Category Archives: Finance basics

How to avoid lifestyle inflation to achieve Financial Independence

House and bicycleHousing, Transportation and Food are the big three categories to control in order to maintain a relatively high savings rate. To achieve financial independence (FI), the most important thing is your savings rate as I explained in a previous post here.

A lot of people try to find investments or other means with a high return rate. However, this may turn out futile if the necessary capital available to invest is not substantial. Good returns do not have a big impact if you intend to be financially free at a young age, considering that the stock market typically returns nominally 10% a year.

I am in the process of looking for a new place to live in January 2020 and this has made me to seriously consider my lifestyle costs in future. When I moved to new places previously, I did not  do the math well, particularly for housing and transportation costs in relation to my new lifestyle. In a number of cases, this has resulted in me being worse of either financially, by quality of life or both.

For example, when I moved for my current job (from Cambridge to London outskirts) my salary went up by 13%. This seems great but I ended up living 11 miles from work compared to 4 miles previously. This seemingly innocuous change turned a simple 20 minute commute into a gruelling drive of over an hour in rush hour traffic.

The new job meant that I lost many hours a month plus cash due to the long commute and I was generally more tired. It felt like I had already been to work when I got to work.

Housing and Transportation

I see management of these two elements as being critical in propelling me towards financial independence at this stage. It is not wise to find a cheap place to live which is very far from work, costing time, an arm and a leg to get there. For this reason, I have decided to find a rental within walking distance of the office. Costs will be roughly the same as the previous place but the commute by car or train will be completely eliminated, resulting in cost savings and 7 hours a week freed each week. That would be effectively gaining an extra work week each month! 

55% savings rate

To be financially free by my target date I have estimated that at least an average 55% savings rate will be required. This has been over 53% so far. I will also need to maintain the progress made by maintaining my core living expenses or even better by reducing them. To do this it is important to know current and expected expenses which will guide the search for new accommodation.

Housing and Transportation to gross income ratio

People often wonder how much they should spend on housing in relation to their income. It will depend on what you can afford and what you value in life. I was a bit shocked when the estate agent said that I could afford a place which is my gross salary divided by 30. This would mean that 53% of net pay would go towards housing which is ridiculously high. Admittedly I would get a nicer place but my financial independence progress would drop to only 29% and future savings to 35%. Achieving freedom would become practically impossible, leading to many more years in the cubicle.

Housing and Transportation to gross income ratio

With these facts in mind how much should one allocate towards housing and transport. I have been tracking how much I spend on these two since 2007 as shown the the graph above. When I started my first job in 2007 I lived in shared accommodation with very low costs and a 20% spend. However, within a year I got a small pay rise and had a huge bout of lifestyle inflation by moving to my own studio flat.

Now with a hefty 30% expenditure I managed to save absolutely nothing after a three year period and remained with even more credit card debt while having a negative net worth.

Over the next few years I moved locations for new jobs and back to shared accommodation. This enabled me to pay off the credit card and start the fi journey in 2012.

The housing and transport expenditure proportion has been steadily decreasing due to some some pay rises and is expected to get back to near 20% when I move to the new place. I find this to be an acceptable amount to pay. It may mean sacrificing a little luxury but will not derail progress towards financial independence within a few years.

*It is also important to stick to a budget while tracking your other expenses as these will affect the overall picture.


In summary, to maintain a 55% savings rate I would need to spend roughly 20% of my gross income to housing and transport to achieve financial freedom within 3 years. This is based on my current level (52%) of expenses covered by passive income.


I have found this to be the most comfortable scenario for me in relation to my goals. Everyone’s situation will be different.

Geographic Arbitrage

As I am currently based in one of the most costly areas of the UK (South East), applying some Geographic Arbitrage almost anywhere would definitely have a positive impact. Quality of Life could be increased and Cost of Living reduced readily so this will definitely be on the cards soon. In fact I realise that I am already 70% FI for less costly parts of the country.

Also, renting a place rather than owning is beneficial as one would be far more flexible to take advantage of opportunities and overall expenditure on housing and transport would be far easier to limit.

