My Financial Plan 2021/2022

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We’ve reached the end of another financial year and so it is time to set my financial goals for the next 12 months.

Previously, I’ve tried to maintain a 50/50 split between my savings and investments, however I’ve now reassessed this strategy for two main reasons.

  1. Firstly, current interest rates for savings are so appalling that the return from them hardly seems worth the effort.
  2. My savings balance currently sits at around £10,000 – assuming a £1,500 per month personal spend, this gives me a little over a 6-month emergency fund to fall back on if my income dries up. Do I really need any more?

So, this year I plan to plough a lot more money into my investments than my savings for the opportunity of bigger returns.

Savings for 2021/2022

As mentioned above, I currently have £10,000 in instant access savings. These are split as follows:

Over the course of the year, I aim to save another £8,000, bringing the total value of my savings to £18,000 (or 12 months emergency fund). I will probably put this in my Marcus account, however I will be on the lookout for better deals.

Investments for 2021/2022

In addition to my savings, I also want to use my entire £20,000 ISA allowance for my investments.

My primary investment vehicle is my Vanguard ISA, which is invested in their Global All-Cap Equity Fund (this returned around 40% over 2020/2021 and I’m hoping for something similar this year).

I’ve already banged £2,500 into my Vanguard this financial year (earlier today when I was rebalancing my portfolio) so I have £17,500 ISA allowance left.

I will be looking at other options for investment but the Vanguard is the most likely product I will use.

Goals and Plan

When goal-setting, I aim to set a high bar whilst also being realistic.

My financial goals for this year are:

  1. Save £8,000.
  2. Invest £20,000

Therefore, I need to ensure I earn at least £28,000 after tax, however I have already invested £2,500 into my ISA so this brings the total amount I need to earn to £25,500.

In addition, I will need to earn my living expenses of £1,500 per month or £18,000 over the year, which brings the total to £43,500 after-tax). Assuming a tax rate of 40% I would need to earn pre-tax profits of £73,000 per annum or £6,084 per month.

This is quite a lofty ambition, however, I believe it is doable. I earned just shy of £60,000 last year and last month (my best month on record) I earned £6,200. Also, I have some ideas to create additional profits this year.

So a monthly breakdown forecast would look like this:

ExpenditureAmount
Tax & NI£2,433
Living expenses£1,500
Savings£667
Investments£1,458
TOTAL£6,058
Monthly Expenditure Plan for 2020/2021

I have forecast that the first few months of the year (during the Summer) will probably not hit the total needed but this will be made up during Autumn, Winter and Spring as my new ideas come to fruition.

2020/2021 End of Year Financial Review

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First up, I must apologise for going AWOL over the last couple of months.

I’ve been working hard on my income goals, had a few personal crises and have been frantically moving my money round in an effort to avoid becoming a higher-rate tax-payer.

I failed at the latter – there are only so many legitimate business expenditures and I was simply earning far more than I could realistically spend.

Business profits (and taxes)

There’s a couple of weeks to go in this fiscal year and it looks like my final end-of-year profits will be around the £60,000 mark – that’s a full £10K more than the £50,000 upper limit for basic rate tax-payers.

So, not only will I be paying a higher rate of tax on that top £10K (at a hefty 40%, that’s £4K of income tax), I’ll also have to pay back the child benefit that my partner has been receiving, which adds an extra £1,100 or so onto the total.

Incorporation is the way forward

I’ve had a few Zoom meetings with my accountant and we’ve decided that the best way forward would be to incorporate part of my business – I am going to become the Director of my own company!)

It’s not what I would have ideally wanted – extra admin and regulation – but it will certainly help me out with my tax bill in future.

This is because as a sole trader I typically pay 20% tax on earnings between £12.5K and £50K and 40% above £50K (below £12.5K is my personal allowance that I do not pay tax on). In addition, it is about 9% for National Insurance (2% over £50K), so around 29% in total at the basic rate and 42% at the higher rate.

However, as a limited company, the company would pay a flat 20% Corporation Tax on profits. Then, I can take a Director’s salary (which would be tax-free because it would be a low amount that falls within my personal allowance) and the rest can be taken as dividends, taxed at 7.5%. If I am earning too much – like what happened this year – I won’t be personally taxed on any excess because it will stay within the company.

Premium Bonds (the home of my tax money)

During the period of time after I receive revenue in my business but before I have to pay my tax, I have a crapload of cash sitting around that is owed to HMRC.

