Lifestyle Level-up! New house

Guess what, we bought a house! A real, full sized house. After four and a half years in our 90m2 two-bedroom courtyard home we've decided to stretch out into a three-bedroom, two bathroom monster.

The shitty state of housing options, and the joy of deceased estates

On one hand, the new place is bigger than we really wanted or needed. On the other hand, we'd been looking for over a year and we'd come to the conclusion that there were two options out there: nice, new shoeboxes with no backyard and tiny rooms or places built in the 1960s that needed thousands of dollars work... or a bulldozer. After a year of looking we were starting to think that the perfect place didn't exist. We were even thinking that a 'tolerable not great' place wouldn't be happening. It seemed an impossible dream to find something we liked, and were willing to pay for.

Enter our flashy new place. Built in 2007 it wasn't an off-the-plan home. The original owners had tweaked and pushed, and built a beautiful three bedroom home with space. So much space - the smallest bedroom is 3m x 4m.

However, they also neglected the property for 12 years. They didn't damage the property, but they also didn't upgrade or maintain anything. The front room was painted a horrible plum colour - but lazily badly done with splashes of paint across the power points and window frames. The skirting boards were cracked and the walls were all scratched.

Then the owner passed away and the estate was being managed by relatives out of state. They didn't polish up the property for sale, and didn't maintain it for the three months it was on market.

The end results of this laziness? We purchased the property for $67,000 less than the original asking price. After a coat of paint we both agreed that the property now looks like it's worth what they were asking for it.

This is the second property we've purchased from a deceased estate, and I have to say it's so very worth it. My original property was the last item to be wrapped up in a deceased estate - eight years after the owners passed away. The place we just purchased was also a deceased estate, and the executors of the will lived interstate. In both cases they were keen to unload the property and accepted lower offers for a quick sale.

The awesome parts of the new place

Before I get into the costs (because there are costs) let me gush about how great this new place is...

We are now the overwhelmingly happy owners of:

• Three bedrooms! (or specifically, two bedrooms and a project room)
• 40m2 of living room, PLUS 24m2 of dining room
• A double garage (hello space to put the car away, and all the bikes, AND have a gym.
• 80m2 of GRASS! Well, actually, three corner jacks at the moment, but soon to be grass
• A spa in the en suite bathroom!
• Solar panels
• A dishwasher
• A kitchen big enough to to bulk cook, or to host a dinner party.

At the moment, we've sacrificed half the backyard to the chickens and entrusted them with killing off all the weeds in that area. They now have 10m2 each - the RSPCA recommendation is 1m2 each. They are having a great time and eating much less food. Win-win for everyone!

The only resident not thrilled with the move is poor FIRE-cat. While I thought she'd love having all the extra space, she hasn't settled in yet and is constantly pacing. Fingers crossed she settles in soon. Our first non-essential home upgrade will be putting together a catio so she can roam outside without escaping our yard and killing the wildlife.

Okay, but what does it cost?

Here we go, the thrilling numerical analysis!

Firstly, ownership and the deposit. While I have said 'we' through this whole post, it's important to clarify that I didn't buy this property - it's entirely in Mr. FIRE's name. This has been the plan for a while because I bought the last place entirely in my name. We like to keep our finances separate, so having one person as the property owner, and one as a 'tenant' works really well for us.

In terms of the deposit, this part is shared. We took out a mortgage ($90k) against the equity in my property, and combined it with Mr. FIRE's savings ($30k). Mr. FIRE will be working to pay off this loan first so we can untangle our finances entirely.

Secondly, my old house. I purchased it in late 2014 for $340k, and it's currently valued at $410k. Not only that, but the rental estimate is $350 per week, more than my mortgage repayments. The property isn't anything special, but it's neat, in a nice neighbourhood, and less than half an hour from the CBD (by car, bus or bike). I've been busily getting it ready to rent, and at this stage all that's left is painting, landscaping (bark out the front, grass out the back) and a quick pre-rent scrub.

