Budget allocation

miss_undastood

So the general consensus is that roughly spend/save/house should be roughly 1/3 of your monthly income?

We are roughly 39%/25%/36% at the moment. We knew we were stretching ourselves when we bought the house and the balance is slowly returning through overpaying.

At the moment annual costs like car insurance/tax (1 car) and home insurance come out of the “save” pile as that’s basically the “whatever is left”

We have a small part of our mortgage which is at 1.6% and set up to run the course for the next 29 years. The payment for this is £134 a month and as things stand it wouldn’t be worth paying it off early unless rates were to rise (but this is counted in my house pile)

What I’m wondering is would it be sensible to allocate my “save” pile to overpay the mortgage (the big part) to reduce future liabilities. Hubby and I both get annual bonuses which covers holidays etc; we both get 10-30% of our salary depending on company performance etc

We have 6m emergency fund built up and I have other money currently in shares that I could sell if I needed to

new_mortgageeee

Hi Miss undastood!

From a 'best off' point of view you should put your money where it will make/save the most interest - so if you can make more in savings % interest than you pay in mortgage % interest then you'll be better off in the long run if you save the money - and vice versa. But, it's a really personal choice, and depends where you priorities/long term goals/levels of comfort lie.

Pensions are a really important and tax efficient place for your money, so its worth checking that those are in the position/growing in the way that you need them to for your future retirement plans.

I personally like to have 6 months' mortgage payments in my emergency easy-access savings, but again that's very personal - think about if you and/or your husband were to lose your job; how easy would you find it to get a new one? What would you min. monthly outgoings be and how long could you live off your emergency savings?

If those areas are both at comfortable levels then this forum is all for overpaying your mortgage - any element with the highest interest first. Have a play with the overpayments calculator (google will bring up the MSE link) to see what sort of difference you'll be making to your term and overall amount paid by overpaying. You might also want to do a SOA (google 'stoozing SOA' for a good one) if you're looking for ways to identify where you could save more for OPs or saving.

miss_undastood

Hi new mortgageeee

We have a 6m cover everything emergency fund built up.

We have both been paying into pensions since early 20s - I contribute 6% into mine and my employer 20% and my husband pays 10% and he gets 6% paid by his current employer

We have also both just finished paying off our student loans (finally)

I have between 25 & 30k in shares which I can use as well as my 6m emergency fund. Although in a few weeks they could be worth less!

Our big mortgage is at 3.89% (fixed until 2023) so I think it’s about neutral between paying it down and saving it - but after 2023 our rate will rise and fall with the BoE base rate so I partially want to protect myself from this - rates are currently very low and I don’t think anyone expected them to stay this low for as long as they have. I’m sure Brexit will throw some spanner’s into the mix too?

I guess I just want some reassurance that I’m being level headed maybe?

gallygirl

miss_undastood wrote: »

So the general consensus is that roughly spend/save/house should be roughly 1/3 of your monthly income?

We are roughly 39%/25%/36% at the moment. We knew we were stretching ourselves when we bought the house and the balance is slowly returning through overpaying.

At the moment annual costs like car insurance/tax (1 car) and home insurance come out of the “save” pile as that’s basically the “whatever is left”

You need to add your annual costs to the spend category - what you are describing is delayed spending, not saving.

Do you have a limit on what you can overpay on your mortgage?

What is your attitude to risk as the financially best option is probably to stick potential overpayments in a S&S ISA - growth will generally be higher than your mortgage rate. (Though shares can go down as well as up bla bla bla etc.)

Would you incur any capital gains if you sold your shares or are they in an ISA? Are they in all in one or two companies as that is very risky.Would you consider selling (up to the capital gains limit if appropriate) some to make a lump sum payment off your mortgage? Or sell and buy index tracker funds instead as they are less volatile?

