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Reader Case Study: Not Quite as Easy in London

benWhen it comes to optimizing your financial life, one of the biggest advantages you can gain is a sense of perspective.  Beyond boosting your finances, perspective can make all the difference between spending your days worrying and complaining, and going out into the world having a great time as you get some serious shit done.

When confronted with a hardship, the standard consumer’s brain floods with negative emotion and shuts down, grappling for a remote control or a convenience product to dull the pain. In this scene, there is nothing but the consumer, and the problem.

But as a Mustachian, you’ve learned to step back immediately and survey the scene from a broader perspective. Suddenly there’s you, the problem, and all the other people who live in this world and those have lived before you. Some of those other people have solved problems just like yours, often with fewer advantages. With the narrow view, you might only see the bottom of a hole you just fell into. But zooming out, you see the flowers, grass, and overhanging tree branches you can use to pull yourself out.

So today we take a trip to London, where a young Mustachian-in-training wrestles with his savings rate, and we get to contrast the UK financial scene with our own.

MMM,

I recently discovered your excellent blog through a UK financial blog called Monevator which I’m sure you’re aware of.

I am a 25-year-old working in finance in London, earning about £50k p.a. (c. $78k in your money!)  This is quite a bit more than the UK average though I suspect not atypical for London.

After tax my take home pay is just over £34k p.a., or £2833 per month.

Living costs in London are ridiculously high – I share a 2-bed flat with a flatmate and we *each* pay £910 per month for the privilege including council tax.

I do live in a nice area of London, and yes I realise that my situation lacks the economy of a larger household of 3-4 people, but the cost of renting probably wouldn’t change materially while keeping me the same distance from work (might save £100-150 per month, which is a lot but I’d be much less happy in a different area).

Other bills:
– water, energy, internet total £75,
– mobile phone at £25/month
– a bus pass at £120/month
– interest on student loans: £25/month

 Total Bills: £1155/month

Savings/investments: Each month I invest

– £200 pcm into an ISA in shares/funds (a tax sheltered account)
– £100 pcm into a cash savings ISA
– £270 put aside each month into my SIPP (pension account similar to 401(k).
– Principal portion of student loan repayment on a $19k balance at 1.5%: £125
Total: £620/month

So after all that we get to just over £1k left per month for food plus everything else.

Current balances are:
SIPP (only accessible at 55 years old) £6,500
ISA £1,350
Cash £2,500
Total – just over £10k

So after housing, bills, food, transport and savings I have about £700 left per month. I guess the main difficulty I have is that given I have high fixed costs at the moment (rent being the bulk of it), I struggle to see how I can save as much as you propose throughout your blog.

I can see that transport is an area I could save a lot on. The bicycle is sensible and I enjoy riding it, but I currently have an unresolved health issue and until that becomes clear cycling every day is out. I am toying with the idea of a motorbike but that remains an idea.

So then we get to reducing my monthly spend on food, entertainment etc. from £700. I have started making my own lunches for work, and I rarely buy new clothes or other such items. I don’t drink a huge amount but don’t want to stay inside my whole life either!

The long and short is that it seems drastically more effective/attractive given the high living costs here to a) implement the easy changes you suggest like cutting costs where possible and b) then trying to increase income as it all drops through to savings (once the 50% tax has been taken…)

PS – as an aside UK housing market is pretty horrible too. London prices have just about returned to their peak of 2007 levels, and buying for many people is a silly notion. The average house/flat in London costs £371k which is 2.3x the national average, and something north of 15x the average wage! While it is tempting to buy what with exceptionally low interest rates, the deposit required is enormous, and the fear of an impending crash always looms at these levels.

To make matters worth the government has just announced it will guarantee mortgages for up to 20% of the value, which serves only to inflate prices even further.

Sincerely,
Jack London

Dear JL,

From what I can tell, you have very little to worry about. I can’t make fun of you for credit card debt, car commuting, or even the student loan, given that you pay only 1.5% interest on the balance and you are investing most of your savings at higher rates. Moreover, I commend you on being a Monevator reader, as that will keep you on top of the UK financial scene.

