It’s past time for my bi-yearly budget review to accommodate any changes since I updated Budget 4.0 at the start of the year. The updated 2016 budget allows small course corrections to take account of changes to living expenses. Since it’s a mid-year adjustment, I’m not increasing the overall amount. But there are changes nonetheless and I’ve had to adjust my Savings philosophy to some extent.
I review my budget twice each year. This new Budget 4.5 runs from July to December. Although it’s August now, I’ve been following this budget since last month; I just haven’t had chance to publish it.
Budget 4.5 for 2016
My budget applies to Living Expenses; the typical monthly spending required for living, and I divide all living expenses into spending categories.
I consider each category as either Mandatory (a need) or Discretionary (a want). Mandatory expenses are things like food, utilities, mortgage etc. Discretionary expenses are for luxuries and hobby related items. I track the cost of both since it’s always good to know the minimum cost of living in case of emergencies or unforeseen events; I could stop immediately stop spending in any of the discretionary categories if absolutely required.
Here’s the high summary of view of my past budgets and how the remainder of the year will look with the new version 4.5.
|Monthly Living Expenses||$3,960||$3,900||$3,850||$3,900||$3,900|
Because this is a mid-year adjustment, I’m focusing more on reallocating money between categories to avoid an increase in the overall amount. Increasing the amount makes my other targets harder to reach as my dividend income goals, Work Freedom Date and Emergency Fund levels are all based on a multiple of the monthly budget value.
But things do change during the year and predicted expenses or assumptions made may be wrong. The mid-year review is a way to make a course correction and reduce spending if necessary.
Mandatory expenses – spending on those things I can’t do without will increase by about 0.6% or $20 a month.
Discretionary expenses – spending on things I can do without, will decrease by $20 a month or about 3.3%.
The following sections explain the categories and changes in more detail.
Budgeting in a nut shell
The categories below represent every anticipated expense that I can think of. I put the budgeted amount of money into a high-interest checking account every month – I use ally.com who offer a 0.60% interest rate on their checking account (0.2% at lower amounts) plus free bill payment by check. I’ve recently tied an Ally Online Savings account to this account so I can park some cash at a higher 1% interest rate. The sole purpose of this account is to hold cash for Living Expenses. Cash that I hold as part of “Savings” or my “Income Fund” are held in separate accounts.
Expenses are paid for with checks or credit cards linked to the Ally account (credit cards are set to automatically pay the full balance each month) and each expense is categorized in an Excel file. Each month the surplus or deficit for each category rolls over to the next month and I aim to keep 3 months’ worth of monthly expenses in the account as a buffer. This works for annual expenses such as auto insurance too – I’ll be saving money for 11 out of 12 months then there will be a big expense in the 12th month when the payment is made.
Because of the 3-month buffer amount, I can typically afford to keep a category in negative amounts, even across multiple years if I need to, since the amount is offset by surpluses in other categories.
Note – Ms. DivLife and I keep separate finances. This budget covers all of our joint expenses including all groceries, insurance and utilities, but there are a couple of areas that she still pays separately for – her medical, clothing, auto repairs and gym membership costs.
Mandatory expenses have increased largely due to the higher amounts for medical, house repair, insurance and internet.
Utilities: Electricity, Water, Gas, Phone
Electricity and Water bills are within their expected ranges so I’ve kept the amount the same. I’ve reduced the spending for Gas as I have more data now about the usage.
We don’t have a home phone, just wireless. I’ve recently changed my wireless plan at AT&T to use less data and the current savings look to be about $20 a month. I reduced spending $6 for now until I’m sure of the new amounts.
It seems my “special discount” expired for the internet and cable TV bill, so it’s back up to about $126 a month. I’ve not yet had time to try to negotiate a better rate or switch to another provider so I’ve had to absorb this increase for the time being.
My health insurance is high-deductible so I have to pay out of pocket for each doctor’s visit. I’m avoiding the use of my HSA investment account as I want that to grow tax-free until I have more significant expenses when I’m older.
That said, my medical expenses have been much higher than expected this year and I’ve already reached the yearly deductible limit of $1,500. The maximum out of pocket expenses is $2,300 which I’ve not yet reached.
