9 Reasons Why You Are Not Saving Yet

Very many people do the bare minimum of saving, many more don’t save at all. Most people would like to be in a better financial situation but seem unable to muster the energy to find out what they can do to finally start saving and eventually achieve financial independence. Here are 9 reasons why you are not saving yet that may help you get on track and start moving towards a more rewarding financial situation.

1 You have not spent any time analyzing your spending

For those who find statistics, spreadsheets and meticulous review of accounts interesting it should be no problem to figure out where your money is going. For others, this is very painful and boring. In either case there are great tools out there that can help you visualize and find out what you spend your money on. Once you have a bigger picture you can begin to take steps to limit spending in some categories. In my opinion the best tools for getting a good picture of your spending patterns are those that automatically import bank data. Living in Iceland that would be an service called Meniga which automatically imports data from almost all banks in the country you have an account with.

After you have a better picture of your spending habits, you will have an easier time to figure out where you would like to cut spending. A word of caution though; if you don’t have a goal in mind (see step 2), you may not feel compelled to cut spending.

In general I find it useful to think about cutting spending by asking myself three important questions about the spending habit, number one and most important is whether cutting this spending will help us reach our financial goal quicker. Question number two is whether cutting this spending will result in me living a healthier life. I often find it very helpful to cut spending when it causes me to be more physically active, consume less calories or expose me to new skills that would be very useful to learn and know. The final question is whether this spending is actually an investment that will cause savings down the line. A good example would be acquiring tools to be able to do your own repairs around the home or how-to books on topics that, in the long run, will save you a lot of money and increase your skill set.

2 You have not created a financial end goal

If you don’t have a purpose driving your savings, your results will be lackluster. Before we had our goal of financial independence, saving felt like something you you should but it was not even close to central. We did not allocate large funds to our investments and did not accumulate nearly as much as we could have. All the things we spent our money on back then have faded from memory. It was only after we sat down and really thought about how we wanted to live our lives in the future that we  got motivated to think strategically about saving and investing. It felt easier to set aside not just a large part of our income, but a huge part of it after creating a vision of the future, a strong goal.

Whenever I transfer money at the beginning of the month to our investments or mortgage I have our vision in my head. I see myself having time for our child, and for myself. I have a hundred hobbies, but spending 8 – 9 hours a day in an office and then coming home and doing household chores leaves almost no time for any of them. Being freed from this is what drives me. Yes a brand new car would be nice but that is going to take me further away from my vision, not closer. Yes a weekend trip to a resort would be nice but that also would take me further away from my vision and not closer.

3 You don’t spend any time analyzing your investment options

This was definitely true of me (Sæþór) for a long time. In the US, most teenager’s financial education is rudimentary at best, so I was only trying to build credit, and save money. Both of those are good goals, and even doing so it put me ahead statistically of the majority of my peers, but I wasn’t doing either smartly. I took the first CC that came in the mail, waited for their own credit line increases rather than asking, and didn’t run everything through the card that I could, which is a common method in America for building up one’s credit score. With my savings, I put it only in a standard savings account, though I did shop around for the one with the best interest rate (still abysmally low).  If I had been smart I would have bought bonds, REITs, index funds, or even some stocks, but I was either unaware of those options, or they seemed more complicated than I could handle.

Equally when moving my savings from the US to Iceland, I did no research on historical exchange rates, which would have pointed to the timing being poor (I moved over my savings at an all time low exchange rate, that would actually have been fairly obvious a correction was coming in the short term, had I looked).

4 You dont think strategically about your life (small pain at the beginning for a reward)

This is a big one. Especially if you go from having little to no money as a teenager, to having the funds of a job without having to pay rent and other bills. You’ll find yourself with a plethora of funds, but equally many opportunities to spend it. It’s very easy to “grow into” any income increases.

Some examples of strategies I have thought up to save money, but required small pain at the beginning: We started cutting our own hair. I had to learn how to cut hair, find the right shaver/scissors to make the task easy, and then do it. In the five years since doing that for two adults and now our son, we have saved thousands of dollars. Another is working out at home. We knew with our son’s birth coming up, we’d need to quit the gym anyway for at least a period, but we didn’t want to stop exercising. So we got some at home weights and matts, and could cut out the monthly gym membership which was quite pricey. It takes more mental energy to get myself to workout, and I have to come up with the routines, but it’s saved us money. A third example is eating out. We used to go out at least one evening a week, but we could see that would add up in cost over the years, so now we go out much less often.

Sometimes an expendature is still worth it, and that’s ok. The important thing is to weigh the long term costs against the benefit it provides. We both love going to the movies, but that’s a weekly cost that adds up. We decided that was worth it, so we still go regularly. We did find that Tuesday nights are half priced, so we make sure to wait til then to see a movie, so we did identify some cost savings with a small change.

5 You have not come up with a strategy for reaching your financial end goal

6 You don’t have the right mind set for accumulating wealth (look at every (larger) expenditure as either something that will save you money or make money)

7 You have too many wants (change some of your wants from things to skills)

8 Risk aversion (double edged sword)

9 You are too comfortable


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Ice cream in Napoli - The ultimate indulgence

How Much Do Little Indulgences Cost

Calculate How Much Little Indulgences Cost You

Little indulgences are nice, but how much do little indulgences cost in the long run. A coffee before work, going out to lunch a few times a week, a restaurant visit a couple of times a week. Even more organized indulgences such as a cable subscription or a magazine? If you would take all your weekly coffee purchases and instead invest the money in a fund, how much money would that be after say 10 years? Use the calculator below to find out.

Indulgences Time Cost Calculator

If you are thinking about saving, one good way to look at cutting these little habits is asking yourself how much time it adds until you will achieve your financial goal, whatever that may be. For me, I think a lot about how to shorten the amount of time until we can become financially independent. I would like to become independent before our son reaches school age because at that time we will be much more restricted in where and when we can go and explore the world.

Let’s find out how much your little habit from the example above costs in terms of time:

Methods for Cuttings Little Expenditures

Another good way to cut spending and getting rid of some of these little habits is to come up with a substitute. Maybe you don’t need to go and buy a coffee, maybe you can make it yourself. Perhaps instead of having cable you can cut that entirely and focus on learning a skill instead using the numerous free videos there are online. I employ this tactic a lot in my life, not just because I like to save money but also because gaining skills and leveling up in life is important to me.