Previously, I’ve kept it in a high-interest instant-access savings account to make a bit of money on it before I get my tax bill. Unfortunately, there doesn’t seem to be such a thing as high-interest savings these days with current top interest rates at around 0.4%! So, this year, I’ve decided to give Premium Bonds a try (review coming soon!)

Premium Bonds are pretty much a lottery. Instead of paying interest to everyone, they give cash ‘prizes’ to lucky winners that have their numbers called each month. And, best of all, the prizes are tax-free. I currently have about £16K invested in Premium Bonds but have so far won nothing, however, I’ve only been in one prize draw thus far.

At the end of the year, I hope to have earned more in prizes than I would have in a savings account -and I hope to report a decent win soon!

Current NET worth

At the beginning of April last year (2020) I had personal assets (savings and investments) totalling about £15K.

This year, it is around the £28K mark.

Rebalancing

Every year, I rebalance my portfolio to ensure that I have the right risk exposure – I try to have around 50% of my portfolio in low-risk cash savings and the other 50% in higher-risk investments.

Investments

In reality, it’s usually more like 55%-60% in cash and 40%-45% in investments. I had a little extra cash because it would provide me with a bit more of a cushion if my business went tits-up. However, now I have a larger cache of savings (over 6 months emergency fund), I’ve decided to put the surplus in my investments instead. Also contributing to this decision is the current poor interest rates available. My investment of choice my Vanguard ISA.

Savings

With regards to savings, my First Direct Regular Saver has matured and I’ve taken my cash out. I won’t be opening another one this year, as it has dropped to 1% interest rate. With no regular saver, I have closed my First Direct 1st Account as the Regular Saver was the only reason I kept it open.

My Club Lloyds Account currently pays 0.6% on balances up to £4000 and then 1.5% on balances between £4000 and £5000, which is better than a lot of instant access savings accounts. So, I’ve decided to keep a balance of around £5000 in my current account.

Any remainder will be stored in my Marcus Savings account, whilst I await a better opportunity to utilise it. It only pays 0.4%, which is sad but even sadder is that is still one of the best instant access savings accounts on the market.

The Club Lloyds account also provides access to the Lloyds Monthly (Regular) Saver, which will be 1% this year. It matures in a couple of weeks and I will be opening a new one.

Why keep the Lloyds but ditch the First Direct when they both pay 1%? Firstly the Lloyds Monthly Saver is part of my regular banking – the First Direct Current Account only exists to facilitate the regular saver. It’s just one more bank account for me to worry about, so I’m happy to lose it for the sake of simplicity. Secondly, the First Direct only allows a maximum of £300 to be deposited each month, whilst the Club Lloyds Monthly Saver allows up to £400.

Savings & Investments Breakdown

The table below shows how my money is distributed amongst my savings and investments.

ASSETVALUE
Marcus Savings£2,500
Vanguard ISA£10,508
Club Lloyds Current Account£5,314
Barclays Current Account£1,334
RCI Bank Savings Account£2,038
Club Lloyds Monthly Saver£4,800
CrowdProperty£3,175
Premium Bonds (NEW)£16,000
TOTAL£45,669
Current allocation of assets

So, these numbers include tax money and operating cash (day to day personal and business spends) so are not a true reflection of wealth. Discounting these accounts, the real value of my savings and investments are below:

ASSETVALUE
Club Lloyds Current Account£5,000
Marcus Savings£2,500
RCI Bank Savings Account£2,038
Club Lloyds Monthly Saver£4,800
CrowdProperty£3,175
Vanguard ISA£10,508
TOTAL£28,021
Current allocation of assets

Oh No! I’m Going to Become a Higher-Rate Tax-Payer!

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It’s January 2021. I’ve just been going over my accounts for the year and was shocked to find that at this rate I’m going to become a higher-rate tax-payer for the first time in my life.

My profits for the year are going to exceed the £50,000 limit for standard-rate tax-payers, which means anything I earn above that is going to be taxed at 40%.

In addition, this will also mean that I have to repay a portion of my partner’s child benefit through the High-Income Child Benefit Tax Charge.

Now, I am a law-abiding citizen and happy to pay my taxes. But only what I owe and if there are ways of reducing my legal obligation I feel it is my duty to look into them.

Staring at the figures and forecasting for the final two months of the tax year, it looks as though I am going to have earned around £58,000.