To manage this, I’ve increased the monthly amount a little, but I’ve also started to use part of my Savings for medical costs. I think in the longer-term I’ll use this category for standard costs e.g. prescriptions or small incidental costs and I’ll pay more expensive medical bills out of Savings instead of Living Expenses.
I’m currently carrying a negative balance in this category.
I’ve increased this category by $5 a month because of higher repair costs. I treat house repair separately than expenses for home improvement – this category is for repairs that must be done.
I’m running into the same issue here as with medical costs however; recently we’ve just paid $900 for plumbing repairs and $1,600 for repairing the deck. So I’m going to be diverting some of my monthly Savings into House Repair and use my Savings to pay for some of the more expensive (& hopefully infrequent!) house repairs.
House: Property Tax
I separated out the Property Tax portion of the mortgage from the base principal plus interest. This is paid as part of my mortgage payment but I like to track it separately since the escrow payment varies. When I have no mortgage; this will be the monthly amount I need to pay.
This is paid annually and I pay it separately than the mortgage using my credit card so I can earn air miles for doing so. Like most things, it’s increased again this year but the existing mostly amount is enough to cover it.
So this amount now represents the fixed principal and interest payment which won’t change as we have a fixed-rate 30 year mortgage. I’m not trying to pay down the mortgage; instead I’m saving additional money in Vanguard’s Wellington fund each month and I’ll use that to pay off the mortgage early in a lump sum. My current estimates show that happening 18 years from now in June 2034, nine years earlier than the original mortgage arrangement.
I don’t have any hang-ups about carrying mortgage debt as my liquid net worth is more than the mortgage so in that sense I consider myself “debt-free”. I just choose not to pay off the mortgage now as I prefer having more liquidity than house equity.
That said I may look into refinancing the loan since the rates look to be low enough to justify it.
ADT increased their prices for the second time in 3 years. The first time I removed an optional service from the service; the second time I switched to AT&T’s Digital Life. This is cheaper at $39.99 a month inclusive of taxes / fees. The higher monthly amount is because of some residual ADT charges since I only switched recently; I should be able to reduce this category again in December.
I also own AT&T stock so I like to think that I’m getting some of this money back with each dividend they pay me.
I’ve moved this category into the mandatory section as we continue to spend money on maintaining the yard – mulch, fertilizer etc. Any large home improvement project expenses would come out of Savings.
Ms. DivLife manages the grocery budget and does a great job at saving money. No changes here at the mid-year but we’ll increase it next year.
I’ve not spent any money on gasoline so far this year. The electricity charges of my new electric car are about $1 a day as I get a cheap nightly rate for charging which is included in the Utilities budget. I may have to buy a tank before the end of the year though. I believe I had to put two tanks of gasoline in my previous Volt over the 3 years / 14,000 miles I had it for.
Auto: Insurance, License, Repair & Assistance
Auto Insurance increased again this year; partly because of my new car and partly just because Michigan is so crazy expensive for car insurance. I plan on shopping around for a better insurance package before next year.
Auto: License: No changes here – this category is for license and registration fees.
I reduced the Auto: Repair budget since my car’s back under warranty and the only things I need to pay for are consumables such as wiper blades.
The Auto: Assistance category is now empty too since roadside assistance is covered by both OnStar and my credit card.
This is for tax preparation fees / tax payments needed using last year’s numbers as an estimate.
I’ve stopped using this category now – I like every dollar to have a purpose where possible, so I’ll be deleting it entirely in 2017.
Entertainment: Books, Music, Games & Movies
Music expenses increased as we’ve been going to more concerts lately. This category currently has a negative balance and will need to increase more next year.
I decreased spending in Games by $5. Movies remained the same although we only rarely spend money on Movies since we get most videos from the public library.
No changes to the clothing budget – I don’t spend much on clothes as what I have is good enough for now.
Subscription: Credit Cards
I also use a free Chase Slate card as it provides a free monthly FICO score report. Amex provide the exact same credit score for free too but the Chase report summary is more comprehensive.