Things look set to get more exciting in the next couple of years as the snowball keeps gathering speed and size, opening up more possibilities and options.

2019 Berkshire Hathaway Meeting – Top advice for Investors

It is that time of the year again when investors, big and small, descend in Omaha, Nebraska for the Berkshire Hathaway Annual Shareholders meeting. Warren Buffett and Charlie Munger have been fielding questions regarding diverse topics including business, the economy, Brexit, investing and life.

Here are the gems and insights I have managed to pick up from this year’s meeting.

Tech in focus – it is never to late to invest

In the past Warren Buffett has been reluctant to invest in Technology companies as he did not understand them fully. However, Berkshire has invested heavily in Apple during the past few years. Buffett says that the company has a “sticky” product.

In a surprise move, Berkshire has revealed that they have now invested in Amazon. Buffett admits that it was stupid for him to not buy Amazon stock sooner and it was one of his deputies who had actually initiated the purchase. He emphasised to not look too much into metrics when considering an investment and that Value Investing principles were still applied in the Amazon purchase regardless of the company’s very high Price to Earnings ratio.

This shows that it is never too late to start investing even if you feel like you may have missed the boat. To emphasise the importance of Tech, Apple’s Tim Cook and Microsoft’s Bill Gates were also in attendance at the meeting.

Global thinking

What initially strikes me as I watch the meeting is the global appeal of Buffett and Berkshire. The 40,000 plus attendees of all ages and from all walks of life come from many places, even as far as Australia, France, India, South Africa and China.

It makes sense to invest with a globally diversified portfolio as this will help to shield from any shocks in a particular region and should enable capturing gains from as many angles as possible. Responding to a question regarding the best approach to 5G, Munger said that Berkshire has bought in China before and is highly likely to keep investing there.

Unrealised gains can be misleading

$21.661 Billion! The first slide presented by Buffett was a summary of the 2019 first quarter after-tax earnings for Berkshire Hathaway. Accounting rule changes now require companies to include unrealised gains in quartely financial statements. As such gains are drastically impacted by share prices of investments owned, this can result in wild variations in results presented.

For personal investors working to Finance Independence the lesson is to not get too elated when the market surges or to feel down when there is a crash. It is best to stay the course while maintaining a high savings rate until goals are achieved.

Keep it simple

Referring to a question about alternative investments, private equity and using leverage when investing, Buffett warned that this is not something he would do. A lot of fund managers with “higher IQs” than him and Charlie got into trouble in 1998 when they employed such methods. It is a lot safer to invest in the simple index fund. Speaking of “alternative investments”, Charlie joked about being invited to a Bitcoin meetup.

Lay the ground rules and stick to them

This was an interesting one. A 27 year old aspiring fund manager had a question about knowing the right time to set up an investment fund. Buffett said that it is important to set expectations and rules when planning investments while not promising too much. This may result in having fewer clients but the expectations will be clear. A good way to keep focus on goals is to create an Investment Policy Statement (IPS). Figure out what works and do it.

Teamwork and Patience Works

Another top theme repeated over and over during the session was how Berkshire is operated so well by an excellent team of managers. Charlie and Warren are figureheads while there are several names including Ajit Jain, Greg Abel, Todd Combs and Ted Weschler who are also involved. I am certain that the future of the company is in good hands. Also worth mentioning is how patient Warren and Charlie are; moves are well planned and executed without any panic.

Asset Allocation and Opportunity Cost

Berkshire currently holds in excess of $100 Billion in cash or equivalents. There was a comment which outlined how this would have generated an additional $50 Billion if it had been invested in an S&P 500 Index Fund. Buffett acknowledged that this would have been the case given the recent stock market performance.

However, the cash pile is maintained for the benefit of Shareholders and as firepower to be deployed for “Elephant” sized acquisitions in times when it is raining gold such as 2008; times when no-one else is capable of making such investments. This can also apply in personal finance for example by holding a large proportion of a portfolio as cash or bonds when the intention is to deploy it within a short timeframe.

That’s it for this year. There will be more interesting tips and advice from the next meeting in May 2020.

