Recently I achieved a significant milestone on my road to financial independence. But it has brought an unintended consequence and an enforced change of plan. However, some core truths remain in play.
I paid myself a dividend and paid off the last of my repayment mortgages.
This means three things:
- 1) I’ve reduced my debt to the building society and got a step closer to financial freedom. I feel good about this.
2) The most obvious and impactful route available to me for reducing monthly overheads has been exhausted. The repayment mortgages were on fairly short terms so the monthly payments were quite high relative to the amount borrowed. Further mortgage repayments will clearly reduce what I owe but a pound paid off won’t move the dial on my monthly commitments as much on the remaining mortgages.
3) I now have interest only mortgages at low interest rates, so that when I pay off a sum, the amount that is shaved off my family’s monthly commitment is not significant. In addition, the mortgages come with terms which means that I can only pay off a certain percentage per year. In short – I am not allowed to hit the remaining mortgages as hard as I have been, and if I do, the monthly amount I am asked got pay won’t go down much. For a few years at least, I am restricted in what I can throw at the mortgage. This leaves me with the question of how to manage finances, and specifically how to manage money which is surplus to the monthly amount we need in order to pay the bills and live our life.
I must remember not to complicate this matter too much. The facts remain that
1 – I owe an institution some money
2 – I need to exchange my time for money through working because I do not have investments or other sources of passive income which cover my expenses
3 – The bigger the gap between what I earn and what I spend, the more is available to fix the problem identified above (2).
So, here’s what I plan.
- save and set aside two years of spending
- consider income above and beyond a month’s spending ‘surplus’ and invest it in either the mortgage, the pension or non-pension investments. On a yearly basis, pay the allowed amount off the mortgage and then pay into equity investments, recognising that pension payments are the most tax efficient.
But now I am toying both the idea of keeping one – rather than two – years worth of cash, and investing surplus beyond that. Two years seems sensible, but I’m now thinking it is too conservative and I can be confident enough that insuring myself against two full years of no income is un-necessary. I will noodle this for a bit longer. I might split the difference at 18 months, or something less rule bound, like 16.465months. Why are we so obsessed with round numbers?
A reason to be conservative? The threat of recession
Reasons to be conservative do exist of course – we are probably due a downturn and I’m not so arrogant that I believe my business will be immune to the consequences of economic slowdown. Of course, downturn also means investment opportunity in the event of equity markets falling with sentiment, and cash in the bank is not cash that is working hard for me.
Non-pension / pension balance
Another item on my list of nice problems to have is that I have reduced some of my ISA holdings in the process of paying off the mortgage. As FI approaches (albeit a hazy vision a long way into the future) I will need to ensure that enough of my funds are available to me to spend before I can access my SIPP. Basically, I will need to take the income tax hit on paying myself more in order to fill ISAs. If I do not, I risk finding myself loaded but having to wait to access the money. I told you it was a nice problem to have!
Slow down or push hard?
I have young kids, and I have been reflecting lately that now (really NOW) could be a good time to calm down a bit at work and spend a lot of time with them. I occasionally wonder if a whole year out would be a super-cool thing to do. In a few year’s time the kids will not need me and these years are truly golden. The prospect of ‘daddy not needing to go to work’ is wildly more exciting to a primary school kid than I imagine it might be to them when they are teenagers; at that point ‘daddy not going to work’ is more likely to be filtered as ‘I wish that square old bugger would f*ck off out of my house’.
So the question is: could I / should I / will I take some time out and enjoy the family while they give a shit? I’ll end up working longer but arguably it’s a good way to prioritise the years. Another consequence I’d need to consider is how it will affect my employability when I bless the working world with my presence once again. Will I be forgotten / written off?
Back to the big picture – be grateful
I have come a long way in my financial life in a relatively short period of time. I am in demand enough to earn a reasonable income. I know a lot of people who earn a lot more but I am well paid by any measure. Life is organised in such a way that we do not spend all of that income every month. As a consequence, our family’s net worth has risen sharply over a few years. I have fewer and fewer money worries as the years go by and for that I am grateful. There’s details to consider and decisions to make, but it is important to keep the big picture in mind.
Thanks for reading.