Path to Financial Freedom

[Zion2022]

As an introduction. I consider myself very financially literate and would often advise friends and family in this area. I have however made some terrible financial decisions myself in the past by not practicing what I preach. I fear I’m too involved to make objective decisions anymore.

Personal details

Age: 29
Spouse’s/Partner's age: 28
Number and age of children: None

Income and expenditure
Annual gross income from employment or profession: €220k base + €50k cash bonus + 30k RSUs (variable)
Annual gross income of spouse: €30k
Monthly take-home pay: €11,500 (excluding bonuses)
Type of employment: Private sector - permanent full-time

In general are you:
(a) spending more than you earn, or
(b) saving?
- Saving significantly. Cost of living (ex mortgage) is c. 40k per annum. Diverting 6k per month + c25k per annum bonus into savings/investments.

Summary of Assets and Liabilities
Family home worth €1.3m with a €930k mortgage remaining
Cash/savings: €170k
Defined Contribution pension fund: €180k
Company shares: 0

Family home mortgage information
€630k with lender @2.5%, 5 years fixed. 34 years remaining. Monthly repayment €2.2k. No early repayment options (I fixed at a bad time regarding swap rates so my early redemption charge is significant)
€300k family loan @ 0% interest. Repayments to begin in 5 years time over a flexible term.

Other borrowings
None

Do you pay off your full credit card balance each month?
YES

Other savings and investments:
- €150k cash primarily earmarked for home improvements
- €20k in Investment account

Do you have a pension scheme?
Yes - €180k Fund. €4k per month employee + employer contribs. 100% global equities.
Wife has a small pension

Do you own any investment or other property?
No

Other information which might be relevant

Life insurance:
Yes, €3m + 50% salary. Combined death in service + Mortgage protection
Health insurance:
Through work

What specific question do you have or what issues are of concern to you?

My concerns are twofold:
1. I’m extremely conscious that we bought a house for an amount well in excess of what I’d have advised to someone else. We plan to have a decent sized family so downsizing would be a nuclear option. I know that the cost of debt will be far far higher in 5 years time so I am neurotic about minimising our exposure to higher rates when our fixed period expires.

2. I find my job increasingly stressful to the point I’m not sure how sustainable it is long term. I would love to be in a position to take a step back and work either in a less senior role, or ideally do consulting work. This work wouldn’t be guaranteed so I’d want to be financially secure before I could consider this. The debt we have now means I have to endure for the foreseeable.

My current thesis is:
We can save c.€100k per annum (+12k equity cleared from mortgage each year). I plan to put 100% of this into global equities (any advice on how best to do this would be much appreciated. Given tax treatment of ETFs, I feel forced to invest in 20-30 large cap stocks which is not ideal).
When our fixed period is up in 5 years we should have close to enough to pay off the bank loan (assuming no market collapse).

That would leave us with a fairly modest €300k family debt with no interest charge. We could pay this off over 20 years. At this point, whilst nowhere near set for life, I’d certainly feel I was no longer a slave to the corporate world and could start exploring my options for a more fulfilling career.

Is there anything I’m missing here? (I know, sell the house - but again I’m not open to this). I sometimes fear I’ll be selling out my 20s and 30s just to be financially solid and this might be something I’ll regret in future.

 

[Brendan Burgess]

- €150k cash primarily earmarked for home improvements

This jumps out at me. You acknowledge that you have bought a bigger house than you should have. But now you plan to spend another €150k on it!

If they are home improvements and not essential maintenance, do without them.

Brendan

 

[Brendan Burgess]

€630k with lender @2.5%, 5 years fixed. 34 years remaining. Monthly repayment €2.2k. No early repayment options (I fixed at a bad time regarding swap rates so my early redemption charge is significant)

Are you sure about this?

If you repay €100k now, what will the early repayment fee be?
With 5 years to go, you will pay €13k interest on it. How does the break fee compare to that?

Brendan

 

[Brendan Burgess]

Yes - €180k Fund. €4k per month employee + employer contribs.

Age: 29

You have a big fund for your age and will hit the fund size limits fairly early.

Is there scope for you to reduce your contribution without impacting what your employer contributes? If so, you should do so.