Your main “problem” is that you’re young and just starting out in your career. So your income is relatively low for a London finance worker, and you have no built-up investments compounding to push you ahead.

While it’s hard to tell the difference between a 25-year-old and a 38-year-old if you stand them up next to each other in a pub, there is an enormous difference in things like career progression and the amount of time they have had to amass the ‘Stash of cash we refer to as a Money Mustache. When I was 25, I had just arrived in the US, with savings very similar to your own. I had just barely made the jump from new-graduate salary to a solid middle-income one similar to your own.

With £2855 of after-tax income and £620 of savings per month, you’re at a 22% savings rate right now. That’s far better than average, although it still yields a 35-year working career, ignoring government subsidies and pensions for now.

But if you can eventually double your take-home pay while maintaining the same expenses, you’d be at a hefty 60% rate, which drops the working years down to 12.

By living in London, you are maintaining access to one of the world’s most productive money machines. To justify the high cost of living there, you either need to tap into it in order to get a suitably high income, or acknowledge that you are just there for the experience, and be willing to work much longer than you would in other cities with lower living costs.

And there’s still hope for you on the expenses side. I would never suggest that a young, single man curtail his nightlife too much while living in such a fun place. But as you get older and settle down a bit, this will probably happen automatically.  These days, my whole family can’t seem to spend even $700 US dollars per month on food and entertainment. It’s not that we don’t have lots of fun around here – it is just a different kind of fun than I had at age 25 in a big city.

Regarding housing, I think you have the right instinct. Always compare the price of owning with the price of renting, and don’t stretch uncomfortably to buy property in a hot real-estate market. Someday you may find a way to own, using renters as a way to subsidize your own cost. But building up a nice asset base first is a reasonable prequisite to property investing.

I always find stories of other countries interesting from my vantage point here in the US. I moved to this country partly because of the world-leading conditions for early retirement. High salaries, low taxes, and amazingly cheap food and consumer goods, on top of the beautiful landscapes and climates available. 14 years later, the US remains at the top of my list for get-rich-quick destinations, and I hope more of those born here will come to appreciate how good we have it.

With this perspective, spending less and investing more becomes a privilege – there are not many other countries where you’d have such a surplus available to buy yourself some freedom.

  • Jacob @ iHeartBudgets May 7, 2013, 11:40 am

    Location, location, location! It’ll get ya every time. Sounds like you’ve got a good thing going on there in London, let’s just hope the pay increases come sooner, and you can get yourself into saving half your income, and on your way to Financial Independence. I agree with MMM here, you can definitely PARTY IT UP and cut your food/entertainment down to, say, $400 a month. That’s about where we’re at for a family of 3, and we go on dates, have friends over for a party, and EAT VERY WELL! That extra $300 a month will is another 10% increase in savings (based on take-home pay), and will get you much closer to your goal of saving 50%.

    For us, we moved away from the city a little ways, but are still in the Northwest, and we bought a fancy expensive house (300k). Sure, it makes the budget a bit tight, but we are willing to pay the price to stay in the area. We’re at a break even point with about 10% savings rate at the moment, but are content, and as income grow over the next few years, we don’t plan on increasing lifestyle. Hoping to get to the famed 50% savings rate in the next 5 – 10 years, or sooner if I can work a few things out. Sure, that puts in another 20 years until FI, but I’d still be “retiring” at 45, which I’m totally cool with :)

    Reply
  • Cat May 8, 2013, 5:56 am

    Yay, I’m glad to see a non-US reader case study! (They’re all helpful, but US housing and food is depressingly cheap.)
    This one is pretty similar to my situation, so I’m glad to hear it doesn’t sound completely crazy… I’m in Australia, but all my numbers are close enough for comparison.

    Reply
    • Gus May 8, 2013, 4:28 pm

      Agreed with the housing… but in terms of food, it all seems way more expensive than in the UK or in my home country: Spain.

      Maybe the problem is that I’ve only been to big cities in the States: Boston, New York, Miami, Washington, and I had to pay the tourist price…

      Reply
  • Raman May 8, 2013, 4:01 pm

    Well done JL for even thinking about these issues at the start of your career.

