Another tax year is over and despite the calamity that has befallen all of us, we (like many) are better off now than a year ago.
This last year has been quite tumultuous for a number of reasons but it’s funny that it’s been spent almost entirely at home. That gives the days, week and month a sort of uniformity reminiscent of Groundhog Day except Bill Murray wasn’t woken up by a milk-thirsty toddler who’s perpetually in a bad mood in the morning.
I re-read my posts from the end of 2018/19 and 2019/2020 recently and it’s different this time.
The Lady has been in 3 jobs in the year after her old company downsized (or whatever the word is) and she found a new job that she hated and now a better job that she loves. I’ve been working away as contractor/consultant engineer but was only really employed half the time. My income took a bit of a hit over the year which scared me but once it happened, it didn’t scare me that much.
Where we saved money by not holidaying as much in 2020 we made up for it by spending it on floors. Spending was high but under control and beneath our means. The big hitter being childcare which is now in excess of £1,800 a month for both the Master and Little Lady 5 days a week. (the Master is in school this August and then more funding will come in for the Little Lady which will help significantly).
Most significantly, our net worth has jumped by over £200,000 in the space of 12 months. Most of that in the rampant bull run.
- Total Spending in Year = £46,500 (£3,870/month)
- Total Spending less Childcare = £32,400 (£2,700/month)
- Spending on Childcare = £14,100 (£1,170/month)
- Household Expenses = £9,600 (£800/month)
- Mortgage Interest = £2,500 (£210/month)
- Car Depreciation = £1,300 (£110/month)
- Pension payments = £18,800 (£1,560/month)
- Take Home pay = £60,800 (£5,060/month)
- Tax Paid = Far too Much
- Dividends = £37,000 (£3,100/month)
This includes money from my side hustle which was £26,000 for the year or around £2,000 per month.
What is not so great is my paid work for the year which was great last April to July then died a bit before coming back to life at the end of the year. But the funny thing is that I don’t really care that much especially if earning more would add to the stresses in my life. Also, since we spend less than we earn, earning more isn’t going to make our lives any better I don’t think. That’s the benefit of a bit of savings and the confidence to not lose hope or perspective.
- Net Assets: Year start = £860k year. Year End = £1,066k (£206k / +24%)
- Pensions: Year start = £441k year. Year End = £556k (£115k / +26%)
- Fire Funds: Year start = £366k year. Year End = £433k (£67k / +18%)
- Housing Equity: Year start = £53k year. Year End = £77k (£24k / +45%)
- House Value: Year start = £246k year. Year End = £260k (£14k / +5.7%)
See that jump in equity vs. the house value? That’s partly due to the wonder of leverage [LINK] but also the paying off of debt (still another ~20 years to go).
Ratios and Whatnot
- Basic Savings Rate = 1 – (£46.5k / (£18.8l + £60.8k)) = 42%
- Total Saved = £33.1k = 3.8% of net worth
- Asset Growth = £173k = 20% of net worth
From this, you can see that whilst saving money is nice, owning assets is even better. These numbers are a bit inflated since a year ago, markets were on their knees and it was their recovery that really flatters things. Looking at the longer term, our net worth is increasing at a similar rate as before – business as usual.
Personal Withdrawal Rates
You can see from the graph that compared to March 2020, our personal withdrawal rates have come down significantly but are more or less where they were in March 2019 – if anything a bit higher. I define personal withdrawal rates as the percentage of your assets that you spend each month if annualised. So, if you have a net worth of £600k and spend £5k a month that’s £5kx12 = £60k / £600k = 10%. We are sitting at around 4.5% on our total spending on our total net worth. However, since half of our money is tied up in pension and we can’t access them [LINK], I look at our Pre-pension funds (or FIRE funds). Here we are burning through our money at almost 12%! Or to put it another way, if we keep that up we’d run out of money in 8 year’s time. Of course the major (temporary) expense for us is childcare, so I lop that off and it gives us around 7.5% which get us close to our normal minimum retirement age.