Some other ways to cut spending is to focus on spending that is damaging to you. Do you buy too much alcohol? It’s easy to justify cutting some of that. Do you eat too many sweets? Cut. Do you watch too much TV? Cut the channel subscriptions or even the TV itself and spend the time with family or friends instead. Find yourself taking a taxi too often? Consider bicycling or planning better. The list goes on. You can reinforce the spending cut by justifying it with supporting arguments such as health and time spent with family or on hobbies you love.

Above all else I think the most important thing you can do to start saving money is to sit down and actually come up with a financial goal and a way to reach it (also known as a “plan”). Check out our post on how we calculated our own financial end goal. It puts you in the mind set of having a project, a really valuable project. What could be more important than to spend as much time as you can on your family, hobbies you enjoy, traveling and generally enjoying life having reached financial independence? I myself absolutely love my work, but I do one kind of thing at work for 8 hours straight. I have so many other hobbies I would just love to dedicate more time to, but I can’t right now because more than half of my waking time goes towards work.

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Grape Angel

How We Started Saving 70% of our Take Home Salary

How we went from occasional savings to 70% a month

Agust and I were frugal before we met. I waited to get my driver’s license til 21 (most Americans get theirs the day they turn 16) to save on car payments, insurance, and gasoline, and was able to go into university with about $8,000 in my savings account. Ágúst has always been frugal at heart and does not have many material needs. He didn’t have a set financial goal for a long time until one day he did the mistake of co-signing a loan as a favor to a friend. Less than a year later the friend defaulted and Ágúst had to pay almost the entire loan himself. He intensely hated having that loan hanging over him so he made it his mission to pay it off as quickly as possible. After paying it off in a couple of years he kind of liked the idea of being debt free and started working on his student loan, which also disappeared in a couple of years. Right around this time he met Sæþór and kept saving a significant (yet far less than currently) part of his salary. Later this would become the down payment on our first mortgage.

For the first years we were together we didn’t have much of a budget. We simply tried not to spend too much, saved extra on our pensions, kept an emergency fund, and largely relied on being young and with good salaries rather than budgeting. We also got lucky in our life choices in that we moved to Germany during the height of the economic crisis in Iceland, and were saving Euros. When we moved back to Iceland we were able to take advantage of a very favorable exchange rate, and many people were looking to sell the houses in Iceland that they were upside down on. We needed to have at least 30% down for a loan and because of the specifics of our situation and the house we wanted, we needed just over 36% down in cash. At 29 this would have been impossible to save up in a short time, but thanks to our frugality and savings earlier in life it required only a bit of a final savings stretch. When we returned to Iceland we found a small shared flat for a good price and lived as frugally as possible to save up the final amounts for such a large down payment. After doing all of that we sort of continued saving in an aimless fashion. It did not even occur to us that you could save enough to live off the interest payments long before the ripe old age of 67 (and probably 70 by the time we get to that age). One day though we came across a very interesting blog that was all about self reliance and you guessed it, early retirement, that blog is called Mister Money Mustache.

The mind set of early retirement and how we started saving 70%

The concept is simple, much like losing weight, one has two options. Burn more calories or eat fewer. In the same way eating fewer takes less actual effort (but more will power) Mister Money Mustache suggests spending less money on things that are pure “wants” and more on things that improve your skills, save you money or optimally, earn you money. Also, the best way to save more money is to earn more money if you can so feel motivated to go and get that pay rise. He has many other areas of advice such as self reliance and improving one’s skills, and smart investing, but his site was the first I ever read that showed how many changes a person can make with their current salary. It made total sense, and we decided to do a total overhaul of our spending and saving. The idea of being retired by 40, when our son will be 7, became our goal. This is a perfect age to be free to go on adventures, pursue new hobbies, or be invested time wise in whatever he is interested in beyond the level of having a 9-5 job will allow. Especially in light of our second blog subject, building a house in the mountains of Virginia, being able to spend a month or two in the mountains without the worry of planning time off or income will enable a really engaging childhood for him and for us to enjoy it with him.

First, we went through all of our monthly expenses to see where we could save. We consolidated our house and car insurance, we hunted for the best phone + internet plan, we decided to eat out far less often (we were averaging once a week) and made a per day food allowance. We also set a savings goal: 70% of our take home pay a month, transferred at the beginning of each month. We also started trying to add as many skills as we could that would save us money in the long run. From learning how to do construction and renovations to shopping 2nd hand for clothes when possible, to selling used things rather than taking them to the dump. We are lucky that we never really got too much satisfaction in life from consumer spending, so it wasn’t much of a change, just small sacrifices that aren’t missed at all. Early retirement seems like the most luxurious thing we could ever buy. The new hobbies and skills we have learned more than make up for any missed entertainment from more casual spending.

After running the numbers, it made far more sense for us at that particular time (right after the crash) to pay off our mortgage early rather than put that money in a savings account, so we did that. One reason we purchased the house we live in now is because it has a guesthouse in the garden. Originally a garage, the previous owners converted it into a home office space. We took the first few months, spent around $4,000 to renovate it into a full guesthouse, complete with tiled shower. We had to learn how to install drywall, plumbing, tiles, kitchen cabinets, and wooden floors. We then took to renting it out over AirBnB but have since changed to long term rentals after seeing how much AirBnB has messed with the local rental climate. We continued to pour our extra savings into the mortgage, and as of late 2015, we are mortgage free on our primary residence. At that point it made sense to buy another apartment, so we shopped around and did just that, and used our new construction skills to renovate the place. We also replaced the entire upstairs bathroom in our primary house, and redid the flooring in our kitchen. All of these were newly learned skills, where the projects took up time and were fulfilling hobbies, and increased the value of the house while we only needed to pay for the supplies. Additionally our skillset is that much greater, enabling future projects such as the Virginia mountain house.

Final advice

If there’s one piece of advice I’d give you it is that you should look at spending (larger amount of) money asking yourself the following question: will it save me money in the long run or will it earn me money? In other words, is it a good investment? It’s also worth wondering how much early retirement is worth to you? Are you ready to forgo buying that second car if it means you get financial freedom months or years earlier? Do you really need that entertainment package when it’s going to cost you $10,000 over a 10 year period?

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Another Extra Mortgage Payment

Today I made another extra mortgage payment on our big loan. It’s far less than usually because. The reason for that is that we are still waiting to see how much the repairs on the rental property are going to cost and also because we are expecting a bill from the tax authorities for a few thousand dollars any day now.