One highly-recommended option is to put the money into a pension. I don’t currently have a pension and, to be honest, I don’t really understand them. I believe you can put money into a pension before being taxed on it, however you’re still taxed when you take the money out. And I don’t like the thought of my money being locked away for the next 25 years or so.

The next obvious thing to do is look at reinvesting some money back into my business as expenditure, thereby reducing my profit.

This will mean foregoing my savings and investments for a couple of months and instead, use the money to increase the value of my business assets over the coming year. This is particularly difficult for me because I am, by nature, frugal and thrifty – the thought of spending money terrifies me.!

This weekend, I spent a few hundred quid on some business software I’ve been considering buying for some time. But this didn’t make much of a dent in my excess capital.

So finding things to spend my money on is becoming a bit of a nightmare. And, of course, I am restricted to purchases that can be considered business expenses.

Some ideas that I’ve had are:

  • A new laptop
  • A new mobile phone
  • Additional business software
  • Hiring freelancers to do some work for me
  • Buying small business websites

I’ve not quite decided exactly how I am going to do this. Or if if I am going to do this at all – maybe I should just pay the tax charge. However, I feel my frugal nature has held me back a bit from scaling up my business – I usually prefer to keep excess profits for myself rather than reinvest – so maybe this is an opportunity to take my business to the next level?

Monthly Report: December 2020

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NET Worth Report December 2020 - £25,500.

With the new year came a review and update to my financial plan and I opened a new financial account.

I’m now only going to be reporting my savings and investments for my NET worth. I previously included the money I have in my current accounts, however, this fluctuates quite a lot depending on the time of the month and so does not give an accurate picture.

I earned £5,500 in December and put about £1,500 of that into my savings and investments.

Recap from last month…

Last month I was considering the possibility of moving house and made a plan to make this affordable, however, after discussions with the family and looking at property available in our area, we have decided to hold off on this idea for a little while.

I was also looking at finding a new home for my cash savings and tax money that is now earning a paltry 0.5% interest. Unfortunately, the whole instant-access savings market is pretty dire at the moment, so I tried something else (see Savings below).

Asset Table

ASSETVALUE
Marcus Savings£4,700
Vanguard ISA£8,400
Club Lloyds Current Account£600
Barclays Current Account£1,800
RCI Bank Savings Account£2,000
First Direct Current Account£1,000
Club Lloyds Monthly Saver£4,000
First Direct Regular Saver£3,300
CrowdProperty£3,100
Premium Bonds (NEW)£8,900
TOTAL£37,800
Current allocation of assets

Real Asset Table

The table above includes all my financial products, however, it is not a true reflection of my NET worth because some of that money is reserved for my income tax and National Insurance (when self-employed, it has to be paid in January and June). In addition, the above table also includes a snapshot of my business and personal current accounts at the time of writing. The amount of cash in these change quite regularly based on what I earn and what I pay out.

The table below shows only my savings and investments and is a better reflection of my NET worth.

ASSETVALUE
Marcus Savings£4,700
Vanguard ISA£8,400
RCI Bank Savings Account£2,000
Club Lloyds Monthly Saver£4,000
First Direct Regular Saver£3,300
CrowdProperty£3,100
TOTAL£25,500
Current allocation of assets (excl. current accounts and money owed to taxman)

NET Worth

So, my NET worth for December 2020 is:

£25,500

Savings

Being unhappy with poor interest rates at the moment and after reading this article by Martin Lewis, I decided to invest some of my cash savings in premium bonds. Another reason for this decision was to separate the money I owe to HMRC from my own personal cash savings. I previously kept them both together in my Marcus Savings Account, which was a pain when it came to quickly working out what was mine and what belonged to the taxman.

So I bought almost £9,000 of premium bonds (all my tax money after paying £12,000 to them for January).

Regarding my own personal savings, I left about £4,500 in the Marcus account to act as an ’emergency fund’ (about 3 months of living expenses). I also have a Club Lloyds Monthly Saver and First Direct Regular Saver containing about £3,000 combined and a £2,000 5-year fixed-term account with RCI Bank.

Altogether, my savings value at:

£14,000

Investments

I increased my stake in my Vanguard Stocks and Shares ISA and it also grew in value (I’ve realised about 40% capital growth since I started investing in early 2020). Some of my CrowdProperty loans were paid back and reinvested. Altogether, my investments are valued at:

£11,500

Thoughts & Plans

Separating my personal cash and the money I owe to HMRC by putting tax money in Premium Bonds has certainly made understanding my finances easier. I’ll do a full write-up of my reasons for choosing Premium Bonds when I get time – hopefully, I’ll get a nice win as well (or at least enough to beat the 0.5% interest it would have received in the savings account).

