Simple Pound

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The further the year progresses, the nearer the time comes that my boyfriend and I have set ourselves for buying our first property. And since I love planning and organising stuff I also have a tendency to get overly involved before it’s even necessary. For example, I started to monitor rental prices in London at least weekly (if not daily!) almost a year before we would actually have to move. That meant that I wouldn’t just waste hours sifting through property websites (which is fun!), but also panic about things that were completely out of my control (e.g. whether we’d ever find a flat that I liked within our price range).

Despite the assumption that human beings are capable of learning and hence avoiding past mistakes, I’m doing it again. I get weekly property updates from a range of websites and spent hours more searching for places that might fit our criteria. However, this time, I’m trying not to panic too much in advance, but simply use this flood of information to be as prepared as possible in order to avoid nasty surprises. By now (almost a year before we’re planning to make this buying commitment) I already have a reasonably good idea of the property prices in the area I’m considering, the mortgages that are available and the maximum amounts we will be able to borrow. Yet, beyond saving for a deposit, I’ve never had a closer look at what costs we’ll be facing as part of the process.

And I’m horrified.

The list is seemingly endless: moving costs, legal costs, surveys and mortgage fees all have to be researched and compared in order to cut the best deal. And trust me, it’ll be absolutely crucial to get the best deal possible as the costs can mount up to almost 4% of your property’s purchase price. That is a lot of money. All along, I was hoping we could commit to a deposit of roughly 10% of the property’s purchase price. After my cost analysis, it looks more like 5% unless I start saving so much more aggressively than I have done in the past. Especially as there are further implications with not hitting the 10% deposit mark – many mortgage lenders won’t be willing to offer you their most competitive interest rates unless you can commit at least 10% of the purchase price.

In any case, check out the following list for an estimate of the magnitude of the costs you’ll be facing if you’re considering the purchase of a property. The property I’ve based the calculation on is a flat with leasehold and a purchase price of £400,000. Bearing in mind that the average house price in London is somewhere around £375,000 (depending on which source you query), it’s not that extortionate and probably represents the maximum amount we could afford anyway (optimistically speaking).

Moving costs

• Insure possessions against accidental damage during move (the following calculation is based on an estimated premium of 50% - 100% of our current contents insurance – I haven’t actually checked with them but I doubt it would be more than 100% our annual premium) - £50,- to £100,-
• Hire medium-sized van for a weekend (this will be cheaper than hiring a removal company, especially as the flat we are currently renting is furnished which means we will have very little heavy furniture to move – just tons of DVDs and books *grins*) - £120,- to £200,-

Legal costs

• Conveyance solicitor fees (this will depend hugely on whether you’re looking to buy a house – i.e. freehold – or a flat which is commonly on leasehold; to a certain extent it will also depend on the value of the property you’re looking to buy) - £300,- to £700,-
• Local authority searches (this search has to be carried out to establish whether any matters such as planning, environmental problems, building regulations etc. affect the property) – £100,- to £120,-
• Land Registry fee (this fee is payable to the Land Registry for them to put down your name as owner of the property in their records; tedious but important) – £220,-
• Land Registry search (as far as I can tell this search is conducted to purchase the registry plan and registry title (at £3,- each) from the Land Registry to ensure the property you’re being sold actually belongs to the seller) - £6,-
• Bankruptcy search (to ensure that the property you’re buying has no history of bankruptcy or financial difficulties which could affect your credit rating) - £2,-
• Stamp duty (this is by far the largest chunk of the costs you will have to put up with and is calculated as 3% of the purchase price for any property above £250,000 and below £500,000) - £12,000,-

Survey costs

• Home buyers’ survey (the main purpose of this survey is to ensure you’re paying a fair price for the property; you’ll be told about any defects that might affect your decision to proceed with the purchase or which may affect the price you’re willing to pay – a useful tool for price negotiations later on!) - £480,- to £550,-
• Valuation report (survey conducted by your mortgage lender to establish whether the price you’re quoting them for the property is justified and whether they feel save accepting the property as a collateral for your loan) - £525,- (you might be able to get this free as part of a mortgage deal)

Mortgage costs

• Deposit (as discussed, ideally you want to put down at least 5% - 10% to get the best interest rates from your lender of choice) - £20,000,- to £40,000,-
• Product fee (covers the initial mortgage setup and whatever else the bank can come up with to possibly justify a further grand of expenses) - £500,- to £1,000,- (possibly less depending on what mortgage you pick)
• Application fee (because they can) - £100
• Bank transfer fee (and more costs just to get the money the seller’s account asap) - £35

This brings us to a whopping total of between £14,440 and £15,560 in fees for the purchase of a £400,000 property. That number obviously doesn’t cover the additional 10% you want to put down as a deposit. If I include the 5 – 10% range, we reach a final sum of anywhere between £34,440 (with 5% deposit and all the best deals the street offers) and £55,560 (with 10% deposit and higher fees).

