In today’s post, I change gears from the usual informational style article you will see on this website to take on The Progression Playbook’s first-ever reader case study. I’ve been excited to take on a real-life scenario for a while now and get a chance to apply everything I’ve learnt whilst creating this website in a more practical setting.
So when today’s case study subject, Holly, reached out requesting I consider writing about her – I was more than happy to take on the challenge.
Holly is a 23-year-old woman who has her financial life in great shape for her age and is looking to take the next step – begin meaningfully investing in order to set herself up for long-term financial security and early retirement if desired!
Having asked Holly to record a full spending diary for a month and partake in an interview on her financial situation – my biggest take away is this: for people who consistently make smart financial decisions – financial independence may be a whole lot easier to attain than you would think.
For the rest of this post, I will lay out Holly’s financial situation and her spending habits as revealed by the spending diary exercise before running the maths on Holly’s finances, laying out precisely what I would do in her financial situation and demonstrating why Holly could be well on her way to being in a position to retire much younger than she expected.
Quick disclaimer – I am not a financial advisor and nothing in this post should be taken as specific financial advice. Rather, I am laying out how I would tackle the specific financial conditions here and sharing what I believe to be good financial practices.
Holly’s current financial situation
So let’s start by laying out Holly’s current personal finance situation.
Holly is a 23-year-old woman in a serious relationship splitting expenses according to each partners level of income which happens to be close to 50/50.
Holly works in a stable HR position earning £30,900 per year with an employment bonus of typically £1,000 per year. This works out as net income coming into the bank of approximately £1,800 per month after tax, national insurance and pension contributions.
Based on the January spending diary, Holly has total monthly expenses of £1,090 which are broken down by category below:
| Item | Amount spent | Notes |
| Pet insurance | £13.43 | |
| Eating out / take away food | £113.84 | Opportunity to save extra by cutting down here. |
| Petrol | £43.74 | Car expenses |
| Events (including birthdays) | £11.65 | |
| Groceries and household expenses | £126 | Quite low – indicates frugality. |
| Pets | £76 | |
| Rent | £350 | Low rent relative to income – a good opportunity for saving. |
| Car | £176.93 | Car expenses |
| Sheep | £20 | Amazingly, I didn’t think to follow up on this! |
| Investments | £100 | To be excluded from expenses – actually represents a saving. |
| Credit card | £25 | No interest incurred per interview |
| Clothes | £34 | |
| Total | £1,090,59 | |
| Total excluding investments | £990.59 |
Other information:
Holly contributes £206 per month to her pension each month (including employer match) and the total current value is approximately £14,000.
Holly has a cash LISA and has contributed £4,000 for 2 consecutive years. This has enabled her to receive the government top-up of £1,000 per year in both years. The total LISA value is, therefore, £10,000 (maybe slightly higher due to interest on cash but I have left as £10,000 here for simplicity).
A further £20,000 is invested in premium bonds which doubles up as an emergency fund.
Beyond her pension, Holly hadn’t until recently invested in the stock market. As of this year, Holly has started to invest £100 per month into the stock market via an ISA with the Vanguard platform. A key financial goal of Holly’s is to better understand stock-market investing and use it as a tool to improve her financial situation.
Holly estimated she would be able to retire at 69 which is actually later than the national retirement age of 67. Her goal retirement age is 55 which seems a completely realistic goal given her strong personal financial position.
Reasons to be optimistic
As I reviewed Holly’s financial situation and January spending diary, the first thing that really stood out to me was that there was a lot of reason to be optimistic here.
Not only does Holly have a secure, reasonably well-paid job, but she also has some decent savings (pension -14k, LISA – £10k, premium bonds – £20k), has avoided debt and has reasonably low expenses due to living in an area with a low cost of living and presumably by adopting a frugal lifestyle.
Here on The Progression Playbook we often refer to the need to create a surplus (income – expenses) and invest the difference wisely. A key metric people can use to achieve this is ‘savings rate’ which is simply surplus divided by total income. So let’s calculate this for Holly.
Income: £1,800 net salary + £206 pension contribution = £2,006 total income.
Expenses: £1,090 – £100 invested = £990 total expenses.
Surplus: £2,006 – £990 = £1,016.
Saving rate: £1016 surplus / £2,006 total income = 51%.
A savings rate of 51% is really encouraging and suggests financial independence could be achieved much sooner than expected.
Putting the above data into the Networthify calculator, Holly could theoretically retire in just 14 years (at age 37) if she was willing to maintain her current level of expenses. Obviously, certain factors like future children, future home purchases and other big life events haven’t been considered here but regardless, this fact alone that Holly could be completely financially independent within the next 14 years (rather than the 46 years she guessed during our interview) should be considered a huge win.