Where possible I charge every expense on a Credit Card to obtain Delta air miles that I use in reducing travel costs to the UK. The usage priority is Amex > Chase Marriot > Chase Slate.
Although the Amex Delta cards only offer a standard 1 mile for $1 spend, you can double or sometimes quintuple that amount by online purchases via their shopping site. The return ticket for my trip to the UK last month cost 60,000 miles vs a cash value of $1,800 (ticket prices vary during the year so this redemption rate can change); that’s about 3 cents per mile. So far this year I’ve earned 30,000 miles from purchases based on a $20,510 spend, which at that rate is worth $900 or about 4.4% of the spend. Miles from flights provided another 10,000 miles so far this year.
I increased the Travel budget $10 – Travel is another luxury item that I enjoy and I’d like to travel more. The $60 that this increase provides for the remainder of the year won’t go very far but I expect to increase the category again next year.
I spend cash once in a blue moon when I have my hair cut and I think that’s about it. I cut the amount $5 as part of my ongoing anti-cash campaign. The only cash expense I have is to pay for a hair-cut.
This category is for miscellaneous computing expenses as well as subscriptions / software purchases. I decreased this monthly amount since I’ll now be using Savings for larger hardware related purchases e.g. a new laptop etc.
Immigration is a newer category due to costs associated with my citizenship application. I’ll be using this category for passport fees & any additional fees such as the Global Entry program. In the meantime this money will be paying down the application fees which still carry a negative balance.
We’re eating out a little more often so I’m increasing this category by $22. I’ve also started to spend a bit more on lunch at work as I’ve had to buy food from the cafeterias there from time to from.
I might buy a book or video on fitness once a year, so I’m leaving this amount unchanged – I exercise at home (Pilates and bodyweight) so I don’t need any expensive equipment or gym membership.
This category covers any spending on presents or charity. I’ve reduced this category although I’m still carrying a small negative balance so I may need to revise it next year again.
This is just a small amount that can be used for any purpose. I’m currently earning small amounts of interest on the account balance so I’ll likely convert this category into interest income and redirect the interest to the category with the lowest balance each month.
The following chart shows each expense category in order of size.
In addition to the budget changes, I’m also going to increase the amount I’m putting into my Savings monthly; I’ll be saving at least $1,280 a month with an $100 additional monthly contribution if needed. This is an increase from the $1,100 a month I was saving in the first 6 months of the year. Investments are the remainder of my income and will be $2,300 monthly.
I hold a Cash Account for short to mid-term saving goals as well as Vanguard Wellington (VWELX) for longer-term savings. $380 of my monthly savings will be directed into VWELX (up from $360 in the first half of the year) – the remainder goes into an Barclays online Savings Account at 1% interest.
I’m still adjusting and tweaking my Savings system but I’ve learned so far that I should be using it more for larger & infrequent purchases. I’ve started to create more savings categories so that I can allocate different amounts to different savings goals. I’m also using the savings account to cover any loans I might have; currently I only owe my car lease payments – I have enough money allocated to that purpose in my Savings account to pay all future payments. I plan to create similar categories for insurance deductibles.
So I think my Savings account will be part “unexpected expense fund” and part “planned future purchase fund” going forward. I’m still keeping my dedicated Emergency Fund, but that’s reserved for covering loss of income.
The mortgage payment is by far the largest expense. It’s a little embarrassing to see Fitness as the lowest expense as if that’s my lowest priority, but walking and doing Pilates doesn’t cost any money.
This updated budget will have no impact on my monthly score card for remainder of the year except that the savings percentage should increase a little. As for my security ratio (dividend income divided by monthly budget) – that will remain the same.
I think the changes for how I’m using Savings is necessary but at the same time I’m concerned that these would be valid expenses in retirement and that perhaps that I need yet more dividend income to be FI than I anticipate. On the other hand I do think that expenses would be less in retirement (one car, no need to drive as much etc) so that it’ll probably balance out in the long-term. But it’s not a problem to worry about today, and I’m collecting more and more data each month about expenses and where my money goes to make better future decisions.
Quote of the day
Good health is not something we can buy. However, it can be an extremely valuable savings account.