Finance Smiths

Picking up from my previous post about blogging on the personal finance mistakes we have made, I was discussing how we graduated in 2009 in Melbourne. One of the most important decisions we made then was that we should move in together after graduation. This decision was borne out of necessity as it would have helped to reduce our cost of living in Melbourne when we started working.

That being said, we enjoyed each other’s company and wanted to take the first serious step in our relationship by moving in together officially. I will walk through how we came to the decision to rent a relatively new 2 bedroom unfurnished apartment in the city close to our workplaces and paid more than 30% of our net monthly income in rent. I will write this post as a series of questions just to make it more interesting and you can draw your own conclusions.

Where did we choose to stay?

We were staying in student accommodation close to the university during our undergraduate days and wanted to move out to a “proper” apartment in the city. Since we didn’t have family in Melbourne, we chose to stay in the city to be closer to our friends and to make it easier to go for a night out with them and our colleagues after work. Taking my unemployment at that time into consideration, I also thought it would facilitate going for interviews for job roles in the city. Although I did end up working in the city, I really should have considered job roles in the city fringe or suburbs close to the city.

The problem with staying in the city is that the rental cost will be higher than if you are to stay in the city fringe or suburbs. Yes, you save on transport costs from having to travel into the city but it still doesn’t add up to the higher rent you will be paying. The savings on “transport time” was a big factor for us since we didn’t want to spend too much time travelling to and from work.

Should we stay in a 1 or 2 bedroom apartment?

We wanted more space since we were both staying in small student accommodation apartments previously. We also wanted to be able to host our family, friends and colleagues at our place. This was despite the fact that we will probably be using the spare bedroom as a storage space for most of the time. We ended up paying quite a bit more in monthly rent for having that 2nd bedroom.

Should we stay in an older or newer apartment?

Our preference was to stay in a newer apartment although that would increase the monthly rent. The older apartments would have been fine but we wanted a nice place with a good view. This  was coming from a couple who has barely started working and with one half unemployed.

Should we rent the apartment furnished or unfurnished?

We didn’t know how long we will be staying in Melbourne but decided on an unfurnished apartment anyway. We bought most of our furniture from Ikea but still ended up spending a lot of money on the TV, bed, sofa etc. The monthly rent on an unfurnished apartment is lower and it makes more sense to buy your own furniture only if you are planning to stay in the place for a long time. Although we ended up using our furniture for 4 years (moved most of them from Melbourne to Sydney but held to sell some of them off cheaply), it probably wasn’t as much savings as we thought.

What was our budget for rent?

Notice how this most important question comes after those above? That’s how we approached it then. As I was unemployed at the time of making this decision, the monthly rent for a relatively new 2 bedroom unfurnished apartment in the city would have been more than 50% of our monthly income (based on my wife’s salary alone). This was where I made one of the biggest mistakes of projecting my income. I didn’t think it would take a long time for me to find a job in accounting and I was anticipating a certain income level when I do find one. That way, we will be able to stick to the conventional 30% rule on rent i.e. monthly rent should not exceed 30% of our monthly income.

The problem was that projected income doesn’t count as actual income and it took me 6 months to find a full-time job that could meet the required income level. Another problem was that Australia’s personal income tax rates are higher than Singapore’s and it runs on a Pay As You Go (PAYG) withholding tax system. This means that a certain portion of your monthly income is withheld for tax purposes. You can see how this reduced monthly cashflow will have an immediate impact on our budget especially when we didn’t factor this in at the start.

Anyway, as part of my commitment to staying on in Melbourne, I brought over most of my savings from Singapore to Melbourne and told myself that if it runs out, I might have to head back to Singapore to find work. When I landed the full-time job after 6 months in Melbourne, I had A$300 left in my bank account. I only told my wife about this years after that.

