This week I’ve reached a milestone for this blog. It’s a year since I launched it. A whole year ago, I wrote about my plans to achieve financial independence by the time I turn 35 in 2025.
As I wrote these plans, I identified six core targets that could act as a measuring stick for my progress. I promised an update every 6 months.
So here’s how I’m doing after one year.
Target #1: Eliminate student debt by 2021
Context: In the UK, student debt repayments are taken automatically from your pay as a percentage. You have the option to overpay, but the value of doing so depends on which tranche of student loans you’re paying under. My student loan package has an interest rate below inflation, so I choose to pay only via the automatic payments. It is, however, a substantial chunk of my take-home pay, so my income will receive a welcome boost once the debt is cleared.
Progress: As my pay has increased in 2019, I will close the year having reduced my student loan balance from 40% to 20% of the original borrowed value.
Outlook: On my current income trajectory, I expect to clear the student loan balance in early 2021. If the balance is small enough at the end of 2020, I may choose to pay off the balance before then.
Assessment: ON TARGET.
Target #2: Reduce mortgage to 30% of property value by 2025
Context: While I recognise the trade-off between early mortgage repayment and investing, on a time horizon of 2-3 years and considering my rate of interest and balance, I believe early mortgage repayment is currently a preferable option. As I have previously written, I will switch to a more aggressive equity investment strategy from 2021/2022. All things being equal, reducing to 30% of property equity will mean my modest rental income from one room should cover subsequent repayments and household expenses.
Progress: In 2019 I reduced my mortgage from 80% to around 62% of the property value. This was supported by a healthy savings rate and strong growth in post-tax income.
Outlook: I will continue to overpay on the mortgage until the end of 2021. Assuming property markets remain stable, I should be in a position with a mortgage at around 40% of property value at this point. In the meantime, I will begin to build a base in equities to diversify.
Assessment: AHEAD OF TARGET.
Target #3: Achieve an 80% savings rate
Context: My savings rate will be a crucial indicator of my rate of progression. I set an aggressive target of 80% for 2019 and 2020, and then 90% thereafter. The boost in savings rate from 2021 will be supported by clearing my student debts and broadening my income streams.
Progress: I expect to close the year at a savings rate of 78% for the full year. While I’ve increased my income (more on that shortly), some one-off legal and health costs have eaten into my savings rate.
Outlook: In 2020, I should return to a more stable savings rate of 80%, supported by increases in base income and less one-off costs.
Assessment: BEHIND TARGET.
Target #4: Achieve post-tax income growth of 10% per annum
Context: My two main sources of income at present are my main salary and rental income. While my rental income is unlikely to grow further at this point, I am focused on negotiating strong increases in salary every 18 months, along with broadening my income streams to other sources.
Progress: I exceeded my income target substantially in 2019, growing my post-tax income by 28% vs. 2018. This was driven by salary negotiations on a new job role, as well as my continued renting of rooms to lodgers throughout 2019.
Outlook: Against the backdrop of a very strong year, I expect this target to be more challenging in 2020. I anticipate that I’ll still grow my income, but it’s unlikely that growth will achieve similar heights. I won’t consider moving roles until late in the year, and I’m expecting to slightly reduce lodger rental income as I move to renting just one room for the year.
Assessment: ON TARGET.
Target #5: Grow private pension by 25% per annum
Context: I have two defined contribution pensions from previous employers and one defined benefit pension with my current employer. Given that I’m likely to give up such a scheme via an employer in 2025, I will need to aggressively grow the pension balances while I’m in work.
Progress: My overall pension balance grew by 35% in 2019, including the contributions. As I am now on a defined benefit pension scheme, it gives me less control and influence over the growth rate. Strong performance on my defined contribution pensions helped top up the growth from contributions on my existing pension.
Outlook: In 2020, I will reduce (yes, reduce) my contributions to my defined benefit pension scheme. Unfortunately, the modern world of defined benefit isn’t anything like the old world of defined benefit. My ratios even suggest a defined contribution pension would be preferable. I’ll continue to contribute a smaller proportion of my salary for a smaller final salary ratio, but I’ll use the difference to invest privately.
Assessment: ON TARGET (BUT AT RISK)
Target #6: Passive income streams to cover living costs by 2025
Context: My main source of passive income is currently rental income. By 2025, to be in a state of financial independence, I will need to have expanded my passive income streams to cover living costs.
Progress: My passive income covered 40% of my core living expenses in 2019.
Outlook: I expect my passive income coverage to be slightly lower in 2020, but my focus will be shifting to building longer-term sources of income, such as dividends and online income streams.
Assessment: BEHIND TARGET.
It’s been a strong financial year, with good progress towards some of my core targets. It’s clear, however, that 2020 will require a renewed and different kind of focus on passive income. If I’m serious about achieving financial independence in such a short time, I can’t keep ignoring this.
I’ll continue to make the most of rental income, but I’ll also look to diversify my income streams. For example, regular readers will notice that I’m now occasionally using affiliate links for books. I don’t expect this to bring earth-shattering income (probably pennies in reality), nor will I let affiliate links spoil the content of the blog. The salient point is it’s a signpost for the kind of change in thinking that will be required in 2020.
Whilst my financial approach evolves in 2020, so will my mindset. 2019 has been a phenomenal learning year. I’ll carry forward what I’ve learnt in 2020 and most importantly, I’ll enjoy the journey. If we can’t enjoy what we have now, we won’t enjoy what we have later.