assumptions

The basic assumptions  I’m going to run with (because they are true for me) are that:

• there is no consumer debt
• there is a fully funded 3-6 month emergency fund
• there is extra money in the budget without a purpose

key interest rate details - short to medium term

If I’m thinking about the short to medium term, then the only choice is deciding between a savings account and the mortgage. More risky investments are not appropriate on these timescales

• Mortgage interest rate 4.69% (Nationwide Base Mortgage Rate)
• Regular Savings account rate 5% after tax (Barclays Regular Saver Account)
• Cash ISA savings account rate 4.6% untaxed (Scottish Widows Cash ISA)
• Other savings account 3.64% after tax (Allied Irish Savings Account)

All these accounts are protected by the FSCS apart from the Allied Irish who are underwritten by a similar Irish guarantee.

arguments for and against

I calculated the amount of money that I could allocate to either saving, or overpaying. I then worked out how much that would grow to in savings, and how much that would reduce the mortgage balance by, over 3 years.

Assuming these rates stay about the same, the total difference between overpaying the mortgage or using a regular savings account or cash ISA is less than 1%. That’s really not a clear advantage. If I have regular money to put aside each month out of my salary, or haven’t used up all my ISA allowance it doesn’t make any real difference in financial terms if I put the money in a savings account, or overpay the mortgage. Even if I’ve used up my cash ISA allowance, and the money is irregular, or a lump sum, the difference between the overpaying the mortgage or saving is less than 2%.

Overpaying the mortgage means that the money cannot be accessed if needed for another purpose. It is less flexible than using a savings account. Whilst there is a psychological benefit to watching the mortgage balance decrease more quickly, I think I could achieve the same effect by mentally designating a separate regular savings account as the *mortgage overpayment account*.

There is very slightly less hassle associated with going for the mortgage overpayment as savings account rates need to be reviewed at least once a year to make sure you’re getting the best deal. However, since my other accounts and financial products also need to be reviewed once a year, I’m not sure that it’s too big a problem to add another account to the mix.

what about the long term?

Well, long term isn’t my forte. If, in the short term it doesn’t make that much of a difference whether to save or overpay, then in the long term the question is really about whether over the next 10-30 years I think the stock market will have a better than 5-6% annual return (the likely interest rate of my mortgage). For me, the answer to that question is probably. I expect my return from the stock market over the long haul to be in the region of 7% per year.

Whilst that 1% might not sound like it’s going to be lot, over the course of the remaining 28 years of my mortgage, and by the miracle of compounding, it would add up to 30% more money by investing rather than saving or overpaying. That’s a lot of money to turn down.

I mentioned the other week that I’d sort of thought that at some point I might want to live abroad. I don’t know if that’s something that I really want to do, or not, but I think that it’s fairly likely that in the next 3-5 years I may want to make some changes to my life. Although I’m settled, I’m not quite ready to say that for definite all my extra money can be tied up for 10 years.

Well not exactly my house, which is fine. But the value of my house and the mortgage on it.

I knew full well when I bought my house that it was probably near the top of the market, but I slightly pushed that to the back of my mind for the following reasons:

• prices in the area hadn’t moved for 2 years
• negative equity is not a problem if you’re not planning on moving and can afford to pay the mortgage
• it’s as important to buy when it’s right for your personal circumstances as the market

I disliked the flat that I was renting. I had enough money saved up / received in windfalls to mean that I had a 10% deposit plus fees plus a little extra for decorating. Rents were about the same as mortgage payments, so if I wanted to upgrade there would be no cashflow benefit in renting. It made sense to me to buy.

In return for my investment I have

• a home that I really like
• a mortgage of £87k to pay off (£500 a month for 30 years)
• an asset whose market value is £80k and falling (slowly)

Yes, I can see what you’re saying. Financially has not necessarily been the best purchase so far.

With my rational self, I can see that a house is not a short term investment. In the long run it is likely that the house will increase in value - probably at the same rate (on average) as wages. Besides which, it doesn’t matter if it doesn’t because I don’t need the house to even stay the same in value to eventually pay off the mortgage. Although the house would have been cheaper if I’d waited, it’s much harder to get a mortgage than it was 18 months ago - I wouldn’t have a large enough deposit to get a good rate for example. At the time, the decision I made was reasonable. It might still turn out to be a mistake, but not one that I could reasonably have forseen in advance.