Brendan

 

[Brendan Burgess]

I plan to put 100% of this into global equities (any advice on how best to do this would be much appreciated. Given tax treatment of ETFs, I feel forced to invest in 20-30 large cap stocks which is not ideal).
When our fixed period is up in 5 years we should have close to enough to pay off the bank loan (assuming no market collapse).

If the break fee on your mortgage exceeds the interest saved, then this would be the right strategy.

There could well be a stock market collapse - in fact, there probably will be at least one in the next 5 years.

Not sure if you need to go as high as 20 stocks. You can handle the risk from a smaller number.

Brendan

 

[Blackrock1]

As an introduction. I consider myself very financially literate and would often advise friends and family in this area. I have however made some terrible financial decisions myself in the past by not practicing what I preach. I fear I’m too involved to make objective decisions anymore.

Personal details

Age: 29
Spouse’s/Partner's age: 28
Number and age of children: None

Income and expenditure
Annual gross income from employment or profession: €220k base + €50k cash bonus + 30k RSUs (variable)
Annual gross income of spouse: €30k
Monthly take-home pay: €11,500 (excluding bonuses)
Type of employment: Private sector - permanent full-time

In general are you:
(a) spending more than you earn, or
(b) saving?
- Saving significantly. Cost of living (ex mortgage) is c. 40k per annum. Diverting 6k per month + c25k per annum bonus into savings/investments.

Summary of Assets and Liabilities
Family home worth €1.3m with a €930k mortgage remaining
Cash/savings: €170k
Defined Contribution pension fund: €180k
Company shares: 0

Family home mortgage information
€630k with lender @2.5%, 5 years fixed. 34 years remaining. Monthly repayment €2.2k. No early repayment options (I fixed at a bad time regarding swap rates so my early redemption charge is significant)
€300k family loan @ 0% interest. Repayments to begin in 5 years time over a flexible term.

Other borrowings
None

Do you pay off your full credit card balance each month?
YES

Other savings and investments:
- €150k cash primarily earmarked for home improvements
- €20k in Investment account

Do you have a pension scheme?
Yes - €180k Fund. €4k per month employee + employer contribs. 100% global equities.
Wife has a small pension

Do you own any investment or other property?
No

Other information which might be relevant

Life insurance:
Yes, €3m + 50% salary. Combined death in service + Mortgage protection
Health insurance:
Through work

What specific question do you have or what issues are of concern to you?

My concerns are twofold:
1. I’m extremely conscious that we bought a house for an amount well in excess of what I’d have advised to someone else. We plan to have a decent sized family so downsizing would be a nuclear option. I know that the cost of debt will be far far higher in 5 years time so I am neurotic about minimising our exposure to higher rates when our fixed period expires.

2. I find my job increasingly stressful to the point I’m not sure how sustainable it is long term. I would love to be in a position to take a step back and work either in a less senior role, or ideally do consulting work. This work wouldn’t be guaranteed so I’d want to be financially secure before I could consider this. The debt we have now means I have to endure for the foreseeable.

My current thesis is:
We can save c.€100k per annum (+12k equity cleared from mortgage each year). I plan to put 100% of this into global equities (any advice on how best to do this would be much appreciated. Given tax treatment of ETFs, I feel forced to invest in 20-30 large cap stocks which is not ideal).
When our fixed period is up in 5 years we should have close to enough to pay off the bank loan (assuming no market collapse).

That would leave us with a fairly modest €300k family debt with no interest charge. We could pay this off over 20 years. At this point, whilst nowhere near set for life, I’d certainly feel I was no longer a slave to the corporate world and could start exploring my options for a more fulfilling career.

Is there anything I’m missing here? (I know, sell the house - but again I’m not open to this). I sometimes fear I’ll be selling out my 20s and 30s just to be financially solid and this might be something I’ll regret in future.

you have a good job and salary, at your age with that kind of seniority there should be scope to really kick on over the next decade, im not being unkind but arent you a bit young to be feeling 'corporate burn out'. Once you have kids i get it, but for now id be maximising my earnings, getting the loans paid down so that when the kids come along and you want to take it a bit easier you can, also you dont have to be in an uber stressful job to make similar money, the two dont always go hand in hand. Further, as you get older and more experienced your ability to manage stress and put things in perspective improves.

