August 2016 – monthly summary

Counting Crows performing at DTE Energy Theatre on 24-Aug-2106

We went to a Counting Crows concert in August – see photo attached. We try to go to a couple of concerts each year – this year we went to a total of four. In other news, it’s time to look at the numbers in my August monthly summary. This post follows on from my August income fund update. Did summer end on a good or bad note?

My Score for August

Living Expenses $3,900 😐
Security Ratio 13.8% 😐
Expenses 52.2% 🙂
Savings 18.7% 🙂
Investments 29.1% 🙂
Wet Worth $153,289 😎
Work Freedom Day 26-Oct-16 😎
Emergency Fund 107% 🙂

Living Expenses

This is my fixed monthly budget for living expenses and it includes both essential (e.g. groceries, mortgage, insurance), and non-essential (e.g. music, travel) purchases. $3,900 is the amount from my Budget 4.5.

I spent a total of $10,154.03 (!) in August which means I overspent my budget by $6,253.36. This month happened to be a perfect storm of a year’s worth of Auto-Insurance ($3,497 for two cars in Michigan), the credit card bill from our UK trip ($1,154) and some purchases I made using money from my Savings account ($1,985). Both the insurance and travel spend were planned and part of my regular budget so I’ve been building up a surplus for a year in anticipation of this month.

Security Ratio

This is the percentage of my monthly living expenses budget that my Income Fund pays for. This metric is no longer tied to the actual dividend income per month. Instead I’m automatically withdrawing a flat monthly amount of cash from my Income Fund that’s fueled by dividend payments. The current amount is $540 a month which is 13.8% of my current $3,900 monthly budget.

I’ll change this amount once or twice a year as dividend income increases. $540 a month is $6,480 a year; that’s about 80% of the total dividends I’m projecting to receive this year as I want to build a small cash buffer for smoother cash flow.

Living Expenses %

The percentage of net income that’s spent on living expenses. Lower numbers are better here.

This month’s 52.2% is a slight improvement over last month’s 51.9% due to higher dividend income this month. I save or invest any income that I don’t spend on Living Expenses so my Savings Rate this month was 46.1%.

Any change in this number is caused by a change in either income or budget similar to the Security Ratio although this calculation takes total income into account and not just dividends. This value uses the planned budget against income; not the actual spend.

Last August I spent 53.8% of my income on expenses, so I’ve done a littlee better compared to last year. Although last year’s budget was $50 less at $3,850, this year’s result is helped by a higher salary since dividend income was fairly similar having only a $13 gain.

The chart above shows the trend in my Living Expenses % since the start of 2014. For the first part of 2014 I was paying two mortgages. In June 2014, I introduced Budget 1.0 after selling my first house and I made some minor tweaks in Budget 2.0 from October onwards. In January I started Budget 3.0 which I updated to Budget 3.5 in July.

Budget 4.0 started this January and it increased the monthly amount which negatively affects results this year. I’m now following Budget 4.5 which kept the total monthly amount the same from January.

The average percentage value should decrease over time because salary and investment income should increase faster than living expenses.

The Living Expenses % metric and the Work Freedom Day metric (see below) are both good incentives to avoid increasing the budget since both numbers are impacted by a higher budget.

Savings %

The percentage of net income spent on Savings.

As part of my revised budget and savings plans, I’m putting aside $1,380 every month for mid and long term goals (any large expense or purchase due a year or more in the future). The savings percentage was 18.7% of my month’s income compared to 16.5% last year.

Last month’s saving rate was 20.7%; this number decreased this month primarily because I didn’t add any extra contributions to my Emergency Fund.

Investment %

The percentage of net income that I invest.

Any spare money left over after savings, retirement and living expenses are paid goes into my Income Fund. This month it was 29.1% of my income.

I’ve written about my August portfolio income and gains in a separate post, so I won’t repeat all of that here again.

Wet Worth $

My liquid assets minus all debt (excluding retirement and non-liquid assets).

My Wet Worth increased $3,531 in August from $149,758 to $153,289; a new record high! There’s a more detailed breakdown of this amount further below.

Work Freedom Day

The day in the year that my dividend income could pay for the rest of the year’s expenses.