My irrational self however is more concerned that any future lack of income could eventually lead to complete bankruptcy (rather than just homelessness) because the house is in negative equity. As I have self-employment earnings and some savings, I’m exceedingly unlikely to qualify for any help with my mortgage payments should I lose my job. I’m also the type of person who likes to have plenty of options and so even though I want to stay in the house for the next few years I feel slightly trapped. On the cash flow question, my mortgage payment now is the same proportion of my take home pay as my rent used to be (wage inflation is an amazing thing).

I am wondering, somewhat tentatively, whether it’s a good idea to revisit the pay off the house vs save and invest argument. When I last did this, shortly after purchasing the house I endeed up slightly in favour of saving and investing. Now, some of the variables have changed - particularly my own comfort with my mortgage debt, which is just as valid an input as the relative investment returns.

In the next couple of days I’ll go through the figures and see how they stack up.

I think I need to get more on top of this maintenance lark. For Christmas I received some DIY store vouchers and this time, I bought some sensible stuff - radiator keys so that I can bleed the radiator in my room, a draught excluder for the front door which opens straight onto the living room - as well as some new knobs for the kitchen cupboards (well, they were half-price and sort of needed).

Making an effort to improve the insulation of the house should save me in heating bills. I live in an end of terrace workers’ cottage, which means that there’s no wall insulation and it’s prohibitively expensive to fit some. It’s actually the little things that will have the most effect. I’m also doing things like closing the curtains promptly at night to keep the heat in, and shutting all the doors in the room that I’m in. I save money by using blankets, hot water bottles and keeping the heating on a timer.

Although I’m not really a winter or house person, I do know enough to keep the heating on very low (there’s a special setting on the boiler) to ensure that the pipes don’t freeze. As I’m sure you know, if they do freeze when they thaw out they will probably flood the house.

This constitutes my complete knowledge of how to make sure my house functions well in winter. If you have any suggestions, please let me know in the comments.

One of the things is something that’s quite well known. Average house prices in the UK oscillate, regularly going through boom and bust cycles and are mean reverting to between 3 and 3.5 times average earnings. This makes excellent sense, because most houses are still bought by home owners and mortgage companies have historically offered mortgages of about 3 times salaries, and then most people have a deposit as well.

According to this article, which had figures up to 2005, house prices are at a 55 year high compared to earnings, with the average house price in 2005 being more than 6 times average earnings.

It’s possible that this is a genuine shift in the underlying housing market caused by many more people using two incomes rather than one to get a mortgage. And of course, if you use twice the average earnings, and multiply that by 3, then you get 6 times the average earnings. Maybe the price/earnings ratio has fundamentally shifted.

On the other hand, the general rule in investments is that when someone suggests that the underlying rules of business have changed they’re usually wrong and we’ve reached the peak of a bubble. And maybe in 2007 (when I bought a house ) we did.

But, the house that I bought was valued at just under 3.6 times my earnings. Does that mean that I am in a better position? Maybe when it comes to keeping my house, but not otherwise.

I normally assume that the long term average is about right, so this means that house prices will revert to 3 to 3.5 times average salaries, but this means that my house is *really* worth only about 1.7 times average salaries. That’s the value that I should expect it to hold in the long term - my house is not as nice as average.

If we assume that inflation will average 3% and earnings 5%, then over the next 30 years - the length of my mortgage - then the actual expected return on my house is about 2.5%.

I can really only expect to do better if:

1. there really has been an underlying shift

or

2. I can sell at the top of another peak, and not need to buy

Neither of these is looking exceptionally likely to me. All in all, it’s a good job that I like my house .

Interestingly, it’s quite easy to find out the prices that houses have been selling for in an area if you use the website houseprices.co.uk. The information dates back to about 2000, and the house opposite me has sold three times in that period

1. March 2008 - £102,000
2. July 2004 - £91,000
3. March 2000 - £24,000

So the nice couple with the baby made £11k on their house in 4 years, which works out as an annualised rate of return of 3.15% per year. Which is about the same, or slightly more than, the rate of inflation in the same period. Interestingly, the people before them made an absolute killing. They made a £67,000 profit on the house, which works out to an annualised rate of return of 36.19%.

