January 2017 review – a look at my finances for the month

Winter scene for January 2017 reviewMy January 2017 monthly summary follows on from my January income fund update and shows general financial health. Almost like a balance sheet statement, but different!

My Score for January

Living Expenses Budget $3,970 😐
Security Ratio 17.6% 😎
Expenses 54.0% 😐
Savings 19.8% 🙂
Investments 26.3% 🙂
Wet Worth $186,621 😎
Work Freedom Day 31-Oct-17 🙂
Cash Reserves 3.6 months 🙂
Emergency Fund 11.4 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. $3,970 is the amount from my Budget 17.0.

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 $700 a month which is 17.6% of my current $3,900 monthly budget. Or, as ambertree pointed out, almost one day a week that I don’t need to work!

I’ll change this amount once or twice a year as dividend income increases. $700 a month is $8,400 a year which is about 84% of the total dividends I’m expecting.

Living Expenses %

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

This month’s 54.0% is likely to be the worst monthly result of the year. This is a combination of a new higher budget amount and lower investment income this month. I save or invest any income that I don’t spend on Living Expenses so my effective “Savings Rate” this month was 46.0%.

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 as I try to limit lifestyle creep and personal inflation.

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 January I spent 55.1% of my income on expenses, so I’ve improved 1.1% points compared to last year. Although last year’s budget was $70 less at $3,900, this year’s result is helped by a higher paycheck. In other words, my budget increased at a lower rate (1.8%) than my salary + 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 2015 I started Budget 3.0 which I updated to Budget 3.5 in July.

Budget 4.0 started last January with an increase to the monthly amount which I held constant in the mid-year review of Budget 4.5.

Starting this month I’m adopting Budget 17.0 which increases monthly spending to $3,970.

Savings %

The percentage of net income spent on Savings (excluding Investments). Savings represents cash plus a long-term holding in Vanguard’s Wellington fund (VWELX).

As part of my revised budget and savings plans, I’m putting aside $1,310 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 19.8% of my month’s income compared to 19.3% last year.

Last month’s saving rate was 13.9%; the percentage increased this month because I saved more money instead of investing 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 26.3% of my income.

I’ve written about my January 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 $6,212 in January from $180,609 to $186,821. This is another all-time 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.

My initial estimate of my Work Freedom Day is 31 October 2017 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 $3,970 budget, one Work Freedom Day requires about $132 of dividend income which in turn requires about $4,400 of capital. Financial Independence then requires about $1,584,000 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 $3,707 in January which means I underspent my budget by $343.

Overall, the amount of monthly Living Expenses that I hold in cash has increased this month. The account balance at the end of January is up to 3.6 months of living expenses, compared to 3.3 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. $39,700).

After my recent Emergency Fund shuffle, I’m currently holding $9.886.08 in VBIIX plus $35,570.20 in a money market account. Together this is enough for 11.4 times my monthly $3,970 expenses. I’m moving the money market cash into VBIIX in my Income Fund.

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 +$1,401 Cash for living expenses increased this month as I used some savings to pay medical expenses.
Debt -$1 Debt decreased $1 this month! The charges on my credit cards cancelled out decreases in the mortgage and remaining car lease obligation.
Savings +$998 I saved $900 in cash this month. But I also withdrew $1,367 to pay towards medical bills and car lease, so cash decreased a little. My longer-term savings in the Vanguard Wellington (VWELX) fund increased $770 overall thanks to a $400 contribution and Miss Market. My HSA increased $400 too.
Emergency Fund -$3,925 This value represents the decrease in my money market account containing my old Emergency Fund. I’m moving the money into my Income Fund.
Portfolio +$7,736 My Income Fund market value increased in January. See my earlier post for details.
Total +$6,212 Total change in Wet Worth

January 2017 Summary

So, yet another month where my Wet Worth reached a new record high. This result means that I could pay off all my debts tomorrow and still have $186,821 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. I chose not to pay off my mortgage because I can get better returns in the market and I prefer more liquidity.

Living Expense cash increased a little as I dipped into savings. I want to avoid using my HSA for medical expenses, and I don’t have many specific deadlines for my Savings.

Although this year started out badly with a high 54% of my income going towards living expenses, that number will only get better during the year. Plus, it’s already an improvement over last January’s result, so this year’s looking good to make some more all time records!

How was your January? Let me know!


Quote of the Day

One of the most tragic things I know about human nature is that all of us tend to put off living. We are all dreaming of some magical rose garden over the horizon instead of enjoying the roses that are blooming outside our windows today.

12 thoughts on “January 2017 review – a look at my finances for the month”

  1. Hey DL,

    Nice month. Looks like things are going well on the job and investment front! One question, you are taking $700 a month from your income fund, instead of re-investing all the income? I’m just curious as to your thoughts on this, or if I didn’t read it right.

    Erik

    1. Hi Erik,
      Yes I withdraw $700 a month but it really just means I can invest an extra $700 of my income, so it’s the same. Dividends are paid into my Money Market account; I have an automatic $700 withdrawal from the money market account to the checking account which pays the bills; I transfer $700 less from my salary to that account, and I invest that $700 instead. Money is fungible 🙂 It’s all automated so I don’t have to worry much about it.
      I do this to learn and experiment on how to live off the cash-flow from my income fund, since one day my salary will stop.
      Best wishes,
      -DL

  2. Div Life –

    The work freedom day is pretty cool and hoping that that day moves earlier and earlier for you! Keep hustling and grinding away and hopefully you can figure new ways out to save more $, invest it and increase that income. Nice job.

    -Lanny

    1. Hi Lanny,
      Thanks for the encouragement! I always appreciate your comments 🙂
      Have some good news to share later this month about increasing income – stay tuned!
      Best wishes,
      -DL

  3. I like the idea of the word freedom day and seeing it move down each time you make contributions even if it is a day earlier! If only we all had jobs where we could just take the last 2 months of the year off!

    I’m impressed by the ww growth, you’ve doubled it since the start of the year.

    1. Hi timeinthemarket,
      It’s always fun to watch the date move forward, and rewarding too when it’s in the rear-view mirror!
      Best wishes,
      -DL

  4. Hi DL,
    I also very much like the element of the work freedom day. How do you calculate it? Do you take the actual number of working days in a year or the number of days ie including weekends and holidays?
    Thanks for sharing your Score for January.
    Regards,
    DIB

    1. Hi DIB,
      I calculate it based on calendar days since that’s simpler. So it includes weekends and holidays.
      It’s a simple percentage of my projected income over expected expenses. That percentage is applied to the number of days in the year which I then convert to a date.
      Best wishes,
      -DL

    1. Hi 10!
      Yes I took it from the tax freedom day but it’s based on projected income instead. It’s a fun way of looking at progress and another excuse to celebrate when the day comes around! 🙂
      Best wishes,
      -DL

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