This post is a short follow up to my previous posts where I wrote about how The Richest Man in Babylon help me increased my savings rate from 10% to 30% of my income and in more recent times, saving 40% of my monthly income. And that brings me to the topic of this post, how I've managed to reach my new savings rate.
Since May 2019, I committed eating two meals a day (famously known as intermittent fasting) instead of three meals and snaking inbetween. In the past, I tried intermittent fasting on and off. The result of being more consistent with the practice of eating two meals a day, I ended up reducing my ‘lunch’ bill from around £80.00 a month to 35.00 a month. And I reduced my grocery bill from £200.00 to £100.00 a month.
When my broadband contract ended at the end of 2018, I didn’t renew it, which ended up costing me £54.99 a month.
When I decided to renew my contact in June 2019, I was offered a broadband package of £41.00 month. I didn’t accept the offer and decided to switch provides. Vodafone were offering a broadband deal for £24.00 and £40.00 in cashback. I found this offer through my favourite cashback site TopCashback (if your interested in creating your own account, consider signing up through my referral link). When BT found out I was switching to Vodafone, they offered me a broadband contract at £19.99 which I accepted.
The biggest factor for new savings rate was increasing my income. I started job with a new company which resulted in an additional £400.00 a month after tax. I documented my job hunting journey here.
So nothing new here, just a combination of reducing what I spend and increasing what I earn!
In this post, I'm sharing my typical spend for any given month. In my previous post, I shared how I split my income across different savings, investments and spending accounts.
Rent - £600.00 per month for a flat/family share.
Transport for work, train ticket - £400.00 per month on average.
Council Tax - £179.00 paid across 12 months.
Energy and Water - £0.00, since I cover the council tax bill my flat mate covers the energy costs.
Grocery - £100.00, reduced from a previous spend of £200.00 per month.
Broadband - £19.99 reduced from a previous bill of £54.99 per month.
Sim only mobile contract - £15.00 per month. I could reduce this cost to £0.00 if I were to use my company mobile for both business and personal use.
Life insurance - £17.85 per month.
Rewards Credit Card fee - £160.00 per year or £13.50 per month.
Haircut - £16.00 every 3 months. I could reduce this cost to £0.00 since I have my own hair clippers. But I prefer the look of my haircut when the cut is done by my current barbers.
Entertainment and Social
Football pitch hire - £32.00 per month.
Spotify music subscription - £9.99 per month.
Sony PlayStation Plus subscription - £60 per year (£5.00 per month).
Visiting family, fight ticket - £444.00 per year (£37.00 per month).
Donations and Miscellaneous
£24.00 per month.
Clothing - £150.00 every 3 years or so.
So there it is, I'd say I'm doing ok. I was thinking of moving within biking or walking distance of work. After having a brief look at rentals, I'm budgeting for a flat share with rent costing £1000.00 per month, bills included. This means the rent would equal my current rent and work travel costs, but I'd save on the council tax bill. And the other main benefit would be health related, since I'd be walking to the office instead of sitting on a train for an hour or so. However I'm in no rush since I'm happy with my current living arrangements.
When I decided to follow the principle of paying yourself first I managed to exponentially increase my savings rate from around 10% of my income to 30% of my income. I discovered this principle from a book titled the Richest Man in Babylon. The book is made up of short stories or parables which the author uses to teach the reader a set of finance lessons.
Prior to following the principle of paying yourself first, I would receive my salary for the month and immediately pay bills- rent, mobile, broadband and groceries. Then I would pay Sony and Netflix for entertainment. Through the course of a month I dwindled down my cash through frequent spontaneous spending on lunch or takeaways. And whatever amount of money was left over is what I would save.
Trying to save this way meant my savings rate was not consistent. Over a six month period my savings would read something like this: January savings +£100.00, February savings +£50.00, March savings +£73.00, April overspend -£200.00, May savings +£65.00, June savings +£35.00, so in my mind I thought I’d saved quite lot, but what I didn’t include or didn’t realise was the one month where I spent close to what I managed to save over five months. As a result, I was moving sideways instead of moving closer towards a total savings goal. However when following the principle of paying yourself first, I found you are always making progress, every time you execute the principle, you will always be further head compared to the previous month. The way I interpret this principle is, the money you get paid at the end of each month only came into existence through you exchanging your time and skill set at a job or business. Therefore, paying yourself first is simply acknowledging this.
In order to execute the principle of paying yourself first, I needed to change other aspects of my savings behavior. The first thing to have in place was a savings target. In my case, my target was £6000.00. Additionally I gave a personal reason as to why I wanted to save £6000.00. And the reason was because I wanted to have a contingency fund in place before investing in property and the stock market. Something else I did, which is not mandatory, I decided to challenge myself by saving 30% of my income instead of the 10% suggested in the Richest Man in Babylon.