I try to keep an even split between my savings and investments, however there’s currently a bit of disparity between the two with my savings at £14,000 and investments at £11,500. So I need to look at rebalancing soon.

I’m toying with the idea of investing in precious metals and cryptocurrencies but I have a whole lot of research to do first!

How Can I Afford a Bigger House?

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How can i afford a bigger house: I thought I'd be able to afford a nice big house when I had a nice big income - Hobbit Money.

I recently discovered that a good salary does not make house-buying much more affordable.

More Income ≠ Bigger House

A few years ago, I could have only dreamed about the income I am earning now. Back then, £1,500 per month would have been a good monthly take-home salary for a full-time job – last month, I earned 3 times that working a few hours a day around my family life.

I’m so grateful for being able to do what I do and maintain a good work-life balance, whilst having the financial freedom to afford pretty much anything I need (although I am still as thrifty as I was all those years back).

Except, it seems, a bigger house!

The other night, the family and I were talking about how cramped our home is becoming. There’s 5 of us living in a small 3-bed semi in the centre of England. My girlfriend and I have one room, our youngest daughter has the box-room and the third bedroom is the domain of my two older boys. Downstairs, there’s a small lounge and kitchen/diner.

We decided to look into getting a bigger house, perhaps a 4 or 5-bed with a bit more space for all the clutter and an office for me to work in (rather than be sat at the kitchen table). Every time I’ve bought a house in the past, it’s been at the low-end because this is all I’ve been able to afford – it was a case of doing an online search and sorting the houses by ‘price low to high’ and hoping there was something I liked on the first page.

“Not this time,” I told myself. I was wrong.

How much is a mid-range house?

Looking on right move, the low-end price for a detached house within a 15-mile radius of our current area that has off-road parking and 4 bedrooms is about a quarter of a million pounds!

Not being familiar with property prices (and having not really looked at property for over a decade) this came as a bit of a shock to me. I quickly crunched some numbers in my head:

  • 10% deposit @ £25,000
  • Mortgage of £225,000
  • Mortgage @ 3% over 25 years = £1,067 per month

Although I can afford this at the moment, the nature of my business means that income can potentially be volatile so I was cautious about committing to something that I may not be able to afford in the future.

How does that compare with my current mortgage?

My current home and mortgage details are below:

  • Value of home: £140,000
  • Mortgage balance: £115,000
  • Equity in home: £25,000
  • Monthly payment: £511
  • Remaining term: 22.5 years

So, to more than double my monthly repayment for an extra bedroom and a little more space does not seem like a good option.

How do people afford big houses?

This was quite disheartening. I was expecting to be able to afford something a bit nicer without breaking the bank.

I also became quite perplexed at how other people could afford such a big expense. I see quite a lot of people that live in big houses, go on multiple foreign holidays each year and own expensive cars. I’m sure they have good jobs and work hard for their money but I find it hard to believe that they are earning enough to pay for this. Surely they cannot all be lottery wins, rich families or financed up to the eyeballs! Or maybe I am just missing something.

My plan to afford a bigger house

Although the cost of moving had given me somewhat of a reality check, I made it my goal to be able to afford a bigger house during 2021.

And this required a plan.

How much would a bigger house cost?

Firstly, I needed to decide (along with my family) how much our desired house would cost. Now, we had to be realistic here – personally, I would love a multi-million-pound house in the country with 6+ bedrooms, a swimming pool and surrounding acreage but this was simply out of our means at this moment in time. Even with my current income of over £4,000 per month, this was completely unrealistic (although this could be the next step-up in a few years time).

So, we had a look on rightmove and found that modest accommodation that suited our needs and means would cost about £250,000 to £300,000.

Additional Costs

In addition, we would also have to pay an estimated:

  • Mortgage arrangement fee: £1,000
  • Stamp duty: £12,500 – £15,000*
  • Conveyencing: £1,300
  • Surveying fees: £400
  • Removals: £400

*Stamp duty is set at 0% until April 1 2021, so if we move before then, we make a MASSIVE saving.

So, excluding stamp duty, we will be looking at an additional £4,000 or so (with stamp duty, it could be up to £19,000).

