Category Archives: Financial Independence

Going car free – The real cost of motoring

The real cost of car ownership is one of the trickiest expenses to determine. Unlike predictable expenses such as public transport, renting a place to live or food costs, it is impossible to accurately estimate the true cost of motoring. This can be a problem for financial independence planning because you need to be reasonably certain of what your expenses are. Previously, I tried to ignore this paradigm but the relentless rules of simple arithmetic will always come out on top.

This post is timely as I will be going into a period of being car free. This is involuntary as I had no intention of getting rid of my car until the reality of car ownership hit me with a bang. While driving from work a few weeks ago, I was involved in an incident with another vehicle at a mini-roundabout. This resulted in my car getting written off and getting sent off to the scrap heap for just £100. I was shocked at how quickly things can change; I purchased the car (a 2007 BMW 118d) 6.5 years ago for £9,500 which has virtually gone down the drain in an instant. The car’s value had depreciated substantially since so it would not be worth much anyway.

Options

This situation presents me with several options.

Option A: Normally I would attempt to immediately reinstate my previous position by getting a like for like replacement vehicle. Obviously, this is not as simple as it seems as it would mean acquiring a used 12 year old similar model with over 100,000 miles on the clock. This is very unwise due to the amount of potential problems with such a car. At least I knew what work had been done on my previous car.

Option B: Alternatively, I could follow a similar approach to how I purchased the previous car by looking for a 4 or 5 year old used vehicle. This would have a huge impact on my finances as the cost would be way in excess of my emergency fund. The shortfall could be made by borrowing extra funds which I would not do.  Alternatively, I could dip into my investments or other savings. This is unwise; a classic case of swapping assets (investments) for liabilities (car ownership and purchase), therefore would leave me a lot poorer in the long run.

Option C: This is really hard to take personally; car ownership is often associated with status and a sense of freedom, but going car free has to be a consideration. A few weeks ago this option was unimaginable but after doing an in-depth analysis of what it entirely cost me to run my previous car this is not such a crazy option. I had to ask myself of what my real needs of transport are and unreluctantly concluded that for me, car ownership had been a nice to have, a very costly one at that. Here is why.

The true cost of car ownership

Over this 6 year period, owning and running the car cost me a total of nearly £30,000 (US$40,000), which is around £4,500 (US$5,900) a year or £370 (US$480) monthly. Costs equated to 44 pence per mile over an average of 10,000 miles a year which could be used to calculate a reasonable estimate of a journey’s true cost. This is an astonishing amount as I had considered the car, from an era when diesels where still being promoted by the government, to be well made, fuel efficient and cheap to tax.

I listed all the line items of everything I remember spending on the car to reveal the harsh reality. Here is the result:

BMW 118d: Total Cost (£) Of Ownership 2012-2018

ProportionItem6.5 YearsYearlyMonthly
33.87%Purchase+supagard(depreciation)9,7501,500125
32.75%Fuel. 10k/y, 42mpg, 52L, 134p/L1,450121
10.16%Insurance45038
0.68%Road tax303
1.02%Breakdown cover454
1.13%MOT test504
2.26%Brakes – £300 / 30,000 miles1008
2.64%Tyres – £350 / 30,000 miles11710
0.90%Brake fluid service – £80 / 2 yrs403
2.26%Oil service & filters1008
6.95%Timing chain (N47) & clutch repair2,00030826
1.39%Oil filter housing  – after oil leak400625
0.69%Parking brake snap repair200313
2.26%Parking & tickets & tolls1008
1.04%Audio: head unit+tweeters300464
Overall Cost incl. depreciation28,7834,428369
Running costs (cash flow)19,0332,928244

*The above list seems very long but it is the truth of the minimum spend on the vehicle. The figures would be higher or lower for other vehicles and usage. If I had bought it new, costs would have been north of £500 a month which could easily be more than rental/ mortgage costs.

What next

Such figures don’t lie and I would ignore them at my own peril. Another possible option is to purchase an electric vehicle (EV) which has substantially lower running costs due to a simple design (electric motors have less than 20 moving parts) and does not emit harmful emissions.

However, EV  purchase costs are still high, even on the used market. Despite the high initial purchase cost, I have calculated that there would be huge savings over the same 6 year period by purchasing an electric one. For example, an EV bought for £14,000 would cost a total of £20,000 to run over 6 years compared to nearly £30,000 for a petrol or diesel car purchased for £10,000.

