Over recent weeks I’ve been struggling with illness. As my energy has dwindled, I’ve found myself battling for that last shred to get a blog post out.
In truth, my creativity has suffered. I’ve lacked the verve to take on the research-intensive posts I’ve come to love since starting this blog. Instead, I’ve spent more time on less energy-intensive tasks, like reviewing and finetuning my personal finances.
And that’s got me thinking. Back in December 2018, I set out some personal financial targets on this blog. Some of these are quite clearly defined, and others will become more clearly defined in the next few years. But as you can read for yourself, I said I’d provide a regular update on my progress towards these goals.
Exactly how regular I didn’t define, but now seems an opportune and logical moment to provide my first update. Thereafter, I’ll provide an update every 6 months.
How I set my financial targets
Before I get onto the detail of my progress, let’s first recap on the underlying logic.
My financial targets focus on three core areas. First, cost control and debt reduction. To achieve early financial independence, I need to control spending, save more and reduce the drag of debt on wealth accumulation. I’ll do so by focusing on quick savings, identifying opportunities through expense tracking, and shifting my overall spending mindset towards a more intentional spending approach.
Second, I’m focusing on current income growth. That means pursuing gains within my full-time job, through promotions and in-role negotiation. But it also means going elsewhere to achieve sustained salary growth, and looking at supplementary income streams (or side hustles).
And third, critical to achieving financial independence, I’m focusing on developing sources of passive income to cover future living expenses. Primarily, I will focus on achieving a balance of property and dividend yield here, but this will become a stronger focus as I move through the final 5 years of my plan.
Cost control and debt reduction
So that’s the context, but how have I done in practice against these three areas?
As an overall savings metric, I’m targeting a savings rate of at least 80% up until 2021, increasing to 90% thereafter.
Let’s be clear with what I mean by savings rate here. I’m working out how much cash flow I have left over to invest after all expenses each month. Any mortgage payments or investments are excluded from the expenses to get an accurate reflection of core expenditure without any investment benefit. And I’m then simply dividing by my take-home income.
In the first six months of my plan, I achieved a savings rate of 82%. I expect this to fall away a little throughout the rest of the year, due to the impact of bonuses in the first half of the year and some much-needed travel I’ll take in the second half of the year. Nonetheless, I should hit my target of 80% after the first 12 months.
I also set a target to eliminate my student debt by 2021. This is progressing well. I’m not making contributions above statutory requirements, but the proportional payback has increased as I’ve moved into higher paying work. All things being equal, I expect to have the student loan cleared by early 2021. This will then provide a nice income boost as the burden of debt repayment is released from my monthly pay.
Finally, I set a focus on faster mortgage reduction. I wrote that over 7 years I intended to reduce my mortgage balance to 30% of the property value.
I’ve written extensively about the pros and cons of early mortgage repayment, and I recognise the battle between emotional intuition and financial logic at play. Notwithstanding, mortgage reduction remains part of my focus. I won’t be throwing the kitchen sink at reducing it, but I will be paying faster than my terms require.
This is about peace of mind and lower living costs. I’m keen to reduce the mortgage to the point at which my lodgers cover 100% of both the mortgage cost and the costs of running the property. In other words, so the passive income generated from the property becomes ‘self-covering’ for all associated costs.
Currently, this rental income covers 70% of all associated costs, so there is a way to go. I’ll think carefully about whether I reframe my mortgage reduction target in accordance with this self-coverage principle over the next few months.
Current income growth
When it comes to current income growth, I set a target of 10% growth in post-tax income each year. Over the first 6 months of my plan, as compared to last year, I am considerably outperforming this target. In fact, my post-tax income is some 50% higher than the first 6 months of last year.
But growth percentages are funny things, and I’m lapping a previous year where things were very different. My post-tax income has been bolstered by a strong salary increase, as well rental income that only took hold in the second half of last year.
This is what I was expecting. I’ll see a reduction in this growth percentage when I review the full year-on-year figures at the end of the year. What’s more, there is a significant challenge ahead in 2020 to achieve 10% growth in post-tax income.
Passive income generation
Finally, I laid out two financial targets for passive income generation. The first is to aggressively grow my workplace pension pot by maximising contributions and employer matching. I’m targeting 25% growth per annum in my total pension balance until 2025.
The good news is that I’m comfortably on target for 2019. I’ve grown my pension balance by 16% in the first six months. This gives me plenty of breathing space to hit the 25% target by the end of the year. But again, this is a target that will get harder as the years go by and the cumulative challenge gets bigger.
My second target was more general. To be financially independent, I need passive income streams that fully cover living expenses by 2025. And the truth is that I’m a long way off.
This was to be expected. I’ve developed bedded down sources of rental income, but I expect my broader investment strategy, for a variety of reasons, to come fully into play from 2021. I’ll judge myself more harshly against this target from then.
My finances are in reasonably good shape against my targets, but there’s a long way to go. Over the next 6 months I’ll continue to track my finances and consolidate the momentum I’ve had so far in 2019.
Most importantly, I’ll do this with a conscious focus on my mindset. I’ve written before about the importance of keeping an eye on the prize but doing so healthily, and I haven’t forgotten my own warning.
As for the blog, I’m looking forward to making a full recovery from this illness, so I can again focus my energies towards providing quality research and content on all things money and mindset!