House prices in the UK have increased on average at 2% above the rate of inflation since the 1970s. But this is very much not the rate of return each year in that period. In the case of the houses on my street, they seem to have had their biggest rates of return in 2000 to 2003. And not done very much at all in the last section of the boom. I think it goes to show that if you’re using them as an investment, houses need to be kept for a long period of time for any capital gains to be realised.

This is why if you buy a house it should be because you plan to stay their for 5 or more years. Given what I saw of the property details of the house opposite me, it’s slightly nicer than my own, and I think that my house is worth around 10% less than that house, and more importantly about 5% less than the amount that I paid for it.

I’m not the only person who is not doing well out of their primary residence at the moment. Cleverdude thinks that his house in metro DC is now probably back down in value to the price that he paid for it, which puts paid to any plans that he might have had to move. I’m contemplating changing jobs in a few months time, and I’m going to be limited to the city that I currently live in. For various reasons this is a good choice for me anyway, which is lucky because having to sell up now would be a bit of a disaster.

Yeah, I agree people move for opportunities Jerry but that’s the point - you have to have something to move TO rather than just moving FROM your current high rent or whatever. Not just consider dollars and cents. It’s a package.

I could move to a significantly cheaper area. But for us personally what we would be giving up in terms of diversity (we’re both immigrants), leisure activities that are important to us, public transit, major airport, commute time, friends, job opportunities aren’t worth a few thousand a month. If it would even be that by the time we’ve taken jobs elsewhere. Others would disagree, I guess.

I see blog commenters all the time saying things like “why doesn’t he just move from LA/New York/London/expensiveplace!” as though it were the easiest thing in the world, and a person’s lifestyle and support network isn’t intricately tied to where they live.

Some frugal choices that people suggest require a massive change in lifestyle. And, just because one person can do it and be happy with it, doesn’t mean everyone else can. That is, it doesn’t mean that everyone else can be happy with it.

assumptions

People that advocate moving to a cheaper place to live assume one of three things:

1. the desire to downshift and move to the country/small town
2. the attraction of moving closer to family, who live in a cheaper place
3. a lifestyle that can be easily replicated in another, cheaper town or city

Now, even within the UK (or Ireland), which doesn’t have the geographic variety of many of the other English speaking countries any of those might be possible.

There are more rural areas, like North Wales, that are cheaper than the cities and would suit someone trying to downshift.

Having grown up in and around London, there are oodles of people living there who have family in other, cheaper parts of the country - I believe the same is true of Edinburgh and Dublin, other notoriously pricey cities.

Cambridge (expensive) is not that different to Durham (cheaper). Villages in Hertfordshire aren’t really any nicer than villages in Yorkshire, but Hertfordshire is very expensive, and Yorkshire is cheaper. Market towns in the South East are no nicer than ones in the Midlands, but they are more expensive.

but they don’t work for everyone

But, not nearly everyone is in that position. I have absolutely no desire whatsoever to downshift. Maybe I will in 20 or 30 years time, but like guinness416 I get an awful lot out of living in the hubbub. As it goes, my family live in a more expensive place than I do, I’d never save money moving closer to them - I don’t think that Dublin is cheaper than Toronto either.

A big city (or mid-sized in my case) lifestyle can’t easily be replicated elsewhere cheaper. Cities with similar characteristics tend to have similar prices, whereas smaller locales are more affected by regional prices. In the UK there’s little to choose between Manchester and Leeds, and there’s very little difference between the cost of living there either.

it’s never just about the money

Not all ideas that people put forward for saving money are good ones for you. Of course that doesn’t mean that they won’t work for some people. Any major lifestyle change, really needs to be done for its own sake than because it will save you money. Even if it really would be cheaper not to live in New York.

Where I live the cost of buying a flat or house starts at around £80k (US $160k approx). You can buy a 3 bed 2 bath family house in Madison, Wisconsin for the same price, and the lowest you can really go is $50k or £25k. Using the Big Mac index, you can see that the cost of a Big Mac in the US is $3.57, whereas in the UK it’s the equivalent of $4.57 - that’s 28% more, and something that’s almost certainly repeated for other food goods. The price of petrol/gas in the UK isn’t at about $4 a gallon like the US, it’s more like $7-$8.

