OK, I know. It’s practically Summer of 2019 and here I am writing a New Year post. But I’m trying to catch up so I have to live in the past for a couple more months. I think Financial Independence is a journey than a destination, so here are some changes I’ll be making for 2019.
2019 – Budget 19.0
My 2018 budget was set at $4,040 a month. I’m increasing the 2019 Budget to $4,120 per my Goals. This is a nominal 2% yearly increase with some rounding down to make a ‘nice’ number. Multiplying the monthly budget of $4,120 by 12 gives an annual income of $49,440. This value is tracked as the gray line in the chart below.
Cash Flow changes
I group money into four categories:
- Living Expenses
- Savings (for planned purchases, this includes paying down debt)
- Investments (for extra income, should not be used for expenses)
All income that I receive is allocated to one of these four categories. But over the last year I’ve changed how I think about my Savings.
Previously I tried to avoid withdrawing any money from my Savings and use it only for planned long term purchases. However this meant that I tended to use Living Expenses to pay for un-budgeted short term purchases, which lowered my Living Expense balance.
Now I don’t worry about spending my Savings as much. In fact, this helped me get used to having lower cash balances in my Living Expense accounts.
I tried to protect against unplanned purchases by building up a large cash buffer in Living Expenses. Instead, I’m now building that cash buffer in Savings with a higher interest rate. I’m not quite ready to move to the next logical step which is to keep my Living Expense accounts at the same fixed amount at the end of each month, but I’ll be doing that at the end of each year.
Thoughts on Cash
Cash is a necessary evil, but “too much” cash is also bad, given regular cash-flow and large liquid assets, since it can be put to more productive use. Now, obviously “too much” is a subjective and highly personal amount, but in my case it’s somewhere around three times my monthly budget.
Since my Bill Payment Account at Ally only earns about 0.1% APY, I’m going to put some of the balance into an Ally Online Savings Account earning ~2% APY. This is a Savings, not a Checking account, and so there are restrictions for withdrawals (6 per month). However, it can be used for overdraft protection and also offers instant transfers to the online checking account.
|Income||Receives income payments and distributes money to other money classes.||– No monthly fees
– Physical bank
|Bill Payment||Contains the monthly budget and pays all living expenses & bills.||– No monthly fees
– High interest
– Free payment of bills via bank checks
|Bill Payment (overflow)||Used to earn extra interest.||
– No monthly fees
|Cash Spending||Used for cash withdrawals.||– No monthly fees
– ATM card with no transaction fees worldwide
Together these total to 3.2 times my monthly budget for a total of about $13,184.
In the longer term, I plan to reduce amounts in the Income account which is mostly used to smooth out a bi-monthly paycheck.
Having four accounts seems a bit excessive. However, I accept it because a regular brick and mortar bank is helpful to have for Notary / Medallion Guarantees which they provide for free. Likewise the Cash Spending account only exists because of the international ATM fee refund. It contains a small amount of cash that I can use to withdraw cash abroad, although I haven’t actually needed to do that for a while now.
There’s not a lot of work involved in managing the accounts since there aren’t many transfers between the various accounts. In addition, they all import without problems into Quicken for easy monitoring.
Target Income Allocation
My Charter had targets for living expenses being below 50% of net income. Now this means that I should save or invest half of my net income. However it also requires saving of at least 15% of net income.
I’m going to remove these targets – my living expenses are pretty well controlled and currently under 50% of my net income. And I want to save the amount that I need, rather than be tied to some arbitrary percentage. Note that any income left over after Living Expenses and Savings are taken out is automatically Invested.
Living Expenses & Budget
I used to have the following statement in my Charter:
“If the total Bill Payment Account value falls below two times the monthly Budget amount, spending shall be reduced below the budgeted amount to allow the buffer to be restored within twelve months.”
I’m now replacing it with
“Spending for items outside of the planned budget shall be paid for from Savings.”
This change is really just documenting my more relaxed approach to Savings. It means that the Living Expense balance at the end of the year will exactly match the target amount as any shortfall will come from the Savings account.
I’m making some changes to my asset allocation too. However I won’t cover them here but I’ll discuss those in my monthly summaries.
Everyone has their own way of thinking about money and budgeting and there’s no single best way that works for everyone. Living below your means and saving or investing the rest is the real path to financial freedom.
How was your latest month? Are you one step closer to Financial Independence?
Quote of the DayIf it is not right, do not do it, if it is not true, do not say it.