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

May 2017 reviewHere’s my May 2017 review following on from my May income fund update. It’s almost like a balance sheet statement,┬ábut different!

My Score for May

Living Expenses Budget $3,970 ­čśÉ
Freedom Ratio 20.2% ­čśÄ
Expenses 52.1% ­čÖé
Savings 20% ­čÖé
Investments 27.9% ­čÖé
Wet Worth $239,924 ­čśÄ
Work Freedom Day 20-Oct-17 ­čÖé
Cash Reserves 3.6 months ­čśÉ
Emergency Reserves 9.2 months ­čÖé

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┬áis more of a spending goal than a strict budget as I over/underspend each month.┬áThe 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.

Freedom Ratio

My Freedom Ratio is the percentage of my monthly living expenses budget that my Income Fund pays for. The current payment is $800 a month which is 20.2% of my current $3,970 monthly budget. So I’m 20% of the way to Financial Independence!

I’ll change this amount once or twice a year as dividend income increases. I aim to keep this number as a sustainable number, so it’s a little below the maximum dividends from the Income Fund.

Living Expenses %

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

This month’s 52.1% is back to more normal levels after March’s 42.5%. I save or invest any income that I don’t spend on Living Expenses so my effective “Savings Rate” this month was 47.9%. This is a little higher than last month’s 47.4%.

Like the Freedom Ratio, any change in this number is caused by a change in either income or budget. However this metric takes total monthly income into account including actual investment income. This means it jumps around more, especially in the third month of each quarter.

The average percentage value should gradually decrease over time. This is because salary and investment income will hopefully 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 May I spent 52.4% of my income on expenses, so I’ve improved 0.3% points compared to this time last year. Although last year’s budget┬áwas $70 less at $3,900, this year’s result is helped by a higher paycheck and income. In other words, compared to last year, salary + investment income increased at a higher rate (2.3%) than my cost of living (1.8%).

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). This month the savings percentage was 20% of my month’s income compared to 15.3% last year.

Last month’s saving rate was 15%; the┬ápercentage increased this month because I saved $200 more.

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 27.9% of my income.

I’ve written about my May 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┬áincreased $8,278 in May from $231,646 to $239,924. This is yet another all-time high and so far this year there’s not been any decline. 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┬áWork Freedom Day remains at 20 October 2017 for this month. Although I can already tell it’s going to jump forward next month. It’s nice to think that I only need to work 10 months of the year before┬áinvestment income┬átakes 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┬ámonthly expenses┬ácurrently in my Living Expense account. Cash stored in other accounts such as Savings and Investment is not included here.

I spent a total of $5,089.22 in May which means I overspent my budget by $1,119.22. Non-typical monthly spending came from paying for income tax preparation and several pairs of shoes for work. $315 of this spending came from Savings.

This means that the amount of monthly Living Expenses that I hold in cash has decreased again this month. The account balance at the end of April is now at 3.6 months of living expenses, compared to 3.8 months in April.

Emergency Reserves

After my recent Emergency Fund shuffle, I’m now holding $36,354 in VBIIX as part of my Income Fund. This would fund 9.2 months of living expenses (at $3,970 a month) in an emergency. The investment has added a total of $723 of capital gains by itself, excluding the monthly distributions of ~ $80.

With over $350,000 in my taxable account, it seems redundant to keep money sitting around in a 1% savings account in case I lose employment. I have Savings which cover other unexpected expenses. So I’m calling this bond allocation in my Income Fund simply “Emergency Reserves”. In my Wet Worth detail below this is counted in the Income Fund category.

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 -$766 Cash for living expenses decreased overall due to larger annual purchases.
Debt -$2,192 Debt decreased this month as I paid off more typical credit card charges.
Savings +$1,405 Savings increased, helped by good performance from VWELX.
Income Fund +$5,447 My Income Fund market value increased this month. See my earlier post for details.
Total +$8,278 Total change in Wet Worth

May 2017 Summary

The roof, the roof is on fire still damaged

The roof repair I mentioned last month is not yet started or paid for, although I have signed a contract. It was delayed on account of bad weather. I’ve chosen to have a completely new roof installed for $7,900 which includes a 30-year warranty and should help lower my home insurance too once it’s installed.

In other news

My Wet Worth reached a new record high continuing the winning streak from each month so far this year. This result means that I could pay off all my debts tomorrow and still have $230,000 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 aggressively pay my mortgage down because I can get better returns in the market and I prefer more liquidity. That said, I paid an extra $300 towards the mortgage this month.

So despite the looming roof expense (to be paid out of my Savings) May was another solid month and headed in the right direction towards Financial Independence!

Quote of the Day

Security depends not so much upon how much you have, as upon how much you can do without.

8 thoughts on “May 2017 review – a look at my finances for the month”

  1. Keep it going DL!! I love the concept of Wet Worth and was looking at that for myself… a small $15k ­čÖé I’m working on it!

    Thanks for sharing your progress, looks like you are crushing the blogging again. Keep it up

    1. Hi Erik,
      It may be small but most importantly it represents that you could pay off your mortgage and still have $15k in the bank.
      As for the blogging, yes I’m back in the UK for a couple of weeks visiting my parents so have a bit more time to catch up on some overdue posts. Congrats on growing your blog – it’s fun seeing it grow!
      Best wishes,

    1. Hi Lily, Yes they’re regular emojis – I have some crazy rating scheme in my head that I seem to reinvent each post. But it’s fun.
      Glad you liked the quote – I enjoy looking around to look for cool / thoughtful quotes around personal growth and independence. Thanks for stopping by!
      Best wishes,

  2. Many of your individual stocks yield less than your stock funds. Ever consider focusing your individual holdings on higher quality stocks that have a yield higher than your stock funds or do you consider the growth potential to outweigh the lower yield and higher risk?

    1. Hi Derrick,
      Good question. By higher quality stocks, I assume you mean large cap / higher yield / long dividend growth companies e.g. MO / T / XOM etc? I think that VHDYX provides enough exposure to those as a whole that I don’t need to focus my individual stocks on only that category. I’m increasingly more considerate of total return and so I like to have some lower yielding stocks as they likely have more capacity for capital growth.

      Over the last four years I’ve gradually downplayed the importance of individual stocks in my portfolio in favor of indexes. I think it’s best to diversify in a mix of companies, some more value and some more growth oriented as who knows what the next 30 years will bring.

      Thank you for commenting!
      Best wishes,

  3. Just found your blog, I have really enjoyed looking around, and will follow. It’s great to see a fellow Gen-Xer on the same path.

    I am impressed in particular by your Charter, which is quite similar in structure and intent to an investment policy I’ve kept for awhile (and thought I was geeky because of its detail!). The clarity, rules based accountability of yours appeals.

    The concept of mapping out the work freedom day is very creative and tangible. It reminds me of awhile back, when I used to calculate a similar set of freedom ratios and numbers – e.g. ‘number of days I could survive without work’. I’ve found what motivates me, which metric, changes over time – have you? My inelegant solution is to have a lot of them, all in one excel sheet! ­čÖé

    1. Hi FIExplorer,
      Yes am definitely a numbers nerd – part of being an engineer I think. It is important to have some kind of investment policy to help remove emotion / feelings from financial decisions. Mine’s a bit more detailed but I like to see things written down. There’s no one perfect way however – everyone is different.

      I have evolved how I track progress over time too – I think that’s natural and means that you’re learning new things. Financial Independence is a personal journey; I believe it includes more than just personal finance. The journey forces you to think about the value of time / money and what you want out of life.

      Thanks for your comment!
      Best wishes,

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