For now I will go car free for a while as I actually do not need one. Commuting to work would be by a 20 minute train ride plus less than half an hour’s walk. Other trips would be by train, tram, taxi, coach or bus. This is not a problem in London. For inaccessible locations or other uses I will use rental cars or vans when needed. I estimate that these alternatives combined will cost me a quarter when compared to car ownership and the proceeds will be invested or put towards an EV.

I expect that this will also boost my savings rate by over 6%, alleviate the stress of having a metal box sat on the driveway, avoid aimless trips, parking, roundabouts, traffic lights, schools, fines, endless maintenance, break ins, road rage, scratches and prevent me from sitting in or battling rush hour traffic while risking a crash.

I have already saved an unexpected initial £50 by cancelling my breakdown cover; this will be promptly invested into Vanguard index funds. The benefits are substantial as I have not even gone into the impact of opportunity cost, where the above costs would be invested wisely. If car travel is really needed I will consider going electric in future.

It is incredible how such the seemingly innocuous decision of whether to drive or not can have far reaching consequences on your personal finances and possibly on when (potentially years) or if you will achieve financial independence.

*The AA has a useful guide about car running costs here.

What do you think? Are these costs realistic for you? What are the pros and cons of owning a car?

You might also like:

Interesting reading:

     

BMW i3 120Ah – Why it could be the best car for the financially independent

There is no getting around it – electric vehicles are the future. Here I will review and detail how the latest version of BMW’s i3, the 2019 120Ah or 44 kWh version, is possibly the ideal car for the frugally minded or the financially independent in the near future. Main reasons for this are the minimal running costs due to the vehicle’s requirement for minimal maintenance, having few moving parts and use of electric power. This review will be from a financial perspective.

What is the BMW i3 120Ah

Like many drivers I used to be extremely reluctant to the idea of owning an electric vehicle. I felt that the reasons for this including range anxiety (fear of running out of battery), poor performance and lack of charging points were valid. However, with wider adoption of the technology and advances in battery production, things are changing very quickly which has allayed most of these fears. This is perfectly showcased by the progression of the i3.

The BMW i3 was launched in 2013, as part of the BMW i sub-brand which manufactures plug-in electric vehicles. A high riding hatchback which seats 4 adults in comfort, the i3 is relatively compact, making it easy to manoeuvre in urban environments. Styling on the outside is futuristic so can appear controversial to some but I think the interior is very minimal, elegant and practical.

BMW i3 Interior

BMW i3 Interior

The i3 is rear wheel driven by a single-speed 170 hp electric motor and has a Lithium Ion battery pack located on the underfloor. Construction is with CFRP (Carbon-Fiber Reinforced Plastic) which makes it ultra light weight at 1195kg.

At launch the i3 came with a 60Ah (22 kWh) battery which offered a range of only 80 to 100 miles. This was then bumped up to 120 miles with the introduction of a 94Ah (27.2 kWh) battery in 2017. The improvement did not catch my eye but the latest upgrade has; from late 2018 the i3 has been upgraded to a 120Ah (44 kWh) power pack which offers up to 190 miles range. Versions with range extending petrol engines are available but I will not consider these due to them being phased out by the 120Ah.

I consider the 120Ah’s range quite useable as it covers the vast majority of typical trips I undertake in a year. A single charge would be enough for a whole week’s commuting to work or a typical weekend trip to the coast or countryside. For longer trips, it is feasible to find charging stations at Motorway services.

As typical with most electric vehicles, the i3’s performance is good, with a 0 to 60 time of 6.8 seconds for the sportier version the i3s. This is faster than most cars on the road as the electric motor provides the 250Nm peak torque instantly. The i3s also has a wider track, stiffer springs and is lowered compared to the standard version so is worth considering. Top speed is limited to 99 mph.

Running costs comparison – Electric vs ICE

Being frugally minded, I purchased my current ICE (Internal Combustion Engine) diesel car, a 2007 BMW 118d hatchback in 2012. This was a great deal as I managed to acquire the car for 40% of its market value. Buying it approved from BMW insured that any gremlins would have been ironed out and it came with a 1 year warranty. The model was awarded green car of the year 2008.

Despite a number of faults over the years the car has performed well and requires servicing after relatively long periods. As I wrote about before,  I have started doing most of the servicing and maintenance on my car which has saved me a lot of cash, improved my hands-on skills and gives me confidence that the work has been done correctly with the best components. With 112,000 miles on the clock, the car is running perfectly.

