How this New Zealander discovered F.I., Downsized his Home, and Increased His Savings Rate to 40%
Nick is the author of the personal finance site Your Money Blueprint. Today he shares how he went from living paycheck to paycheck to discovering the concept of financial independence, downsizing his home, and boosting his savings rate to 40%.
In a world full of Twitter, Facebook, Instagram, and reality TV, we all love a bit of voyeurism. Looking at other people’s lives from the outside seems to interest us. Maybe because we like to learn from other people – what we want to do, what we don’t want to do. Maybe we just want a bit of excitement and to feel like we are living vicariously through them. Either way, it is a bit of pastime.
So today is a special day my little voyeurs. I am going to open up on a step by step level, how I got to where I am today, and where I am hoping to get to.
This is not to show off. I am not in the best position by any stretch of the imagination. I have received a few requests and I am doing this for those interested in taking control of their life and money, to show that it can be done and one of many paths that can be taken.
You will see I made some mistakes, I had some luck, and I worked hard. I think a lot of “road to riches” stories emphasize the hard work and sacrifice, yet minimize the luck they often have.
Heck, born as a white male to a loving family in New Zealand is winning the ovarian lottery. I need to acknowledge this, because there are very real hurdles for some people that I have not necessarily encountered.
Age 18-22 (1998 to 2002)
In 1998 I started University in Dunedin, not because I necessarily wanted to, but because it was the normal thing to do, right? I also followed the advice to study what you are passionate about so I chose Physical Education and Management. I had a good time studying, but for my finances I regret not choosing more practical degrees.
My parents paid for my first year of university which was a great start. In every summer holiday, for 3 months I found full time work ranging from packaging boxes at Officemax stationery to picking apples and working in the vineyards of Blenheim.
I was lucky to have very low cost accommodation during the holidays, with my parents letting me stay at home for minimal rent. It hardly covered my food! Thankfully I had low outgoings and was able to save enough each summer for the upcoming years fees of approximately $5,000.
At the start of year 2 I had no debt, but I also had no savings. In year 2, I discovered that I may be eligible for a student allowance due to my parents income levels. Another lucky moment for me where I would pocket approximately $90 per week for the rest of time at university.
This was enough to cover rent in most of my scummy flats. This means I was only out of pocket each year for all other living costs, such as power, food, and entertainment. Entertainment (aka beers) was a big proponent of my spending.
Fast forward to 2002, the fifth and final year of university, and I emerge with my double degree. And my net worth? Drum roll please…
I came out of university at the age of 22 with less money than the day I was born. Baby Nick was a baller by comparison. $27,000 was the cost of my student loan for my living costs and books for 4 years.
I count myself lucky that I was able to receive help from my parents, both with the first year costs and with cheap accommodation during holidays. I was also lucky to be eligible for a student allowance. Even so, I still had to take advantage of the luck by working hard.
I hadn’t yet discovered personal finance though.
Age 22-30 (2002 to 2010)
The job market was tough. This is when I started wishing I had picked a more specific degree. I was doing office temp work for about 8 months before I landed my first full time gig. I was a dispatcher for a large courier company. Like many of us, this had nothing to do with my field of study whatsoever.
I have been pointing to my luck, so I will also highlight something unlucky before you go thinking I was blessed. I was of the era where I had interest accumulating on my student loans. I didn’t like making payments and not watching the balance go down in full. This was probably my first introduction to real world finance and the impact of our decisions. I could have been much more prudent with my money when studying, and now I had to live with that decision.
Debt felt like a massive burden on my shoulders. I endeavored to pay any money I had left after expenses towards my student loan. I was renting in Wellington at the time so I did not have as much discretionary income as I did when I was living at home.
With aggressive repayments I managed to pay off my $27,000 in 4 years at the age of 26. I could have paid it off even quicker if I didn’t spend so much on frivolous things such as too much food, beer and entertainment. Notice a theme here?
So, at age 26 I now had extra money coming into my pocket without the obligation of student loan repayments. Did I save the difference? No, I just spent more. Still living paycheck to paycheck.
Shortly after one of my mates bought a house, I thought I wanted a house too. But with zero dollars to my name and a fairly low income job ($40,000), it wasn’t going to happen any time soon.
So, what would any self-respecting 26 year old do? Move back with their parents of course.
I did this for three long years and was able to save up a 20% deposit for my first house. Except it wasn’t a house, it was a 2-bedroom apartment. I think I decided on an apartment because it was in a central location with very little lawn to maintain, meaning I could spend a lot of time nightclubbing and eating out. I am glad I did decide on an apartment, though, as it was easy to rent out.
I was still young (ish), so I didn’t mind sharing the apartment with a stranger. It was a great help with the mortgage repayments. Without a tenant, I would have struggled to keep up with the mortgage, but having a roommate freed up a bit of breathing room on my finances and helped me get on the property ladder. Did I save the difference? No, I was still spending willy nilly at the age of 29.
I had enough to pay the mortgage but not much more. My net worth at this point was basically what I had saved for the deposit on the apartment: $80,000.