PS - that's a great pension you've got!!!!! What are your long term plans? Do you want to retire earlier than state pension age? Time to start thinking of that as well!

miss_undastood

Hi Gallygirl

Currently all of my shares are in limited baskets which is risky. I do aim to diversify; but 90%+ are from my employer through sharesave and share purchase schemes. I would have to pay CGT unless I only sold part of them - but I guess if things did hit the fan I have an escape route - but the plan is that I try and keep them in there until such a point where I have enough so the dividends pay me a nice lump sum.

We can overpay by 5% at the moment. We are comfortable overpaying about 10k per 12m and now the 5% cap will “limit” us - but in 2023 there is no cap so I need the excess to work for me in the meantime

I only work 16hrs a week now - we have 2 young children; but I know I’ve got a very good pension scheme and my part time wage now is only about 3k less than my starting salary (full time!) so I feel like I’m well paid for a part time employee. My husband didn’t believe my pension scheme was what it is until he read it and agreed - it’s split into 2 parts - 1 is 3% and they match 3% the other I put in 3% and they put in 17% - I think tbis may be invested and I can specify how much is into high, medium and low risk investments or let them manage it for me on an even basis.

I know the annual costs are technically part of the spend category. But they are kind of accounted for in my average credit card bill cost - we always pay in full.

Hubby has a company car. Mine is 2 yrs old and we only owe the mortgage, and I have plenty of childcare vouchers saved up which will cover nursery costs until we get free hours in September.

I’d say I’m naturally cautious but open to reasoned risk.
I felt uncomfortable with a mortgage over £300k, I really want to owe less than 150k and get the minimum monthly payment to around £700; obviously we can then overpay what we already were paying but we can pause that whenever we want to and we have more control. The more I think the more I think I want control, if anything were to happen minimising outgoings is key, and the mortgage is by far our biggest outgoing....

getmore4less

The 1/3rds split includes pensions

The idea is the 1/3 you save covers the spending in retirement the house 1/3 pays your accommodation for life.(fimished by retirement).

This would be be a 20-25year cycle to retire.

If you mortgage is longer that changes the split.

With kids you really need to split into 1/4's with kids using 1/4.

miss_undastood

So because we already pay into our pension before our pay hits the bank account part of the 1/3 has already been saved and our total pot of money to spend is slightly bigger than I think?

This is good news - although I think you’ve given me with one hand and taken away with the other by throwing 1/4 into the mix! I think I need to work out my numbers again adding in our pension amounts and classing them as savings. I’ll be back tomorrow with a refreshed view of where I am!

I have an ambitious plan to be mortgage neutral in 12 years from now - so we have either paid off the mortgage or have enough dotted around that we could pay it off if we chose to - or if mortgage interest is > savings interest/returns

miss_undastood

Right I’m back. That was quicker than I thought.

Between us we have:

Pensions £1,100 a month (including employer contributions - before money hits our accounts)

Take home pay £3,000 a month + £300 into sharesave (savings taken out of net pay)
Mortgage £1,100 a month (well maybe £1120, but whatever)
Living £1,200 a month - gas, electric, food, water, food, fuel, council tax, tv, phones etc
Left to save/for kids: £1,000

It seems almost perfect? I just need the flexibility of being able to pay less on the mortgage. Building a bit more of a buffer; I don’t want to be under unnecessary financial strain if things go wrong.

A lot of money is taken from us for saving before t hits our account (sharesave and pensions) so that’s really helpful as you don’t miss what you’ve not got.

getmore4less

The 1/3 1/4 is based on 20-25 years, house paid, kids independent.
If you work on a longer term to match pensions timescales you have some leeway on the mix, and it can be variable mix over time it's a long term plan.

miss_undastood

Oh ok. So if for some reason you can only do 20% in one pot for a few years then you can adjust it back the other way later. Makes sense.

I’d love to do 1/5ths with the extra pot for holidays :-)

getmore4less

If you want to continue the holidays in retirement it needs to be in the spend/save mix.

The key is the spend/save works, the house can be more or less or even include some save(downsizing).