This, and other things I learnt from an analysis of my expenses for 2017…
2017 was the first full year of expense tracking for me. It was probably March or April before I began to log all of my expenses in a spreadsheet, based on receipts that I had been collecting since the beginning of the year for this purpose, along with all transactions on my online bank account statement. I wrote in a previous post about how I procrastinated for some time before actually sitting down and doing this: https://wordpress.com/read/blogs/110850157/posts/120 Even now, I can sometimes let more than a month pass before I sit down to update my tracker. When I analysed 2017’s expenses, I was more than a little surprised by how much it actually cost to keep my household and my life running for the year. Below are some highlights from what this exercise revealed!
I spent more money than I earned in 2017 – My savings rate was a negative 8%!
Considering that I had been unemployed for the first half of 2017 (and the last quarter of 2016), and that I had made some large non-recurring investments in my home during the year, I was pleasantly surprised to find that only 8% of the expenses came out my savings. The rest came from a combination of the Jobseekers Benefit which I received as an unemployed person during the first part of the year, the salary from my job in the second part of the year, along with some rental income received during the last few months of the year (more on this momentarily). When I re-ran the numbers excluding the large non-recurring investment in my home, I found that my savings rate would have been a more healthy 28% had I not made this investment!
Monthly average expense breakdown:
• 44% of expenses were mortgage -related! This includes my mortgage, life and home insurance & TV licence. I don’t expect my expenses in this area to change much in 2018.
• 31% were household expenses: 87% of this category related to home renovation. Specifically, the creation of an en-suite, the complete renovation of the main bathroom, and attic insulation. I purchased my home almost 2 years ago, and took the advice of friends and colleagues who suggested that I live in the house for at least one year before deciding what home renovations to invest in. I tried to be strategic in what I invested in in this category. The conclusion that I reached was that an en-suite shower room attached to one of the bedrooms would be a good investment, since it would provide a perfect setup to rent a room in my home (and down the line, an additional toilet/ shower for the household). At the same time, I completely renovated my main bathroom and insulated the attic (another sound investment, in terms of reducing heading costs). Although I have been told that the cost of building the en-suite immediately added the equivalent value to my home, my purpose in building it was to add a passive income to offset some of my mortgage and utilities costs by taking in a lodger. The intention was to retain “the best of both worlds” as much as possible, by creating an independent bathroom facility for the lodger, and, of course to attract a higher rent through having the en-suite. Conversely, I retain the main bathroom as my own. Knowing that 1) we are in midst of a housing crisis here in Ireland and 2) I live next to a university meant that this was a good investment. The remaining expenses in this category included items of furniture, bedding, towels, etc. purchased for the lodger’s room.
Several other expenses, in particular entertainment and travel are much lower than I would expect to see in years to come. I took no holidays during the year, and minimised expensive entertainment, such as eating and drinking out outside the home, instead entertaining friends at home as much as possible. This was a particularly frugal year in this respect, because I was unemployed, and did not know how it would take me to find a job. As such, I was ruthlessly frugal in some areas, so that travel category typically represents things like the cost of getting the bus into town for a job interview, as opposed to going away for a holiday, or even a week end away!
Other includes everything from driving lessons, a driving test application, gifts, non-recurring medical expenses, bank charges, entertainment, hair & beauty, clothing, vet fees, etc. (Some of these got their own categories as the year progressed, and I tweaked my tracker spreadsheet). Utilities includes electricity, gas, phone and internet. See my earlier post on how to optimise these: https://wordpress.com/read/blogs/110850157/posts/91
During the second half of the year, things started happening for me. After countless job applications and interviews, I was at last successful in securing a new job, which I’m very happy with. Just when I was on the brink of deciding that I would need to start to think of other ways to cover my expenses (a combination of renting a room on AIRBNB and trying to get some lecturing work was one potential idea that I had), the job offer came through for me, and I began my new job in June.
Then in September, I got a lodger to occupy the room with the brand new en-suite. I rent this room under the Irish government’s rent-a-room scheme which allows me to earn up to €14,000 tax free! https://www.revenue.ie/en/personal-tax-credits-reliefs-and-exemptions/land-and-property/rent-a-room-relief/what-conditions-must-be-met.aspx Frankly, I have not looked back! The only thing better than passive income is tax-free passive income in my opinion! I have compared how little effort I have to make to make this money, versus making the equivalent amount from job-based income, and I am hooked! I am and am even considering renting a second room in my home to further boost my savings rate.
Projections for 2018 savings rate:
Here are my projections for my savings rate as a % of my net income in 2018. I have included a few scenarios – 1) savings rate assuming I do not rent out any rooms in my home 2) rate assuming that I rent out 1 room in my home (my current situation), and 3) projections for if I were to rent out a second room in my home (something which I am considering):
Currently, I have one lodger, so my projected savings rate for 2018 is 37% in my current situation!
In all, it was a very frugal year. Since I started earning job-related income again in the latter part of the year, and also passive income through taking in a lodger, my focus now is to build up my cash reserves again, and also to try to manage my tax rate effectively by contributing as much as possible to my work place pension. Outside of this, I continue to explore options to shorten my path to financial independence. Having seen how little work is involved in renting a room in my home, I feel that the path my well end up being a mix of real estate and the tax deferred pension option. We are in the midst of a housing crisis in Ireland due to the lack of building over the past 10 years since the banking collapse, and there may be opportunities in this area for a good saver with an ability to demonstrate income-generating capability to the banks to acquire an investment property! With house prices starting to soar here again, I may however just decide to take this year to consolidate, and possibly just continue with the steady path which I have put in place this past 6 months, with the potential option to rent a second room in my home to boost my savings rate further.
I will continue to track expenses, because doing so has given me a deep awareness of my financial situation which I had not had previously, (and which I believe most people lack). I have been able to use the data to calculate my savings rate, and can now tweak various inputs to understand what has the biggest impact! Doing this analysis tends to lead me to thinking as I go about my life of ways to boost savings, or to reduce the time to financial independence. Seeing the analysis has been a powerful way of really understanding what is driving what, and in a way has led me to analyse my own life and movements a bit like a business.
I am also planning on taking a holiday in 2018, and socialising a bit more. While I would like to make smart money decisions, I also intend to loosen my grip where things like travel, entertainment, and even grocery shopping!