Thanks to Yahoo Finance a webcast of the meeting (4 May 2019) can be watched here.

How to give yourself a perpetual pay rise through index investing

Getting a pay rise is the ultimate dream for many workers. How can you get a pay rise without following the usual frustrating processes in the workplace. By taking a different perspective at building and maintaining an investment portfolio it is possible to take the initiative give yourself a pay rise. Even better this can be set up so that it happens perpetually, regardless of what your employer does.

Taking a personal initiative and interest are imperative. This realization came to me as I was sat in a work webinar Q&A session between management and employees.

The general theme was that employees were not happy, and to be honest they are completely powerless about most of the issues raised such as new graduates starting on higher pay than older ones, why pay rises are 2% when profit margins are far larger, who and how one gets a bonus etc.

All this on top of external factors which may affect the company due to the wider economy and a recent corporate takeover of the organisation by a larger competitor which has an unsavoury past. Hence it is important to have control of the situation.

Taking control

The process is not simple as all the traits of pursuing financial independence should be applied, mainly; patience, discipline, frugality and the appreciation that simple arithmetic works.

Like many, I used to wait around to get the bog-standard 2% or so annual pay rise which, at the whim of management, is often distributed with little regard to the employee’s performance. Depending on the industry, some will also get a bonus if they are lucky. This seems to be standard practice for a lot of companies.

At an early stage I realised that this was going to be the likely scenario in the workplace so I decided to take action. Having control over the growth of my net worth meant taking control of my finances, rather than relying on a manager at work using some esoteric means to determine my future.

Taking control meant living within my means, cutting back on unnecessary expenses like motoring, self-educating on business and finance, achieving a 50%+ savings rate and investing in the stock market. Obviously, this approach has not been easy – spending big always seems more attractive than saving.

Dividend growth and investment returns

With the annual growth of Global dividends currently running at 8.5% according to Janus Henderson, it is clear that by holding a sizeable investment portfolio you can grow your income substantially. I would rather have 8.5% than a paltry 2% any day. Coincidentally, this 8.5% growth is not too far off from the long term return of the stock market so we can use it to run a few scenarios:

Suppose you have two workers at the same company who make £40,000 each. Worker A has zero interest in investing or perceives it as “risky” while Worker B is well on their way to financial independence and has been diligently saving and investing for a number of years. Worker A assumes that their pension is secure and someone else’s problem to manage. Their company does not offer bonuses and Worker A is always complaining about how little his pay rises every year therefore feels powerless to do anything about it.

Worker B, however, is not worried at all as his personal financial hacks have unlocked additional income which is unrelated to his employment. Instead of frivolous spending and accumulation of liabilities, Worker B has built a diversified portfolio of stocks and shares, real assets. As an example Worker B has a portfolio of £250,000. Using the typical 8.5% return this means that the portfolio earns an additional £21,250 a year for Worker B, which would be tax-free when invested in an ISA account. As this figure is equivalent to net pay, the worker would need to earn a gross salary of about £26,500 to take home the same amount.

Impact of investment returns on salary

Adding this to their pay we find that Worker B theoretically earns £66,500; substantially more than Worker A and an impressive 66% on top of the standard salary (see above). This would occur at an ever increasing rate every year depending on savings rate. Now that is what I call a pay rise. It is also interesting to note that the investor would easily stealthily grow their income to such a state that they would be better off than other people above their pay grade or other higher paid professions.

These gains would actually be bigger if higher tax rates were considered but that calculation would be a bit complex to do for our example. Gains would vary and may be bigger or smaller depending on yearly market fluctuations but it is important to focus in the long term. When not withdrawn, the gains are unrealized and therefore reinvested to form an ever larger snowball.

Financial Independence – the journey is as important as the goal

This perspective shows that there are multiple benefits to striving for financial independence, even way before the goal is achieved. The greater the savings you have, the more the opportunities which appear to you. It is time to say no to zero or below inflation pay rises. I honestly no longer worry about pay rises or bonuses like I used to when considering the perpetual (and growing) impact an investment portfolio has.

