Family Budget 2011-2025

 I kept logging my expenses without sharing them for the past three years. It’s time to catch up! Here how our family expenses look like over the past 14 years: 

October 2022 update ($701,515 +$41,544 or +6.3%)

↓ Emerging Markets Stock Index Fund is down by $4,622 or -4.1%
Grand total losses: $4,622 USD

↑ Eurozone Stock Index Fund is up by $8,387 or 7.9%
↑ US 500 Stock Index Fund is up by    $21,198 or 8.0%
↑ Global Small Cap Index is up by $9,734 or 8.1%
↑ Growth fund is up  767 or 1.3%
↑ EUR is up to USD by 2.1%, so for my portfolio its $4,519
↑ GBP is down to USD by 2.7%, so for my portfolio its $1,560
Grand total gains: $46,166 USD

Family budget 2020 – Family budget over last 12 years.

 This is 12^th year we are keeping our family budget formally, recording every expense and trying to make sense of it all at the end of the year. 

Overall:

The expenses this year exclude a one-off house redecoration - $60K. This is fence around the house, internal doors, wardrobes and hallway parquet replacement, repainting the walls and ceilings.  The house is a typical one for the UK of approximately 1,700 square feet.  Previous once were 60 years old, I think.  These are not registered on the expenses but something to take into account.  I think its reasonable to assume that you need to put aside at least $3K a year on the house long term maintenance. This day will come sooner or later.

Financial independence from A to B

I have been on the road for financial independence (FI) from 2008, with some tangible steps taken since 2011.

 How long will it take me to reach it? 

 

 I would like to make some assumptions first:

Assumption one.  Our house is not an equity.  Counting home equity is only good if you don't plan on living there in retirement.

We are making a lot of irrational decisions by renovating the house to our liking. Significant amount will go in in the next two years’ time (approximately $100,000). 

Assumption two. I am planning to invest $2,000 a month.  This is after taxes. I assume that this amount will increase in line with the inflation.

Assumption three.  I am able to achieve 3% return after the inflation on my investment.

Assumption four.    In fifteen years’ time the kids will be out of the house and the mortgage paid.  This should lead to annual expenses of $50,000. 

 

 Key milestones to achieve Financial Independence:

 At four percent withdrawal rate I should be able to get $50K a year.  There some potential opportunities but pitfalls too. Let’s see what the journey will bring ahead.

 My father retired when he was seventy years old. He actually kept coming to work  for free for almost a month, after retirement. This was  to make sure that his successor transitioned into the role well. I maybe have a job  in my late sixties to do too by keeping my skills up to date.  However, I see a lot of people in their early fifties are given a boot at every major crisis. 

How to stay wealthy. Inequality or the rich vs. the poor

Looking back home Americans believe that hard work is essential to become rich.  The study shows that it is quite unlikely that somebody from the poor background will make it. Two the most common ways are: have the rich parents or get married to a rich person. The third is get into Harvard or Yale university and into finance industry.  The universities prefer the kids from the rich families.  This goes back in time and the example below can show how the rich are staying wealthy.

Tax efficient account in the United Kingdom

In the United Kingdom there is provision to open Individual Savings Account (ISA) for children and adults.  After income taxes are paid, you can invest either in cash savings account or shares into one of the two ISAs. As long as the money stay on the account any income (interest or dividends) is tax free and no capital gains is paid on the sale.

Currently the annual allowances are:  4,368 GBP per child and 20,000 GBP per adult. From 2020 the kids’ allowance will go up to 9,000 GBP per year. When the child turns 18 years old the Junior ISA converts into adult one automatically.  I put the British currency (GBP) for the reference, but please ignore throughout the text, as it is of no importance (for facts hungry, current exchange rate GBP to USD is 1.25 and GBP to EUR 1.1).

Ability of an average family’s to use the tax efficient account

Let’s look who benefits from the ISAs in the United Kingdom.

Average salary for a full-time worker in the UK is 35,423 GBP per year (27,623 GBP after taxes).   

Assuming a family with two children and both parents are working.   You need to have 48,736 GBP savings left to keep the ISAs full this year or 58,000 GBP from 2020 onwards.

Average of living of our family is 3,500 GBP per month, including rent or mortgage and the house taxes (council tax).  The family will be left with 13,000 GBP a year of potential savings.

How is benefiting from the tax efficient accounts?

How much do they need to earn to keep their ISAs full?  The family need combined income of 90,736 GBP this year or 100,000 GBP next year. This is after the income taxes are paid. 

To have 50,000 GBP after taxes you need to earn 72,000 GBP per year (double the average salary). This needs to happen for both parents. To earn single handedly you need to have salary of 170,000 GBP per year.  This assumes no pension contributions or any other investments.

70,000 GBP salary is top 5%, and 170,000 GBP is top 1%.  The reality is that people earning 170,000 GBP a year do not live on 3,500 GBP a month while taking 8,500 GBP home.  The actual threshold is even higher.

Why is it important?

The income from the ISAs is tax free. If you receive an average salary of 35,423 GBP, you will have 2,300 GBP a month after taxes. To have 3,300 GBP a month your gross income should go up by 18,577 GBP before taxes or 1,548 GBP a month.

 Imagine if you had rich parents and they used Junior ISA from your birth until you are 18 years old.  Even if you put no additional money, at age of 40 you still can get extra 1,000 GBP a month just as dividends tax free, while earning the average salary.   It gets even better in case you maximized your ISA allowance from 18 onwards.  In this case by the age of 39 you are getting the average salary for life tax free.

See the table below which has two scenarios: Investing maximum amount allowed by ISA through the life and stop investing at age of 18. I assumed 3% inflation adjusted income on investment. The money is in thousands GBP.

Financial Independence change in the Net Worth over the past 7 years analysis

This is how my financial performance looked like over the course of the last 6 years and benchmarking my investment decisions against global stock markets:

Year	2013	2014	2015	2016	2017	2018	2019
End of the Year, $ K USD	298,429	288,608	295,536	387,831	482,266	432,089	575,086
Money invested (Do nothing)	298,429	318,105	332,356	413,899	508,617	528,940	549,690
Inflation adjusted U.S.*	394,553	361,145	336,942	462,739	619,649	501,911	722,293
S&P 500 benchmark**	394,553	467,612	488,316	627,481	859,178	835,597	1,118,724
DAX (Germany)**	374,528	404,317	457,382	570,485	708,560	599,216	772,167
FTSE (the UK)**	354,235	376,391	385,749	540,970	700,605	664,879	804,044

* If I invested in inflation protected US treasury bills

** Total return (market change and dividends reinvestment)