That is a lot of free capital you need to have available before committing to a house purchase. I will seriously have to review my savings pattern to assess how I can possibly squeeze more money out of my budget for savings…

In case you want to read more about this evil topic, I suggest the following sites:

• 4Money’s guide to buying a home
• WhatPrice (actual cost estimates slightly outdated)
• Adviceguide (for a description of the whole buying process)
• DirectGov
• Complete Guide to Homebuying (the clue is in the title; slightly outdated but informative)

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December has been a busy month and I have not found the time to post much as a result. I also accumulated a massive amount of receipts that I needed to enter into my spreadsheet in order to track my spending and not abandon my good efforts this close to the end of the year.

After all the paperwork was done, I am pleased to see that my net worth increased by 4.46% from November to December which translates into 33.8% of my next goal. The increase in net worth can be fully attributed to my decision to throw all my available funds at the credit card and hence pay down the entire balance in one go. All that remains now is the last interest payment of £41 which was only debited this morning.

Now that a full year is over, it’s also time to draw some conclusions which will go hand in hand with new goals for 2008. I started keeping track of my net worth in May 2007 when I first came across the NetWorthIQ website. Based on that, I would like to see my assets grow at a steady rate of 0.5% a month at least, ideally closer to 1% a month. Liabilities should ideally be reduced to zero, unless they are subject to 0.00% APR - I am thinking of taking out a 9-month interest-free loan in order to purchase a digital piano, but I consider this good debt as long as it remains interest-free.

After tracking my expenses for a full year now, it’s time to draw up a (hopefully realistic) budget. In doing so I have mainly focused on the expenses I incurred over the last four months (since moving to London, starting my job…) as I believe they best represent my new lifestyle and hence actual spending. I have slightly underestimated my income as I don’t know what January’s bonus round will bring yet. Moreover, since I can live off my current salary quite comfortably I’m hoping to put any extra money that might come my way straight into a savings account in the hope of ever being able to purchase my first London home

As a result of now “being on a budget” I have made a few changes to my original spreadsheet so that I can monitor whether I’m sticking to it or not. I will review the budget in 3 months’ time to see whether my estimates are still feasible. After all, for me the whole point of having a budget is to get a good picture of my living expenses while also ensuring I don’t spend more than I have…

Finally, there will be a slight shift in focus with regards to my savings goals (see Progress page): I have decided to abandon my pursuit of a car as well as the eye laser surgery in favour of aggressively saving towards a deposit on a flat or house in London. While everyone is afraid of a housing crash and recession (dare I say the word…), I’m absolutely optimistic as this means that both property prices and mortgage interest rates will hopefully become a little more affordable than they are at the moment.

Thus, in a nutshell my (financial) goals for 2008:

1. Increase assets by at least 0.5% a month

2. Stay on budget

3. Deposit, deposit, deposit

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Plonkee tagged me to describe how I would live my life if I was debt-free.

Fortunately, since my parents were generous enough to pay my tuition fees at University and I used to work most summers during school and University to contribute the rest, I am actually in a position where I am already fairly debt-free.

Yes, admittedly there is a small outstanding balance on one of my credit cards, but this is mainly to do with the fact that I just moved into a new house which brings an awful lot of major expenses - especially since it’s the first time I’m actually living in my “own” (if rented) flat.

Hence, I will slightly re-phrase the question and will instead give you my opinion on how to stay debt-free.

Firstly, and this is what everyone will be telling you, set yourself a budget that reflects your personal circumstances (i.e. be neither too stringent nor too generous) and try to stick to it. Now, I’m not terribly good with that sort of thing but I found that I stay on top of my finances if I simply keep track of how much I’m spending on what (more info…). You’d be surprised, trust me!

Secondly, keep a “splurge fund“. This mainly works like an emergency fund but for shopping tours. It might well be a phenomenon that women suffer from most, but I’ve certainly enjoyed the certainty of knowing that I have some money, to balance my account with, after that particular pair of shoes just had to come home with me. Just make sure that you realise you can’t actually afford an item, if even your splurge fund wouldn’t cover it…

And finally, where possible, get interest payments for your savings credited on a monthly basis. Knowing that you’re getting a reward for your savings on a regular basis will keep you motivated and will also help you develop a habit of saving spare cash - even if it is just to see the “reward” grow.

These three suggestions are entirely taken from own experience, but I’d be delighted to hear how it’s working out for you and what preventatve measures you’ve set yourself!

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This post appeared as a guest post at Wellheeled.

We all know that having a budget and controlling your spending is a good thing. In theory. That’s great, but there are so many things we know are good for us, yet we still don’t manage to put them into practice. Think exercise… After I grew up with my mum telling me I should really track all my expenses, I have tried so many things, but none of them worked for longer than a couple of weeks when the novelty wore off.

When I realised that I was going to start earning a salary soon (i.e. regular income) and would have bills to pay (i.e. regular outgoings) as well as many dreams to fulfill (car, property…), it became clear that there was no way around coming to grips with my money. And that’s what I did. I have been sticking with the same process for the last 7 months, and I hope this is gonna be it. So what am I doing?

