Category Archives: Frugality

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.

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?

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£3000 for a new iPhone – no thanks


It is September again which means that Apple will be releasing its latest and greatest iPhone, their best selling product. Many will splash out a lot of cash on this gadget without assessing how this may impact their finances in future. After doing some assessment of my own I was astonished at how big the impact is due to the huge costs involved.

I have to admit that as an iPhone 6 user I have been tempted to jump on the bandwagon and upgrade to the new version of the product after watching the slick Apple 2018 keynote product launch presentation which was streamed from the Steve Jobs Theater in Cupertino.

The average selling price for iPhones is now higher than ever before following the release of the Xs, Xs Max and Xr versions with starting prices at $999, $1,099 and $749 respectively in the US. The annoying thing is that the same number (£999, £1,099 and £749 ) is used for the price in the UK despite the pound being stronger than the dollar. These prices are obviously crazy if you consider what other phones with similar specs are currently on the market.

Buying on contract

Costs are even crazier once you realise how much people end up paying by getting these devices on contracts as most cannot afford to pay cash upfront. My strategy is to buy a phone SIM free for cash and buy a separate monthly contract which is suitable for my needs. Currently I have a contract for just £10 a month and purchased an iPhone 6 for £260. The phone was refurbished but you couldn’t tell it apart from a brand new one.

To see how much a new iPhone would cost I logged on to my mobile service provider’s website. In-order to have the new iPhone Xs Max on a typical contract you would need to pay £100 cash and then £103 a month for 24 months. Over the 2 year period total costs would come up to £2,572.

As it is such an expensive purchase, the service provider suggest that you insure the device, at £14 monthly. This would result in a total cost of £2,908! This is shocking as I would have paid only £240 on my current plan over the same period by not doing anything. I might be missing something but the iPhone 6 seems to be pretty fast, runs the latest quicker IOS 12 software, has a good “retina” screen, decent battery life and perfect camera.

Investment impact

Being a personal finance geek, I decided to plug the numbers for the contract for upgrading into an investment calculator to find out how much someone could have from investing all the payments in the stock market (or better yet in Apple stocks) at a typical 10%  annual return rate.

Phone contract payments invested over 2 years

Phone contract payments invested over 2 years

The figures keep on rising and the final total cost for the insured gadget comes in at £3,364.24. This is definitely not worth it. I don’t  even want to go into the impact over a 10 year period.

Moore’s Law

While studying electronic engineering I got acquainted with Moore’s Law. Moore’s Law is an observation that the number of transistors in a microchip doubles every year while the costs are halved.

This is why computers have gotten smaller, better and cheaper with time. For this reason, the £3,000 iPhone we are considering here would have greatly devalued and seem outdated compared to new devices by the end of the contract. Some may consider taking a further hit then by buying the latest device.

I would prefer to maintain my current device for as long as practicable and invest in real assets for now. After investment, some of the proceeds may be used to get a good device at a good price in when the need arises.