Trimming the fat off of your monthly expenses
When I look at Holly’s January spending diary – I have to say I am impressed. Not only are the total expenses low which gives rise to the great savings rate as discussed above but also there is very little fat to trim in terms of her expenses.
One of the key tenets of becoming financially independent is being able to live happily without overspending. Clearly, Holly has benefitted from a low cost of living with a monthly rent of just £350 per month which is very low in comparison to her monthly income.
When I look at Holly’s expenses – the only real areas I can see for improvements are car expenses which are pretty high at £221 per month including petrol and takeaways at £114 per month.
Now given January was in the middle of another COVID lockdown here in the UK, the high amount spent on takeaways is perfectly understandable and may represent a bit of an anomaly.
The car expenses may represent a good opportunity to cut expenses slightly and increase that savings rate even further. This change may come in the form of leasing a cheaper vehicle or even reducing car travel where possible.
Instant changes to improve your financial life
So given there is little room for improvement on the expenses side of things – perhaps we can look at some alternative ways to improve Holly’s financial situation.
If there is no obvious path to reducing expenses in order to increase your surplus, the obvious alternative is to increase income. As far as I can see, this may come in two forms for Holly.
This income increase may come in the form of a promotion in her day job. Given Holly is only 23, it’s a reasonable expectation that she has many years of career growth and promotions ahead of her. As Holly’s salary increases over time, the crucial point will be to avoid ‘lifestyle creep’ whereby expenses grow in proportion to income.
Alternatively, Holly could consider starting a side hustle to supplement her career income. Whilst side hustles are highly dependent on individual skills and other specifics like the opportunities in your local area – I wrote a blog post on 21 solid side hustles ideas that can be used for inspiration.
One clear item for improvement is the cash LISA discussed earlier. While it is great Holly is making use of the government’s 25% top-up, she is missing out on investment returns by not using a stocks & shares LISA. My suggestion is that as soon as Holly can, to transfer her cash LISA over to an S&S LISA and continue to invest the £4k per year into it, particularly if this is to be used for retirement and not home-ownership.
Eventually, this money could then be used for either the purchase of a first home or for retirement when the time comes.
Related to this – Holly should consider whether she is getting as much benefit out of her pension as possible. The goal here should be to contribute the most you can afford each month whilst getting the best match from your employer.
Finally, let’s discuss the premium bonds situation. For me, this has two big issues.
Firstly, Holly suggests this doubles up as an emergency fund but this is problematic as premium bonds are not liquid enough. By this I mean they can not be turned to cash instantly if an unexpected expense crops up. From experience, I can say that to liquidate premium bonds into cash is a process that takes at least a few weeks and an online form. If Holly was to incur a significant expense such as a broken boiler, it may be difficult to pull together the cash quickly under the current plan.
One workaround for this is to pay any emergency costs via credit card, sell the premium bonds as needed and pay off the credit card in full before any interest is incurred.
Secondly – £20,000 is simply too large for an emergency fund. Whilst it’s wise to be prudent with emergency funds in the age of COVID, given Holly has high job security, it still seems a bit too much.
My suggestion is to have an emergency fund of no more than £5,000 which is stored in an easy-to-access bank account and for Holly would cover 5 full months of expenses.
Holly should weigh up whether premium bonds are a good investment or whether this money would be better served in the stock market invested in low-cost, passive index funds. My thinking is this would likely offer a better average investment return over time.
How much does Holly need to invest to become financially independent
So let’s run the maths – using the 4% rule which I wrote about in detail here, we can calculate Holly’s FIRE number i.e. the total invested assets she would need to amass to become financially independent whereby her annual investment returns would cover her expenses.
So based on Holly’s monthly expenses of £990, her annual total expenses would be £11,880. By applying the 4% rule – Holly’s FIRE number is £297,000 of invested assets (£11,880 / 4%).
So what does this mean? Well – based on Holly’s current expenses, she needs to amass just £297,000 of investments in order to be completely financially independent. Let’s say Holly gets to £300,000 of investments – according to the 4% rule, she could withdraw 4% of these assets (£12,000) each year which covers her annual expenses.
That would mean after one year, she would have £288,000 left invested. However, these investments will grow each year. Let’s say these investments return 10% for the year (£28,800) which is a very realistic return, the new portfolio balance would be £316,000 which is significantly more than she started the year with despite withdrawing £12,000 to cover her annual expenses.
So given our aim is £300,000 of invested assets (rounded for simplicity) and Holly has already amassed close to £50,000 in invested assets (premium bonds – 20k, LISA – 10k, pension – 14k) – she is already partly there. This does of course assume she switched her cash LISA and premium bonds to the stock market to benefit from the returns on offer.
At what age could she realistically retire?