 

[Zion2022]

This jumps out at me. You acknowledge that you have bought a bigger house than you should have. But now you plan to spend another €150k on it!

If they are home improvements and not essential maintenance, do without them.

Brendan

Thanks Brendan. Yes I think you’re right here. Probably about €75k is ‘essential’ or has real payback in terms of improved energy efficiency. Bathrooms etc. can wait. I’ll see if I can convince the wife. €75k saved would be a big lump to ‘save’ at this stage.

Are you sure about this?

If you repay €100k now, what will the early repayment fee be?
With 5 years to go, you will pay €13k interest on it. How does the break fee compare to that?

Brendan

I’ve never formally checked, but I think the 5 year swap rate was down about 1% from when I locked in (probably ticked back up since). So I estimated I’d have an ERC of roughly 5% (1% x term length). So €5k on €100k repayment say. Probably worth confirming this which I’ll do next week.

You have a big fund for your age and will hit the fund size limits fairly early.

Is there scope for you to reduce your contribution without impacting what your employer contributes? If so, you should do so.

Brendan

No, I contribute 7%. Employer 15%. That’s perfectly maxing out the matching. I’d hate to miss out on any employer match and SFT might be less of an issue if I move to contracting later in life I guess. So feel I should accumulate now while it’s ‘cheap’

If the break fee on your mortgage exceeds the interest saved, then this would be the right strategy.

There could well be a stock market collapse - in fact, there probably will be at least one in the next 5 years.

Not sure if you need to go as high as 20 stocks. You can handle the risk from a smaller number.

Brendan

I’m torn on this. I regularly advise people to not invest with a mortgage to be repaid. But if my ERC brings the benefit down to say 1.5% per annum by repaying (2.5% IR less 1% ERC charges) Over a 5 year horizon I guess the likely result (historically speaking) would be heavily skewed towards investing instead. This brings risks of course, although I do wonder, given our relative financial strength if we should look to carry the risk to seek the extra return. Difficult decision.

 

[RichInSpirit]

One loan that you could overpay at the moment if you have extra money is the family loan. Without any early payment penalty.
I know it is at zero percent interest but it would be a load off your mind for the future and might also make for more harmonious family interactions in the future.

 

[Brendan Burgess]

So €5k on €100k repayment say

€5k to save €13k in interest seems worth it. I think it's a better option than investing in the stock market.

Over a 5 year horizon I guess the likely result (historically speaking) would be heavily skewed towards investing instead. This brings risks of course, although I do wonder, given our relative financial strength if we should look to carry the risk to seek the extra return.

I think I need to financially plan for flaming out.

I really don't think you should take the risk with such a large mortgage in relation to your salary and the risk that you might burn out. Go for the low-risk option here.

If you had a much smaller mortgage, I would live with the borrowing to invest risk.

Brendan

 

[Zion2022]

you have a good job and salary, at your age with that kind of seniority there should be scope to really kick on over the next decade, im not being unkind but arent you a bit young to be feeling 'corporate burn out'. Once you have kids i get it, but for now id be maximising my earnings, getting the loans paid down so that when the kids come along and you want to take it a bit easier you can, also you dont have to be in an uber stressful job to make similar money, the two dont always go hand in hand. Further, as you get older and more experienced your ability to manage stress and put things in perspective improves.

Yeah I take your point on ‘burn out’ and I probably phrased incorrectly. I very much had your mindset when we bought our house. My salary and career were only heading one way. I really saw it as reasonable and likely that I’d be earning upwards of €500k by age 35.

However my last promotion has taken me to more of a ‘figure head’ position from previously managing small teams/doing technical work.
It’s not necessarily the work that’s stressful, more that it’s the first time in my life I feel out of my depth. That upward career trajectory feels like it’s suddenly stalling out and I’m not sure my skill set is suited to further upward movement anyway.
In addition to the stress of not being happy with the quality of my performance in the role, I also have to do a lot of public speaking which, whilst a strength of mine, is always something which brought sleepless nights.

I hope you’re right that I get better at handling the stress as I get older. It’ll change everything if I do! But for now I think I need to financially plan for flaming out.

