I thought it might be nice to take some time out of the enforced sentimentality of the Christmas season to take a look back at 2018!
The end of the year is a great time to look back and to take stock on the year’s achievements, and to put some goals in place for the New Year! My personal view is that there is potentially nothing more futile than realising that you have worked for a year of your life and have nothing to show for it. This is one of the reasons why I feel that it is very important to track a few key metrics and to establish goals in advance.
On the whole it has been a positive and stable year. I worked throughout 2018 in the same permanent job, and this continues to be a positive experience. My investment property continued to be fully occupied throughout by the same long term tenants generating a stable cash flow. I continued to rent a room in my primary residence for 9 months of the year which generated a nice bit of extra income and allowed me to share my utilities bills with my tenant.
I continued to track my income and expenses throughout the year, and additionally began to track the values of my various pension investments on a monthly basis. I had automated my savings activities on beginning the new job in 2017, and this automation also continued. These activities and behaviours have now become habits and require very little time or thought. I took some additional positive steps in 2018 which I describe below.
This was also the year when I finally began to meet some of the financial independence community. I attended a conference for Financial Independence Week Europe in Romania in June which was like a city break with a focus – great fun in addition to being very informative! I have also now attended 3 meet-ups here in Dublin, where I was delighted to connect with a network of like-minded people.
So without further ado, let’s take a look at some of those key metrics that I have been tracking. What progress did I make in 2018?
- I maximised 2017 pension contributions:
Although this might seem like it should be a 2017 goal, in Ireland we have until the end of October of the following year to top up our pension contributions. This coincides with the deadline for filing tax returns and declaring any income which is earned outside of the employee “pay as you go” system. Since I have rental income to declare, I decided a couple of years ago that, rather than forking out for additional taxes, I would instead try to keep some money aside to make an additional voluntary contribution to my pension at the same time as I file my tax return.
This achieves a number of things – it allows me to put money aside tax free which will then be allowed to grow tax free. Even better, if I manage the amounts correctly, it also allows me to pay no additional tax on the rental income. While tax is payable on profit earned on an investment property, tax is refundable on pension contributions. So, by making a sufficient additional voluntary contribution to my pension, it all nets out and I don’t pay any additional tax.
2018 achievement -> this year (for 2017), I made an additional voluntary contribution to my pension, paid no additional tax on the rental income and even got a bit of a tax refund. Another way of looking at this is that I invested the equivalent amount of the rental profit into my pension plan, allowing me to pay no tax on this.
2019 goal -> this is something that I intend to continue doing in 2019 and beyond, particularly while I remain an employee with the ability to avail of income tax relief for investing in a pension plan. Each year I will review my finances and take a decision on how much I can afford to siphon away to the pension, while also attempting to retain sufficient cash on hand to meet any unexpected events and opportunities. The goal would be to at least contribute sufficiently to avoid paying any additional tax on the rental income.
- I arranged to overpay my mortgage:
In Ireland we have the option to choose a fixed or a variable rate mortgage. If we choose a fixed rate, this is typically for a fixed period of time. In my case I chose a fixed rate of 3.6% for the first two years of my mortgage. This period expired during 2018.
2018 achievement -> In 2018 I opted for a 5 year fixed rate of 2.8%. At the same time I put in place an overpayment of about € 300 per month. If I keep this in place for the duration of the mortgage, this will save me € 20 k in interest and wipe 8 years off the mortgage. I can also cancel the overpayment at any time with no penalty. The only downside to having locked myself in for 5 years is that I will not be able to increase this overpayment without penalty during this period if I found myself with additional money to spare.
2019 goal -> the overpayment is automatically deducted along with my mortgage payment each month. I intend to leave this in place for 2019.
- Increased rent on investment property and budgeted and planned for major renovation works:
I have an investment property which has been rented out to the same tenants for a considerable period of time. I had always imagined that, during the natural course of events, they would eventually move out, and I would take the opportunity at that stage to renovate the property. However, they have remained in the house, and I decided that the time had come to take action and complete the necessary renovation works to bring the property up to modern standards.
