thoroughly researched before making a decision to purchase a rental property. I wish it were an easier process, but unfortunately, no two real estate markets are the same and there’s no one right answer on whether its’ a wise investment to become a landlord. I always recommend that US readers reference the real estate investing site Bigger Pockets and I’m hoping my UK readers can recommend a similar resource in the UK (hint, hint)!
All this to say, real estate can be a wise and revenue-generating investment, but it is by NO means a risk-free or guaranteed rate of return proposition. It’s essentially as uncertain and risky as any other form of investment.
#4: Part 2: If we don’t buy a home now, what should we do with the money we have saved?
Great question! First of all, Betty and David should set aside an emergency fund. An emergency fund is a cash reserve that’s held in an easily accessible checking or savings account that totals anywhere from three to six months worth of living expenses. There’s no substitute for an emergency fund and nothing but cash will suffice for this purpose. A car, a paid-off house, investments, fine china–none of these things are an emergency fund.
Lucky for Betty and David, they have ample cash to siphon off into an emergency fund. At their current rate of spending, I recommend they set aside anywhere from £7,877 (which would be three months’ worth of living expenses) to £15,755 (which is six months’ worth of living expenses).
Savings Accounts Side Note
One of the easiest ways to optimize your money is to keep it in a high-interest savings account. With these accounts, interest works in YOUR favor (as opposed to the interest rates on debt, which work against you). Having money in a no (or low) interest savings account is a waste of resources because your money is sitting there doing nothing. Don’t let your money be lazy! Make it work for you! And now, enjoy some explanatory math:
- Let’s say you have $5,000 in a savings account that earns 0% interest. In a year’s time, your $5,000 will still be… $5,000.
- Let’s say you instead put that $5,000 into an American Express Personal Savings account that–as of this writing–earns 1.70% in interest. In one year, your $5,000 will have increased to $5,085.67. That means you earned $85.67 just by having your money in a high-interest account.
And you didn’t have to do anything! I’m a big fan of earning money while doing nothing. I mean, is anybody not a fan of that? Apparently so, because anyone who uses a low (or no) interest savings account is NOT making money while doing nothing. Don’t be that person. Be the person who earns money while sleeping. Rack up the interest and prosper. More about high-interest savings accounts, as well as the ones I recommend, here: The Best High Interest Rate Online Savings Accounts.
After they’ve identified how much they want to have in their emergency fund, I see several options for their remaining money:
- Buy a house now. I think we’ve ruled this option out for the present as I don’t think Betty and David know what type of home or in what area they want to buy. No reason to jump into home ownership without being absolutely certain of these factors.
- Invest in the stock market. Their savings–which total an impressive chuck of change (well done!) isn’t doing anything for them right now. You want your money to be working for you as this is how you grow wealth. Money does not grow if left to sit on its own in a low-interest savings or checking account. Frugality and savings will only take you so far. In order to build wealth, you need to invest, either in real estate, or the stock market or some other venture. What I invest in, and recommend, are low-fee index funds, which I outline in detail in this post: For the Love of Frugal Hound, Manage Your Money Yourself! (by following The Simple Path to Wealth). UK readers, please chime in with your favorite low-fee brokerages! I recommend Fidelity and Vanguard, but I’m not sure if they operate in the UK.
- Pay off their low-interest rate student loans.
Whoa, whoa, whoa Mrs. Frugalwoods, did you just say “pay off their low-interest rate student loans”?!? I sure did and I’ll tell you why.
Why They Might Consider Paying Off Their Student Loans
While I have zero quibbles with low-interest rate debt (such as these uber low 1.5% student loans or a low, fixed rate mortgage), the only circumstance under which I have zero quibbles is if your money is doing something better. If, for example, Betty and David choose to invest their excess cash in the stock market, then there’s no reason for them to pay off these super-duper low interest rate student loans because it’s highly likely their money will generate a higher rate return on their investment in the market.