We decided to split what we would usually put towards the mortgage in two, half of it went towards the principal of the mortgage while the other half went into our emergency savings account. It’s nice to see it swell a bit. This month, we are only paying an extra $1,462 / 182,692 ISK.

Paying extra on our mortgage using our online bank
Paying extra on our mortgage using our online bank

In total we saved $2,923 / 365,384 ISK, which is 50% of our income. That’s too slow for my taste, I’d like to see that number at 70%, although according to this early retirement calculator, we just might reach our goal if we play everything correctly before we reach 40.

As usual, we were hit by some unexpected expenses and some expected expenses this month. The expected expense is our trip to the US to visit relatives and also the survey the land we just invested in. We’re going out there to meet with a representative of the Virginia Health Department to get a building permit and also with a well and septic system contractor to lay out the location of the house we’re going to build as well as the well and the septic system. You can read more about our project on our house building blog.

The unexpected expense was a $1,000 / 125,000 ISK bill from the tax authority. Apparently we forgot to include some freelance invoices in our tax return and are now being charged a penalty as well as the missing tax. This was a pure oversight on our half. We really need to get better about organizing invoices and keeping track of tax issues. I’m on that.

Success! And poor English.

Changes in our emphasis

After the latest renting disaster we started thinking that it might be a good idea to diversify. We have very little liquid cash on hand which is not generally very good. We have been thinking really hard about what exactly we can put some of our money in and so far the only other thing we can think of is either Iceland state bonds or the Icelandic stock market. Both of those do not sound very appealing so for the time being, we’re putting it into a high-interest savings account. They are actually quite good (for the time being) with interest rates around 4.6%

Once the capital controls are released (in Iceland, since the financial crisis, you can’t transfer money out of the country). Were were thinking about investing in real estate REITs. These are special financial constructs that invest in real estate only, such as buying office buildings and renting to companies or buying shopping centers and renting to retail companies. We can only start to fully think about how we want to diversify when we see some movement towards the Icelandic government lifting the capital controls.


The current tally

Whenever the last post is in a previous month I’ll include the repayment tally like the one below. I’ve fixed the interest rate at 1 USD = 125 ISK (the average February rate for the last 5 years):

  • Assets: $460,477 
    • Real estate: $455,506 / 56,938,190 ISK
    • Cash: $4,867 / 608,394 ISK
    • Stocks: $104 / 12,966 ISK
  • Debt: -$127,942 
    • Mortgage: -$127,868 / -15,983,531 ISK
    • Credit Cards: -$74 / -9,295 ISK

Sum: $332,535 (Up 1.1%)


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How Expensive is Iceland

13 comparisons between Reykjavik, San Francisco and the rest of the USA

How expensive is Iceland? Iceland has a reputation of being an expensive place to live in, but just how expensive and compared to what? I am going to compare Reykjavik to an expensive place in the US (San Francisco) and the USA as a whole when possible to answer this question.

It’s always a bit tricky to compare two places that are using a different currency. I’ll be using the average February exchange rate for the last 5 years which is 1 USD = 125 ISK.

1 Cost of living, Singles: Reykjavik is 5.3% more expensive than San Francisco and 33% more expensive than an average small city in the US


According to the Ministry of Welfare’s cost of living calculator, a single person in Reykjavik spends $22.712 / 2,838,972 ISK a year, that’s $1,893 / 236.581 ISK a month, on necessities which includes everything except housing and taxes.  That’s a bit more expensive but pretty comparable to living in San Francisco where your same single person has to dish out $21,564 / 2,695,500 ISK each year, or $1,797 / 224,625 ISK a month.

The source for the US numbers is from the Economic Policy Institute’s 2015 Family Budget Calculator, but since they don’t calculate the average for the whole of the US, I chose a small city in an average state, Charlottesville Virginia. Living there as a single person is going to cost $17,064 / 2,133,000 ISK each year or $1,422 / 177,750 ISK a month.

The Economic Policy Institute’s calculator includes housing and taxes but since the Icelandic one does not, I’ve remove those entries from the values for San Francisco and Charlottesville.

Surprise, Reykjavik is the most expensive, beating San Francisco for that dubious honor. Here’s the line up from most expensive to least expensive:

  1. Reykjavik: $1,893, 5.3% more expensive than San Francisco, 33% more expensive than Charlottesville.
  2. San Francisco: $1,797, 5.0% less expensive than Reykjavik, 26% more expensive than Charlottesville.
  3. Charlottesville: $1,422, 25% less expensive than Reykjavik, 21% less expensive than San Francisco.

Worth noting is that you have to pay out of pocket for various things in the US which is provided for free or heavily subsidized in Iceland such as health care, education, childcare, some forms of insurance etc. Property taxes are also much lower in Iceland although the income tax is higher as well as the VAT (a form of sales tax).

Sources: Economy Policy Institute, Iceland Ministry Of Welfare.

2 Cost of living, Family of Four: Reykjavik is 4.6% less expensive than San Francisco but 8.2% more expensive than an average small city in the US

Reykjavik family

What about the children? Does having children change the calculations in favor of another place? In San Francisco, a family of four (2 adults and 2 children) has to spend, according to the same calculator as in step 1, $55,824 / 6,978,000 ISK a year for necessities or $4,652 / 581,500 ISK per month. The same family will have to dish out  significantly less in Charlottesville, Virginia or $49,140 / 6,142,500 ISK a year, $4,095 / 511,875 ISK a month. The same numbers for Reykjavik are $53,202 / 6,650,280 ISK each year, or $4,434 / 554,190 ISK a month. Let’s line them up.

  1. San Francisco: $4,652, 4.9% more expensive than Reykjavik, 13% more expensive than Charlottesville.
  2. Reykjavik: $4,434, 4.6% less expensive than San Francisco, 8.2% more expensive than Charlottesville.
  3. Charlottesville: $4,095, 12% less expensive than San Francisco, 7.6% less expensive than Reykjavik.

Clearly having children in Reykjavik evens the numbers a bit, this is where the welfare state starts kicking in.

Sources: Economy Policy Institute, Iceland Ministry Of Welfare.

3 Income: Income in Reykjavik is 7% higher than the median US income, but 26% less than the San Francisco median income

Reykjavik income

The median San Francisco household income is $75,604 / 9,450,500 ISK, that’s not enough to afford the median house from step 3. The national median US household income is somewhat less at is $51,939 / 6,492,375 ISK.

