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?

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.