February 2018: A look at my finances

February 2018 review - a snow sceneWhat goes up, comes back down and that’s what happened in February. Here’s my February 2018 review 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 $4,040 😐
Freedom Ratio 21.0% 🙂
Expenses 57.0% 🙁
Savings 19.5% 🙂
Investments 23.5% 🙂
Wet Worth $320,643 😐
Work Freedom Day 06-Oct-18 🙂
Cash Reserves 2.8 months 🙁

February broke the sequence of successive increases in my  Wet Worth with a large decrease. My Work Freedom Day remains unchanged with an estimate in early October. Other stats remain pretty bad, so there’s definitely room for improvement over the rest of this year.

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. $4,040 is the amount from my Budget 18.0.

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.

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 $850 a month which is 21.0% of my current $4,040 monthly budget. So I’m 21% 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 57% beats last month‘s dire 59.8% so hopefully it’s onwards and upwards from the low point of the year. Still not a great result though. The poor result is due to low investment income.

I save or invest any income that I don’t spend on Living Expenses so my effective “Savings Rate” this month was 43.0%.

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 February I spent 53.2% of my income on expenses, so I’m 3.8% points worse than this time last year. This year’s budget is $70 more at $4,040 but I had lower investment income this month compared to 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. In 2017 I moved to Budget 17.0 which increased monthly spending to $3,970.

This year I’m following Budget 18.0 which allows for $4,040 a month in living expenses.

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 about $1,300 every month for unexpected and mid / long term goals (any large expense or purchase due a year or more in the future). This month the savings percentage was 19.5% of my month’s income compared to 18.6% last year.

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 23.5% 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 decreased $7,374 in February from $328,017 to $320,643. 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 Work Freedom Day estimate is 06 October 2018. The exact date won’t be known until later in the year as I’m using conservative estimates to predict the date.

Note that based on a $4,040 budget, one Work Freedom Day requires about $134 of dividend income. Financial Independence then, requires about $1,800,000 at a 3% withdrawal rate.

Cash Reserves

Here 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 $4,574.93 in February which means I overspent my budget by $534. There was a little overspending from Christmas presents charged to my credit card finally being paid plus my car license.

As a result, my account balance at the end of February decreased to 2.8 months of living expenses, compared to 2.9 months the month before.

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 -$248 Cash decreased due a little overspend from Christmas. The month was fairly typical otherwise.
Debt -$1,176 Debt decreased this month due to regular loan & credit card payments.
Savings -$2,361 Savings decreased because of the drop in the market.
Income Fund -$5,941 My Income Fund market value decreased this month. See my earlier post for details.
Total -$7,374 Total change in Wet Worth

February 2018 Summary

Cash Flow Forecast

No major expenses are planned for the next couple of months and cash reserves should start increasing until larger bills are due in the summer.

In other news

Nothing exciting to report this month. Work is keeping me busy and I’ve been planning some big changes to my Savings accounts going forward as well as another big change in my finances. How mysterious! More on that later.

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


Quote of the Day

Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence.

 

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