Iceland Statistics does not calculate median income per household but per working age person so we need to find the definition of what a “household” is and how many working individuals that would make in the US. According to the US Census there are 2.62 persons to a household. Of the whole population, 24% were under 18 so we won’t count them. That leaves  1.99 working age individuals per household. The labor force participation stands at 62.7%. Based on these numbers there are  around “1.25” employed individuals per US household. Using the Icelandic way of measuring income, that makes $60,483 / 7,560,375 ISK per working individual in San Francisco and $41.551 / 5,193,900 ISK for the median US worker.

Unfortunately, Iceland Statistics does not differentiate income by region so we’ll have to use the income numbers for the whole of Iceland. I would expect the income in the capital to be a bit higher than the national median.

Iceland has a much higher labor force participation rate than the US at 80.1% and a different household composition. In Iceland, a household is composed of on average 1.6 working age adults. With labor force participation at 80.1% that makes 1.28 working adults per household. The median income per fully employed individual is  $43,584 / 5,448,000 ISK. Multiplying that by 1,28 to get the household income comes to $55,788 / 6,973,440 ISK, pretty comparable to the median US. This income is, incidentally, also not enough to buy that house from step 4.

Let’s line it up:

  1. San Francisco: $75,604, 36% more than Reykjavik, 46% more than the US median.
  2. Reykjavik (Iceland): $55,788, 26% less than San Francisco, 7.4% more than the US median.
  3. US Median: $51,939, 31% less than San Francisco, 6.8% less than Reykjavik.

Sources: US Census Bureau, Iceland Statistics

3 Housing Cost: Reykjavik has the lowest housing cost, 66% lower than San Francisco  and pretty much on par with the US average (0.4% lower)

Reykjavik housing cost

Using Numbeo.com’s international cost of living calculator and adding together utilities and rent for a 85m2 / 914 ft2 apartment outside the city center.

In San Francisco, rent for a 3 bedroom apartment outside the city center is going to cost you on average around $4,648 / 581,000 ISK a month. That’s simply crazy. Utilities for a modest apartment are a reasonable $117 / 14,625 ISK a month though. Combined that’s $4,765 / 595,625 ISK a month.

On average you can expect to pay $1,467 / 183,375 a month for a 3 bedroom apartment / house in the US, and $148 / 18,500 ISK for utilities a month. Combined that’s $1,615 / 201.875 ISK a month on average in the US.

In Reykjavik you’re going to spend $1,500 / 187,500 ISK for that 3 bedroom apartment outside the city center and $109 / 13,625 ISK on utilities. Combined that’s $1,609 / 201,125 ISK.

Let’s line the numbers up:

  1. San Francisco: $4,765, 195% more than the US average, 196% more than Reykjavik.
  2. US average: $1,615, 66% less than San Francisco, 0.4% more than Reykjavik.
  3. Reykjavik: $1,609, 66% less than San Francisco, 0.4% less than the US average.

Sources: Iceland Statistics, Economic Policy Institute

4 House Prices: Reykjavik is 32% less expensive than San Francisco but 205% more expensive than the US median

Reykjavik house prices

In San Francisco, the median (50% are more expensive, 50% are less expensive) house price is $841,600 / 105,200,000 ISK. Compare that to a very reasonable national US median of $188,900 / 23,612,500 ISK. Icelandic Statistics does not calculate median home prices so I took it upon myself to write down every single detached single family home for sale on the most popular online real estate advertising platform and calculated the median. The median price for a single family dwelling in Reykjavik is $576,000 / 72,000,000 ISK. Not quite as expensive as San Francisco but way more expensive than the national US median.

I chose single family dwellings because even though in Iceland you have a much larger selection of condominiums, duplexes etc. that you can get for a lot less than a single family dwelling, I believe the most common housing form in the US is a single family unit so to keep the comparison more accurate that’s what I chose. Just as a note, a good condominium/multiple units housing can be had for around $280,000 / 35,000,000 ISK in Reykjavik. Another interesting factoid; house prices in Reykjavik have been marching up for a while after taking a nose dive during the financial crisis. Compared to the income index, we’re roughly at the same place we were back in 2005.

Here’s the line up:

  1. San Francisco: $841,600, 46% more expensive than Reykjavik, 346% more expensive than the US national median.
  2. Reykjavik: $576,000, 32% less expensive than San Francisco, 205% more expensive than the US national median.
  3. US national median: $188,900, 76% less expensive than San Francisco, 67% less expensive than Reykjavik.

Sources: Business Insider, Mbl.is

5 Mortgage Payments: Taking a loan in Reykjavik for the house in step 4 is 2.6% more expensive than in San Francisco and 244% more expensive than on average in the US

Reykjavik mortgage payments

Paying for that median home mortgage (30 year loan) will set you back $3,684 / 460,500 ISK a month in San Francisco. The same median house in the US is only a fraction of that or $1,098 / 137,250 ISK. Using Iceland’s biggest bank’s online mortgage calculator, in Reykjavik you have to shelve out $2,787 / 348,377 ISK a month. Please keep in mind that the loans for each location are for the house prices defined in step 4, so you are getting a much more expensive house in San Francisco than in Reykjavik or the US average.

There’s a catch to the Icelandic mortgage. Icelandic loans are inflation indexed. In essence this means that every month the bank applies the current inflation percentage to the principal and lends it to you, effectively adding it to the principal, it’s sort of like a loan where you don’t have to pay all the interest up front each month to begin with. This causes the loan principal to increase rather than decrease for more than half of the lifetime of the loan. The only reason these loans ever get paid back is because the repayment is also inflation indexed. At the end of the loan, with an average 2% inflation, you will be paying back $4,770 / 596,298 ISK a month. Let’s use the average of those two numbers, $3,779 / 472,336 ISK and hope your salary has kept up with inflation during those 30 years.

To add insult to injury, mortgage interest is not tax deductible in Iceland. There’s a very good reason to pay back your loan as quickly as you can here, even though this is exceedingly rare. Clearly, taking and keeping a mortgage in Iceland is a poor financial decision.

Lets line them up:

  1. Reykjavik: $3,779, 2.6% more expensive than San Francisco, 244% more expensive than the US median.
  2. San Francisco: $3,684, 2.5% less expensive than Reykjavik, 236% more expensive than the US median.
  3. US median: $1,098, 71% less expensive than Reykjavik, 70% less expensive than San Francisco.

