What I was really hoping to write about this month is how we went from negative net worth to positive net worth. Instead, what I am going to write about is how we are slashing our expenses so that we can hoard cash and try to aggressively pay off debt thanks to coronavirus. The idea is so that we can live on basically 50 percent of our income (my income) in case (and in the likely event) that my husband loses his job. In case it was useful to people, I thought I would write about where we are slashing and hacking. The best general budgeting book I have read is All Your worth by Elizabeth Warren and Amelia Warren Tyagi. And I must say, without having stumbled into the Personal Finance FIRE community now over a year ago, I think we would have been in much worse shape than we are today. So my gratitude to all of you that I have read and learned from. I still have negative net worth but we are more secure (I hope) than previously with about 3/4 months worth of emergency money.
Money and how to get some extra:
- Government Assisted Payment Holidays:
So far, there are two payments that are going on “holiday”. One is a student loan holiday (where I don’t have to contribute to my student loan until September 2020) and another one is pushing back the self-assessment tax payment due date until January 2021 from July 2020. These two programmes alone will enable us to live on a single income at least until September. The latter one is especially important because the expected income that I was supposed to pay tax on will probably no longer transpire as the extra summer school teaching I was planning on doing may be cancelled. In other words, I wont have to pay taxes for income that I don’t actually earn only to have the tax authority pay it back (which is obviously less efficient). Both of these initiatives are actually pretty useful to us and are things we can take advantage of. Also important to me, they are things that we do not have to apply for and happen automatically. I don’t know where you live, but if you have either upcoming tax or student loan payments, see what programs are available for you.
- 2. Health Payments:
I think that I mentioned that my partner was diagnosed with a chronic health condition. Since his diagnosis, we have been spending a lot of money on exercise / personal training because exercise is the only treatment (besides pills) that help. We spend about 5% of our income on gym / personal training a month. This will have to be hacked otherwise it will be 10% of our income once/if my spouse loses his job. I feel not only terrible about this because we actually need this for his health but also because I know that our PT is self employed, has 3 children, and that her business has been destroyed by this crisis and she is in need. If anything can be salvaged from our old budget, this is it. Once/if everything goes back to normal, I think just my spouse could go to her. At the minute, she is sending us exercises by email which we are not doing because her other job is making us accountable in real time by showing up.
We will have to continue to pay off debt and try to save cash. We will have to do this more rather than less aggressively because we will have to remortgage next year and I am concerned that property prices will drop. If property prices drop, then we might end up in a situation of negative equity and therefore being unable to afford a new fixed rated mortgage and stuck on the standard variable rate. The standard variable rate for our mortgage is about 4% (maybe less now that the Bank of England lowered interest rates to 0.5% but let us see how exactly this translates into mortgage prices). This would push our mortgage payment up a few hundred pounds just when our income was falling and likely house prices are also falling. And if this is happening to us, it’s happening to everyone.
- Mortgage Holiday:
This is one programme that we are not taking advantage of. From my non-expert understanding, a mortgage holiday applies to the payment on the principal not on the interest, and they just push the interest payment down the road a few months. Given we are at the start of a 25 year mortgage and paying a lot of interest, this wouldn’t work for us. We would end up getting a “break” only to pay higher monthly rates a number of months later. I think it would be easier to try to throw everything at the mortgage and skimp on other things (like pay minimum credit card debts). Even though the interest rate on our mortgage is lower than the interest rate on our credit card (2.68% vs 21%), we owe substantially more money on the house than the cards. This means that it’s more economical to try to pay off the mortgage while taking longer on the cards.
- Cancelling subscriptions and reoccurring direct debits:
We have been canceling subscriptions including my partner’s transportation costs, charitable donations, and subscriptions to parks and heritage sites. I also cancelled my investments (we don’t have enough emergency cash to be investing right now but I will not touch what we already have made). I’m waiting to see if we will be reimbursed for a flight we cancelled to France (I am doubtful). I am not cancelling the cleaner. We can afford her and like the personal trainer, she is self employed, a single mom, and needs the cash.
After doing the worse case scenario budget, we are back spending 80 percent of my income on essentials and about 20 percent on debt. It’s not ideal but I recognize that we will be better than most families. How are you changing your budget? Let me know how you are doing in all of this mess.