Interesting reading:

How to save hundreds by switching your energy supplier

As winter rolls in it is more important than ever to switch your energy supplier and save a lot of cash. There are many bills to pay in life so paying more than necessary should be avoided where possible. This step to step guide shows my approach to the process and the key things to consider. Any savings can be used for acquiring assets such as investments rather than losing the cash forever.

Why you should switch you supplier regularly

The main reason why you should switch your supplier is that in the energy industry loyalty does not pay. Energy suppliers know that a lot of customers believe that they will be treated well by staying with the same provider for a long time, therefore are very unlikely to change a supplier.

Companies exploit this by jacking up the costs once the initial, usually cheaper, contract period has elapsed by moving you to the deceptively named standard tariff. In other cases customers simply cannot be bothered to switch as they see this as a hassle or think that the process is difficult. These reasons should be disregarded as I will show here.

Know how much your use in kWh

Knowing your annual usage is critical as it enables you to calculate how much a prospective deal will cost. The units to use for energy are Kilowatt hours (kWh). 1kWh is equal to 3.6 megajoules. For a constant supply, overall energy used is equivalent to the power supplied (kilowatts) in for the period in hours. It is not difficult find out your overall use figure; this can be done by recording meter readings for a certain period or obtained from your energy supply account and bills.

Electricity usage in kWh

Electricity usage in kWh

Above is an example for my electricity only usage of about 5.2 kWh a day or 1,898 kWh per year.

Compare energy suppliers’ tariffs

The next step is to compare different supplier tariffs when your contract comes to an end. If it is a fixed term contract, you can do this from 49 days before the end date. Within this period you can switch without paying an exit fee.

Look for 2 key pieces of information; the daily standing charge and usage per unit. The standing charge is fixed while the usage per unit determines costs according to your needs. Armed with the annual usage information and tariff information, you can estimate with reasonable accuracy how much you will spend with different suppliers. The following shows the figures I used while carrying out my recent electricity supplier switch.

Current SupplierRenewal offer – current SupplierBest Quote – new Supplier
Standing charge (daily)17.47p x 365 = £63,7717.17p x 365 = £62,6721.20p x 365 = £77.38
Usage per unit14.25p/ kWh x 1,898 = £270,4618.49p/ kWh x 1,898 = £350,9413.60p/ kWh x 1,898 = £258.13
Total per year£334.25£413,61£335.51

Annual Electricity Supplier Comparisons

Even though I have not managed to reduce my annual bill, it is projected to remain about the same which is less than inflation and 25% less than if I had been loyal to my current supplier. It is worth noting the renewal offer from you current supplier but I have always found this to be more expensive than the previous tariff or other suppliers’ offers.

Make the switch

There are numerous websites which can be used to compare energy suppliers once you get to that 49 day final period. All you need are details of your current tariff and estimate usage. These online services are generally good but care should be taken when using them as they do not facilitate the switch to all suppliers on the market.

This is not much of a problem as it is only a few extra steps to contact the other, often cheaper, suppliers directly and request a switch. Once you give the instruction the switch is painless, there will be no interruption in supply and should take about 3 weeks. Both companies will handle the changeover and all you need to do is supply the final meter readings.

Notes on gas supply

If you also have a gas supply the steps above apply. I always find that it works out better value to avoid using dual-fuel tariffs where a single supplier provides both gas and electricity. A dual-fuel tariff seems easier to manage but it is definitely not cost effective.

For gas the meter readings refer to recordings of gas volume consumed in cubic metres (m³) or cubic feet (ft³) for older ones. However, as with electricity, customers are billed in kWh following a conversion.

As shown above it can be tricky to determine the best deal for energy. The table provided and tips within this article should make that decision easier and lead to long term savings if applied consistently. It is also useful to set up reminders and to document essential tariff details such as name, switch date, cost rates, start date, log in details etc. The next switch will come before you know it.

I recommended switching energy supplier once a year separately for electricity and gas supplies in order to get the best value. There are numerous small energy companies out there which offer a decent service and the best prices. In such a competitive industry there is no need for the customer to pay more than needed.