Sources: Business Insider, Landsbankinn

6 Income Taxes: Reykjavik has a heavier tax burden but it is unclear if you are getting a better deal in Reykjavik than the US considering the small difference and the services you get for your taxes

Reykjavik income tax

Iceland is much more of a welfare state than the US and this reflects the most in taxes. One thing to note about the Icelandic income tax system is that there are practically no deductions, you pay the amount stated, almost nothing is deductible. There’s no annual fat check from the tax authorities, in fact half the time you owe them, the other half there’s a meager $20 direct deposit or something similar.

Let’s calculate taxes based on the median Icelandic income of $55,000 / 6,875,000 ISK. We’ll be using the state tax laws of California for San Francisco and Virginia for Charlottesville.

In Reykjavik (and the rest of Iceland), using this online income tax calculator provided by the national tax authority, a person making $4,583 / 572,875 ISK a month (that’s $55,000 / 6,875,000 ISK annually) will take home $3,161 / 395,094 ISK. Note that this includes a lot of services such as child care, health care as well as pension savings.

Using this income tax calculator for California, an individual making $4,583 / 572,875 ISK a month will take home $3,466 / 433,250 ISK. This does not include health care insurance though. On the other hand, it also does not include any deductions. Also consider that the Icelandic taxes include local (municipality) taxes whereas the California calculations do not. In light of all this I’m going to add 50% of a modest health care insurance to the tax burden, or $137 (source), bringing the take home amount in San Francisco to $3,329 / 416,125 ISK.

Using this income tax calculator for Virginia and applying the same health care premium, your take home pay is slightly less at $3,272 / 409,000 ISK.

Here’s the tax burden line up:

  1. Reykjavik: $1,422, 8.4% more than Charlottesville, 13.4% more than San Francisco.
  2. Charlottesville: $1,311, 7.8% less than Reykjavik, 4.5% more than San Francisco.
  3. San Francisco: $1,254, 11.8% less than Reykjavik, 4.3% less than Charlottesville.

7 Gasoline prices: Gas in Reykjavik is 229% more expensive than the average US gas price, 124% more expensive than the average San Francisco price

Reykjavik gas prices

Gas prices are at $2.5 per gallon in San Francisco and $1.7 on average in the US. Of course, no one outside the US will understand what that means so internationally, the price per liter of gas is $0.66 / 82 ISK in San Francisco, $0.45 / 56 ISK on average in the US. Compare that to an average price of  $1.48 / 185 ISK per liter in Reykjavik (that’s $5.61 / 701 ISK per gallon, I can hear you gasp Lynne).

  1. Reykjavik: $1.48/L ($5.61/G), 124% more expensive than San Francisco, 229% more expensive than the US average.
  2. San Francisco: $0.66/L ($2.5/G), 55% less expensive than Reykjavik, 47% more expensive than the US average.
  3. Average US: $0.45/L ($1.7/G), 70% less expensive than Reykjavik, 32% less expensive than San Francisco.

Sources: San Francisco Gas Buddy, Orkan, ÓB, Shell, N1

8 Dining: Reykjavik is 35% less expensive than San Francisco but 30% more expensive than the US average

Reykjavik dining

Dining at a mid-range restaurant in San Francisco is going to take you back $75 / 9,375 ISK, which is double the national average of $37 / 4,625 ISK. In Reykjavik you can get a very decent mid-range restaurant deal at around $48 / 6,000 ISK. Keep in mind that the number of tourists in Reykjavik has exploded in the last few years, driving up restaurant prices. Also of note is that the price you see on the menu is the final price, including tipping. Tipping is not customary in Iceland as waiters are other staff are paid a decent wage. Let’s line it up

  1. San Francisco: $75, 56% more than Reykjavik, 102% more than the US average.
  2. Reykjavik: $48, 35% less than San Francisco, 30% more than the US average.
  3. US average: $37, 51% less than San Francisco, 23% less than Reykjavik

Sources: Numbeo.com, various Icelandic restaurant home pages (online research)

9 Alcohol prices: Reykjavik is a very expensive place to buy booze in, 115% more expensive than San Francisco, 143% more expensive than the US average

Reykjavik alcohol prices

Alcohol prices in Iceland are very high. There are two main reasons for this; government policy and shipping/import costs. It has been a part of Iceland’s public health policy to restrict both access to alcohol as well as keep it expensive through taxation. Let’s look at some numbers. Let’s take a standard 500ml glass of domestic beer and a 750ml bottle of Absolut vodka. In San Francisco, a reasonable glass of beer is $6 / 750 ISK. That same glass of beer would cost you on average $4 / 500 ISK in the US. In Reykjavik a glass of beer costs $8 / 1,000 ISK.

What about something stronger. In San Francisco you can expect to pay $20 / 2,500 ISK for a 750ml Absolut Vodka bottle. On average in the US, Absolute Vodka costs pretty much the same, $19 / 2,375 ISK. In Reykjavik you will have to shelve out a whopping $48 / 5,999 ISK. This is the reason why I never buy alcohol in Iceland but prefer to make my own.

Let’s create a shopping basket containing one 500ml glass of domestic beer and a 750ml bottle of Absolut Vodka and line them up:

  1. Reykjavik: $56, 115% more than San Francisco, 143% more than the US average.
  2. San Francisco: $26, 54% less than Reykjavik, 13% more than the US average.
  3. US average: $23, 59% less than Reykjavik, 12% less than San Francisco.

Sources: Numbeo.com, Vínbúð, ABC Stores

10 Groceries: Reykjavik is a bit pricey, but still 14% less expensive than San Francisco, but 30% more expensive than the US average

Reykjavik groceries

Food is definitely more expensive in Iceland than in the US. It follows logically from its remote and isolated location. Most things have to be shipped in. But why? One thing you have to realize is that Icelandic agriculture is incredibly marginal. Being just south of the arctic circle, we have long (albeit mild) winters with little sunlight. That means for the majority of the year, nothing will grow here without a lit up greenhouse (which is much more expensive). As for the summers, the temperature never gets really high enough to support a fast growth rate. For these reasons Icelandic agriculture has historically and still is mostly about growing grass to feed animals. We turn something that does grow relatively easily (grass) into protein, that is meat and dairy. As a fun fact, Iceland can only support one meager potato crop a year. I even remember a few years when the potato crop almost completely failed because of summer frosts.