So, what about moving somewhere with a lower cost of living? Well, of course I can’t move to the US because it’s almost impossible to get a work permit, but it would still probably work out cheaper to live in Australia, Canada or New Zealand, which are all places where it’s feasible that I could both emigrate to, and find a job in my current field (I’ve seen the trade press adverts).

Moving across an ocean is a little extreme, after all going that far away from friends and family brings it’s own costs in regular flights back, and international calls. But, many (not all) EU countries have a lower cost of living, Spain, Cyprus, Italy, Poland, Slovakia all come to mind - particularly for the cost of accommodation. I’d need to learn a new language though. More of a challenge. The other country that almost solely speaks English, is Ireland. Whilst there are many great things about the place, I’m not sure that low cost is one that springs to mind. Especially if you’re considering the Dublin area.

Which brings me back to the UK. Most of the costs are generally the same throughout the country, unless you’re in or around London, in which case all bets are off. If I wanted to move somewhere cheaper, I’d have to go further north in England, into Wales, or up into Scotland - carefully avoiding pricey Edinburgh. Towns are usually cheaper than cities, and there are plenty of nice ones dotted around the place.

I’m actually not in a great position to move somewhere cheaper. I bought my house last year at the height of the property boom, and I think *forever* is a good description of how long it would take me to sell. Most of my friends and family actually live in more expensive parts of the country than I do, so it’s not like I’d have the advantage of being near friends and family. I don’t think that I could move somewhere that was that much cheaper.

The price of property is the biggest difference between the regions, but I don’t think that it makes enough difference at my end of the ladder. In the four cheapest regions in England the average price of a terraced house is between £110k and £120k. But I only spent about £100k on mine in any case.

I guess where I live is cheap enough that I can’t easily save money by moving anywhere else. I’d have to look at seriously altering my lifestyle instead. But, I think I might be in an unusual position. Have you moved or thought about moving somewhere cheaper? What have your experiences been? Let me know in the comments

I’ve also included some basic prices for brand new cheap versions of these, you might have luck with free/second-hand, but then, you might not.

1. A bed - and now that I’m old, I’ve got to say that I’d never go back to a single bed (£100)
2. A sofa with arms - and I know that this is essential because I’ve lived without a sofa, and currently have one without arms. Both situations suck. (£90)
3. A table that you can eat from - it saves on laundry. I’ve lost count of the times that I have spilled all my dinner down me whilst sitting on the sofa in my old flat (no table) (£20)
4. A chair that you can sit on to eat dinner - see above. This set up is also handy for blogging (£10)
5. A wardrobe/closet - I don’t iron, so if my clothes aren’t hanging up they get creased and then I look a mess. These do not necessarily come as standard in British homes (£30)
6. A bedside table - countless reasons why you use them, they’re also cheap. I think it’s better to get one with a drawer, you don’t necessarily want everything in view (£10)
7. Window coverings in at least one room - you need somewhere to get changed where you won’t be frightening the neighbours children (£15)

The total price tag for people that can’t do mental arithmetic that quickly is £275 (approx $550).

What do you think? What are your essential pieces of furniture? Have I missed anything off? Let me know in the comments.

Image by pixeljones

It would help if you had a reasonable budget - understand your current income and expenditures, which might include debt repayment, a car, various hobbies, eating out, mobile phones and so on. You should initially budget for an emergency fund if you don’t have one (and more savings or investments if you do), 10% of your income would be a nice round figure to start off with.

ongoing costs

What will it cost you each month to live out on your own? I’ll try and outline all the regular costs that you really need to consider, and give you a rough outline of some of the typical amounts that I’ve spent on them.

utilities - gas, water, electricity

It can be pretty hard to work out in advance what reasonable utilities would be. The best solution is to ask someone in your area who lives in similar circumstances what they pay. For what it’s worth, living in a small flat or house, my gas/electricity bills combined have been in the region of £30-£40 a month, and my water bill something like £15-£25 a month.

insurance

You’ll need contents insurance. The cost of this depends on where you live and how expensive your stuff is. I’ve typically paid £100-£200 annually. You should be able to go to an insurance quotes website to get a reasonable idea of likely costs, whilst you’re just looking for a frame of reference, in the UK, Endsleigh Insurance, and the Post Office usually offer reasonably competitive quotes.

communications - phone, internet, tv

In the UK, check out the best deals at money saving expert. If you don’t use a landline much, you can probably get phone and broadband for around £25 per month. If you like to talk on the landline a lot, you can get an idea of your likely bills by looking at the current bills wherever you’re living. This is an area where it’s easy to cut down. A tv licence is £135 annually.

groceries

A very subjective choice. I think in the UK, a bare bones budget for a single person would probably be about £20 a week (£85-£90 a month) to include lunches and so on.

council tax

This will depend entirely on the area that you live in. Most small flats and houses outside London are likely to be in the A or B bands, but closer to London they will range higher to C or D and above. Estate Agencies often put council tax bands on the details of the properties they are letting or selling.

