Renting a new place changes my financial plan
My financial situation has changed and I need to adjust my approach. Here's how I plan to move closer to my goals with every paycheck.
Last month my partner and I moved into a rental unit. Before that we had spent most of the past twelve months pet-sitting in return for free rent. Having our own place and not having to move every three or four weeks is amazing. But it comes with the obvious downside that my share of rent has gone from $0 to $375 per week – a decent chunk of my salary.
My financial situation has changed. And when that happens, so too must the plan.
If I’m honest, I spent most of my first 29 years on Earth without a financial plan at all. Even when I was putting aside money for things, I wouldn’t say I had a plan. A savings goal or two, perhaps, but no bigger picture. This was even true when I worked for myself and had to manage things that an employer usually does for you, like saving for retirement and making sure I put enough aside for my tax bill.
When I look back now, I realise that I was showing a lot of blind faith. Faith that the amount I was contributing to my retirement savings every month was enough. Faith that my bank balance would be alright by the end of month, without actually knowing how much I was spending. Faith that nothing bad - like losing a client or an unexpected expense - would happen and put me in a hole.
Returning to salaryland this year changed things. Suddenly I knew exactly how much I was going to be paid and when. This seemed like an opportunity to add a bit of structure. An opportunity to become, dare I say it, a bit more grown up about my finances. As the work of my new colleagues Mark and Shani showed me, this doesn’t need to be hard.
It all starts with establishing where you want to go, and where you are now. Once you have those two things worked out, you just need to plot a route between the two.
Sound too simple to be true? It isn’t. Here is how I went through this process myself. By the end of this article you will be able to 1) set a financial goal and 2) have a plan for moving closer to it with every paycheck.
Step one: Work out where you want to be
At the highest possible level, I have two main financial goals: I want to be secure and able to enjoy life in the present. And I want to be able to support my family’s lifestyle once we have stopped working. To plan a route to these goals, I need to be a bit more specific.
To me, being “secure” means that I can meet unexpected expenses without sacrificing my quality of life, going into debt or having to sacrifice long-term investments. To do this, I need to have an emergency fund. Not in term deposits. Not in bonds and definitely not in equities. In cash. Money I have immediate access to in case I lose my job or I need to buy a flight back to the UK at short notice for family reasons.
Aiming for 3-6 months of expenses is seen as a good place to start here. To turn that into a dollar amount, I needed to work out my monthly expenses. And to do that, I listed all of my essential and “inevitable” costs – things that I pay for and either can’t stop paying for or wouldn’t like to stop paying for. Even in an emergency.
My essentials included rent, internet and electricity bills, groceries and transport (public transport tickets for my commute and costs related to our car). My “inevitables” included my gym membership, cricket and soccer rego costs, and a small social budget for trivia nights and the like. The total came to $3000 dollars per month.
Properly investigating these costs by looking at your bank statements can be eye opening. I found out that I routinely spend $100 per month on road tolls, even though I don’t use my car for commuting and only really use it at weekends. I would never have guessed that, and therefore could have been short if I had estimated my costs without really looking into it.
The recommended level of 3-6 months of living costs leaves me with a target of $9,000 - $18,000 for my emergency fund. Given that I may need to fly back to the UK at some point, it makes sense for me to be at the higher end of that range. I will go for $18,000 as my medium-term goal.
As for the long-term objective of having enough for retirement, my target is to have $1.8 million in today’s dollars by the time I retire. I don’t turn 30 until December, so I still have 35 years left. I reached the $1.8 million figure by following Mark’s four step guide to working out how much you need to retire.
Step two: Assess where you are now
My two main financial goals are not new. I have been trying to build my emergency fund since I became a salaryman again in April. And I’ve been contributing to my retirement fund since leaving university.
How am I doing? Well, I have $5.8k in the emergency fund at the moment. My retirement pot sits at around $40,000 once my British portfolio is converted into Aussie dollars.
In other words, I am making progress towards my emergency fund target but I’m not there yet. And I am a long way from the retirement goal. Not only that, I am off the pace. As I found out in my eye-opening retirement audit, the annual rate of return I’d need from my starting point and current level of contributions is optimistic at best.
If I want $1.8m with today’s buying power in 35 years and assume annual inflation averages 4% over that time, I would need $7.1m by the time I retire. Given my starting balance and current level of contributions, that requires a juicy 12.3% annual return for the next 35 years. Here it is in the goal setting tool inside Morningstar Investor:
Figure 1: My required return for my retirement goal. Source: Morningstar Investor
If I am realistic, I either need to contribute far more toward my retirement goal or make the goal easier. I choose the first option.
Steps one and two of this process haven't just defined my goals. They have helped me prioritise them. In the short-term, I will focus purely on getting that emergency fund up past the minimum level of 3 months of expenses, or around $10,000.
After that, I will continue to build the emergency fund towards my $18,000 target but also chip away at my retirement deficit. Now for how I will actually do it.
Step three: Form a simple plan to bridge the gap
Splitting up your paycheck on arrival is the easiest way to make sure you move consistently towards the financial goals you have set.
You can set your bank account to do this automatically. Or some employers let you get paid into different bank accounts straight away. As for me, I find it quite satisfying to do the transfers manually in my banking app.
To allocate the funds, I use an adapted version of the popular 50/30/20 method.
This method divides money between your needs, wants and financial goals. I like this concept because it is simple and easy to stick to. I adapted it because with my current salary and rent costs, keeping my needs under 50% isn’t going to work.
Instead, I worked out roughly how much my essentials and inevitables actually cost me as a percentage of my post-tax pay. I then split the remaining percentages up between the ‘fun fund’ and money that will go towards my financial goals.
My needs every two weeks came to $1500 or around 55% of my take home. I rounded that up to 60% in case I forgot something – and, let’s face it, there is always another bill coming from somewhere.
I then allocated 20% to wants (mostly sports tickets and holidays) and 20% to my financial goals. If my salary was to increase, a 50/30/20 split would become more realistic and following it could be a good way to avoid lifestyle creep from setting in.
Projecting it out
As I write this in early September, I have eight pay checks left this year.
Putting 100% of my “financial goal” money towards my emergency fund will leave it at $10,000 by the end of the year. At just over 3 months of expenses, that’s a solid base.
At the start of 2025, I will split my savings 50/50 between building the emergency fund towards the medium-term goal of $18k and putting more money into my retirement portfolio.
Figure 2: Projected goal progress by the end of 2024 and 2025. Source: Author calculations.
I like the paycheck splitting method because it is simple. I know what I am going to do and I will be able to see steady progress towards my goals every two weeks. All I need to do is keep my living costs under control and transfer the right funds across after getting paid.
Having a plan and a clear route forward feels good. Here is a quick re-cap of how I got here:
- Set financial goals and attach a dollar amount to them. Mine are financial stability today and a well-funded retirement tomorrow. I am aiming for an emergency fund of six months expenses in cash ($18k) and a retirement pot of $1.8m in today’s dollars once I retire.
- Measure your current position. My emergency fund stands at $5.8k and my retirement portfolio is at $40,000. I am $12k away from my emergency fund goal and do not yet have the minimum recommendation of 3 months’ living expenses. At my current level of contributions, hitting my retirement goal could require a 12.5% or more annual return once inflation is taken into account. That is unrealistic and I will need to contribute more or reduce my goal.
- Prioritise your goals and split your paycheck. Splitting your paycheck 50% to essentials, 30% to wants and 20% to financial goals is a good benchmark. After working out my costs I adjusted my regime to 60% essentials, 20% wants, 20% goals. Given that I don’t have the minimum of 3 months’ costs saved, all of the latter 20% will go towards that in the short term.