However, Betty noted that they are risk-averse and THERE IS RISK involved in investing. It’s very much a ‘nothing ventured, nothing gained’ proposition that is, ultimately, risky. For me, historical stock market trends make me feel confident in my decision to invest in low-fee index funds, but, it’s still a risk. And so, if Betty and David would prefer not to assume that risk, then a great, low-risk option is for them is to pay off their loans in their entirety. Otherwise, they’re paying interest (even though it’s only 1.5%) and not getting anything in return. Leaving their money in a savings account and paying interest on their debt isn’t what they want to be doing. In sum, I advise that Betty and David either invest in the market or pay off their loans.
Betty and David’s Expenses
No Frugalwoods Case Study would be complete without a stroll through everyone’s favorite… Betty and David’s monthly expenses! I want to preface my advice with the caveat that Betty and David are already doing an excellent job of saving every month. Much of my advice is predicated upon a question of whether or not they want to reach financial independence. Betty mentioned that they’re interested in potentially reducing their work hours to part-time or less, and if that is an earnest goal, then they will need to increase their savings rate.
However, if Betty and David decide they’re both comfortable with working full-time in their careers until a traditional retirement age, they really don’t need to change much about their spending and savings habits. It’s all a question of what they want to do with their lives, which is why I opened up my recommendations section with that prompt. As I’m fond of saying, you do not need to have financial independence as a goal in order to live a financially secure, stable lifestyle. It is but one option in the pantheon of ways you can manage your money and your life. So with that, let’s go through their expenses:
- Fun Money. At £340 per month, this is a fairly hefty sum for discretionary fun money. That being said, this is where knowing what their longterm goals are is crucial. If Betty and David are serious in their desire to reach financial independence and/or significantly reduce their incomes, this is a line item that’s ripe for removal. On the other hand, if they are content in their careers and happy with the prospect of working until age 65+, there’s really no reason to eliminate this. If they did decide to save this amount, it’d equal a whopping £4,080 per year saved.
- Vacations. Everything I just said about the Fun Money category also applies here. Travel is a wonderful thing (I spend quite a bit on it myself and treasure every trip!) and Betty and David may decide that this is definitely a priority for them. If it is a priority, keep it! If it turns out that it’s not, this would be another £3,000 per year saved.
- Groceries and household items. I include this here just to commend Betty and David for how incredibly low this line item is!!!! £185 per month qualifies as extremely frugal and I am impressed. Well done!
- Gifts. £540 per year on gifts is a tad high in my estimation, but it’s also a question of what Betty and David’s family traditions and priorities are. It’s not a bad thing, but it is perhaps an opportunity to consider more frugal alternatives for gifting, if interested. If they were able to trim this category to, say, £240 per year, they’d stand to save £340 per year. Here are a few posts to that effect:
- Gym Membership and Squash Club Fees. I am all for spending on priorities and it sounds like squash is a priority for David. So, I’m not suggesting he eliminate these expenses, but, I wonder if he’s looked into opportunities to barter and trade in exchange for free or reduced fees and memberships? I used to volunteer at the front desk of my yoga studio–and take out the studio trash (glamorous!)–in exchange for free classes. This saved me a gigantic amount of money every month and still enabled me to participate in my very favorite sport (yes, yoga is a sport! why not!). I’ve since heard from readers across the globe who’ve worked out a similar arrangement at their gyms/studios/exercise clubs and are now reaping the benefits of free exercise. I know next to nothing about squash, but perhaps David could volunteer as the team coordinator or something in exchange for his fees? Something to explore at the very least. This would save the couple £1,008 per year. Two posts for inspiration and guidance:
- Eating out. This line item is super duper cheap at a mere £35 per month, but it is an option for elimination if Betty and David decide they are super duper serious about becoming financially independent. Eliminating this would yield £420 saved per year. Inspiration for eliminating eating out:
- Special occasions. On top of the fun money, eating out, and gift categories, this is yet another area where the couple could decide to save more if they so desired. Again, it’s all a question of longterm goals. Trimming this expense would equal £360 saved per year.
