# Reader Case Study: Not Quite as Easy in London

## By Mr. Money Mustache

## Fri, 03 May 2013 05:02:48 +0000

When it comes to optimizing your financial life, one of the biggest advantages you can gain is a sense of perspective. Beyond boosting your finances, perspective can make all the difference between spending your days worrying and complaining, and going out into the world having a great time as you get some serious shit done.

When confronted with a hardship, the standard consumer’s brain floods with negative emotion and shuts down, grappling for a remote control or a convenience product to dull the pain. In this scene, there is nothing but the consumer, and the problem.

But as a Mustachian, you’ve learned to step back immediately and survey the scene from a broader perspective. Suddenly there’s you, the problem, and all the other people who live in this world and those have lived before you. Some of those other people have solved problems just like yours, often with fewer advantages. With the narrow view, you might only see the bottom of a hole you just fell into. But zooming out, you see the flowers, grass, and overhanging tree branches you can use to pull yourself out.

So today we take a trip to London, where a young Mustachian-in-training wrestles with his savings rate, and we get to contrast the UK financial scene with our own.

MMM,

I recently discovered your excellent blog through a UK financial blog called Monevator which I’m sure you’re aware of.

I am a 25-year-old working in finance in London, earning about £50k p.a. (c. $78k in your money!) This is quite a bit more than the UK average though I suspect not atypical for London.

After tax my take home pay is just over £34k p.a., or £2833 per month.

Living costs in London are ridiculously high – I share a 2-bed flat with a flatmate and we *each* pay £910 per month for the privilege including council tax.

I do live in a nice area of London, and yes I realise that my situation lacks the economy of a larger household of 3-4 people, but the cost of renting probably wouldn’t change materially while keeping me the same distance from work (might save £100-150 per month, which is a lot but I’d be much less happy in a different area).

Other bills:
– water, energy, internet total £75,
– mobile phone at £25/month
– a bus pass at £120/month
– interest on student loans: £25/month

Total Bills: £1155/month

Savings/investments: Each month I invest

– £200 pcm into an ISA in shares/funds (a tax sheltered account)
– £100 pcm into a cash savings ISA
– £270 put aside each month into my SIPP (pension account similar to 401(k).
– Principal portion of student loan repayment on a $19k balance at 1.5%: £125
Total: £620/month

So after all that we get to just over £1k left per month for food plus everything else.

Current balances are:
SIPP (only accessible at 55 years old) £6,500
ISA £1,350
Cash £2,500
Total – just over £10k

So after housing, bills, food, transport and savings I have about £700 left per month. I guess the main difficulty I have is that given I have high fixed costs at the moment (rent being the bulk of it), I struggle to see how I can save as much as you propose throughout your blog.

I can see that transport is an area I could save a lot on. The bicycle is sensible and I enjoy riding it, but I currently have an unresolved health issue and until that becomes clear cycling every day is out. I am toying with the idea of a motorbike but that remains an idea.

So then we get to reducing my monthly spend on food, entertainment etc. from £700. I have started making my own lunches for work, and I rarely buy new clothes or other such items. I don’t drink a huge amount but don’t want to stay inside my whole life either!

The long and short is that it seems drastically more effective/attractive given the high living costs here to a) implement the easy changes you suggest like cutting costs where possible and b) then trying to increase income as it all drops through to savings (once the 50% tax has been taken…)

PS – as an aside UK housing market is pretty horrible too. London prices have just about returned to their peak of 2007 levels, and buying for many people is a silly notion. The average house/flat in London costs £371k which is 2.3x the national average, and something north of 15x the average wage! While it is tempting to buy what with exceptionally low interest rates, the deposit required is enormous, and the fear of an impending crash always looms at these levels.

To make matters worth the government has just announced it will guarantee mortgages for up to 20% of the value, which serves only to inflate prices even further.

Sincerely,
Jack London

Dear JL,

From what I can tell, you have very little to worry about. I can’t make fun of you for credit card debt, car commuting, or even the student loan, given that you pay only 1.5% interest on the balance and you are investing most of your savings at higher rates. Moreover, I commend you on being a Monevator reader, as that will keep you on top of the UK financial scene.

Your main “problem” is that you’re young and just starting out in your career. So your income is relatively low for a London finance worker, and you have no built-up investments compounding to push you ahead.

While it’s hard to tell the difference between a 25-year-old and a 38-year-old if you stand them up next to each other in a pub, there is an enormous difference in things like career progression and the amount of time they have had to amass the ‘Stash of cash we refer to as a Money Mustache. When I was 25, I had just arrived in the US, with savings very similar to your own. I had just barely made the jump from new-graduate salary to a solid middle-income one similar to your own.

With £2855 of after-tax income and £620 of savings per month, you’re at a 22% savings rate right now. That’s far better than average, although it still yields a 35-year working career, ignoring government subsidies and pensions for now.

But if you can eventually double your take-home pay while maintaining the same expenses, you’d be at a hefty 60% rate, which drops the working years down to 12.

By living in London, you are maintaining access to one of the world’s most productive money machines. To justify the high cost of living there, you either need to tap into it in order to get a suitably high income, or acknowledge that you are just there for the experience, and be willing to work much longer than you would in other cities with lower living costs.

And there’s still hope for you on the expenses side. I would never suggest that a young, single man curtail his nightlife too much while living in such a fun place. But as you get older and settle down a bit, this will probably happen automatically. These days, my whole family can’t seem to spend even $700 US dollars per month on food and entertainment. It’s not that we don’t have lots of fun around here – it is just a different kind of fun than I had at age 25 in a big city.

Regarding housing, I think you have the right instinct. Always compare the price of owning with the price of renting, and don’t stretch uncomfortably to buy property in a hot real-estate market. Someday you may find a way to own, using renters as a way to subsidize your own cost. But building up a nice asset base first is a reasonable prequisite to property investing.

I always find stories of other countries interesting from my vantage point here in the US. I moved to this country partly because of the world-leading conditions for early retirement. High salaries, low taxes, and amazingly cheap food and consumer goods, on top of the beautiful landscapes and climates available. 14 years later, the US remains at the top of my list for get-rich-quick destinations, and I hope more of those born here will come to appreciate how good we have it.

With this perspective, spending less and investing more becomes a privilege – there are not many other countries where you’d have such a surplus available to buy yourself some freedom.