Based on current projections and including the last dividend amounts, my Work Freedom Day has moved forward to 26 October 2016, that’s a little over a month away!

Note that based on my $3,900 budget, one Work Freedom Day requires about $128 of dividend income which in turn requires about $4,000 of capital. Financial Independence then requires about $1,600,000 at a 3% yield.

Emergency Fund

This value is the actual balance of my Emergency Fund vs my target balance which is 10 times my living expenses (i.e. $39,000). The stock market increased my EF funding level to 107.0% this month, up from last month’s 106.7%.

Currently my EF is 100% held in VTSAX, a low cost stock market fund. It is not recommended to hold your Emergency Fund in stocks. Economic conditions where you might lose your job would likely impact the market and cause lower prices. Also if you’re relying on your EF to pay an large unexpected expense, the money might not be all there when you need it due to stock market drops.

However, in my particular situation, my EF is dedicated solely to covering loss of employment and so I feel comfortable with this risk when judging the chance of losing my job. Especially so since our household has two incomes. In an extreme case where the market drops 50%, I still have 5 months of living expenses. More importantly, every day I move closer to Financial Independence reduces the need for an EF to protect against job loss.

Wet Worth detail

I’m showing my Wet Worth in this post – this is the cost of my liquid assets minus debt, I exclude assets and retirement accounts from this number. I prefer this over Net Worth since the equity in large assets (house, car) and retirement funds is hard to get at and not always predictable. I find this is a more honest view of where I’m at on my journey.

The change in Wet Worth is caused by

Cash -$3,976 Cash for living expenses decreased this month due to a higher credit card payment.
Debt -$6,543 Debt decreased this month as I used cash to pay off the bills from my UK trip and yearly auto-insurance.
Savings -$1,531 Although I saved $1,400 this month, I also withdrew $2,060 to pay for a new laptop. My longer-term savings in the Vanguard Wellington (VWELX) fund and my HSA account increased this month.
Emergency Fund +$115 My Emergency Fund consists of the Total Stock Market fund (VTSAX). It grew by $115 all on its own.
Portfolio +$2,380 My Income Fund had a flat month from new capital and capital growth. See my earlier post for details.
Total +$3,531 Total change in Wet Worth.

August 2016 Summary

My Cash accounts took a beating this month from the large credit card bill which was paid in full. I have enough cash reserves in my Living Expenses account to cover the payment but it was sorely tested this month and I need to start building my cash reserves up again. My new Savings approach will help with this as it means I’ll use Savings more for unexpected or for large planned purchases.

Despite this however August was another good increase for Wet Worth and I reached a new record total!


Quote of the Day

Today is life-the only life you are sure of. Make the most of today. Get interested in something. Shake yourself awake. Develop a hobby. Let the winds of enthusiasm sweep through you. Live today with gusto.

14 thoughts on “August 2016 – monthly summary”

  1. Those months with the big one time payments are the worst. I can’t remember the last time I paid my car tax bill so it’s probably on the way sometime soon.

    Still nice to see the wet worth grow despite the high expenses!

    1. Hi timeinthemarket,
      I’m glad not to have too many of them, even if they are somewhat planned / expected!
      It looks like the market will be putting the brakes on any increases this month but we’ll see what happens between now and the end of the month.
      Best wishes,
      -DL

    1. Hi Tawcan,
      Good point. I think it’s a little cheaper to pay in one go because of small fees added for monthly payments but I should check on that. I do plan for the large payments by putting the money aside each month, so it’s more of a psychological cost of seeing a large drop in my bank balance!
      Hope you had a great September!
      Best wishes,
      -DL

  2. I’ve been to a bunch of Counting Crows concerts, but not in the past few years. Great band, especially live. I’m jealous. It’s a small world, my older sister went to junior high and high school with the Crows lead singer Adam Duritz.

    1. Hi IH,
      Wow that’s a small world! The seven degrees of separation is probably true after all then 🙂 They still put on a great performance and played a mix of new and old songs so it was a good concert to enjoy.
      Best wishes,
      -DL

    1. Hi DFG,
      It’s mostly because it’s Michigan – the state guarantees unlimited personal injury protection, regardless of who’s at fault. Coverage also includes unlimited lifetime medical benefits.