I have budgeted for the work, and I have a builder earmarked to begin work in February of 2019. Currently we are finalising the quote and agreeing on all the little details, so that there will be no surprises once the work begins!
2018 achievement -> In the meantime, I have increased rent to the market rate. As those familiar with the Irish situation will know, this is allowable currently outside of so called “rent pressure zones” in Ireland. As a rookie landlord who had been charging well below the market rate for several years now, on a rental property located outside of Ireland’s current designated rent pressure zones, I was very conscious of the need to take action before said rent pressure zones are extended in Ireland. Once they are, landlords will only be allowed to increase rent by 4% every 2 years. In anticipation of the extension of the rent pressure zones, I did my research and increased rent to market rates, and this will now remain the rent for the next 2 years, by which time I expect that rent pressure zones will be in place, and I will only be allowed to increase by 4% every years. 2019 Goal -> Renovation is earmarked to begin in February, and is expected to take a couple of months. The builders will work around the tenants, who will remain in the house, so I do not anticipate a gap in rental income. I believe that the key is to agree the costs with the builder up front, and to be firm about the maximum that I wish to spend while focusing on a few key areas.
- Savings Rate/ Emergency Fund/ Pension:
2018 achievement ->
- Savings rate this year was 37%, as predicted at the end of last year given my current salary, as well as income from my rental property and renting 1 room in my primary residence. Rental income from the rental property increased at the end of 2018, so this will increase 2019 income. Income from the rent a room is expected to remain as is.
- Pension: The value of my pension fund investments increased by just under 10% in the 9 months from March 2018 (when I first began to track this) to December 2018. As many readers know the stock market has fallen over the course of the last few months of the year. The value is up mainly due to the additional voluntary contribution I made in October.
- Emergency Fund: This has increased by 40% since the end of 2017, and currently could cover 16 months of living expenses. However, renovation works will deplete this to 6 months. (This was another reason why I was content to delay the renovation for a number of months more, to bolster my savings)
2019 Goal ->
- Savings rate: I have given myself another year in my current job despite having being contacted throughout the year with opportunities paying up to 45% more than my current role. Further detail on my decision making will be discussed in my next post. On this basis I anticipate that my savings rate may be around the same for 2019.
- Pension: I intend to continue to contribute 6% of my salary from my job on a monthly basis, and have my employer contribute 5%. As noted above, I will then make an additional voluntary contribution in October, of an amount to be determined.
- Emergency Fund: Renovation works will deplete this to 6 months. The intention would be to build it back up to be 12 months again.
This year has been all about embedding an infrastructure designed around good financial habits. Now that the infrastructure is in place, I anticipate that maintaining it will not require much additional effort or time. In general I believe that consistently maintaining these habits is the bedrock for building financial independence. While I do have some ideas on how to fast track my way to FI (to be discussed as I explore them in 2019), I intend to maintain this infrastructure consistently.
I finally feel as though I have the basics in place, and have visibility on, and control over, my financial situation. Imagine where I would be now if I had begun tracking, monitoring and thinking about all of this stuff when I first graduated from my undergraduate degree and got my first full-time job! In an ideal world of course, this thought process and discussion would have begun in primary school, but perhaps that is something that we will see (or implement) in the next generation! I would urge anyone regardless of your personal goals to take stock of your finances. Once you have oversight on these, the maintenance becomes easy and the stress of the unknown is removed. While there is always more that can be done, a basic high-level excel analysis is sufficient to give a good idea of your financial position. Start basic, and you can develop this as you wish down the line.
In my next post I will discuss why I have shunned opportunities throughout 2018 to earn up to 45% more than I do in my current job, and what I intend to focus on in 2019!
Happy Christmas everyone! I hope that your 2018 was positive, and and all the best with your 2019 goals!