If Betty and David decided to make all of these cuts, they would be on track to save an additional £9,208 in a year.
In summary, I advise Betty and David to do the following:
- Identify their longterm goals. Go through the exercises I mentioned and do other long-range projections to consider where they’d like to be in 10 years, in 20 years, and so on. By deciding first what they want out of life, they’ll next be able to craft a financial plan to match that picture. Set your goals first and your money will follow.
- Begin researching real estate. Betty and David should start frequenting open houses, browsing listings online, and researching potential neighborhoods to purchase a home in.
- Decide if they want to invest their money, pay off their student loans, or save for a downpayment. Or, all three! Betty and David are tremendously fortunate to have a nice nest egg saved up. Now, they need to decide how best to deploy that capital as it’s underutilized at the moment.
Ok Frugalwoods nation, what advice would you give to Betty? She and I will both reply to comments, so please feel free to ask any clarifying questions!
Would you like your own case study to appear here on Frugalwoods? Email me (firstname.lastname@example.org) your brief story and we’ll talk.
Update From Betty on 11/1/18:
Following the excellent advice we received from you and the readers, we spent time really thinking about whether we wanted to buy a property and if so, where and what type. We viewed a lot of houses and weighed the pros and cons of different areas, and different types of properties (new build, renovation project etc).
While all this was going on, I received the results of the medical tests that I’d been waiting for. Whilst it does seem that I have the rare and potentially serious condition that we feared, the good news is that it’s currently very manageable and I’ve been given a good prognosis from my doctors. I am, of course, extremely thankful for this and although it’s still not an ideal scenario, it does at least remove some of the uncertainties that we had. We were also given confirmation from my doctors that it would be medically safe for me to go ahead and try to get pregnant. Up until this point, we hadn’t been sure if pregnancy would be advised against or even impossible, which I think was contributing to our indecision about finances, since we were so uncertain about whether kids would feature in our futures or not.
This cemented our decision to purchase a house, and also helped us realise that if we were going to hopefully add children to our family, we would feel more comfortable doing so while living in an area that is family-friendly, safe, and has good local schools. We also agreed that we would like to live within a very easy and short commute to work, since we would be coordinating commuting with picking up/dropping off at childcare. This helped to narrow down our search area, but unfortunately, we were then left looking at housing areas that are both pricey and competitive (even in a buyer’s market). However, we were able to use our position as child-free, first-time buyers to our advantage and in March 2018, we purchased a two-bed property on a great street!
Despite the excellent location, other buyers had been put off by the fact that the house was in a very poor decorative state and needed a complete overhaul, which I guess is not particularly appealing for families with kids, so we managed to get it for a really good price! The house was structurally sound and just needed a full cosmetic update to make it livable, so we spent a crazy couple of weeks over Easter ripping out carpets, stripping wallpaper, putting down new flooring, and repainting the entire house, which only cost a total of £3,000 because we did almost all of the work ourselves. In the long-run there’s potential to add more value, since the house is the only one on the street that has not yet been extended from its original 1930’s footprint. This means we are almost guaranteed to get planning approval to extend in future (and we confirmed this with the local planning office before purchase), so we may do this at some point. This, combined with the excellent location and good schools, means we are confident that our home is not only now a lovely place to live, but also a safe investment for the future.
In terms of finances, we spent approximately half of our savings on the 15% deposit and related expenses for the house. We luckily benefited from the new stamp duty exemption policy that had just come into place in the UK (more here if you’re interested). With the remaining balance, we will decide within the next six months whether we’d like to pursue a house extension immediately (see below) or if we’ll wait a few years and invest the cash in the meantime. We will maintain an emergency fund of £10k as you advise.
And last but not least… after completing the renovation work and moving into our house, in May we received the joyful news that we are expecting our first child. I am now six months pregnant and in the full throes of (frugally) preparing for life with a newborn come January 2019!
Thanks once again for all of your help!
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