The following are my estimate running costs for my personal car over the last 6 years.

ItemCost/ yearNotes
Fuel1,20010,000 miles a year diesel.
Servicing100DIY service, with oil changes typically every 18 months.
Repairs460Includes timing chain (1,600), clutch (600), handbrake (150), oil leak (400).
Tyres & brakes270Total cost of 1,600 in 6 years.
Road tax30118g of CO2 per kilometre.
Total2,180

This seems high but includes total running costs. In comparison, for the same usage, an electric vehicle is expected to have much lower running costs as shown here:

ItemCost/ yearNotes
Electricity300Assumes 3p per mile.
Servicing50No oil changes. Brake fluid and fewer filters need changing.
RepairsUnknown but expected to be minimal.
Tyres & brakes270
Road tax0No  polluting emissions. Also exempt from congestion charges.
Total620

If these estimates are correct, I would avoid spending the difference (£1,560) a year just by switching to an electric vehicle. This is very compelling and makes me seriously consider purchasing the BMW i3 when the time comes to get a new car. I would not do it immediately but there will come a time when it is not justifiable to spend more on a huge repair which costs more than the car and the electric charging infrastructure is improved.

Good advice would be to buy a used car which is 3 to 4 years old and has taken the greatest hit on depreciation or using government subsidises if buying new. For me it would be ideal to aim for the 2018 i3 120Ah in 2021.

Of course, competition in the electric vehicle space is hotting up with models such as the long range Mercedes EQC, Audi E-tron,  Porsche Taycan, Tesla Model 3 coming up along with more affordable Hyundai Kona and Renault Zoe, there should be plenty of viable choices by 2020. With Dieselgate and rapid progression in green technologies, petrol and diesel cars will soon look like they are from the stone age.

Although initial purchase cost may be high, such low running costs make electric cars an ideal choice for the financially independent or those aspiring to be due to the greatly reduced impact on running costs and the added environmental benefits.

BMW i3 120Ah Key Specs

  • 0-62mph: 7.3 seconds
  • Top speed: 93mph
  • Range: 193 miles
  • CO2: 0g/km
  • Engine: Single-speed electric motor
  • Power/Torque: 168bhp/250Nm
  • Transmission: Single-speed automatic, rear-wheel drive
  • Boot space: 260 litres/ 1200 litres with rear seats folded
  • Fastest charge time: 45mins with 50kW DC rapid charging

Latest info on development can be found at INSIDEEVs.

You might also like:

Your Savings Rate: Why it is the most important metric in personal finance

euro notesA personal savings rate sounds like the most boring term in personal finance. It is something most people are not concerned about or have no idea what it is. However, I consider the savings rate as the single most important metric when dealing with finances.

Why it is important

Imagine that you are striving to achieve Financial Independence – a state in which you have assets generating income which exceeds your expenses. If you read this blog and follow the strategies, as a general rule you would need to have stock market investments which equate to at least 25 times your annual expenses. Such an asset base is huge and can take many years to build up.

As an example suppose your core monthly expenses are £1,000 and your monthly net income is £3,000. You would need an asset base of £300,000 to be Financially Independent (£1,000 x 12 x 25). At a healthy 50% savings rate (£18,000 per year) it would take 10 years to reach this goal as determined by the compound interest calculator below.

compound interest calculation example

300K accumulation at 50% savings rate

This calculation assumes a typical annual stock market return of 9.5%. As £300,000 is a lot of money it is easy to presume that the bulk of the amount would be raised due to investment returns. Surprisingly, this is far from true; compound interest, what Einstein called the eighth wonder of the world, only starts to kick in with a meaningful effect after a long time. Even this 10 year period is relatively short when thinking of investments.

Over 10 years the amount raised by savings would be £180,000, a proportion of 60%. If investment returns are less than 9.5% it would take a much larger proportion of savings to achieve the same goal within this time frame. It is entirely plausible for investment returns to be as low as 5%. At this rate the investor would need to save an astonishing £276,000, or 92% proportion, in the 10 years in order to achieve their goal.

Savings rate needed at 5% returns

Savings rate needed at 5% returns

These calculations prove that along with keeping investment costs low, avoiding debt and minimising taxes, a high savings rate is one of the sure ways to guarantee accumulation of reasonable amount of wealth.

Proportion of savings needed at a 9.5% return vs 5% return rate

Proportion of savings needed at a 9.5% return vs 5% return rate

You can not control or forecast investment returns but you can control how much you spend which directly impacts the savings rate.