I then took action, I opened separate accounts for my income and my savings. I did not allow my income and savings to remain in the same account. To make this easier, I made use of standing orders. On the same date I received my income, 30% of my income would automatically be transferred from my ‘income’ account into my separate contingency account.
Today I'm sharing how I split my income across different types of accounts and the purpose of each account.
Long Term Savings & Investments
1. Group Personal Pension Plan - The pension pot is the first place part of my income goes too. The money in this account is used for the purchase of company stocks and shares with the aim of providing a 'retirement' income.
Medium Term Savings & Investments
2. Help to Buy ISA (Individual Savings Account) - This account is used to save for a property deposit. The great thing about this account is the government payment bonus received when you're in the process of buying a property. At the time of writing, the account rules allow a maximum monthly deposit of £200.00 per month.
3. Regular Saver - Due to the savings restrictions of the Help to Buy ISA, I use a regular saver account as a second place to save money for property deposit and the associated purchasing costs. Compared to a standard savings account, a regular saver usually pays a higher interest rate in exchange for a commitment to deposit a certain amount of money each month.
4. Stocks and Shares ISA - As the names suggests, this account is used for investing in the stock market. The primary use of this account is to provide future retirement income. However, unlike the group company pension account where you have to be age 55 to start withdrawing the income without penalty, I'm free access the money in my Stocks and Shares ISA when I need too. As a result, I may use the some of the funds for the purchase of property. I wrote a basic introduction to stock market investing in this post.
5. Tax Free International Investment Account - Similar to the stocks and shares ISA, I use this account for investing in the shares of companies outside of the US and UK stock exchanges. And like the ISA, the earnings made in this account are exempt from capital gains tax.
Short Term Savings
6. High Interest Current Account - This account is used as an emergency fund. I keep 6 months worth of essential livings expenses in this account. The purpose of this account is to prevent or delay my need to borrow money during a time I need to make an unexpected purchase or a period I'm not earning any income. This cash reserve is also in place to prevent the need to sell any of my current or future income producing assets such as stocks or rental property.
7. Current Account - Once my salary is in this account, I only keep the amount of money needed for cash payments. This includes rent, pitch hire for football with colleagues, donations and life insurance. I use a rewards credit card for all my other monthly bills and expenses (council tax, broadband, sim only mobile, train tickets, groceries, music and gaming subscriptions).
Your credit report shows what information is currently held about you and your finances. Your credit file is accessed by banks, credit card companies and other money lending firms to decide wether or not to lend you money and if you are approved for a loan, how much interest to charge you. To access your own credit file, you need to send a request to a credit reference agency.
Based on your account management (paying bills on time, not exceeding your spending limits on your credit cards) credit agencies will also give you a credit score. When looking to apply for a loan with a high or good credit score, you should expect to get charged a lower interest rate compared to having a poor or low credit score. For UK residents, there are four credit agencies which update your credit report:
Some sites and credit agencies will charge you to provide your credit report and credit score information. I've gone ahead and included a couple of sites which provide your credit score and report for free!
Let's go over why someone would bother trying to increase their credit limit? short answer, in almost all cases, a high credit limit has a positive impact on your credit score .
What is Credit Utilization
Credit utilization is a calculation based on the total credit you have available to you vs. the amount of credit you use. So if you have two credit cards, the limit on credit card 1 is £100 and credit card 2 is £100. This means the total credit you have available to you is £200.
Within your billing period, you spend £100 on Credit card 1 and £0 on credit card 2. Your credit utilization percentage would be 50%. Since £100 is 50% of £200. Having a credit utilization of 50% and above, will have a negative impact on your credit score.
For your utilization to have a positive impact on your credit score, the general advice is to aim for a utilization percentage of no more than 30%.
If we take the same example of two credits cards, credit 1 now has a limit of £500 and credit card 2 has a limit of £500, you now have a total credit limit of £1,000. As before, within your billing or statement period you spend £100. By increasing your available credit limit to £1,000 your utilization will drop to 10%. This keeps you below the 30% credit utilization limit and over time, this will result in an increased credit score.
Maximize your spending rewards
The one other major reason you might want to increase your credit limit is if you’re planning on collecting air miles, hotel loyalty points or earning cash back via credit card spending.
The idea is to put as much as you can, if not all of your normal spending and bills onto your credit card, this will allow you to collect the most amount of air miles and loyalty points. Learn how I was able to save on flight tickets here.
Having a low credit limit of £500 is going to make it difficult and a little awkward if you aiming for reward credit card sign up bonuses which will often require a minimum spend of £1,000 or more.
*****Notice I did not mention anything about increasing your limit so that you can buy a new flat screen TV or take yourself on a holiday****