Prep-costs

I didn't pay for the move - Mr. FIRE hired the truck, and we had a friend come and help. We did shell out a lot more in the last two weeks on junk food because we didn't have the kitchen to cook with, and for a couple of days didn't even have the microwave available.

However I have prep costs before I can rent out my place:

• Front of house landscaping: $200 (bark purchase), lots of weeding (about an hours effort)
• Back of house landscaping: Levelling the ground (2hours digging), purchasing lawn $100-$120, laying and watering it down (another 2-3hours)
• Inside house : 2-4 hours worth of packing and cleaning left
• Painting: $2,400
• Deep carpet clean: under $100 (I need this done properly, cat fur is everywhere)
• Possible professional clean: $600 (If I get this done, it will be in place of the carpet clean. If paying cleaners gets tenants into the house 2-weeks earlier, than it's worth doing.)

In total, I'll need to spend $2,800 - $3,320 to have the house ready to rent out.

Ongoing costs

Once I've got tenants into my old property and settled in, I'll be earning and spending more money. I'm estimating that all utilities costs will not change - while we have solar panels on the new property, we also have a bigger space to heat and cool. The new house has a better air conditioner, so I suspect the utilities will be lower, however I can't confirm and I don't plan to estimate based on that.

Costs for the old house:

• Mortgage: P&I payments of $1,000 a month. Interest costs are only $700 per month.
• Council rates: $93 p/month
• Water Fees: $60 p/month
• Emergency Services Levy: $10p/month
• Insurance: $30 p/month

Total outgoings: $893p/month (or $1193 including principle repayments)

Income from the old house:

• Base Rent: $335 per week or $1450p/month - this is lower than the appraised rent, I'm being conservative :) 
• Subtract fees and charges, estimate 10% - leaves $1305 in my pocket
• Vacancies, estimate one month a year as a worst case, subtract a month of income.

Total income: $1196p/month

'Rent' at the new house:

Since Mr. FIRE owns the house and is fully responsible for the mortgages, I pay him rent. This is what we did when I owned the house and it works really well

• Rent: $350p/fortnight, or $758p/month (26 fortnights in a year)

Things I don't pay at the new house:

This is important, because I'm 'renting' I won't be paying the following things for the new house, they will be entirely Mr. FIREs costs.

• Council rates: $93 p/month
• Emergency Services Levy: $10p/month
• Home insurance (I still pay contents): $15p/month

Since I'm not paying for them, living in the new house will be 'cheaper'. It's all funny money, but arguably I save $118 per month by not paying these.

Total cashflow: $1,196 rent in, $758 rent out, $893 costs out, $118 reduced costs = -$337 per month

In a nutshell...

So what does this mean in a nutshell? It means I now own 2 rental properties, the original which is negatively geared, and the new which is positively geared. At the end of a year they should roughly zero out, and as I pay down the mortgages I'll start seeing positive cash flow. It also means that all my home loans are now tax deductible.

I'm 'renting' a lovely 3 bedroom house for $350 a fortnight. This is roughly the same amount I was paying in interest on my old house. Plus I'm saving on the costs of council rates, emergency services and insurance.

The above is a worst case scenario though. I've dropped the estimated rent by 10%, and then put in a full month of vacancy over a year. If the property is not vacant, and receives the estimated rent I'll only be paying an extra $170 a month to live in a new house that is literally double the size.

Mr. FIRE and I are currently discussing whether or not we get a house mate - we have the space for it, and if we have a third person living in the house we could (hypothetically) reduce my fortnightly rent to $200, as well as charging the other person $200. Or even charge that person more, $100 a week is cheap-cheap! I've looked into housing an international student - which pays the princely sum of $280 a week, however we need to feed them and cover their utilities 

I am keen to do a three- six- and twelve-month review on what this move actually costs, versus what I have estimated it to cost. Even if my estimates are out, we are stoked with the move and the space. Importantly we're one step closer to starting a family.... by which we mean get a dog. Or three.