Mortgage Deposit

We have equity of about £25,000 in our current home, so our mortgage would be between £225,000 and £275,000 (providing we sell at the right price). Adding the additional costs excluding stamp duty (above) to the mortgage would mean we would need a mortgage of between £229,000 and £279,000.

Monthly Deposits

At a 3% interest rate, this would result in monthly payments of between £1,086 and £1,323 over a 25-year term.

The Plan

The more money I put down as a deposit (and therefore do not have to put on the mortgage), the lower the monthly repayments will be.

Looking at the numbers, for every additional £5,000 I pay up-front, I can reduce the monthly payment by about £25. That does seem like a lot for a little, but over time, this will add up, reduce monthly payments and reduce the total interest paid over the term.

So, I had a look at how much I could possibly afford for extra deposit on top of the £25,000 from my current home’s equity.

If I rinse my instant-access savings (excluding the cash I will owe the taxman), I can raise about £7,500. My partner and I also have about £2,500 in our joint account, so there’s an extra £10,000. Given the paltry interest rates at the moment, I will get far more value from using this money to reduce my mortgage than keeping it in my savings account (although it will not be as easily accessibly if it is wrapped up in my home’s equity).

Foregoing my investments, I could raise another £5,000 over the next few months, resulting in a total of £40,000 for a deposit.

This reduces my borrowing to between £214,000 and £264,000, which reduces monthly payments to between £1,015 and £1,252. Still a lot more than we are paying at the moment but currently affordable. I think that after moving, I would want to build up my savings again so that I could afford my mortgage if my income is disrupted, which would possibly mean reducing deposits to my investment portfolio. I will have to look at the impact that this would have on my investment plan.

With regards to stamp duty, I feel that we would be missing out on a massive opportunity if we did not move before April, so the plan is to get things in motion as soon as Christmas is over.

I’ll keep you updated…

Monthly Report: November 2020

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NET WORTH REPORT NOVEMBER 2020: £23,990 - Hobbit Money

Another good month in terms of income, with a profit of £4,355 – this is a personal best for me for a single month’s earnings.

I followed my financial plan and moved 40% to my personal account, 45% to my savings account (which includes cash for income tax and National Insurance), 10% to my Vanguard stocks & shares ISA and 5% remained in my business.

Actually, these percentages totalled £4,000 – the remaining £355 I kept in my business account as I am planning to invest a little more in my business this month.

Recap from last month

I’m still on the lookout for a new instant access savings account with a decent rate but unfortunately there does not seem to be a lot on the market.

As I planned, I’ve been working on making my business even more profitable and December looks to be even higher than November!

Asset Table

At the end of November, my assets look like this:

ASSETVALUE
Marcus Savings£21,965
Vanguard ISA£7,180
Club Lloyds Current Account£1,734
Barclays Current Account£1,383
RCI Bank Savings Account£2,000
First Direct Current Account£1,000
Club Lloyds Monthly Saver£3,600
First Direct Regular Saver£3,000
CrowdProperty£3,128
TOTAL£44,990
Current allocation of assets

NET Worth

As always, a fair chunk of my assets is money that I owe to HMRC for my tax and National Insurance, so taking an overcautious figure of what that is likely to be, my NET worth is:

£23,990

Savings

The total of all my minimum-risk savings accounts (Marcus Savings, Club Lloyds Monthly Saver, First Direct Regular Saver and RCI Bank fixed-term savings) minus an over-cautious tax estimate is:

£9,565

Investments

With the announcement of a working vaccine for coronavirus in November, the stock market rocketed and I saw my stocks & shares portfolio increase by about 8% – of course, these profits will not be realised until I actually withdraw the money and could go up or down before that time.

My investments consist of my Vanguard Global All-Cap Index Fund (a stocks & shares ISA) and my CrowdProperty peer-peer lending account. I invested a further £400 in my Vanguard this month and these investments now have a combined value of:

£10,308

Thoughts & Plans

I am continuing my search for an instant access savings account with a decent interest rate, especially as Marcus announced a further cut in their interest rate to 0.5%. Unfortunately, most savings account providers are doing likewise and the ones that are slightly higher have a variable rate and will probably drop again themselves sometime.

I have been considering putting a little extra effort into maximising the interest earned on the little-over £20,000 cash savings I have by using other products such as regular savers, fixed-rate accounts (that limit withdrawals or require notice). I’ve avoided these in the past because I need my cash to be liquid so that I can pay my tax bills on time and access my money quickly in case of emergency. However, with proper planning, this may be a possibility. It is something I will be looking at in December if I have time.