      I am planning to shop around next year to see if there’s something cheaper; I wasn’t organized enough to do it this year. I’m supposed to be getting a good rate but I’m not convinced. It went up a bit because of the new car, but it’s always been high especially to what I was paying in Alabama for a convertible sports car.

      Best wishes,
      -DL

  3. Hello Dividendlife,

    I am very new into investment and I am very impressed with your goals and achievements till date. I am still trying to gasp all the info and advices on your blog. They are great insight for high income investments.

    I am a UK resident and would like to know whether do you know if there is any data on income/dividend bond/ETF investments in UK ?

    Is it possible for me to invest in the US bonds and ETFs such as from Vanguard ?

    I see from your blogs that the dividends in US are paid monthly for bonds/ETFs and quarterly for stocks. In UK for stocks the dividends get paid twice a year. So I don’t see any way to get income on a monthly basis here in UK.

    Your esteemed advice would be very helpful for me.

    Thanks

    1. Hi die_hard,
      I’m sorry I missed your comment entirely 🙁

      I would suggest looking at this page on UK Investing for a general overview of some low cost funds that might be suitable.

      Yes, there are some Vanguard products although I think they’re based in Ireland and are slightly different than the US ones. I don’t think it’s easy / possible to invest in the US Vanguard funds directly from the UK. You might be able to buy the ETFs if your brokerage account allows international trades.

      I maintain a list of UK dividend stocks & funds at DividendChampions.uk. Some of them pay quarterly and a few even monthly, but I wouldn’t recommend making a purchase decision based on how often dividends are paid.
      Although they generally pay less often than US stocks, the payments will be larger as a result. This really depends on how you handle income but one solution, if you want monthly income, is to deposit the dividend money into a separate account and withdraw a smaller portion of it each month. It just means that you have to wait some time before the payments start.

      Best wishes,
      -DL

      1. Hi DL,

        Thanks for your reply.

        Since my question about two months back, I have been reading and researching a lot on investment and dividend income portfolio building. I have decided not to invest in bonds/ETFs to start with. I have started investing in shares which gives me control what to control/buy. Probably near to retirement I would move to safer investments such as bonds/ETFs.

        There are pros and cons of investing in UK shares as compared to US market. In UK, one doesn’t pay dividend tax on first ÂŁ5000 of your dividend income. In US, one would pay 30% dividend tax which is quite high. However, in UK there is less choice of great dividend paying companies as compared in US. In US I could find many companies with big market cap (which means they are financially withstand a recession or crash) and have a history of paying dividends for more than 25 years and increasing.

        I would like to hear your thoughts on this.

        Thanks.

        1. Hi die_hard,
          It’s great that you’re researching and learning more, and it’s good to approach investing from a global perspective to include international / non-UK stocks. The Vanguard article about UK investing that I linked previously had some recommended % allocations for non-UK stocks.

          I personally gravitate towards dividend paying stocks to generate current income. However, I’ve not seen any real data which suggests that dividend champions provide a higher “total return” than the market average over the long-term. I also think low-cost ETFs which replicate a passive stock index are “good enough” without the stress or work required to manage individual stocks.

          Investing is an uncertain world, but the two factors you have complete control over, and which affect your portfolio returns the most, are: Risk and Fees. Fees you can find out e.g. from stock trading commissions or the Expense Ratio of ETFs / funds you plan to buy. Risk you can moderate by choosing a combination of stocks vs bonds (more % stocks = more risk). ETFs don’t necessarily contain only bonds, so they’re not always a ‘safe’ choice.

          The extra Risk with choosing individual stocks as the main basis of your portfolio is from non-systematic risk. You need perhaps 30-60 stocks to eliminate that risk, which brings you closer to an index in any case.

          But in terms of owning individual stocks in your Portfolio, the passive buy and hold strategy advocated by dividend growth investing is, in my opinion, much better than trying to time the market or actively trade stocks. Whether it will outperform the average market over the long-term is another question entirely.

          Best wishes,
          -DL

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