It was discussed above how Holly’s 51% savings rate meant she could realistically become financially independent within 14 years. Let’s see if this play’s out given the £300,000 total investment goal laid out above.
For this, we turn to an online future value calculator, such as this one and plug in the following assumptions:
As Holly has a monthly surplus of £1,016 as calculated above, let’s say she has the capacity to invest an extra £1,000 per month or £12,000 per year into her investment portfolio. The first £4k of this should go to the LISA to benefit from the governments 25% top-up but that has not been considered below in case the LISA is used for purchasing a home in the next few years.
| Entity | Assumption | Notes |
| Present value | £44,000 | Assumes LISA and premium bonds converted to a stocks and shares ISA |
| Interest rate (per year) | 10% | This is a reasonable rate of return for a fund of stocks and shares. The S&P 500 has historically returned just under 12% per year. |
| Future value (our goal figure) | £300,000 | This is the number calculated above that we are trying to get too. |
| Yearly deposit | £12,000 | £1,000 monthly surplus * 12 months. |
| Periods (years) | 9.18 | See discussion below. |
Wow! Our future value calculator tells us that based on Holly’s current portfolio (£44k) and her capacity to invest each year (£12k), Holly can reach our goal investment portfolio of £300,000 in just over 9 years.
That means that if Holly is happy to live with her current level of very low expenses, she could in theory become completely financially independent in less than 10 years (by age 33) and not have to work for money after that date again.
According to the 4% rule – Holly could then withdraw 4% of her portfolio every year for the rest of her life without her investment portfolio ever running out.
This equation is simplified somewhat and doesn’t consider the LISA government top-ups or the timings of the pension withdrawals but regardless, Holly is in a fantastic financial position for early retirement.
Understanding stock market investing
When I interviewed Holly for this post, it was clear her primary goal was to gain a better understanding of the stock market and how it can be used to improve her financial situation.
Investing in stocks can seem an intimidating and complex prospect – not least when you hear about jargon-filled horror stories in the news. The reality, however, is that it’s not particularly difficult or time-consuming once you know the basics.
As well as continuing to read this blog, I suggest Holly and any readers in a similar situation read ‘The Simple Path to Wealth‘ by JL Collins (link takes you to the Amazon page for this book). Whilst this book is written with the US audience in mind, it is a fantastic education on the stock market and will leave anyone who takes the time to read it a far more knowledgeable person.
How to start investing using the Vanguard platform
As alluded to above, the stock market is, in my opinion, the single best tool for increasing net worth available to us.
When I first spoke to Holly, she mentioned she had not yet started investing in the stock market and this was one of the things she was most interested in learning.
Shortly before the publication of this blog post, Holly began using the Vanguard investment platform to invest a small amount each month. For regular readers of this blog, you will know that using Vanguard to invest in low-cost passive index funds is my preferred method of investing in the stock market which hits the sweet spot in terms of the risk to reward ratio.
For any readers looking to follow in the footsteps of both me and Holly, consider reading my full how-to guide on investing with Vanguard which can be found by clicking here.
Using this platform, investors can invest using a stocks & shares ISA which is a tax-efficient investing account meaning that no tax is payable on any returns earned through this account.
Becoming financially confident
To summarise, Holly is in a really strong financial position given her age. Whilst I would personally tweak a few minor things like moving the cash LISA to a stocks and shares LISA, transferring the premium bond investments to the stock market and holding an emergency fund in cash – Holly has clearly done a good job with her finances to date.
The next stage for Holly will be to have the confidence to use the stock market to invest over time and to believe that she has the capacity to amass genuine wealth much sooner than she thought was possible and even retire early if that is something that interests her.
The key to Holly’s future financial success can be summed up as follows:
- Try and increase your income over time either via workplace promotions or a side hustle.
- Avoid lifestyle creep as your income increases and try to keep your expenses in check by deploying a frugal mindset.
- Invest your surplus (income – expenses) in the stock market via the Vanguard platform in low-cost passive income.
- Avoid financial mistakes like poor investments or big purchases you can’t afford.
If Holly can do all of these things consistently, there is no reason she can’t consider herself financially independent much sooner and much younger than she ever thought possible.
As always, please remember I am an Accountant, but not your Accountant. In this post (and all of my others) I share information and oftentimes give anecdotes about what has worked well for me. However, I do not know your personal financial situation and so do not offer individual financial advice. If you are unsure of a particular financial subject, please hire a qualified financial advisor to guide you.
This article has been written by Luke Girling, ACA – a qualified Accountant and personal finance enthusiast in the UK. Please visit my ‘About‘ page for more information. To verify my ACA credentials – please search for my name at the ICAEW member finder. To get in touch with questions or ideas for future posts, please comment below or contact me here.