 

[Brendan Burgess]

That’s perfectly maxing out the matching. I’d hate to miss out on any employer match and SFT might be less of an issue if I move to contracting later in life I guess. So feel I should accumulate now while it’s ‘cheap’

Fully agree. This takes priority over everything else.

Brendan

 

[interested21]

You have a big fund for your age and will hit the fund size limits fairly early.

Is there scope for you to reduce your contribution without impacting what your employer contributes? If so, you should do so.

Brendan

Sorry if off-topic, but do you have a rule of thumb for when and how a high earning young person should think about scaling back pension contributions to best manage the fund size limits?

 

[Brendan Burgess]

Sorry if off-topic, but do you have a rule of thumb for when and how a high earning young person should think about scaling back pension contributions to best manage the fund size limits?

Key Post - Should you contribute to a pension fund if you are in danger of breaching the €2m limit?

What is the Standard Fund Threshold? In summary, it's the €2m cap placed on the public or private sector pension benefits that an individual can accumulate in Ireland over his or her lifetime. If the individual breaches the SFT, at the point the offending pension benefits are retired, he or she...

www.askaboutmoney.com

Key Post - Be careful about exceeding the €2.15m lifetime limit on pension fund

As I stated earlier, for someone currently aged 35 it is pointless worrying about the potential of exceeding the €2.16m. By all means review the numbers within 5 to 7 years of retirement, but hopefully the fund cap will increase over the next 30 years!!! Hi Conan Thanks for clarifying. What if...

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[NoRegretsCoyote]

Personal details

Age: 29
Spouse’s/Partner's age: 28
Number and age of children: None

Income and expenditure
Annual gross income from employment or profession: €220k base + €50k cash bonus + 30k RSUs (variable)
Annual gross income of spouse: €30k
Monthly take-home pay: €11,500 (excluding bonuses)
Type of employment: Private sector - permanent full-time

First off congratulations. You have an exceptional salary for your age. €270k is more than five times average full-time earnings, and most people don't have peak earnings until about 50.

I don't know what you do, but I think there is big risk here in two dimensions. The first is your sector of employment which is clearly extremely profitable today but might not be in 5 or 10 years. I'm old enough to remember the post-2008 crash and there were people breezily making six-figure salaries in construction and related activities who found themselves on jobseekers' benefit in the space of a few months. The second risk is personal, highly-paid people can be quite dispensable when the wind changes internally.

Summary of Assets and Liabilities
Family home worth €1.3m with a €930k mortgage remaining
Cash/savings: €170k
Defined Contribution pension fund: €180k
Company shares: 0

At that value you have a house that's bigger than your needs and a prestige address in Dublin. I suspect it's surplus to needs , particularly before you don't have children. You have a very big mortgage. You have a big cushion as well in the form of cash and the family loan but it's a lot of debt in total.

I don't have too much specific advice. I just think that in general you should make plans that are robust to something like a halving of your net family income over the space of five years.

 

[Zion2022]

First off congratulations. You have an exceptional salary for your age. €270k is more than five times average full-time earnings, and most people don't have peak earnings until about 50.

I don't know what you do, but I think there is big risk here in two dimensions. The first is your sector of employment which is clearly extremely profitable today but might not be in 5 or 10 years. I'm old enough to remember the post-2008 crash and there were people breezily making six-figure salaries in construction and related activities who found themselves on jobseekers' benefit in the space of a few months. The second risk is personal, highly-paid people can be quite dispensable when the wind changes internally.


At that value you have a house that's bigger than your needs and a prestige address in Dublin. I suspect it's surplus to needs , particularly before you don't have children. You have a very big mortgage. You have a big cushion as well in the form of cash and the family loan but it's a lot of debt in total.

I don't have too much specific advice. I just think that in general you should make plans that are robust to something like a halving of your net family income over the space of five years.

Yeah that’s very true. Currently my employment prospects are fairly robust and I could easily replicate my salary elsewhere. I’ve never worked through difficult economic times though and I know that it’s inevitable at some stage.
The reality is that we currently couldn’t maintain our situation with a halving of our income. I’m hoping by aggressively paying down debt whilst we can should insulate us going forward. Just hope the good times last long enough for us to put a meaningful dent in it.

