I have not one, not two, but at least three good friends (couples) who would broadly agree with the statement that you (/one / they) need £500k of salary to live in London. Can this be right? You need at least 20x the official statistical median wage – really?
First a couple of caveats. The friends I’m thinking of are all ‘fully fledged families’ – dual income mum+dad, with 2-4 kids. By dint of being dual income, they need paid-for childcare. They all live in premium parts of London – all in zone 1. They are not blind to the very affluent and privileged lives that they live, but nor are they totally removed from the real world; they aren’t oligarchs. They also aren’t wildly excessive compared to a bunch of other friends; I know a lot of Londoners who would be a similar camp to these guys.
Secondly these friends all live very comfortable lives. Regular ski trips, Michelin-starred restaurants, frequent use of taxis, babysitters used at least once a week – these are all a given. But they all have budgets, manage their finances pretty carefully, and bitch about the cost of living.
What strikes me is that £500k is at such a complete disconnect to the Frugal Living benchmarks set by so many of the personal finance community. Reading the blogs, the yardstick for annual expenses appears to be:
- Bare minimum: about $12k a year (living nowhere near a city like London); example here ;
- Enjoyable UK life: £15k-£20k per year. Examples of which are here, here.
- Very comfortable life: £30k per year. Which still corresponds to £40k gross salary (roughly 1.5x statistical median wage), but with tax-efficient asset allocation you can relatively easily achieve £30k per year without paying any income taxes.
These figures are so far below £500k per year I thought it worth exploring how this discrepancy arises. £500k vs £30k? How come? Yes, “rampant consumerism” is a factor. Yes, school fees are a factor – and arguably are a luxury option. Yes, a lot of what Ermine rants about is going on in my friends’ lives. But without passing judgement myself, let me explain a bit more context about all these £500k friends. They all:
- Live in houses worth £4m+. Which is what decent houses in Zone 1 cost these days.
- Use private schools. These are a killer for budgets, as we’ll explore below.
- Start private schools very early. Age 5 if not before. In my day it was reasonably common even for Etonians to have been in state schools until the age of 13; these days my friends using independent schools all start much earlier.
- Are high-earning professionals/senior people. Of the six people in these three families, there are four people working at least 50 hour weeks.
So, what is a £500k-salary-per-year cost structure?
- £225k Income taxes (inc social charges). These friends all receive all their effective income from paid employment; this is tax-inefficient and means average tax rates of close to 45%.
- £35k Childcare. I’m not exactly sure what my friends pay here but based on Mumsnet, plus regular babysitters at £50-£100/night, I am going to estimate £35k of gross cost. Of course a significant amount of this is a ‘cost of income’ because it is triggered by the parents choosing both to work full-time.
- £50k Mortgage. This number is somewhat hypothetical, based on having about £1m mortgage taken out relatively recently. Possibly there is a small repayment component to this hypothetical figure, but not material for this argument.
- £50k School fees. This is a big round number, based on 2.5 kids at £20k per year (including uniform and a small allowance towards school trips / kit / etc). Having all kids start at private schools early means almost all of my friends’ kids are incurring school/nursery fees.
- £20k Holidays. This is a rather round number, and may be a bit too high, but I’m working off £5k per family holiday, four such holidays a year. In practice there are probably two actual family holidays, and a variety of smaller trips – including maybe parents’ weekend away. All my friends ski, which would bump up the average.
- £15k Groceries. Round number; this works out as £300 per week. I am probably undercooking this one. Let’s say it includes a bit of wine.
- £10k Dining out. This is a pure guess. But on the basis that I know the sorts of places my friends eat at; that such places cost me about £120 for two; and adding a fair bit of taking kids out too, I think £10k per year sounds about right. Book clubs, parties etc all contribute to this cost.
- £16k Shopping. This is a completely random number and almost certainly undercooks it. But it doesn’t take a lot of Kensington & Chelsea clothes shopping, Apple gadgets, garden furniture, etc for a modern London family to hit £16k per year. I confess that £16k helps my addition for this particular exercise.
- £10k Motoring. Between the three families I’m thinking of, they own 5 cars of average value £30k. Assuming £4k depreciation per car per year, plus insurance, servicing etc, £10k per family per year feels about right. Only one of these cars is regularly driven more than 10k miles per year.
- £10k Household. This is a made up number, based roughly on what my house costs to run. This includes utilities, council/property tax, minor repairs (not DIY, naturally), a spot of window cleaning, etc.
- £4k Commuting costs. I’m working here of £1500 per year for zone 1 travel card per adult, plus a bit.
- £55k Wildcard. Savings? New car? New kitchen? Take your pick. No 30% savings ratio here though, obviously. A couple of my friends save a reasonable amount into their pension/ISAs but one doesn’t.
American readers might note the lack of healthcare as a significant expense here in the UK with its amazing NHS. But they must wince, as the rest of us do, at the school fees point from such a young age.
As a final point, there is a clear answer to my headline question: No, the minimum salary required in London is not £500k. For starters, working costs money and tax. For any of these guys to stop working, they won’t need £500k to sustain their lifestyle. If they started drawing down savings, they could make do with about £250k of income from tax-efficient assets. If they gave up school fees, or if they – shock horror – left London – then their costs drop dramatically. But the basis for my blog is that financial independence that needs a major uprooting of your life or constrains your life choices is not truly financial independence. So I think for these friends of mine the minimum income required is at least £200k. Still a very sizeable number.
Two questions from this:
1) Londoners: what have I omitted? My list isn’t comprehensive.
2) Frugalists: With such a cost structure, where would you start saving first?