The US on the other hand has some of the most productive land and favorable growing climates in the world, not to mention the transportation infrastructure where nothing has to be shipped over oceans. No wonder that food in the US is cheaper than on a frigid island in the middle of the north Atlantic.

To compare food prices I’m going to create a shopping basket composed of ingredients you’d need to make a simple chicken dinner; chicken breasts, peppers, cheese and butter.

Here’s the ingredient list for San Francisco; Chicken: $13.77 per kilo ($6.25 per pound), cheese: $15.65 per kilo ($7.1 per pound), peppers: $6.81 per kilo ($3.1 per pound), butter $10.56 per kilo ($4.79 per pound). To make the calculations easier let’s get a kilo of each ingredient. Our whole (and a bit unnatural) shopping cart would be $46.74 / 5,843 ISK in San Francisco.

Here are the same ingredients with average US prices: Chicken $8 per kilo ($3.63 per pound), cheese $9.59 per kilo ($4.35 per pound), peppers: $5 per kilo ($2.28 per pound), butter: $8.26 per kilo ($3.75 per pound). Our average US shopping basket costs $30.85 / 3,856 ISK.

Here are the same ingredients in Reykjavik; Chicken: $16 per kilo ($7.26 per pound), cheese: $13.88 per kilo ($6.3 per pound), peppers: $5.47 per kilo ($2.48 per pound), butter: $4.99 per kilo ($2.26 per pound). Our shopping basket in Reykjavik costs $40.34 / 5.043 ISK.

Let’s line them up:

  1. San Francisco: $46.74, 16% more than Reykjavik, 52% more than the US average.
  2. Reykjavik: $40.34, 14% less than San Francisco, 30% more than the US average.
  3. US average: 30.85, 34% less than San Francisco, 24% less than Reykjavik.

Do take into account that Iceland has one of the lowest use of animal husbandry antibiotics use in Europe, which is already much lower than in the US. Also the farms in Iceland are much smaller than the ones in the US. We still don’t have factory farms over here.

Source: United States Department of Agriculture, Iceland Statistics, Online Research, Shopping Research

10 Childcare: Reykjavik is by far the least expensive option, whopping 84% less expensive than San Francisco and 73% less expensive than the US average

Reykjavik childcare

To compare childcare costs I’m going to compare preschool prices for a 4 year old child attending 5 times a week with meals included. A reasonable price for preschool in San Francisco is quite high at around $1,300 / 162,500 ISK.

On average in the US, a price somewhere around $750 / 93,750 ISK is the norm.

In Iceland, a child is eligible for preschool between the ages of 2 – 6 (just before school). If there’s a pressing need, the child can be as young as ~10 months. Preschools have to provide food as well and the vast majority of children go there 5 times a week. The city of Reykjavik runs most of the preschools within the city limits and charges a unified amount which is currently $202 / 25,280 ISK. Private preschools exist but get most of their funding through the city.

Let’s line them up:

  1. San Francisco: $1,300, 73% more expensive than the US average, 544% more expensive than Reykjavik.
  2. US average: $750, 42% less expensive than San Francisco, 271% more expensive than Reykjavik.
  3. Reykjavik: $202, 84% less expensive than San Francisco, 73% less expensive than the US average.

Sources: Online research for San Francisco, National Association of Child Care Resource & Referral Agencies, Reykjavik City

11 Health care costs: Welfare Reykjavik wins the prize, 90% less expensive than San Francisco and 87% less expensive than the US average

Reykjavik health care

The average monthly health insurance premium for a person living in San Francisco is $438 / 54,750 ISK. Now that’s not the whole story because whenever you do have to go see a doctor or need surgery or any medical services you have to pay a part of it out of pocket. The average out of pocket expenditure in San Francisco is around $330 / 41,263 ISK a month, which brings the monthly total health care cost to $768 / 96,000 ISK. The average cost of health care insurance in the US is $293 / 36,615 ISK a month, with average out of pocket expenses at $275 / 34,373 ISK bringing the US average total health care cost to $568 / 71,000 ISK.

There are no insurance premiums in Iceland, it is all included in your taxes. The only health care expenditure is the co pay which is capped at a certain amount. Using the Ministry of Welfare’s cost of living calculator we can see that the average single person spends a total of $76 / 9,472 ISK a month on all health care related services.

Let’s line them up:

  1. San Francisco: $768, 35% more than the US average, 911% more than Reykjavik.
  2. US average: $568, 26% less than San Francisco, 647% more than Reykjavik.
  3. Reykjavik: $76, 90% less than San Francisco, 87% less than the US average.

Source: WebMD, Iceland Ministry of Welfare, SmartAsset.com, Kaiser Family Foundation

12 Employment: Reykjavik has the lowest total unemployment, 71% less than the US average and 39% less than San Francisco

Reykjavik employment

Normally, the government calculates the unemployment rate by performing a survey and asking people if they are employed and if not, if they are looking for a job. If they are not actively looking, they will not count towards the unemployment rate. To get a clearer picture of exactly how many people are not working it would be helpful to get an unemployment number that shows exactly the percentage of working age individuals that are not working. This unemployment number is always going to be higher than the one usually provided and will include people that can’t work, disabled people for example, but also people that have given up on looking for a job.

The labor participation rate in San Francisco is currently 88%, much, much higher than the US average. The unemployment rate in December 2015 is at 3.3%. Combining these numbers we arrive at a total unemployment rate of 3.75% which is pretty good.

The picture for the whole of the US is not as rosy. With labor participation at only 63% and unemployment at 5% in December 2015, the total unemployment rate is 7.9%.

Iceland in general has a much higher labor participation rate than the US average. Unfortunately Iceland Statistics does not provide labor participation rates for Reykjavik alone so we’ll have to go with the national one. The labor participation in Reykjavik is probably higher than the national one because it is the capital and there are regions outside the city that are not doing as well economically. For the whole of Iceland, the labor participation is 81%, unemployment was 1.9% in December 2015, taken together the unemployment rate is 2.3% nationally.

Let’s line them up:

  1. US average: 7.9%, 111% more than San Francisco, 243% more than Reykjavik.
  2. San Francisco: 3.75%, 53% less than the US average, 63% more than Reykjavik.
  3. Reykjavik: 2.3%, 71% less the US average, 39% less than San Francisco.