Lessons learned

In Singapore, most young couples don’t rent an apartment before moving out together but this tends to be the norm overseas. Having to find a rental apartment and budgeting for the monthly rent taught us about what we look for when finding a place and what we can afford. For example, we were willing to pay more to live in or close to the city to save on travelling time but didn’t need to pay extra for a bedroom we weren’t using. In fact, buying the furniture together made us aware of our design asthetics early on in the relationship!

We realised we have to budget based on our existing and not anticipated income. This sounds like common sense but you will be surprised how hard it is to keep an objective perspective when you see an apartment you like. We got better with managing out rental situation when moving to Sydney but still ended up paying more simply because rental costs in Sydney are higher than in Melbourne.

During our lease renewal negotiations after one year, we found out that the owner was selling the apartment. The new owner was initially planning to stay in the apartment but decided to allow us to continue to rent the apartment. However, the new owner was raising the monthly rent by quite a bit. We went with a 2 year lease to minimise the next rent increase and prevent us from getting kicked out anytime soon. As you can imagine, we incurred higher break-lease costs when we decided to move to Sydney after one year. Sometimes, it’s better not to jump the gun and just let things play out.

Ultimately, managing our rental costs helped us to improve our budgeting skills. It’s funny how overpaying for rent made us better at managing all the other monthly expenses like utilities, broadband, groceries, entertainment etc. That’s how it works in real life, as long as you keep trying and learning, you will continue to build up your life experience and end up with having something to share even when you make a ton of mistakes like us!

I just realised I have written 3 consecutive posts on bank accounts for expense, emergency and investment funds. Goes to show how much I value taking the time to sort out your bank accounts. I actually went through this exercise with my sister. Her monthly salary was being credited into a POSB eSavings Account that was earning 0.05% pa. My sister submitted a form to HR to change the bank account to the OCBC 360 Account and now earns 1.2% pa just from the salary credit. It was easy enough to make 3 monthly bill payments online or through GIRO since she just had to change from the POSB eSavings Account that she was already making bill payments from for income tax and credit cards. That got her another 0.5% pa. My sister is now earning S$50 more per month from doing exactly the same things she was doing before, just with a different bank account.

Why write about Personal Finance?

I wonder how many people there are in the same situation, with the potential to earn higher interest income just by organising your bank accounts. Always start with the low-hanging fruit and focus on the basics of passive income before you start to think about investing!

This is the whole point of me writing about personal finance. I was one of those people! I made the mistake of not looking into my bank accounts after returning to Singapore from Australia in 2014 and went through a year of working with my salary being credited into the POSB eSavings Account. It just never occurred to me that I should review my bank accounts to earn a higher interest income. By making these mistakes and writing about what to do with your personal finances, I hope to shorten your learning curve so you won’t make the same mistakes.

This post is harder to write than I thought. The thing is, I want to write about the positive actions that you can take to improve your situation. With personal finance, it’s easy for me to write about the “good” things that I have done which is working out but leave out the “bad” stuff that I did which have or continue to impact my life negatively. Here’s to a series of posts (not consecutive cause I might want to stop writing permanently if I do it that way) about the mistakes we have made in our life. You can draw your own personal finance lessons from our experience. For me, it works more like a flashback to our past and a walk down memory lane. Who doesn’t like to reminisce?

Graduation

When we graduated from university in 2009 in Melbourne, I was unemployed and trying to find work in 2010.  I underestimated how difficult it would be for an international student to find work in a foreign country right after the 2007/2008 Global Financial Crisis. Long story short, I found work as a professional training course sales consultant, administrative assistant before landing a full-time job as a tax accountant at an accounting firm. This was over a period of 6 months and it’s probably worth a post just on my take about graduate unemployment and underemployment. My wife found a full-time role as an accountant at a bank earlier than me.

We were both struggling with being away from our families on a much more permanent basis, having to learn how to live together after just graduating, and adjusting to the working couple life. You can see how this makes for an environment to make plenty of mistakes in. I will write about the first big personal finance mistake we made on rental costs in another post!