    Some specifics – London rent is expensive. But there are still some ways to make it less pricey. I lived in London about 12 years ago around time of the dot com boom/ bust, so similar prices.

    For a short while I rented a bedroom in a 2 person flat share for £600 pcm in Borough – still very commutable by tube or a very pleasant 30 min walk across London Bridge into the City. After that, I moved out to Harrow-on-the-Hill – a room in a house share at £300 pcm. I was a young single guy at the time and still went out plenty (Islington, West end, etc) – but since I had no family commitments, spending 40 mins commuting each way wasn’t a big deal. Also good reading time in the mornings.

    Final thought: the lucrative City career didn’t last too long for me after the dot com bust (pushed me to work for myself). You’ll hopefully have a much better run but make hay while the sun shines.

    Good luck!

    Reply
  • Gus May 8, 2013, 4:26 pm

    Hi Mr. London,

    I get a little late to the discussion, but wanted to put my 2 cents:

    First the numbers: £120 for a bus pass? I hope that’s the full travelcard, because last time I checked, the bus pass was around £70. Actually, if you can do your commute by bus, you could start saving there…

    Given those numbers your focus should be in lowering your rent. Nice areas in zone 1 or 2 are way expensive, but depending where you work you could potentially consider nice areas further away (I’m thinking specifically Harrow), and your rent would go down considerably, with your travel expenses not increasing dramatically.

    Another option is to live in a not so nice area closer to the town centre. I live in New Cross Gate. It’s not the ideal place to live, but it is way better than what most people think. I’m paying £880 for 1 bed appartment (sharing with my partner). I can imagine that a 2 beds could be around £1300, which is considerably lower to what you are paying right now.

    Looking at the rest of the expenses, you are paying £25 for your mobile contract. Have you considered Giffgaff? You could be paying £10 for a nice package (assuming you have an unlocked handset, which you could get second hand fairly cheap).

    Other places where I cut is on groceries and clothes. I tend to buy my fresh stuff in Waitrose (great quality, but overly expensive), and all the packaged stuff in Aldi (way cheaper). Clothes, pretty much everything in TKMax, which sells branded quality clothes for a reasonable price.

    Hope it helps,
    Gustavo

    Reply
  • Philippe May 9, 2013, 7:42 am

    Hi Jack/MMM,
    It’s quite the same situation in Paris.

    I’m 25 and I earn about 2500€ a month. The average salary for young graduates is about 2300€ per month after tax (equivalent to $3000). The average cost of a small flat is 900€ per month, and the cost of living is quite high, so most young graduates I know save a very small part of their salary (10 to 20% maximum).

    Applying some mustachian advices, I managed to grow a small mustache and reduce significantly my expenses by renting a nice flat with 3 other persons at 650€/month, using do it myself techniques, learning how to cook, and reducing my restaurant/drink bills. So I can live on about 1250€ per month and spending roughly the same amount (650€ on rent, 600€ for food, metro pass, week-end trips and other), and my saving rate is currently 50%. But I struggle to make it higher, since I’m blocked with the rent cost and more globally the cost of living in Paris so there are 2 ways to solve this : raise my income (which is not that easy regarding the economic situation in France) or go live in a smaller town where the expenses can be cut by half!

    Thanks for your blog!

    Reply
  • Albert May 18, 2013, 8:28 pm

    Hi MMM,

    I also discovered your blog just few days ago. It’s a great read! Another perspective from a European reader. I’m in my mid 30-ties and live in Basel, Switzerland. I currently earn about 7,500 $ a month after tax the average for the country being about 4500 $ . From that I need to pay a rent (1500 $) and health insurance (450 $). No need for a car in the city, but I do need a public transport pass (70 $). From the reminder I save and invest about 40%, but reading this blog I realise that much higher rates of saving would probably be possible. Food prices here, however, are ridiculously high and eating in restaurants which I rarely do even more so (double, sometimes triple US prices). That partially “compensates” for high salaries and low taxes… Nevertheless it’s still a great place to live particularly if you like mountaineering, hiking, skiing and cycling plus it’s right in the middle of Europe.