Once you have this information, you can look up the current council tax on the local authority website. This is usually paid either annually, or in up to 10 monthly installments per year, and it’s of the order of magniture of £50-£120 a month. Don’t forget that if you are living on your own you get a 25% discount.

rent

Although finding a place to live is the most important part, it’s actually easier to do the sums in reverse, and find out all the other information first. Totting up all the figures above my experience in the UK has been that general costs of living on your own (excluding rent) will be in the region of £230 to £330 per month.

Suppose, for example, you have an income of £1200 per month, and already committed expenditure of £470 per month through mobile phone, going out, car, and savings. That will leave you with a maximum of £400 to £500 to spend on rent - not forgetting that the more expensive the rent, the higher the additional costs are likely to be.

The other detail to bear in mind regarding rent is that you typically need an annual income of 30 times the monthly rent in order to convince a letting agency that you have sufficient income to cover the rent. If you can’t show that will have this amount then you’ll probably need a guarantor.

Once you’ve got a rent budget, you’re in a better position to look at the current market and see where you can afford to live.

If you do the calculations for your own circumstances, you might find that you can afford more or less than you anticipated. Being able to afford more doesn’t mean that you should go out and spend more. Look again at the amount of money that you’ve allocated to savings and investments - increasing the amount you can put there and having say 10% going to savings and 10% to investments/retirement plans will pay off in the long run. You also might want to spend more on some of the variable parts of the budget, such as groceries or tv.

Being able to afford less than you anticipated, means that you’ll either have to lower your expectations of the sort of living arrangement you can have (consider a smaller place, a shared house, a less nice area) or cut down on some of your already committed expenditure (use the mobile less, cut car or going out costs). You could increase your income by getting a second job, but you’ll need to keep this up for the long term, and you might find yourself getting burned out.

upfront costs

If you’ve determined what everything will cost on a monthly basis, it’s easier to work out the upfront costs. You may need some or all of the following:

• 1 months rent in advance
• a deposit of 1 to 1.5 months rent
• letting agency fees (often £100-£200 depending where you live)
• furnishings (bought new from cheap places like Ikea this might run from £400 upwards)
• moving costs (my last move from my 1 bed flat cost me something like £350 including furniture)
• utility deposits (I’ve never had to pay these, my best guess is something like £50-£100 per service)

Suppose as with the example above that you decided you could afford to rent a £400 pcm flat (assuming such a place exists where you live), and you don’t have any furniture or fittings. Your upfront costs are likely to be in the range of £1300 to £2000.

If you don’t have any savings, by living on the budget that you plan to once you’ve moved and depending on your current living costs, you could save this up within 3 to 12 months.

There are more tips on renting your first flat or house at m-network member, my two dollars.

Have you moved out on your own recently? What do you think of my costings - have I missed anything out, or under- or over-estimated anything? Let me know about your experiences in the comments.

Based on the comments received, it looks like I probably under-estimated the food budget. You could probably allow twice as much, easily.

Image by sholt.

One thing that is agreed upon about the current housing market is the importance of buy to let investors, people who have bought properties as investments.  Although I think that your own house is a poor investment, renting out properties can be.

However, renting out a property you own becomes very risky if the property doesn’t ‘wash its face’, which is to say that the rental income should cover the costs. And for a lot of people who’ve bought recently, it doesn’t. People are paying out every month for the privilege of having someone else live in a house they own.

It’s true that in the UK, the increase in the cost of houses has been running at 2% above inflation since the 1970s. While that’s nothing to be sneezed at, if it would be cheaper to rent then buy, and there’s a glut of rental properties, you can be sure there will be a  correction and it is unlikely to be in your favour.

In short, if you are losing money month on month by renting a property you are likely to be better off putting your excess cash somewhere else, like say, in stocks and shares.