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

Winter landscape for February 2017 review - a look at my finances for the monthSadly the post title is correct. Time’s passed and although I should have posted March’s updates by now, I’m still in February. But I’m slowly starting to catch / wake up so here’s my February 2017 monthly summary following on from my February income fund update. It’s almost like a balance sheet statement, but different!

My Score for February

Living Expenses Budget $3,970 😐
Security Ratio 17.6% 😐
Expenses 53.2% 😐
Savings 18.6% 🙂
Investments 28.2% 🙂
Wet Worth $219,955 😎
Work Freedom Day 31-Oct-17 🙂
Cash Reserves 3.5 months
Emergency Fund 11.7 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.

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 53.2% is a bit better than last month’s 54%, resulting from higher 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 46.8%.

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 February I spent 55.0% of my income on expenses, so I’ve improved 1.8% 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 and income. 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 in 2016 with an increase to the monthly amount which I held constant in the mid-year review of Budget 4.5.

This year I’ve adopted Budget 17.0 which increased 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 18.6% of my month’s income compared to 16.9% last year.

Last month’s saving rate was 19.8%; the percentage decreased this month because I saved additional money last month.

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 28.2% of my income.

I’ve written about my February 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 $33,134 in February from $186,821 to $219,955. 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 current 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 $4,545.02 in January which means I overspent my budget by $575.02. I offset this a little by spending some savings for a net decrease of $355.57.

This means that the amount of monthly Living Expenses that I hold in cash has decreased this month. The account balance at the end of February is down to 3.5 months of living expenses, compared to 3.6 months in January.

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 $32,821.68 in VBIIX plus $13,635.38 in a money market account. Together this is enough for 11.7 times my monthly $3,970 expenses.

I decided to accelerate the process of converting the cash portion into Bonds held in my Income Fund this month.

My EF was originally dedicated solely to covering loss of employment; I use Savings to pay for large unexpected expenses. I’m comfortable with the risk of intermediate term bonds when judging the chance and impacts of losing my job. Especially so since our household has two incomes and I’m only considering my income, which pays almost all our expenses, in this blog.

My Bonus

I received a bonus at work this month, which is tied to the company’s profit share scheme and personal performance. It’s not a guaranteed payment but this year it paid out well. For the purposes of comparing this month to previous months / years, I have excluded the bonus amount from all metrics except those below which relate to balances. I saved $3,000 of my bonus in my Savings Account and invested $15,000 in my Income Fund.

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 -$267 Cash for living expenses decreased a little on the whole this month.
Debt -$1,780 Debt decreased $1,780 this month, mostly from paying off the monthly credit card charges.
Savings +$7,479 I saved $900 in cash this month plus another $3,000 from my bonus. But I also withdrew $280 to pay towards medical bills. My longer-term savings in the Vanguard Wellington (VWELX) fund increased $3,488 overall thanks to a $2,400 contribution and Miss Market. My HSA increased $400 too.
Emergency Fund -$21,935 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 +$46,077 My Income Fund market value increased in February. See my earlier post for details. All of the Emergency Fund withdrawals went into my Income Fund in addition to $15,000 of my bonus.
Total +$33,134 Total change in Wet Worth

February 2017 Summary

So, yet another month where my Wet Worth reached a new record high. It’d be nice if I could write that every month! This result means that I could pay off all my debts tomorrow and still have $219,955 remaining. 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 decreased 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. I realize that I’m labelling some money that I’m spending as ‘Saving’, but it’s a deliberate choice I make each month since eventually, my Savings are planned to be spent.

This month compared pretty much the same as last month in terms of metrics; both January and February are lower months for investment income. So they both come out very similarly. March’s results will be much more interesting 🙂


Quote of the Day

Progress is impossible without change, and those who cannot change their minds cannot change anything.

5 thoughts on “February 2017 review – a look at my finances for the month”

    1. Thanks Erik 🙂 I’m looking forward to getting the March updates out, just have one more thing to reconcile.
      Hope things are going well for you too!
      Best wishes,
      -DL

  1. My boss keeps mentioning our company may pay out bonus’s some day. That would be nice because I would do the same thing you did and invest it (or pay down the mortgage). Thanks for the message on my site.
    Later,
    DFG

    1. Hi PID,
      Yes, the good thing about personal finance is that it’s personal. This also implies there’s no one way of managing finances that satisfies all individuals 🙂
      But hopefully in this great FI community & blogs I read, sharing different perspectives and viewpoints helps us all manage our finances better.
      Best wishes,
      -DL

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