    Reply
  • Chris @ rplan June 4, 2013, 2:26 am

    I also think that Jack has nothing to worry about. With £50k/year at 25 and just a little debt he is in a very exclusive club which gives him a head start. Mind you, as a London-based professional I don’t know too many 25 year-olds earning that money, apart from a few of the city lads. Work hard and all shall be fine!

    Reply
  • GM October 2, 2013, 11:01 am

    Also loving a London case study. I was introduced to this blog by my former software programming colleagues from Seattle. LOVE IT. I’ve tried reducing my spending before but never felt as focused and motivated as with your blog and funny and accessible style, MMM.

    Like many have said, JL is doing great for a London 25 year old. My first London salary (in software) was around £53k, and that was 6 years after graduating.

    My partner and I currently have a savings rate of 40%. Now that we’ve discovered Mustachianism, we hope to get to 50% then 60%. It is possible, even in London. You just need to prioritise. Here are some tips:

    1) Housing. Like many have said, it’s incredibly expensive in London to either rent or buy. We live in an ex council flat in Zone 1 (Shoreditch), walking/cycling distance from both our jobs. Not the prettiest building, but you get used to it and it’s much roomier than regular housing.

    2) Being young and having fun. This is a toughie. I remember being 25 and being glad to spend as much as I wanted and going out regularly. Have fun and go out while you still find it fun. This will likely pass and your real saving can begin. But make this a conscious choice (unlike me).

    3) Food. This one is completely under your control. I don’t find food much more expensive than the USA. Even in Central London. Potentially a big opportunity to save. Like they said above, overpriced chains and fancy restaurants are not worth it in the long run.

    Reply
  • Luke McCarthy June 21, 2014, 2:22 pm

    I live in Leeds and could earn a much higher salary in London – but I would probably have less money left over than I do now. You can get a semi-detached house for around £100-130K in cycling distance of the city centre here. That’s still a tad higher than the historical average as a multiple of income, but not altogether unreasonable. A housing correction would be a good thing for this country as much as the older generation would hate it. However London property prices are primarily driven by foreign capital inflows. This is causing big problems for people who work in the city in lower paying jobs.

    Reply
  • Damian October 28, 2014, 10:36 pm

    London sounds positively cheap and cheerful compared to living in Melbourne or Sydney in Australia, with a house within 15-20km of the CBD easily costing $1Million US+ (for a hovel), with ‘real taxes’ approaching 50%, with compulsory health insurance (or an extra 1.5% tax), very high costs of food, petrol and consumer goods. (The Australia tax).

    We have a combined household income approaching $145K US (pretax), plus about $12-$13K in compulsory super contributions a year, but that puts us squarely in working class here.

    I cycle to work 3 days a week (37km each way) and take public transport on the other two, because driving would cost upwards of $50/day once parking, tolls and fuel are considered (plus wear and tear). Home renovation costs are extreme (and its completely illegal to do many home tasks including any plumbing and electrical yourself), permit costs for basic works can be thousands of dollars.

    The US does sound much easier, of course the US has its own problems like rampant gun ownership, odd tasting sweets (candy) and chocolate, HFCS in everything, the odd culture of tipping, the homeless problem, an overly litigious society, lack of pedestrian and bike friendly areas in some places (Houston comes to mind from my experience) way too many hard core Christians, painful lack of world knowledge in so many people (I met some ‘undereducated’ people in Texas that opened my eyes, No, New Zealanders do not speak German, because we are not next to ‘Austria’).

    Reply
  • PedalToad January 18, 2018, 7:11 am

    I’m really late to this one but as someone from the UK I thought I’d jump in. £50k in London in 2013 was around about the mean household income. This is in a city where nearly every household will have two earners (partners/spouses) or else three, four, five earners if they are sharers. So £50k for just yourself is very good. As others have commented, £900 a month on rent is too high even for London. Back in 2013 in London I was paying £600-£700. He’s putting away just under £600 a month in savings and pensions – I think he can do better! I am still earning under £40k a year but I am managing to save £1500 a month including pension contributions from employer. You can do better! Good luck.

    Reply

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