Onwards to freedom!

Teacher2

"Finally, I don't tend to adjust our house value estimate often, but I may do a little research into sold prices of similar local houses over the next couple of months. I think I'm probably underestimating its value a little too much "

House prices have gone bonkers lately. I know it's not real money and that if the house is sold you have to buy another one at an equally inflated price AND pay wretched stamp duty on it. But it's nice to pretend the rising equity is somehow cash in the bank.

Of course, we have found there are downsides to house inflation. Our daughter has managed to stretch herself financially to buy a place with her b/f but our son is looking to buy on his own and has found everything near us far too expensive to contemplate. The government's Help to Buy scheme is nigh on useless as you can only get the equity loan on new builds and their prices are all inflated.

mrsp1987

And new builds are tiny! Some of them are like rabbit hutches. We were lucky and got a 1970 three bed detached. Compared to what is being built now it's huge!!

Teacher2

mrsp1987 wrote: »

And new builds are tiny! Some of them are like rabbit hutches. We were lucky and got a 1970 three bed detached. Compared to what is being built now it's huge!!

Yes, 'rabbit hutches' is right? My daughter and her b/f struck it lucky and made an offer as soon as they saw their first home. For the price of a studio flat in Shepherd's Bush they have got an ex-air force, 1960's two bed terraced home on the end of the Tube line. The second bedroom is smallish but it has a big main bedroom and a very nice sized living room. No way would they have got that with a new build. Nor any outside space.

SuperSecretSquirrel

I'm not much of a fan of house price inflation in all honesty. If I had a brace of BTLs then sure, I'd feel differently, but I don't - we own this one house, which is our home, and its value isn't really all that relevant.

Rampant house price inflation is not an issue in our area. I originally valued our house at 116k as that's what we paid for it nearly six years ago. I now roughly estimate it to be worth 125k, or pretty much what we paid for it plus what we've spent on home improvements since. At the present moment in time the house has more than likely lost us money in real terms when accounting for inflation! I'm pretty sure we're up on the deal when you consider the mortgage versus rent argument though, and the fact we'll be mortgage and rent free soon is obviously a pretty big deal for us.

At the end of the day, it's quite a nice house, we are very happy here, and its theoretical value isn't really all that important. The only real reason I'm thinking of working on a more accurate valuation is that I like measure and monitor progress. Not having an accurate enough estimate of house value makes a mockery of my 24.98% ltv estimate (woohoo 0.02% below 25% - except in reality it could be anywhere between about 23% and 26%!), and it throws out my net worth sums too... Not that any of this stuff really matters, just heading in the right direction should be good enough!

SuperSecretSquirrel

On the subject of net worth, I'm starting to think that I need to rethink my goals. The value of our house should absolutely factor into our net worth, and I also believe cars and any other significant sellable assets should be included too. If we were in a dire situation with zero cash or shares etc, having about 135k of sellable house and car on hand would mean we wouldn't be in danger of starving. Assets, whether liquid or not, are assets, and should be on the net worth balance sheet. However, they don't earn an income, so I don't think they should be included in FI calculations.

The problem with most PF / FI bloggers is they seem to use the term "net worth" when working out the required amount needed to retire - in simplistic terms (based on a whole host of assumptions) if you can live on 4% of your net worth each year, you can retire. This is possibly true in the case of a renter that can scrape by on 1k a month, has no debt, and has 300k in cash and shares. It is almost certainly untrue in the case of a home owner that can scrape by on 1k a month, has no debt, has a 250k mortgage free house, and has 50k in cash and shares. They both have the same 300k net worth, but one is raking in six times as much passive income as the other. I think the 4% rule should be less about "net worth" and more about "interest accruing assets", or something along those lines.

Anyway, I digress... My recent update estimated our net worth to be £196,146.73 (again plus or minus a few thousand as we don't really know what our house is worth). Knowing that is useful in itself, but not all that relevant when thinking about financial independence.

A more useful measure might be the value of our investments minus debts, stripping out the house and car values. Since we have more cash than debt, we could, if we wanted to, pay the debts off (not a sensible course of action due to ERCs and higher returns on savings/investments than cost of borrowing) which would simplify the maths. The balance of our investments minus debts equates to a simplified view of our "interest accruing assets". This is a value we could use when thinking in terms of financial independence. At the time of my last update, this amount would have been £60,896.73. Using the 4% rule, that's equivalent to a passive income of £2,435.87 annually. A start, but a long way away from independence!

Running through our current SOA, I can imagine the situation in three years time and make changes accordingly. No more mortgage payments, no more nursery payments, no more second car costs (one car would be sufficient if we worked less), assuming everything else stays the same, we're looking at annual household expenses of around 14.5k, let's call if 15k to account for a little overspending and inflation. For us to be a financially independent family, with neither me or OH having to work again, we'd need approximately 375k in "interest accruing assets", so we've quite some way to go. More realistically though, we're looking at working part time, and running side businesses, so the amount required will be far, far less. I quite like the idea of tracking monthly household expenses versus projected passive income, and working out our independence percentage from there. So if we had the £1,250pm household expenses, and 135k in "interest accruing assets", that could be considered equivalent to £450 passive income a month, so we'd be 36% independent.

Right now, with estimated expenses of around £2600pm (includes hefty mortgage and nursery costs), and "interest accruing assets" of £60,896.73, equivalent to £202.99 passive income a month, we are 7.8% independent. That's actually better than I thought, and I can see the percentage increasing quite quickly as our expenses drop. This could be a fun metric to track

edinburgher

You're not comparing like for like squirrel. It's unfair to compare renter and owner scraping by on £1k as it implies that owner spends more. More realistic would be owner needs £1k - mortgage payment (that they no longer need to make)! Liquid assets are important, spending less is also very important!

SuperSecretSquirrel

You're right ed, but that's not the point I'm making. One of them is potentially financially independent, the other is not, they both have a net worth of 300k. The point being net worth is not all that useful as an indicator of progress towards FI.

A better example might be a renter paying £500pm on rent and £500pm on everything else, with 300k invested, potentially FI. Let's say the homeowner lives in a 300k mortgage free house, has zero liquid investments, and has expenses of just £500pm, not FI, in fact 0% independent according to my measure.

SuperSecretSquirrel

edinburgher wrote: »

Liquid assets are important, spending less is also very important!

Absolutely agree that spending less is also very important. Reducing monthly expenses by £50 reduces the required "income earning assets" by a whopping great £15,000!

Of course I don't fully subscribe to the 4% rule, but it's a good enough yardstick for simple forecasting.

jodles16

Hey SSS amazing update and I imagine you will definately reach your target over the next three years! I like the different way you are attacking the MFW mission and think the neutral aspect is also an important way of working it!

Jodles

edinburgher

For the purposes of 4% rule and NW, I think there are three camps. 1) Those adventurous souls/people with no ties who would literally sell their house and then rent/become nomads exploring the wider world; 2) People who don't include their property in NW because they can't do anything with it (but realise it lowers their eventual monthly expenses) and 3) folk who downsize/free up some of their equity to make up the difference between house wealth and liquid wealth.

I always think of a stool when I'm thinking of FI, lots of legs so that the whole thing doesn't fall over FI bloggers give this highfalutin names like 'web of goals' etc. but it's a pretty straightforward concept.

I also have my doubts about the 4% rule because the study was not exhaustive and it looked at a fairly restrictive group of assets. Other 'legs' (P2P/property etc.) could change the outcome significantly. I'd expect to have shifting income in retirement, having a paid off house removes at least part of the uncertainty.