In other news, I’m thinking of moving to a bigger house. I thought I would be able to afford something decent with the money I am earning but property is so expensive! I want to make a plan in the next couple of months to afford the move.

Monthly Report: October 2020

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NET Worth Report October 2020 - £22,518

October was a pretty good month for income, pulling in over £4,000.

Out of this, I took £1,600 for myself to cover monthly living expenses and some Christmas shopping and the rest was allocated amongst my savings and investments.

Recap From Last Month

By taking time off from my job last month (the stress got to me), I’ve been able to spend a bit more time on my business interests, which has helped to push up earnings this month. I’m currently in two minds whether I want to go back to work – I’ve told my employer I will decide after Christmas, so I have plenty of time to think about it.

I did say last month that I wanted to look at changing my instant-access savings account to something with a better rate, however despite regular checks I have not been able to find a product that is significantly better than my Marcus account, which pays 0.7%. There are a few that are slightly higher and I very nearly grabbed a deal with Newcastle Building Society that offered a fixed rate but I missed it. The problem is, all savings products are cutting their rates at the moment and I don’t want to waste my time switching when the rate could drop a month or so later.

I adjusted my contributions between my savings and investments this month to re-balance them for an approximate 50/50 split. I now have about £9,500 in each of my savings and investment pots.

Asset Table

So, let’s take a look at my assets at the end of October:

ASSETVALUE
Marcus Savings£20,852
Vanguard ISA£6,327
CrowdProperty£3,120
Club Lloyds Monthly Saver£3,200
First Direct Regular Saver£2,700
RCI Bank Savings Account£2,000
First Direct Current Account£1,000
Barclays Current Account£841
Club Lloyds Current Account£1,478
TOTAL£41,518
Current allocation of assets (Oct 20)

NET Worth

Being self-employed, a chunk of that money is owed in tax to HMRC in January 2021. The good news is that my accountant filed my taxes last week and the amount owed is a few grand less than I expected 🙂 My tax liability for the year 19/20 is about £8,000 and my estimated tax liability for this year so far is about £11,000 (although I always overestimate this just so I don’t get any nasty surprises!)

So, that leaves me with a NET worth of:

£22,518

Savings

I have retained my main instant access savings account with Marcus and contributed to my two regular savers with Lloyds and First Direct. I also have a 5 year fixed rate savings account with RCI. The sum of all these accounts minus my tax liability is:

£9,752

Investments

My investments continue to perform well.

I lost a little value on my Vanguard Global All-Cap Fund ISA but it recovered pretty quick.

I also configured my CrowdProperty IFISA to ‘autoinvest‘ – I hadn’t realised that some of the interest had started to be paid back in cash and was just sitting in the account!

The value of these two investments combined totals:

£9,447

Thoughts & Plans

With my stress levels beginning to go back to normal and an extended period of time off work, I continue to plan on making my business more profitable, which will provide more income to be invested for my future. Earnings for November are set to be a personal best!

I have to admit that I am happy and comfortable with my financial planning at the moment and all the financial products I am using contribute to my over-arching financial plan in their own way. Therefore, I won’t be actively seeking out new products however, I will be keeping an eye out for an instant access savings account that has a decent or fixed rate.

How I Split My Income Between Savings, Investments and Personal Spends

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At this point in my life, I am very grateful that I am able to earn a (mostly) passive income from my business without really spending a lot of time or effort on it. This gives me the freedom to spend my time as I wish and only work when I feel like it.

I earn between £2,000 and £4,000 per month (it varies) but this is more than enough to cover my living expenses. I am lucky enough to have a fair bit left over to save or invest. In this post, I will be sharing how I allocate my monthly income into different ‘pots’.

Overview

I allocate my income into four categories:

  • Personal: This is the money that covers my personal and living expenses. This includes mortgage, bills, days out, tobacco, holiday savings, house repairs etc.
  • Business: This is the money that I keep in my business to cover business expenditures and trying out new business ideas.
  • Savings: These are very low risk cash savings.
  • Investments: These are higher risk/reward investments.

Business

My business has very low overheads. We’re talking about 3.5% of revenue each month, so very little of the cash my business earns is spent on business expenditure.

I also keep a little bit of cash in my business account to cover any unforeseen business expenses or to test new ideas, such as an advertising campaign.

Therefore I only keep about 10% of my income in the current account I use for my business.