We could ultimately sell the house if it came to it. But conscious the conditions which would precipitate a major fall in my income would likely mean a significant drop in the value of the house too.

I suspect a Sinn Fein government in a few years will significant impact my net income and house equity - so need to make hay while the sun shines!

 

[interested21]

I could easily replicate my salary elsewhere

Maybe there's a side of tech with which I'm totally out of touch, but I find this somewhat hard to believe. Nothing I've seen has suggested to me that ~300k comp packages are easy to come by in Ireland, especially for someone in their late 20s no matter how talented.

Take for example this Reddit survey on /r/DevelEire. Out of 300 responses only 2 were earning +200k, and these types of surveys usually mainly attract responses from people earning above average.

If what you're saying is true, I find it hard to believe that you wouldn't easily see a halving of your salary through a downturn in tech, or a even a downturn in your specific company.

Sometimes the things I see in our industry makes me think of Steve Carrell's character in The Big Short when the stripper tells him that she has 5 houses and he rings his associates and says "Hey there's a bubble!"

As a result I think you're dead right to pay down your debt as aggressively as possible. You've worked hard to get into an incredibly impressive situation and you've used that to get a significant amount of leverage. You should de-leverage as quickly as possible to decrease your downside risk.

 

[Gordon Gekko]

The base seems very high relative to the bonus and RSUs.

It suggests someone who’s not client facing in the tech or aircraft leasing space.

Congrats.

It does seem high for a 29 year old.

 

[Kilkenny06]

2. I find my job increasingly stressful to the point I’m not sure how sustainable it is long term. I would love to be in a position to take a step back and work either in a less senior role, or ideally do consulting work. This work wouldn’t be guaranteed so I’d want to be financially secure before I could consider this. The debt we have now means I have to endure for the foreseeable.

In my experience the stress does not go away, and upping your standard of living to "reward" yourself for the stress only makes things worse. The demands and responsibilities of higher-paid employees are increasing all the time, and in certain industries it's surprisingly difficult to get lower-paid, less stressful/responsible jobs - interviewers don't understand why you are applying for a particular job which is less senior than where you are now, and I would be reluctant of mentioning anything to do with "stress" or its synonyms in an interview. Consulting comes with its own pressures.

Given your mortgage rate is relatively low, I would personally max out my pension, and aim to build substantial and growing wealth which will give you more options in the future and make you less reliant on salary income. Other than the house, you're both doing a good job keeping your cost of living relatively low given your income, and you should try and avoid creep in this area or it will lock you into requiring higher-paid jobs. Unfortunately a more expensive house may lead to mixing with wealthy friends, and I imagine there will be some pressure to keep up with the joneses as a consequence (particularly if kids are on their way) - I suggest awareness of lifestyle creep is the first step in tackling it and giving you the space to drop down to a lower-paid role.

 

[Brendan Burgess]

Do you have a pension scheme?
Yes - €180k Fund. €4k per month employee + employer contribs. 100% global equities.
Wife has a small pension

Given your mortgage rate is relatively low, I would personally max out my pension, and aim to build substantial and growing wealth which will give you more options in the future

Great post Kilkenny apart from the above.

With a high mortgage, and a good pension fund already at a young age, the priority should be to reduce the mortgage pressure. They have plenty of time to boost the pension when the mortgage is at a comfortable level.

Brendan

 

[Zion2022]

Great post Kilkenny apart from the above.

With a high mortgage, and a good pension fund already at a young age, the priority should be to reduce the mortgage pressure. They have plenty of time to boost the pension when the mortgage is at a comfortable level.

Brendan

Thanks Kilkenny, agree completely on the lifestyle creep. I have battled against it aggressively and will continue to do so.

On the pension bit, I do worry about the standard fund threshold and for general peace of mind, I’d rather chop down our debt to safe levels rather than pursue strategy’s of wealth maximisation with higher risk. The debt is cheap now, but it won’t be for much longer.

Brendan, thanks for the previous advice on early repayment of mortgage. Your post motivated me to actually make the call and the ERC terms are far more favourable than I had calculated. We’re going to pay off a chunk with savings and also look to fix for a longer period (7+ years) at a lower rate. Already feel like the weight has slightly been lifted!