Sources: Iceland Statistics, United States Census, State of California Employment Development Department

13 Income Equality: Reykjavik is much more egalitarian than San Francisco and considerably more egalitarian than the US average

Income equality in Iceland

The Gini coefficient is a measure intended to represent the income distribution of a nation, and is the most commonly used measure of inequality. A Gini coefficient of zero means perfect equality where everyone has exactly the same income. A Gini coefficient of one expresses complete inequality where only one person has all the income and all others have none.

California as a whole has one of the lowest Gini coefficient of all US states (meaning it is more equal) at 0.471, San Francisco is a somewhat less equal than the rest of California and has a Gini coefficient of 0.51.

The average US Gini coefficient is a bite more equal at 0.45.

Perhaps not surprisingly, Iceland has a far more equal wealth distribution, having a Gini coefficient at 0.28.

Let’s line them up:

  1. San Francisco: 0.51, 13% less equal than the US average, 82% less equal than Reykjavik.
  2. US average: 0.45, 12% more equal than San Francisco, 61% less equal than Reykjavik.
  3. Reykjavik: 0.28, 45% more equal than San Francisco, 38% more equal than the US average.

Sources: United States Census, Wikipedia, The World Bank


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Reykjavik in the evenings

Rental Property Disasters

No investment is safe. Even storing physical cash is not without risk (from both inflation, theft, fire etc.). Buying property and renting it out is also not risk free. The most obvious thing people think about when they hear the words rental property disasters are poor tenants.

Poor tenants

Poor tenants come in a varying grade of bad. The most benign bad tenant does pay his or her rent every month but handles the property very roughly. The worst kind of tenant is on the other side of the poor spectrum, both not paying rent and damaging the property.

We have been very fortunate with our tenants. They always pay on time and treat the properties well. We’ve decided to foster a positive and rewarding atmosphere. For Christmas we gave our tenants a 10% discount on the rent (a significant sum here in Reykjavik) and we always try to respond promptly and sometimes preemptively to complaints or repair requests. In this way we hope to minimize risk. The risk being resentment and the damage that can potentially cause.

Unexpected maintenance

There are other types of rental property disasters when owning and that has to do with the property itself. I’m talking about maintenance and in some cases, the lack of maintenance that causes major repairs to be necessary down the line.

Unfortunately we have been hit with the second type of rental property problems. Like almost all houses in Iceland, the rental property we bought is a 100% rebar reinforced concrete building. They do last a very long time but not indefinitely as water and the constant thawing and freezing conditions in Reykjavik can slowly corrode away the concrete and strike at the very core of the outer walls. When we bought the apartment we were aware that there was going to be some maintenance work necessary for the outside of the house and we even got an inspector to inspect this for us. However, the damage turned out to be more extensive than anticipated (not just surface damage).

Our situation

The house association spoke about starting repairs early last year. Nothing happened last year so we decided to take matters into our own hands and contacted a specialist in this field who, offhandedly quoted $150,000. Of course we don’t have to pay all that money ourselves. Our apartment is only 16% of the whole house so our share would be $24,000. It’s manageable but my main worry now is that I need to convince the other owners (who own a larger share of the whole house) that this needs to happen right now. I’ve asked for a meeting next week where I am going to try to convince everyone that if this does not taken care of right away, they may be looking at irrecoverable damage and that they will be sitting on a worthless property. In any case I am worried that it might be too late already.

The next thing we will have to do after everybody (or at least the majority) is on board is to secure a loan on behalf of the house association while at the same time we need to have the property inspected thoroughly for this particular kind of repairs and collect quotes. Then when everything is ready we should have the repairs started as soon as possible, even next month if at all possible.


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Reykjavik Pond - Lots of Real Estate

Our Financial End Goal

Before writing many more posts on this site I think it would be helpful if we sat down and defined what it takes to be able to declare financial independence. I have to be honest and tell you that we have not actually done this thoroughly enough. Writing this post will be exactly what we need to define our financial end goal in more detail.

To be able to know how much you need to save to retire, you first need to know how much money you will need every month. Almost all financial advisers would tell you that your retirement earnings should be a percentage of your current income. I don’t find that particularly helpful. I think it’s much more helpful to calculate based on how much you actually need (or want) per month. With that in mind let’s jump right into a monthly “needs” calculation:

  1. Food: $750 / 95,000 ISK
  2. Utilities: $190 / 24,000 ISK
  3. Property taxes: $390 / 50,000 ISK
  4. Maintenance: $395 / 50,000 ISK
  5. Insurance: $160 / 10,000 ISK
  6. Transportation: $155 / 20,000 ISK
  7. Hobbies and life:  $700 / 90,000 ISK
  8. The unexpected aka the buffer: $400 / 50,000 ISK

Sum per month: $3,140 / 398,309 ISK

That’s a bit more than I thought it would be but I’m also being rather cautious. We currently spend maybe 1/2 to 2/3 this much every month. I’d rather be safe than sorry though.

Lets break the needed income into revenue from savings or rental property. Our current plan is to buy or build real estate to rent out. We currently have 2 properties, planning for the 3rd one:

  1. Gross: Apartment in Reykjavik rent: $1,060 / 135,000 ISK
  2. Gross: Guesthouse in Reykjavik rent: $630 / 80,000 ISK

For each rental property we have to pay 17% tax and then there’s always some maintenance. It’s very difficult to plan maintenance but a good rule of thumb is that you should estimate maintenance as 1% of the purchasing price of your property annually. Since these are rental properties the number should be a bit higher. In our case it turns out to be 22% of the rent so taken together with taxes it comes to 39%, so after taxes our rental income looks like this:

  1. Net: Apartment in Reykjavik rent: $647 / 82,350 ISK
  2. Net: Guesthouse in Reykjavik rent: $383 / 48,800 ISK

For a total sum of  $1,030 / 131,150 ISK, so we still have $2,110 / 268,772 ISK to go! That’s 3 more small apartments. Some more effort is needed to make this work. We only have two options: settle with less money monthly or increase the time range. Buying 3 more small apartments is going to take 9 years of monthly $3,900 / 500,000 ISK payments. By that time we will be slightly older than 40 (43). Not that far off though. It’s quite a generous monthly retirement paycheck if you ask me, way more than we currently spend even in December which is our most expensive month.