First of all, I didn’t set myself a budget but simply started tracking my expenses. If you haven’t paid attention to what you spend your money on, chances are you have no idea what life actually costs. Setting yourself a budget in a situation like this is likely to have a disastrous outcome because most probably your budget won’t work, you’ll get annoyed or disappointed and abandon it.

Thus, step 1: get a receipt. Bagel on the way to work? Coffee in your lunch break? Simply ask for a receipt. You’ll be surprised how readily you’ll be able to get one. For transactions you can’t get a receipt for, make a mental note or write it down – either in a little notebook, or on another receipt. All we want is to keep track.

When you get home in the evening, allow 2 minutes for your finances and enter your day’s expenses into a spreadsheet (or anything similar like Microsoft Money, Quicken etc.). But make sure you enter them in a way that will allow you to easily compare figures over months. With all my failed budgeting attempts I compiled my expenses on a day-by-day basis, i.e. I would know that I spend $ 4 on coffee on Thursday, the 2nd of March. The result was that I never looked at these figures ever again. But that’s really not the point of tracking your expenses – the reason you do this is to figure out where your money is going. And if you will have to sit down an spend hours compiling figures at the end of the month, you’re simply not going to do it.

I have arranged my spreadsheet into months and categories, as shown below. This way I’m calculating the monthly running total straight away and can see immediately how I’m doing compared to the previous month.

The first line lists the month’s overall expenses, with the line underneath telling you how much money you should have left assuming the figures in the „Income“ category are correct. Further down, my expenses are broken down by categories (e.g. „Home“) and subcategories (e.g. „Mortgage“). My spreadsheet is actually based on a template that I downloaded from the Microsoft Office site. This way I didn’t have to worry about the spreadsheet details (for instance, all the sums it computes) while still being able to customise it enough to reflect my own personal lifestyle.

Roughly once a week I consolidate the spreadsheet with my online bank statement to include any regular expenses that are deducted by Direct Debit and to make sure that any card transactions are reflected accurately (both in the spreadsheet and on the bank statement).

As of today, I still don’t have an actual budget but I’m constantly trying to undercut expenses or increase my savings rate (which I have included in the spreadsheet as well) as compared to the previous month – therefore moving closer to a figure that accurately reflects my spending per category and that I could potentially use to draw up a budget.

The main reason I haven’t done this so far is that I knew my financial situation in 2007 would change dramatically and hence any budget that worked in March would be obsolete by July. And a budget I would set myself while being in New York (on a business trip for two months) wouldn’t be appropriate for the last quarter of the year when I’m back in London. But I’m nevertheless one step ahead for next year’s New Year resolutions!

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One of the mantras in the personal finance community is to have a budget in order to take control of your expenses and thus (hopefully) free up some money to save and/or invest in the long run.

Budgeting isn’t always easy and it’s especially hard if you don’t know where to start and have no idea where the money went that used to be in your account two weeks ago. This whole scenario gets even more complicated when you owe money, i.e. you’re in debt and various people/institutions expect payments from you on a regular basis.

I’ve just found an excellent starting point, that doesn’t just give you an idea where your money is going but also helps figuring out what you can afford given certain fixed costs. Make sure you check out the “State of Affairs Calculator” to get a better picture of your financial situation!

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Richard Jenkins @ MSN Money has written an interesting article on how to simplify budgeting. He basically argues that breaking a budget down into various categories (i.e. clothes, dining out etc.) is a waste of time, since in the end it doesn’t matter where you overspend - if you do. So to simplify his life, he’s adopted the 60:40 rule, where he immediately puts away 40% of his salary for retirement savings, long-term savings, short-term savings and “fun money” and pays all necessary bills from the remaining 60%.

While I agree that it doesn’t really matter on what items you overspend, I do believe that knowing exactly where your money ends up is definitely a good thing. Obviously, if you adjust your target level every month so that you’d technically never go over, then it’s a waste of time, but if you actually realise that you are wasting money on unnecessary things and set yourself a limit and stick to it, then having a budget can only be beneficial.

Having said that, while I do track my expenses at the moment, I don’t have a specific budget as such, since most of my expenses are still highly irregular. For example, at the beginning of the (academic) year I will have book expenses that I don’t even get close to later on. What I have realised though is that I’m wasting an amazing amount of money on coffee and lunch, which is definitely £40 I could save.

In any case I think that his 40% savings target (30% if you exclude the “fun money”) is maybe a little bit ambitious - reducing your annual salary by more than a third isn’t something that will go unnoticed. Especially after moving to London I will probably have to spend much of my money on the bare necessities like rent, tube and food. Nevertheless, I want to keep this figure in the back of my mind in order to compare my monthly savings to it - once I can actually put some money aside (i.e. not before July). Nothing wrong with aspiring to challenging goals…

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