This isn’t quite how the solar eclipse looked like here in Michigan this month, but if you take away the clouds it was fairly close. Here’s my August 2017 review following on from my August income fund update. It’s almost like a balance sheet statement, but different!
My Score for August
|Living Expenses Budget||$3,970||😐|
|Work Freedom Day||12-Oct-17||🙂|
|Cash Reserves||4.0 months||🙂|
|Emergency Reserves||9.6 months||🙂|
No 😎 this month as August brought an end to my streak of ever increasing Wet Worth results.
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 17.5.
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.
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 52.7% is a tiny improvement on last month’s 52.8%. Still I’m not complaining as it’s hovering close to 50%. I save or invest any income that I don’t spend on Living Expenses so my effective “Savings Rate” this month was 47.3%.
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 August I spent 52.3% of my income on expenses, so I’m 0.4% points worse than this time last year! Although last year’s budget was $70 less at $3,900 and investment income was higher, this year’s result is affected by a lower paycheck. In other words, compared to the same month last year, my cost of living increased at a higher rate (1.8%) than my salary + investment income (1.4%).
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.
The percentage of net income spent on Savings (excluding Investments). Savings represents cash plus a long-term holding in Vanguard’s Wellington fund (VWELX).
I’m putting aside $1,100 every month for mid and long term goals (any large expense or purchase due a year or more in the future). I’ve reduced this down from ~$1,400 in previous months as I’m not saving as much towards paying down my mortgage. This month the savings percentage was 15.4% of my month’s income compared to 20.7% last year.
Last month’s saving rate was 15.5% so there’s been little change in this metric.
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 31.9% 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 decreased $47 in August from $252,652 to $252,605. I guess a decrease had to happen sooner or later, so I’d rather it be only $47. 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.
The current estimate of my Work Freedom Day remains at 12 October 2017, which is fast approaching! This number includes some very conservative estimates of fund income, so hopefully it will move forward again later 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 $1,588,000 at a 3% yield.
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 $12,221.18 in August which means I exceeded my budget by $8,248.88 (!). The credit card bill for my roof repair was $7,843.45 of this and partly paid for by $6,125 of Savings. Spending otherwise was fairly usual although I did have some final credit card charges from my summer vacation to pay this month for an extra $746.
The account balance at the end of August is now 4.0 months of living expenses, compared to 4.5 months in July.
This total would fund 9.6 months of living expenses (at $3,970 a month) in an emergency.
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||-$2,094||I overspent my usual amount with the roof repair payment and some final charges from our summer vacation.|
|Debt||-$4,572||Debt decreased this month as I paid off the credit card bill with the roof repair charges.|
|Savings||-$5,084||Savings decreased quite a bit despite my regular saving amounts as I spent $6,125 towards the roof repair. VWELX gained $70 in capital gains in addition to the $100 I added.|
|Income Fund||+$2,560||My Income Fund market value increased this month. See my earlier post for details.|
|Total||–$47||Total change in Wet Worth|
August 2017 Summary
Cash Flow Forecast
The forward projections on my cash balance is pretty bad for the rest of the year, dropping down to a low of 2.9 times monthly expenses in November. I will need to consider adding more Savings in September / October for some of the larger expenses I’m expecting.
Lower net salary
I’m gradually increasing the amount paid into my 401k with the goal of maximizing the contributions. I started the year with an 8% contribution and I increased it to 9% in May and then to 10% this month. I’m increasing the amount over time so that some of the lower income is offset by higher investment income, with an eventual target of ~13%.
In other news
My Wet Worth increases stalled this month with a $47 decline. It’s all good though as I could still pay off all my debts with liquid assets tomorrow and still have over $250,000 remaining. Of course, that’s not the plan since Mr. Taxman would want some money too.
A positive 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.
All in all, it’s one more step in the right direction towards Financial Independence!
Quote of the Day
Tell me and I forget. Teach me and I remember. Involve me and I learn.