Merry Christmas to me! Lifting the budget

Once upon a time I decided I wanted to retire early just like Mr. Money Mustache. I was convinced I would get my spending down below $30k a year, and have hundreds of thousands saved by the time I ticked over 30.

I was sure I would be a DIY queen, and flip houses like Mr. 1500. I'd make amazing food like Mr Tako, and retire to the countryside like the Frugalwoods.

Alas, as I sit here at (almost) 28, it is clear that these things take longer than anticipated. If I want to kick my FIRE into overdrive, I should be cutting back costs so I can save and invest more.

Instead, my Christmas gift to myself is permission to spend more.

In what might be seen as a frugal fail, I think it's time to cut myself a bit of slack, and loosen the purse strings. There are a few reasons why...

Inflation

Firstly, let's talk inflation, specifically Consumer Price Inflation. We're all affected by this, and it's a strange economic phenomenon where the exact same loaf of bread that used to cost me $3.40 a loaf is now costing me $3.50. It's the baffling part where my energy efficient changes haven't made a dent in my power bill, despite my usage rates having dropped by 15%. It's seeing clothes on special that cost more than you paid for them at full price five years ago.

There are many reasons why inflation happens (and if you want to dig into it, you can start here) but for the sake of this post let's just agree that it does happen. It's the reason most employers give you a small pay rise every year - so that you can maintain the same lifestyle. 

For the last three years inflation has fluctuated between 1% and 2%, mostly towards the upper end. This means that something that cost you $100 three years ago will probably cost you $106 now. Or on the flip side, spending $100 now should get you the same product as spending $94 three years ago.

Putting this into perspective, three years ago I set my budget for $40,000 a year. That same amount of money now only buys me $37,650 worth of goods.

Business Expenses

Once upon a time I strove to do just as well as the personal finance gurus. MMM and family lived on $30,000 a year in the early days of his journey, and Mr 1500 planned for his family of four to live on $40,000 a year. The first thing I noticed about this was a significant difference in living costs between Australia and the US. The second thing I noticed was that this didn't include business expenses. However, given that I was just spending for myself, and not for a family, surely I could reach those levels.

Here I stand three years later to say that maybe that was ambitious. However, it's not because I lack self control (I just spend a week debating with myself the value of spending $7.50 on a video game that was on super special). It's because I'm trying to cover the costs of an investment property with that money, including $8,500 a year in interest repayments.

The biggest expense in the Holy Trinity of Big Expenses is housing, and I'm paying for two of them! In fact, my annual budget is $15,000 for house number 1 (that we live in), another $15,000 for house number two (that I rent out) and a measly $10,000 left over for myself - that needs to cover medical, groceries, my phone bill, and still have some left to Have A Life.

Reductions in costs

But, wait! I hear you saying. If my biggest expense is paying two mortgages, then surely over three years since setting a $40k budget, my interest repayments have reduced as I paid down the principal. I am paying principal and interest on my loan, but I'm only paying the minimum, because I'm a firm believer in using the equity in your home to build wealth elsewhere. 

As an employee of the bank, I enjoy fee free loans and I've taken full advantage by restructuring my loans twice, and pulling out as much equity as I can. Coupled with that, while the Reserve Bank interest rates have not changed, all the major banks have snuck their interest rates up in the last couple of years. As a result, I paid $732 interest in October 2016, and $708 in October 2018 - a whopping reduction of twenty-four dollars!! Wow! A whole $288 over the year.

Except remember that according to my (very rough) inflation calculations above, my spending power has reduced from $40,000 to $37,650. I'm down $2,350 in spending power, but up $288 in interest savings!! That's... not brilliant.

Life is calling

Here though, we come to the crux of the issue. Life is calling me. I can throw up all the numbers I want, and I can come up with inventive ways to lower my costs. And while I will continue to do so, certain things defy even the most frugal of magicians. Here's a couple of pieces of life I want to experience, before I'm too old to enjoy them.

The grass is always greener

Have you seen grass? Smelt freshly cut grass? Have you lain in a hammock under a shady tree on a warm day drinking a glass of champagne and reading while the hours drift by? I haven't... because I have no grass. Our house is small, we have approximately 15m2 of dirt that is split between my chickens and my vegetable garden. I love both of these things, and wouldn't sacrifice them for a small patch of grass, but I'm keen for a bigger garden.

I want to step out my back door and gaze over the lawn. To see my chickens scratching in the near-distance. To see bees buzzing around the flowers. I want some space to stretch out, and of course...

It's time for a dog

When I was young I dreamed about all the pets I would have when I moved out of my parents house. Right now it's packed to the rafters with Mr. FIRE, FIRE-cat, four chickens, seven quail and a budgie. 

Mr. FIRE and I coo over pictures of puppies. We debate whether our dog will run mountain biking trails with him, or learn to do tricks and agility competitions with me (it's both right? definitely both). We tease the cat about how she's going to hate us when she has to share the couch with a dog. FIRE-cat ignores us, because she's a cat.

Realistically, we probably won't get a puppy. I've worked in shelters in the past and I know that puppies are noisy, and stinky, and they cry, and they poop and they chew things. We'll probably bring home an adult that's settled into themselves. But regardless of the age, we're so keen to have a dog. A big one.

This is not me. But hopefully,
soon it will be

I believe I can fly

This is an odd one, but I really want to hang-glide. And I've been watching the budget for years and there's never enough wiggle room. As inflation takes hold, the purse strings get tighter and hang-gliding gets further and further away. 

What's in a game?

Lastly, and least importantly - I miss the relaxed childhood of video games. I can't ever recapture a time when I could play games for hours on end, only taking a break to eat the dinner mum had cooked, which was generally my first meal of the day. 

I have responsibilities, see above for a cat, four chickens, seven quail and a budgie.. all of who like to be clean and fed. On top of that, I've sold 40 hours a week of my life to an employer. But I still sneak in a game here or there, and on my current budget each one I purchase sends me into an overspend-shame spiral. 

What now?

While staying accountable for my spending will keep me on the road to FIRE, my current level of tightness is getting too restrictive. I'm finding it hard to agree to events with friends, because while I don't resent spending on them, it means I have nothing left for the rest of the month. 

While it hasn't really hit yet, I'm not interested in being miserly-FIRE. I've been chasing the finish line for three years, and it's still at least 7-8 years away. I don't intend to spend those years refusing to spend on things I know will make me happy, because it might shift the finishing line by a year.

Based on the numbers above, I could raise my budget to $42,500 without feeling a smidgeon of guilt. It's the equivalent of 2% a year since I first set the budget. However, I have also been reducing my spending in the last three years - at first I recorded $46,000 in a year, then $44,000, and then down to $42,000. While it would be nice to assume the downward trend will continue, there's no signs that I'll hit $40k this year. In fact, it looks like I'll spend a bit higher, while still feeling pinched.

So, I'm giving myself another $924 a year to play with. It might seem like an oddly specific number, but that's because I'm shifting my monthly allowance from $3,333 up to $3,400. A nice round number. 

Of that $77 a month, $40 is being split between my properties, $10 into groceries, $10 into pets (in preparation for a doggo!) and $10 into travel, with the odd leftover $7 going into the 'Other' category (where most fun stuff is bought).

While this isn't a hugely exciting splurge, it's a healthy update. I'll still be striving to reduce boring spending like utilities, mortgage payments, and groceries by seeking better deals and inventive approaches. But hopefully I'll stop eyeing off the categories that pay for living a good life.

There's no point in reaching FIRE if I don't enjoy the journey there.

Can you get filthy rich by spending more money every year?

I want to retire early and take back my free time. I'm willing to forgo expensive luxuries to get there earlier, but I don't want to retire to a life of poverty and pauperism.

However, if I have a couple of years of ridiculously lean living at the start of my journey, it could supercharge my retirement accounts.

So I feel like I'm presented with two choices. I could live the life I want now - knowing it will take longer to get to FIRE, or I could live like a monk for a couple of years to supercharge my investment accounts, then ease into a slightly spendier, but still frugal existence that I could maintain for many years of retired bliss.
 
Let's investigate this idea with our case study participants, John and Cindy.

John, 25, fresh out of University, ready to take on the world!

 

This is John. He's just finished studying a Bachelors degree in DefinitelyGettingAJob. A couple of months later he scores a job as a RegularWorkingDude for SomeWellKnownCompany. John's starting salary is $35,000 a year and he's pretty pleased with himself.

Cindy, 25, fresh out of University, ready to take on the world!

 

This is Cindy. She's just finished studying a Bachelors degree in DefinitelyGettingAJob. A couple of months later she scores a job as a RegularWorkingLady for SomeWellKnownCompany. Cindy's starting salary is $35,000 a year and she's pretty pleased with herself.

Fresh out of university: the winner is?

Well, right now our two contenders are identical. That is the point. Let's see how they do.

No longer a poor student, John is okay with things the way they are

 

John likes his life the way it is, his couch might be falling to pieces, but it's comfortable. He hangs out with friends, goes hiking and plays video games, just like he did when he was a student. He lives in a run down apartment with a couple of flatmates he's known since the start of university. 

He's happy to keep living like this for a while, but he finds all this money is piling up in his account, so he opens a Vanguard investment account and starts putting away $20,000 a year and earning 7% returns. He's used to living on the cheap as a student, so the $15,000 a year he has left is still pretty nice.

Living the high life, Cindy is splashing out!

 

Cindy is thrilled to be earning some real money at last! She gets her hair and nails done, buys all new furniture and goes out for fancy brunch every weekend. She rents a comfortable apartment, takes vacations, visits the spa and never misses a happy hour. 

Cindy is living it up! However she wants to plan for the future so she finds $5,000 a year and opens a Vanguard investment account with 7% returns.

Year One: our winner is..?

Financially, it's John - after all he has $20,000 in his account. Although I'm a little worried for his health because he's still eating ramen noodles for dinner every other night and the old couch has a funny stain on it.

Cindy's account balance doesn't look so great, but she's thrilled with her lifestyle. She has everything she wants and lives like a queen. She'd be happy to live like this forever.

Dog years, John goes to the office every day

Five years have passed and John still works for SomeWellKnownCompany. He's gotten itchy feet a few times and has been promoted up the chain, but not very far. He's gotten an average 2% pay rise each year and he spends it all. He's left his share house behind, got some nicer digs, he eats better and he's started taking local vacations.

He's not quite as spendy as Cindy, but having lived like a poor student for so long each little bit extra feels special. Back when he started at SomeWellKnownCompany he set up automatic payments into his Vanguard account and he hasn't touched them since. He checks the numbers one day and is pretty pleased to see he has $143,000 to his name.

Dog years part two, Cindy works in the same office

Cindy also still works for SomeWellKnownCompany and has gotten the same payrises. She's not enjoying work that much though and every time she gets a payrise she increases her investments. She's gotten comfortable in her nice life and expects the fine things. She still has regular brunches with the girls and is always beautifully presented. If there is a new fashion trend coming, Cindy is there leading the way.

On one of her many trips she met a ridiculously fun guy and married him. She's looking to the future of kids and free time to travel more, so checks her investment account one day to find she has $47,500 to her name.

Five years down, our winner is..?

Cindy is still pretty pumped with her life. She's been living on $30,000 a year for the last few years and knows how to stay on top of her finances. She's got a laundry list of places she's visited and wants to visit, although after that big trip to Europe she got a little tight on some bills. Still, she likes her life, and she's investing each year so she's happy with the way things are.

John has started eating home cooked meals with more than one food group and has bought a new-to-him couch. Most of his furniture is a little rough around the edges, but each year he finds himself with more money in his pocket. He's learned the value of making things last though so he doesn't buy anything without thinking it through first. He has a high quality mattress (because he loves a good snooze) but never bothered to upgrade the dining room table - it's big enough for his friends and no one minds the scuff marks.

Ten years on - John feels richer than ever 

John still works for SomeWellKnownCompany and the 2% a year payrises are still rolling in. Sure they aren't much but John feels like a king, constantly getting more money and having the freedom to spend it. He's settled down with a lovely Lady who shares his values and they are over the moon in love. John and Lady start talking about puppies and easing up on work. John peeks at his investments and is surprised to find he has over $275,000 invested.

Ten years on - Cindy is getting tired

Cindy is still spending her $30,000 a year on her lifestyle, but what once felt lavish and luxurious now feels tedious. She goes to brunch each weekend at the same cafe, orders the same meal and shares the same gossip. She wants to travel but feels like she's seen it all, and without spending a whole lot more she doesn't know what to do. She still works for SomeWellKnownCompany and is still pushing the 2% annual pay rises into her investments, but somehow she only has $130,000 to her name.

Ten year check in

John is leaping ahead in so many ways. His finances are more than double Cindy's despite having the same income and spending more each year. He's constantly thrilled with his life as each year he moves from spending like a poor student to a comfortable adult. He no longer worries about the bills, and eats well on delicious home cooked food with his Lady wife.

Cindy feels stuck, like no matter what she does she isn't moving forward. She wants to change up her life but isn't sure how. All her favourite restaurants serve the same meals every day, and she's tried all the hobbies she can think of. She isn't willing to increase her spending, but doesn't want to cut back either. She's restless with her life and looking to make a change.

Twenty years on - John is on his way up and out!

John and Lady are ready to hit the road! John looked at his bank account and realised he had enough money to never work again! When his boss asked him to work the weekend he politely told him where he could put that overtime and rode off into the sunset!

After 20 years of slowly increasing his expenses John now spends $30,000 a year, and lives like a king. Those early years of scrimping and saving have taught him valuable skills, and he can't imagine what he would do if he had more money.

The $20,000 a year he's been putting aside has turned into $820,000. John knows he can comfortably pull $32,800 a year from his investments, so he retires to a simple life of playing with his pups, taking long walks on the beach, chasing a good stick and sniffing the bushes

Twenty years on - Cindy is stuck and looking for the light at the end of the tunnel

It's been a long road for Cindy. She's spent the last ten years reinventing herself, and now she's pretty happy with her life. She's tossed aside brunches and hair appointments for play dates with the pups and couch parties with her friends. She's learned to cook at home so she can spend more on the things that matter to her like travelling. Cindy feels richer then before - even though she still spends $30,000 a year because she spends less on the little things and saves for the things that matter to her. 

After twenty years at SomeWellKnownCompany Cindy wants to move on. She checks her investments to find she has $438,000. She's disappointed because she really wanted to move away from the corporate world, but she knows the money won't last forever. She works out that she needs to spend another 5 years working and investing before she can step away from her desk forever.

And the winner is? Lifestyle inflation! And puppies!

John is a very good boy. After twenty years of continuously improving his life and relaxing the financials reins he finds himself flush with cash and ready to retire. Cindy on the other hand set herself some very solid spending rules and refused to deviate from them, even when she wasn't happy with her life, yet she has only half of the retirement nest egg that John has.

The oft quoted rule of early retirement is to not let your expenses grow as your income does. We argue endlessly that you can be happy without spending much, and that's true. To an extent.

As young health teenagers John and I ate nothing but junk food, slept on the floor without a mattress and worked 16 hour days without any ill effects. As we got older (I say, at the queenly age of 26) we can't do those things anymore. We like things a little nicer, like a well cooked steak, we get hangry if we skip meals, and we hate spending more than 9 hours at the office.

John and I don't need a yacht to be happy, but we want some slightly nicer things as we age.

By following in John's paw prints, you can let your lifestyle grow with your income and still save a giant nest egg. By starting small you can retire early, retire rich, and retire really really happy.

The earlier you start, the easier it is.