Fascinating alternative scenario*

The above two investment return rates are very realistic. Just for fun, if we assume an overlay optimistic return rate of 20%, the size of nest egg generated would be truly astounding. I repeat that this is overly optimistic and would be in the world of the likes of Warren Buffett. Such a rate would result in a portfolio of nearly £600,000 over 10 years! This is very unlikely but to give yourself any chance at this the high savings rate would be key. The good old savings rate stops being boring here.

Portfolio value with very optimistic 20% savings rate

Portfolio value with very optimistic 20% savings rate


Calculating your Savings Rate

There are many ways out there for calculating a monthly savings rate. Here is my take on this. The savings rate has to be taken in context of net income which you can actually access rather than gross income. Therefore the savings rate would be the proportion of money which is put away in relation to the money which is actually made available. Savings rate = sum of savings / net income.

Sum of savings can include the following:

  • savings into cash accounts
  • investments in stocks and shares
  • personal pension contributions
  • employer pension contributions
  • government pension tax relief payments
  • income saved from other employment sources such as business proceeds

Regardless of which method you use, the key thing is to maintain a high rate. There is little point investing a tiny amount in even if you get exceptionally high returns. As this year has shown, market volatility is never far away. You can only control what you can and when opportunities arise it will be those who maintained high savings that will reap the benefits.

Interesting reading:

     

Why you should invest globally when aiming for financial independence

As the 2018 FIFA football World Cup heads to a thrilling climax it has reminded me of the importance of having a globally diversified investment portfolio. Not surprisingly, as in football or any other sport, investors tend to be very home biased by usually holding the majority of their investments in stocks which are based in their home country. This is often not the most optimum strategy and I will go over my reasoning for this here.

Key financial independence principles

Having financial independence requires that you own a collection of assets which are capable of providing you with passive income which is more than your expenses. Once you reach this stage working for money becomes optional as you will be free to do what you want with your time. Using principles explored on this site and others it can take a relatively long time (typically 8 to 15 years) to achieve this therefore it is paramount that the most optimum strategies are applied. The key principles include:

  • Spend less than you earn and invest the rest
  • Maintain a very high savings rate
  • Invest in low cost stock market index funds
  • Diversify your portfolio
  • Keep investing costs very low
  • Avoid trying to time the market

The power of diversification

The  principle I am focusing on is portfolio diversification. A common way to diversify is by constructing a portfolio composed of stocks and bonds. Bonds should only be included to reduce volatility and protect a portfolio’s value from market downturns for the short term. As a young person striving for financial independence I reduced my bond allocation to almost zero in-order to maximise investment returns. The few bonds I hold are within micro portfolios which may be deployed in the near future for short term goals such as buying a car or property.

As a UK based investor only 20% of my portfolio is made up of UK stocks. The rest consists of international holdings (approx. USA 35%, Europe 20%, Japan 15%, Pacific excluding Japan 10%). This proportion is roughly in line with the weightings of global GDPs (Gross Domestic Product) of these developed economic areas. GDP is a measure of the total value of goods and services produced by the region.

GDP list

Top Global GDPs. source – Wikipedia

With a global portfolio influenced by the above statistics, you can ensure that to a large degree you will benefit from any growth within these regions.

Currency risk – is it worth it

It is important to note that by investing outside you home country you will gain exposure to currency risk. If your currency gains relative to other currencies the portfolio will reduce accordingly and if your home currency loses value then your portfolio will increase in value. I experienced this personally in 2016 when my portfolio jumped by +20% after a drop in the pound sterling.

This is a double edged sword so you should try to get a balance by not overexposing yourself to one region. However, I believe that in the long run currencies in stable economies generally revert to a certain valuation and have low volatility. The benefits of diversification and our inability to predict the future outweigh this risk in my opinion.

Another side of the argument is that for investors in major economies such as the US or UK there is no need to invest internationally as the companies in the major indices (S&P 500 and FTSE 100) already do a lot of their business overseas. This is entirely true but it is not a guarantee that these investments will keep on performing as well as in the past. An interesting article on this is on Morningstar.

Like in this year’s football world cup, expected results are often far from the reality, with all the big teams (Spain, Argentina, Portugal, Brazil, Germany) crashing out unexpectedly. We simply don’t now where the next big gains will come from. It is best to globally diversify, tune out the noise and keep investing.

You might also like:

Interesting reading: