When I first started out on my Early Retirement Extreme Mission in 2014 I calculated that even an individual earning an average UK income could save enough to retire on by their early 50s if they only spent money on the basic necessities and saved/ invested the rest.
I thought it’s about time I revisited this with 2020 (or at least the latest) statistics and it remains the case now, as was the case in 2014, that only a relatively small proportion of typically higher-earning individuals manage to retire before their mid-60s.
The majority for whom early retirement (by their early 50s) is a mathematical possibility fail to do so because they choose to continue to spend hundreds of pounds month on month, year on year, on what I would classify as non-necessities.
The average UK annual household income in 2020 was £30 800
The average UK annual household expenditure to March 2019 £30 530 (based on £585.60 a week)
Note how, on average, the nation is pretty much at its spending limit – only £270 a year to spare!
This expenditure breaks down as follows:
Now we should only use this a rough guide, because there’s no such thing as the ‘average’ household, so we need to be a bit cautious, especially when the stats above include both ‘rent’ and ‘mortgage interest payments – when most households won’t be paying both of these, and many won’t be paying either, so there is going to be considerable variation from this average both in terms of total expenditure and across the different categories of expenditure.
However, this is the most representative source of data available, so I’m going to use this as a starting point and supplement it with a few other data sources where necessary.
Now I personally classify the following as essentials:
Housing – either rented or mortgageCouncil tax – which you just cannot avoid!Food – ideally the cook yourself at home varietyUtilities - water, gas and electricityTransport – usually essential for work/ study/ childcareCommunications – basically a phoneClothes – shoes and warm clothes and work clothes being the most essentialAppliances – washing machine/ fridge/ computer being the ‘big three’ which need renewing every so often.
How much do UK households spend on average on necessities?
It is a bit of a pain to work out how much of average household expenditure is what I would classify as ‘necessary’ because of the rather odd way the ONS has grouped the categories of expenditures, but here’s approximately what the average household spends on these different classifications of goods and services:
- Housing – either rented or mortgage – £8400 (2018 figures, based on alternative an alternative source because the ONS figures includes older people with no mortgage or rent costs!)
- Council tax – which you just cannot avoid! - £1480
- Food – the cook yourself at home variety – £2960
- Utilities - water, gas and electricity – £1680
- Transport – usually essential for work/ study/ childcare – £3840
- Health/ insurance – I’m not going to argue with the former, the later is often unavoidable if you want a house! – £960
- Communications – basically a phone – £960
- Clothes – shoes and warm clothes and work clothes being the most essential – £1200
- Appliances – washing machine/ fridge/ computer being the ‘big three’ which need renewing every so often – £384
- Total = £21864
Taking the total away from average income, there is room for a significant savings capacity of… £30 800 - £21 864
= just under £9000 per household.
Spending on non-necessities is the norm...
However, rather than saving or investing that money the good old British public choose to spend it on a range of non-essential goods and services, broadly categorised by the ONS as ‘recreation and culture’, ‘household items’ and ‘miscellaneous’.
The largest categories of expenditure include…
- Recreation and culture - £4100 a year – which primarily means holidays, but also sports and cinema and magazine subscriptions.
- Restaurants and hotels - £2660 – in the very finest tradition of embellishment this category includes pubs and KFC buckets.
- Furniture and furnishings - £1200 a year, which includes almost £200 a year on soft floor coverings, or carpets and rugs.
I mean I fully support the right of any individual to spend their hard-earned disposable income on whatever they like, but to my mind the average person would be better off forgoing carpets and chicken buckets and then saving and investing a good portion of that £9000 a year – I mean even if it was only for a single year, and then you’ve got a little fund to play around with!
It’s maybe not fair to use the average figures, as there will be A LOT of variety in both income and expenditure patterns, my point here is that overall the norm is to spend as much as you earn, and there is a lot more capacity for stopping spending on shit we don’t need and saving it.
Putting reduced income due to Covid-19 in Perspective...
With the pandemic, many people have had a reduction in income, but what the above analysis shows is that, on average, income could reduce by about a third, and we’d still have enough money to buy the necessities.
The problem is that now a lot of people have been forced into giving up non-necessities due to reduced income, there’s nothing for them to save!
Whereas what happened with me – I’d been only buying necessities for years prior to Covid-19 (well, with the exception of way too many take out coffees and beers) and so was able to subsidise myself and a move abroad during the pandemic with my substantial savings.
Personally, I just can’t see any advantage to having gotten into the habit of spending £9K a year on unnecessary consumer frivolities if you don’t already have significant investments or a massive income, which most people (certainly not the average person) don't have.
That's just the route to suffering as you adjust downwards during a crisis!