I use a Barclays current account for my business banking.

Personal Spends

I need about £1,150 minimum each month to cover personal expenses that maintain mine and my family’s standard of living. I also like to have a little more in my bank account for beer money, impulse buys etc. and to cover any dry months where I don’t earn as much as usual.

40% of my income goes straight into my personal account every month.

I use a Lloyds current account for my personal banking.

Savings

Low risk/reward savings are basically my cash savings, which includes the money I owe the taxman – I might as well earn a little interest on it before I have to pay it, right?

I keep about 35% of my income back each month to cover my income tax and National Insurance and another 10% for my own personal savings.

Obviously, I cannot afford to be speculative with this money because not being able to pay HMRC is my worst nightmare!

So, 45% of my monthly income is transferred to these instant access savings accounts and regular savers, where my cash is covered by the FSCS.

Investments

I also use 10% of my income for higher risk/reward reward investment vehicles.

At present this includes a stocks and shares ISA and an Innovative Finance ISA.

I’m seeing very high returns on these at the moment (25% and 8% respectively) but they could also go down by that amount as well, so I am cautious with how much I invest.

Allocations Depend on Monthly Income

As I mentioned earlier, my income does fluctuate, however the graphic below shows the actual amount of cash allocated to each pot depending on monthly income earned, whilst the ratios remain the same.

How cash is allocated between pots of tax, savings, personal, business and investments when monthly income is £2000, £3000 and £4000.

Monthly Report: September 2020

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The last few months have been a nightmare, both emotionally and economically.

I had some very expensive building work done at my home and the builders did a very poor job, meaning I had to get someone else in to sort it out and pay out double. In addition, health issues within the family and pressures at work have taken their toll on my mental health and I have been signed-off from my employed work with stress. Fortunately, I have my business to fall back on, so I will be able to pay the bills and still have money left to save and invest but it won’t be as much as previous months. I’m talking hundreds rather than thousands.

The fact that I am still able to maintain my standard of living through passive income, even though I am unable to work has made me feel very grateful for the opportunities life has given me. I would hate to be worrying about being able to put food on the table in addition to all my other woes at the present time.

Anyways, let’s take a look at my financial assets:

ASSETVALUE
Marcus Savings£19,736
Vanguard ISA£5,811
CrowdProperty£3,110
Club Lloyds Monthly Saver£2,800
First Direct Regular Saver£2,400
RCI Bank Savings Account£2,000
First Direct Current Account£1,000
Barclays Current Account£800
Club Lloyds Current Account£280
TOTAL£37,937
Current allocation of assets

NET Worth

Roughly £20,000 of that total is owed to the taxman, leaving a NET worth for my finances of:

£18,237

Savings

I try to keep around a 50/50 split between my ‘safe’ savings and my riskier investments.

I try to squeeze as much interest out of my savings accounts as possible, regularly reviewing them for the best rates. I also keep the money I will have to pay to HMRC following my tax return in my savings accounts to earn interest on money that technically does not belong to me.

I currently have my main instant access savings account with Marcus, two regular savers with Lloyds and First Direct and a 5 year fixed rate savings account with RCI. The sum of all these accounts minus my tax liability is:

£7,999

Investments

My investments have the potential to yield far more than my savings at the risk of losing capital. However, these are calculated risks rather than gambles.

I currently have a stocks and shares ISA with Vanguard and an IFISA with CrowdProperty. The sum of these two accounts is:

£8,921

Thoughts & Plans

I have about £17,000 in my savings and investment accounts. As I stated previously, I try to keep a rough 50/50 split between low-risk and high-risk investment vehicles, however due to the success of my investments, they have crept up higher than my savings. Therefore a bit of rebalancing needs to be done in October to maintain the correct split.

My Marcus instant access savings account is taking a big cut in interest rate (it was originally 1.2% and is reducing to 0.75% in October), so I need to look at switching the provider. It may not seem a big difference but there’s about £20k in this account, so for every 0.1% decrease in the interest rate, that’s a loss of £20 per year!

My main concern for this October is working on increasing the income from my business. I don’t go into a lot of details about exactly what I do here, but it is a great business model that generates passive income, once the initial hard work has been done. I will be earning about £4,000 in October from my business, however this is the high end of a variable income. I’m usually looking at around £3,000 per month and this will fall lower in December, which is always a bad month for me so I will need to have some reserves handy. I am working on increasing monthly profits to an average of £5,000 per month from January 2021.