December 2016 review

December 2016 reviewMy December 2016 monthly summary follows on from my December income fund update and shows general financial health. Almost like a balance sheet statement, yet different. But enough already – what are the numbers?

My Score for December

Living Expenses Budget $3,900 😐
Security Ratio 15.4% 🙂
Expenses 40.9% 😎
Savings 13.9% 😐
Investments 45.2% 🙂
Wet Worth $180,609 😎
Work Freedom Day 26-Oct-16 🎉
Cash Reserves 3.3 months 🙂
Emergency Fund 10 months 🙂

Living Expenses Budget

This is my 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.

The amount is more of a spending goal than a strict budget as I over/underspend each month. The budget is calculated from an estimated yearly spend divided by 12, so it’s normal for some months to be over or under the target amount.

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 $600 a month which is 15.4% of my current $3,900 monthly budget.

I’ll change this amount once or twice a year as dividend income increases. $600 a month is $7,200 a year which is about 82% of the total dividends I received this year.

Living Expenses %

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

This month’s 40.9% is the best monthly result of the year, helped mostly by the higher dividend income from my Income Fund. I save or invest any income that I don’t spend on Living Expenses so my effective “Savings Rate” this month was 59.1%.

Like the Security Ratio, any change in this number is caused by a change in either income or budget. However this metric takes total income into account including actual investment income.

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.

Living Expense History

Last December I spent 45.6% of my income on expenses, so I’ve improved 4.7% points compared to last year. Although last year’s budget was $50 less at $3,850, this year’s result is helped by a higher paycheck as plus higher investment income.

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’ve been following Budget 4.5 which kept the total monthly amount the same from January.

Starting in January 2017 I’m adopting Budget 17.0 which increases monthly spending to $3,970. So, there will be negative pressure on the metrics until investment income increases to compensate.

Savings %

The percentage of net income spent on Savings (excluding Investments).

As part of my revised budget and savings plans, I’m putting aside $1,280 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 13.9% of my month’s income compared to 14.4% last year.

Last month’s saving rate was 21.3%; the percentage decreased this month because I invested more money instead of saving it.

Investment %

The percentage of net income that I invest.

All spare money left over after savings and living expenses are paid goes into my Income Fund. This month it was 45.2% of my income.

I’ve written about my December 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 $13,856 in December from $166,753 to $180,609. This is another all-time high. There’s a more detailed breakdown of this amount further below.

Overall throughout this year, my Wet Worth increased from $92,082 at the end of December 2015 to $180,609. That’s an increase of 96% or $88,527! About $22k of that was from investment capital gains, $47k was money invested, so that means I saved / paid down debt for a total of $19k this year.

Work Freedom Day

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

Since I’m already enjoying my “Work Free December”, I’m holding my Work Freedom Day at 26 October 2016 for this year. It’s nice to think that I only need to work 10 months of the year before investment income takes over.

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.

Cash Reserves

This is a new metric I’m reporting to keep a closer eye on the account balance of my Living Expense account. I’m tracking the number of months of monthly expenses currently in my Living Expense account. Cash stored in other accounts such as Savings and Investment is not included here.

I spent a total of $3,505 in December which means I underspent my budget by $395. I paid $760 of medical expenses this month which is not a typical amount.

Overall though, the amount of monthly Living Expenses that I hold in cash has increased this month. The account balance at the end of December is up to 3.3 months of living expenses, compared to 3.1 months in November.

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).

After my recent Emergency Fund shuffle, I’m currently holding $39,494.89 in a money market account. This is enough for ten times my monthly $3,900 expenses. I’ll be moving this money to a bond fund in my Income Fund. This adds more risk than holding cash but it’s also unlikely that I’ll need the money.

My EF is dedicated solely to covering loss of employment. I use Savings to pay for large unexpected expenses. I’m comfortable with this risk when judging the chance of losing my job. Especially so since our household has two incomes and I’m only considering my income in this blog.

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 +$805 Cash for living expenses increased this month due to higher income and lower spending.
Debt -$649 Debt decreased this month due to a lighter credit card bill so my mortgage payment and car payments had more impact.
Savings +$1,769 I saved $1,321 in cash this month. But I also withdrew $776 to pay towards my medical bills and car lease. My longer-term savings in the Vanguard Wellington (VWELX) fund increased $1,222 overall thanks to a $400 contribution and Miss Market. My HSA increased $404 too.
Emergency Fund -$3,207 I took out the surplus from my EF and moved it into my Income. I’ll convert the rest of the money in 2017 over time.
Portfolio +$13,840 My Income Fund market value increased in December. See my earlier post for details.
Total +$13,856 Total change in Wet Worth

December 2016 Summary

So, a great month for my overall Wet Worth reaching a new record high. That’s in addition to record investment income this month. This result means that I could pay off the mortgage tomorrow and still have $184,000 left over. Of course, that’s not the plan since Mr. Taxman would want some money too.

Keeping track of my Wet Worth lets me consider myself to be debt-free. However I chose not to pay off my mortgage because I can get better returns in the market and I prefer the higher cash flow. Instead part of my Savings is targeted towards paying it off in the future and I’ll take the income tax deduction for mortgage interest now while it’s most valuable.

Living Expense cash increased a little as I squirrelled some money away but I continued to put most available money into investments which means a stronger cash flow in the future. It’s a gift that’ll keep on giving for the next thirty or forty years. I think my Future Self will be grateful!


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.

6 thoughts on “December 2016 review”

  1. Wet worth is an interesting way to put it! I get it. Clever.
    My Net worth has slowly grown this year from negative to a positive of over 30k. I am very happy with this growth and hope it continues this next year as well. All the best

    1. Hi BHL,
      Congrats on having a positive net worth! That’s awesome and great motivation to continue building on it. Time is on your side and at your current savings rate you’ll be increasing that amount significantly this year.
      Best wishes,
      -DL

  2. I like the comment of wet worth. If we are looking at that, my wet worth is about $10k… not bad but not great. Most of my cash in the last year has been going towards home improvements. In 2017, hopefully can build wet worth up to $30k or $40k.

    You always put together unique content, nice job in December.

    1. Hey Erik,
      It seems everyone has a different definition of net worth, so I wanted to make it clear mine’s not a traditional net worth including house and other non-liquid assets. I do look at my net worth value but it seems so random based on housing estimates.

      Do you think your home improvements will add a reasonable amount of value to your house? We’re lucky in that our house has pretty much everything good enough, so we only spend a little on improving it at the moment. But we’ll likely want to make bigger improvements in a few years’ time.
      Thanks for commenting!
      Best wishes,
      -DL

  3. That’s really clever, wet worth. I like it. Looks like you had an awesome December and that’s got to be a great feeling knowing you can pay off your mortgage at any time. Thanks for sharing!!!

    1. Hi Mustard Seed Money,
      I found myself playing around too much with house prices and car resale values when I monitored traditional net worth. And even with the house value, there’s still 6% taken by the agent fees so it just gets more complicated to track. Wet Worth for me removes all of that uncertainty and clearly shows my exposure to debt. Wet Worth can’t lie 🙂
      Thanks for your comment!
      Best wishes,
      -DL

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