Looking at the numbers I realize that the rent is generating a very comfortable 5.5% return on investment after taxes. That’s much more than we would ever see on a savings accounts. It’s also considerably more than I can see on any of the investment fund options available here, at least the ones that are relatively safe. We will not invest in risky investment options, period. I can still remember relatives and friends loosing all their savings during the financial crisis, only because they had invested their savings in stock, index or money market funds. The domestic stock market did not just take a little dive like in the US, it was wiped out!

Lets see if we figure something out or realize an error in our calculations in the coming posts that will enable us to reach our financial freedom goal earlier than by 43.

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Paying Extra on Our Mortgage

Today I am going to go to the bank. I’m paying extra on our mortgage. $2,726 to be exact, that’s 350,000 ISK in the local currency. By going to the bank I mean doing it at my computer, at work, during lunch. Here’s what it looks like.

Paying extra on our mortgage using our online bank
Paying extra on our mortgage using our online bank

It’s a bit less than we normally do. Our plan is to make regular monthly payments of $3,850 (500,000 ISK), and ideally we’d like to make payments of $5,000 (650,000 ISK). There are a couple of reasons why we are paying less than we would like to. The main reason is that I’m currently the only one working. Ben is doing some freelance here and there but his main job is to take care of Daníel, which is a full time job with freelance on top.

Another reason for is that we seem to keep getting hit with unexpected expenses almost every month, running 6 months now. This latest one is a huge hot water utility bill (yes, hot water is delivered to homes in Iceland and is used for heating and general warm water uses). We ourselves use hot water with care. I suspect it’s our tenant that’s blasting hot water through the radiator system. We made one big mistake when we rented out our guest house and that is we didn’t make utility payments a part of the monthly rent. In the future we will make sure that the utility expenses are included and reflect the guest house’s share of the total square area. This will encourage people to use resources more wisely. In any case it’s too late for the current tenant for now but you always learn.

Success! And poor English.
Success! And poor English.

Why pay down the mortgage?

Why are we paying extra on our mortgage rather than investing in stocks or putting our money in a savings account? There are several in our eyes excellent reasons for this. The number one is security. Investing in real estate is one of the few investments that survived the financial crisis in 2008. The whole stock market collapsed and I’m not just talking about it going down by several percentage points, I’m saying that most (if not all) of the companies listed there and all the funds traded there went bankrupt. We would have been back to square one.

The other reason is that we are living under capital controls. We can’t invest in foreign stock markets. I’m sorry but I can’t view the domestic stock exchange with less than 20 companies as diversified enough, let alone a safe retirement option. The grandmother of a friend of mine summed it up nicely the other day. She’s from a well off family and had several investments of various types: Of all my investments, only concrete has proven reliable (most houses are made of poured concrete here).

How can we pay so much extra?

How are we paying able to so much extra towards our principal every month? Its not an exact science. We didn’t decide one day that we were going to take such a large part of our salary aside and repay our mortgage with it. It started much smaller but snowballed along the way. We like to consider every large purchase we make an investment if at all possible. That’s one of the main reasons why we bought our house (it had a guest house we could rent out). Repaying the mortgage early is a good investment in our eyes. It saves us years of interest payments (remember that we can not get anything back from taxes here in Iceland) – and it reduces our inflation risk by a huge amount (remember as well that our mortgage is inflation linked).

Taken together, our decisions have caused us to have low monthly expenditures, but has steadily increased our monthly income.

The current tally

Whenever the last post is in a previous month I’ll include the repayment tally like the one below:

  • Assets: $459,446 
    • Real estate: $455,506 / 56,938,190 ISK
    • Cash Savings: $3,839 / 479,867 ISK
    • Stocks: $101 / 12,625 ISK
  • Debt: -$130,492 
    • Mortgage: -$130,460 / -16,307,456 ISK
    • Credit Cards: -$32 / -4,031 ISK

Sum: $328,954 (Up 1.5%)


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Our Plan To Retire Early Before 40

Participate in our experiment as we try to unshackle and gain financial independence before we reach the age of 40 in a country where that is very difficult. Where inflation has historically averaged around 6% and gone up to as high as 18% during the financial crisis only a few years ago.

The time frame is 6 years, as we are currently both 34 years old, one of us is Icelandic, the other one from the US. We live in Iceland. A micro nation with capital controls. That means we can’t move our money out of the country to invest in international stock markets. The best mortgages you can get in Iceland are at around 3.65%. This is the interest rate on our mortgage. But there’s a catch. Mortgages with interest rates like that are inflation indexed, calculated monthly and linked to the CPI (consumer price index).

That means that every % of inflation gets added to the mortgage interest. If inflation is at 2.1% (like it is right now) then our mortgage is effectively at 5.66% – but it’s not quite so simple, and in fact it’s far more insidious. You don’t pay the added inflation percentage right away, it gets deferred and added to the principal. Your inflation adjustment repayments are also inflation indexed, very low at the beginning, gargantuan towards the end. This means that throughout more than half of your mortgage’s lifetime, the principal is growing, not shrinking! Oh and unlike our friends in the US (and perhaps elsewhere), interest payments are not tax deductible.

I hope you enjoy reading about the wacky financial reality of people in other parts of the world. We will be focusing on everything we need to do to reach our financial freedom goal, considering all the constraints of living in Iceland. Many of the issues are shared with people in other parts of the world such as the US, but some are very unique to Iceland, but entertaining and interesting none the less. We will try to explain them so that everyone can understand them, also taking historical reasons and underlying cultural and practical reasons into account.

We will also be talking about our many side projects, many of which stem from us trying to save money and at the same time develop skills and experience with working with our hands. We try to do as much ourselves as possible. The reason is not just to save money, but mostly to gain experience and confidence and most importantly, independence. To be able to take an idea through to reality without needing to depend on external services. These projects include stuff like home brewing (our sparkling hard cider is really good), gardening, construction, house design, pole building and more.

Before ending this post, and future posts until we reach our goal, I’m going to share with you our current assets and liabilities situation as a sort of track record or snapshot in time of how we are doing. Feel free to comment and ask questions about our composition.

  • Assets: $459,167
    • Real estate: $455,506 / 56,938,190 ISK
    • Cash Savings: $3,559 / 444,867 ISK
    • Stocks: $102 / 12,750 ISK
  • Debt: -$135,150
    • Mortgage: -$134,122 / -16,765,283 ISK
    • Credit Cards: -$1,028 / -128,511 ISK

Sum: $324,017 (Down 0% – First post)


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