Age 30-37 (2010 to 2017)
2010 hits, as does the age of 30. I am still in my same job as a dispatcher earning about $45,000 a year now. I have always been an extremely hard worker and always believed that I should work harder than I am paid to and that good things will happen. But at this stage had been working extremely hard with overtime and weekend work for 8 years and was still no better off. Yes, I was paying down a mortgage, but only the minimum on a 30-year term.
Then my break came.
An opportunity came along for the role of Operations Manager. I applied and got it. It was a jump in pay of over 50%. I now had a gap between what I spent and what I earned. Most people in this situation would increase their expenses to match their higher income. Buy nicer things, go nicer places. This is what I would have done in my first 29 years.
For some reason, this time was different. I think I was starting to dislike making mortgage payments only for most of it to go towards interest.
So I kept my expenses the same as if I was still in the lower paying job and really attacked the mortgage for two years. I made tremendous progress and it felt good. I still didn’t know much about personal finance at this stage, but I know this felt like a good thing to do. It was nice to watch the mortgage balance go down.
The devastating 2011 Earthquake hit Christchurch and living high up in an apartment is not fun. Yes, I was living in Wellington but if you haven’t lived in an apartment, they sway a lot at even the lightest quake. After multiple aftershocks I had enough of apartment living and decided to look for a new house. Move up the property ladder. That is what people do, right?
I found a large 4 bedroom, 3 story place in the suburbs in late 2011 and made the purchase. The extra payments I had made on the apartment helped as leverage for being able to purchase the house with a 100% mortgage. I would not have been able to afford this place on my own and had a real fight with the bank to loan me the money.
I always intended to rent out a couple of rooms and I finally convinced the bank it was a good idea. So now I was living in a house with 2 other renters. At 31 years old I wasn’t as happy about sharing space with others anymore, but being a 3 story house really helped to not cramp my style too much.
I have found the “own and rent out spare space” strategy quite useful. I kept my apartment in the CBD, I now rent out both bedrooms, which basically pays for the interest on the mortgage but no more.
At age 31 my net worth was around $140,000, made up of the $80,000 apartment deposit and $60,000 in mortgage reduction. I still had no savings or investments. My net worth, like many New Zealanders, was made up entirely from property. I didn’t even join a workplace Kiwisaver retirement scheme until I was 35.
At age 34, I woke up to the fact that I didn’t like having such high mortgage repayments. It was rather stressful. I was keeping up with repayments but I was starting to lose interest in my job. If I lost my job or the tenants, such high mortgage obligations would have been disastrous.
So, I sold the house in the suburbs and did the opposite to normal script. I moved down the property ladder. Selling a $650,000 house in Churton Park to move into a $250,000 house in Wainuiomata. After selling costs and purchasing costs I didn’t pocket much from the sale. All proceeds went to pay off the Churton park mortgage. But at least my mortgage repayments were now substantially lower. I felt I could breathe again.
With a new job and a new, cheaper house, I had created a nice savings gap again between my income and spending. But, instead of paying down the mortgage I decided to invest my money 100% in the stock market. This was about 15% of my income. I was young and felt comfortable with the risk since I didn’t need the money any time soon.
I was starting to become a bit more financially savvy through reading and didn’t want all my money tied up in housing. I wanted to diversify a bit to reduce my exposure to risk.
With a lump sum payment, followed by regular monthly payments into index funds, I have been able to build up a good cash cushion in these accounts. All thanks to a smaller mortgage obligation.
Just as well, because I badly injured my back and had to take about eight months off work in 2015. That cash cushion was most needed and a lifesaver. During my injury I was very immobile and had a lot of time to think. I wasn’t happy with the fact that I relied so heavily on work income to survive.
This injury taught me that you never know when something can happen that turns your world upside down. I am just lucky it was only 8 months. During this time of reflection is when I discovered the online world of financial independence. It sounded wonderful, being able to save up enough money by age 50 to have enough to retire early if I wished.
I cut my expenses without depriving myself of anything and my savings rate increased from 15% to 40% late 2015. Since then, I have been able to maintain this rate each year.
With the extra savings I now have the confidence to start my own business and do what I really enjoy. The world of financial independence has been so good to me and so life changing, that I now want to educate others to the benefits.
I followed a well-trodden path of going to university, living paycheck to paycheck, buying a house, and moving up the property ladder. It was not until my mid 30s that I have made real progress.
The progress only really started when I ignored the conventional wisdom. Downsizing my house was the best thing I could have ever done. My quality of life hasn’t been affected and our financial situation is much better.
My path was mostly about cutting expenses, predominantly housing. This is only one path though. There are many paths to financial independence.
You could focus on the increasing your income side of the equation.
You could rent instead of buy.
You could go straight to work, instead of racking up high student debt.
You could focus on real estate investments.
Perhaps start a business.
Or move to a lower cost of living area either in the same country or internationally.
I wanted to share my path so that you can see it can be done, even on a average income, and despite the fact I didn’t start becoming financially savvy until my 30s.
I made some poor decisions, had both good and bad luck, and worked hard. I took advantage of the good luck and I turned my bad luck into positives.
You don’t have to win the lotto to achieve financial independence. I clearly haven’t had a big income. It is an attainable goal for many of us, so take some control of your time and freedom by taking care of your finances. Otherwise your time may be spent earning money being a slave to your employers and your lenders.
Republished with the permission of Your Money Blueprint.