Budget cost of living (2022)
Single Person
Couple
MINIMUM:
Covers all your needs, with some left over for fun
£12,800
LONDON £14,300
£19,900
LONDON £22,400
MODERATE:
More financial security and flexibility
£23,300
LONDON £28,300
£34,000
LONDON £41,400
COMFORTABLE:
More financial freedom and some luxuries
£37,300
LONDON £40,900
£54,500
LONDON £56,500
Figure 2: Budgeting your cost of living in retirement (Pensions and Lifetime Savings Association 2023)
These are quite generic numbers and won’t be applicable to everyone, but it’s a good guideline to start from. Approximately five years ago, Lou and I did a deep financial review and some lifestyle profiling with a big-name investment company and the feedback was that whichever way you cut it, holidays, socialising, cars or whatever, most couples come out at an estimated £36,000 per year of expenditure, so I believe you can take this as a fair benchmark.
It’s helpful to pause for breath here and acknowledge that this isn’t all about money. Yes, it’s a fundamental part of it but while it’s commonly said that ‘money can’t buy you happiness’, it certainly unlocks many more options and choices. For this reason, it forms a large part of my approach to life and not just to increase the balance in our bank account. I came across a better quote the other day: ‘Being rich is having money, but being wealthy is having time.’ Later in the book I’ll discuss value, which is generally about the value of the brands or products we buy but it’s also about valuing your time. At this stage, I’d ask you to commit to spending the time to look through your finances and work on making a plan as it will pay you dividends (no pun intended) later down the line. We all have the same 24 hours in the day but you have a large say in how you spend that time, so make it count.
Step 2: Set some targets
These don’t necessarily have to be direct numerical ones; they might, for example, be paying off the mortgage or clearing a credit card debt. Again, a target can and will change over time but at least you have something to track to. If you know what you’re aiming for, you can monitor progress and you’ll know when you’ve achieved it. Having a meaningful target is better than a more vague goal such as ‘I want to manage my money better’.
I was recently chatting to a good friend (a farmer turned accountant) who has also retired early about whether this approach was anything new, and he summed it up in a very Micawber-ish way: ‘Spend less than you earn and invest the rest wisely.’ So to achieve the core elements of your financial goals, you’ll need to:
spend less
earn more
understand investments.
I’ll deal with these in more detail in later chapters – but how to start? You’ll need to know (roughly) where you want to be and then understand the three core mechanisms (or levers) that affect how to get there. So how do you start? Primarily, you need to work out your baseline or financial starting point.
Step 3: Know your financial position
This is where you have to sit down with a pen and paper or a spreadsheet and document everything you know in relation to your finances. Some are straightforward: bank account, mortgage balance, credit cards and so on, but you need to capture everything – car loans, pensions, premium bonds, ISAs, savings accounts, etc. Plus, you need to document any big assets that you own or are on your way to owning. Primarily this will be your flat or house (which you’re paying towards with your mortgage, unless you’re renting, in which case ignore the property figure). It could also include your car but only if you own it outright or have a loan that’s paying towards it and you’ll own the car at the end of the loan. If it’s leased or on a similar personal contract purchase (PCP) agreement, don’t include the value of the car because you won’t own it at the end of the contract.
You should arrange this in two columns (see Figure 3): what you own that’s of value and what you owe to others. Column 1 minus column 2 is your net worth. Don’t be tempted to ignore or hide anything and don’t worry too much at this stage about the net worth figure; think of it as the starting point, not your end state.
What you own of value
What you owe
House
250,000
Mortgage balance
175,000
