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

December 2017 reviewThe last monthly update of 2017. Not great considering it’s already February 2018 and this is old news. But better late than never, so here’s my December 2017 review following on from my December income fund update. It’s almost like a balance sheet statement, but different!

My Score for December

Living Expenses Budget $3,970 😐
Freedom Ratio 20.8% 🙂
Expenses 38.0% 😎
Savings 15.5% 🙂
Investments 46.5% 🙂
Wet Worth $302,480 😎
Work Freedom Day 29-Sep-17 😎
Cash Reserves 3.5 months 🙂

Lots of 😎 sunglasses this month despite the freezing temperatures outside as December broke new records since I’ve started tracking my finances. Expenses are at a record low percentage, my Wet Worth is at a record high and my Work Freedom Day ended up sliding forward into September.

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.

Freedom Ratio

My Freedom Ratio is the percentage of my monthly living expenses budget that my Income Fund ‘withdrawals’ pay for. The current payment is $825 a month which is 20.8% of my current $3,970 monthly budget. So I’m 20% of the way to Financial Independence!

Living Expenses %

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

This month’s 38.0% is the lowest ever and better than the previous record holder June 2017 with 40.4%. This is all caused by the large investment income I received this month. I save or invest any income that I don’t spend on Living Expenses so my effective “Savings Rate” this month was 62%.

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 December I spent 40.9% of my income on expenses, so I’m 2.9% points better than this time last year. This year’s budget is $70 more at $3,970 but I had significantly higher investment income this month than last year.

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 and tweaked it a little to Budget 17.5.

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).

I’m now putting aside $1,500 every month for unexpected and mid / long term goals (any large expense or purchase due a year or more in the future). $100 of this goes into a ‘sinking fund’ towards paying down my mortgage and other long term savings. This month the savings percentage was 15.5% of my month’s income compared to 13.9% last year, because I saved more this December.

Last month’s saving rate was 19.9%. The percentage decreased this month compared to last month because of higher income – the amount of Savings was pretty much the same.

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 46.5% 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 $8,379 in December from $294,101 to $302,480, a new 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.

The final Work Freedom Day ended up at 29 September 2017. The exact date isn’t known until the end of the year since the final index fund dividend amounts aren’t known until the middle of December.

Note that based on a $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.

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 $4,069.12 in December which means I overspent my budget by $98.72. Spending was higher than usual and I spent some savings to buy some winter clothing and pay some medical costs.

My account balance at the end of December is to 3.5 months of living expenses, compared to 3.2 months last month.

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 +$1,192 I used some Savings to buy some larger purchases so Cash ended up increasing this month.
Debt +$2,295 Debt increased this month due to higher charges on my credit card.
Savings +$825 VWELX gained $600 in capital gains in addition to the $100 I added to it. Plus I spent some Savings.
Income Fund +$8,656 My Income Fund market value increased this month. See my earlier post for details.
Total +$8,379 Total change in Wet Worth

December 2017 Summary

Cash Flow Forecast

Cash will be hit hard in January as I splurged on buying tickets for going back home to the UK in December. The charges are why Debt increased this month and they will reduce Cash in January when I pay the bill. I’m excited though as it includes a surprise for Ms. DL.

In other news

Christmas and December isn’t a very expensive time of the year for us as we don’t exchange presents. We usually just go out for a nice meal over the Christmas holidays and it’s nice to just stay home and relax when it’s so cold outside.

All in all, it’s one more step in the right direction towards Financial Independence!


Quote of the Day

You may delay, but time will not.

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