Levers to Pull
If you want to hit your respective Withdrawal Rate targets you have 4 levers to pull.
- Get more money
It’s obvious that earning more can get you the money you need to grow your wealth. But don’t neglect the power of inheritance, larceny or lottery. A side-hustle is another option but if you play the long game, focusing on growing future income might pay-off better.
- Spend less money
That seems obvious
- Invest wisely
Money that’s left over between coming into your hands and being spent can be invested in different ways. Get rich quick schemes aside [LINK] you should look at avoid high fees but more important is where your funds are invested. For many Pensions offer the best return due to tax benefits
- Move the goal posts
Some people use a SWR of 4% or 5% or 6% or whatever – changing it can make you feel better. I used to not include the state pension in my net worth figures, I still don’t but I’m beginning to think that maybe I should. I don’t even use the CETV for my final salary pension (but blogged about it) – but if I did, I’d have much higher numbers. Likewise, I don’t count on an inheritance but I know people who do. And I take off nursery fees on my numbers even though my wonderful kids will never every become cheap, self-financing or even, dare I say it, profit centres.
Plus ça change, plus c’est la même chose?
What should we do in the year ahead with our finances? Some things seem like they will continue unabated like 1) overall monthly saving of income 2) net asset growth 3) never truly reaching a 4% PWR. If these things are inevitable maybe we should just ignore the rules and 1) get less money 2) spend more money. I’m leaning towards getting a cleaner to come once a week. Weekly cost ~£40, annual cost £2,000. However, if it means that instead of us using our precious free time to clean (normally at weekends when I’d like to read/nap/relax) then it might be worth it. I’ll think about it.
The same sort of problem arises with buying our food to cook for ourselves or getting takeaway. I keep records of our spending and here’s what we’ve spent on shopping (including booze at home) and takeaway (or food outside the house, like a coffee & cake after a hill walk). The results show that our shopping spend is slipping a bit and eating out is going up.
Gone are our meals out in cafés or restaurants or when travelling – since all that is closed. But we are getting take away a lot after work. Since we both work from home until around 5pm and then we go to pick up the kids; if we take them to the playpark we can easily get home after 6pm. Who wants to cook then when the kids are in bed at 8pm? Take away is a pragmatic choice (if not economical or healthy one) and we’ve got a decent selection of good places nearby to chose from (but you need to order early to avoid a long wait). It might seem that this pandemic has lead lots of poeple to order more takeaway food and more people to be forced into slaving away as delivery drivers just to make ends meet. In typical rentier fashion, the UK has managed to make profiteering off the back of food delivery a(n almost) national celebration of capitalist endeavour (much like how the royal road to riches is pathed by bricks and mortar and paid for by renters money and subsidised by the government).
I try not to order through the usual apps – I pretty much know what we want and am happy to go old school and phone through my order.
On a more mundane level, the 2021/21 tax year will see us filling our LISAs, ISAs, diverting money to our SIPPs, not funding JISAs, not overpaying the mortgage, selling some VCTs. On a more experimental level, I am thinking of becoming a non-taxer. Since I run my own Limited company, I can chose where the money goes and if money is paid as a salary, dividend or just held in the company. If I don’t pay our much in dividends and keep a modest salary going, I will be below the threshold for income tax and if I lend the company money (upcoming corporation tax due) then I can pay myself (usurious) interest from the company and dump the rest to SIPPs.
- Personal Allowance = £12,570
- Personal Savings Allowance = £1,000
- Dividend Allowance = £2,000
- Starter Rate for Tax = £5,000
- Total tax free allowance = £20,570 (and of that £18,570 reduces my corporation tax bill by £3,528)
I’ll post about this later but it’s something I’m looking into. That’s about it – I’ve tried to put the reason and rationale in front of emotions but overall it’s been a good year. As I keep saying, this Covid lockdown has been a godsend for me – no commute, lower stress, still earning, more time with the kids and life is good.
How was your 2020/21 tax year?