Budget 4.0 – my new 2016 budget

A new year is nearly upon us so it’s time for my bi-yearly budget review to accommodate any changes since I updated Budget 3.5 in the middle of last year. This time around it’s an increase, although I was able to offset some of the increases by re-allocating some surpluses. So just how much was the increase and why?

I review my budget twice each year. This new Budget 4.0 will run from January to June, and I’ll review it again in the summer to see if any changes are needed for July through December.

2015 Performance

This table shows the total expenses in 2015 vs the monthly budget as well as the projected 2016 monthly budget.

The first column shows the budget categories that all spending is categorized into. The “2015 Total” column is the total spending in 2015 in each category and it represents how much money was spent in my living expense account. Every expense, whether it’s a check or credit card payment, passes through this account and I categorize the money in an Excel spreadsheet for each month.

I changed my budget slightly in the middle of 2015 and so the 2015 Budget column represents the average monthly amount from both Budget 3.0 and Budget 3.5. If you multiple the total of this column by 12, the grand total would show how much money was deposited into my living expense account.

The “2015 Actual” column is the year’s total expense divided by 12, allowing a direct comparison to the 2015 Budget column. Surpluses are highlighted green, deficits are red.

Finally the right-most column is the starting budget for 2016 and the basis of Budget 4.0 using the spending from 2015 as a guideline along with other anticipated expenses.

Budget 4.0 for 2016

I consider each spending category as either Mandatory (a need) or Discretionary (a want). Mandatory expenses are things like food, utilities, mortgage etc. Discretionary expenses are for luxuries and hobby related items. I track the cost of both since it’s always good to know the minimum cost of living in case of emergencies or unforeseen events; I could stop immediately stop paying any of the discretionary categories if needed.

Budget V2.0 V3.0 V3.5 V4.0
Mandatory Expenses $3,270 $3,335 $3,285 $3,294
Discretionary Expenses $690 $565 $565 $606
Monthly Living Expenses $3,960 $3,900 $3,850 $3,900

Starting in January, I’m increasing monthly Living Expenses by $50 a month which is a 1.3% increase. The bad thing about a lower budget is that it makes my other targets easier to reach as my dividend income goals, Work Freedom Date and Emergency Fund levels are all based on a multiple of the monthly budget value.

Mandatory expenses – those I can’t do without, will increase by about 0.2% or $9 a month.

Discretionary expenses – those I could do without, will increase by $41 a month or about 7%.

The following sections go through more of the details about the categories and the changes.

Budgeting in a nut shell

The categories below represent every anticipated expense that I can think of. I put the budgeted amount of money into a high-interest checking account every month – I use ally.com who offer a 0.60% interest rate on their checking account. The sole purpose of this account is to hold cash for living expenses, and it’s a separate account from my “income” account where all income is initially deposited.

Expenses are paid for with check or credit cards linked to the Ally account (credit cards are set to automatically pay the full balance each month) and each expense is categorized in an Excel file. Each month the surplus or deficit for each category rolls over to the next month and I aim to keep 3 months’ worth of monthly expenses in the account as a buffer. This works for annual expenses such as auto insurance too – I’ll be saving money for 11 out of 12 months then there will be a big expense in the 12th month when the payment is made.

Because of the 3-month buffer amount, I can afford to keep a category in negative amounts, even across multiple years if I need to, since the amount is offset by surpluses in other categories. While I try not to make a habit of this, I closely monitor the overall balance against the target balance. At the end of 2015, the mandatory balance is about $280 below its target amount of $11,550 (3 months x $3,850 per month, the monthly budget from 2015)

Note – Ms. DivLife and I keep separate finances. This budget covers all of our joint expenses including all groceries, insurance and utilities, but there are a couple of areas that she still pays separately for – her medical, clothing, auto repairs and gym membership costs.

Mandatory Expenses

Mandatory Expenses V2.0 V3.0 V3.5 V4.0
Utilities: Electricity 125 120 120 110
Utilities: Water 40 40 40 42
Utilities: Gas 85 80 75 65
Utilities: Phone 136 131 130 124
Utilities: Internet 115 80 81  81
Medical 25 25 35 42
House: Repair 57 50 50 50
House: Property Tax 0 0 0 500
House: Insurance 186 186 132 130
House: Mortgage 1,608 1,724 1,695 1,200
House: Security 50 52 54 54
House: Improvements  0 0 20 35
Groceries 520 525 525 540
Auto: Gas 5 3 2 2
Auto: Insurance 205 205 216 220
Auto: License 20 20 20 15
Auto: Repair 20 20 20 20
Auto: Assistance 0 5 5 5
Tax Withholding 61 57 55 54
Buffer 12 12 10 5
Total 3,270 3,335 3,285 3,294

Mandatory expenses have increased largely due to the higher amounts for groceries and medical expenses.

Utilities: Electricity, Water, Gas, Phone

No major changes here. I’ve had another year’s worth of utilities bills to use in estimating and I’ve revised the amounts to reflect my best guess.

Utilities: Internet

I’m still fairly happy with my current provider which includes cable TV and internet, and they’ve not changed the rate so everything’s good for the moment.


My health insurance is high-deductible so I have to pay out of pocket for each doctor’s visit.

I added an additional $7 a month ($84 over the year) as my medical expenses next year will be increasing based on my surgery this month. So I’ll be monitoring this number closely as I find it hard to estimate medical charges. My long-term plan is to build up a surplus of the total yearly out of pocket maximum and then refill it each year which will make for a much easier calculation. I’m avoiding the use of my HSA investment account as I want that to grow tax-free until I have more significant expenses when I’m older.

House Repair

I’m keeping this category unchanged which reserves $600 a year for miscellaneous house repairs.

House Insurance

This is paid annually and it’s paid separately than the mortgage since I can charge it on a credit card and earn card rewards for doing so.

House Mortgage

I separated out the Property Tax portion of the mortgage from the base principal plus interest. So this amount now represents the fixed principal and interest payment which won’t change. I’m not trying to pay down the mortgage; instead I’m saving additional money in Vanguard’s Wellington fund each month and I’ll use that to pay off the mortgage early in a lump sum. My current estimates show that happening nineteen years from now in December 2034, eight years earlier than the original mortgage arrangement.

I don’t have any hang-ups about carrying mortgage debt as my liquid net worth is more than the mortgage so in that sense I consider myself “debt-free”. I just choose not to pay off the mortgage now as the mortgage rate is reasonable and I’m getting the most out of the tax incentives while the interest payments are high.

House Security

ADT hasn’t increased their prices yet so no change here.

Home Improvements

I’ve moved this category into the mandatory section as we continue to spend money on maintaining the yard – mulch, fertilizer etc. Any large home improvement project that requires more than a year’s worth of expenses would come out of Savings.


Ms. DivLife manages the grocery budget and does a great job at saving money. We’re increasing it $15 a month this year.

Auto: Gas

I spent $23 on gas in February and that was it for 2015. The electricity charges of having a Chevy Volt are about $1 a day as I get a cheap nightly rate for charging and this is included in the Utilities budget. I think I’ve driven 13,000 miles for less than $100 of gasoline now since I bought the car.

Auto: License, Repair, Assistance

My car’s no longer in warranty and I’ll have to pay for service going forward. I’ve built up a surplus for this category over the last two years however so I’m not increasing the monthly amount at this time.

Tax Withholding

This is for tax preparation fees using last year’s numbers as an estimate.


I’m trying to avoid the use of non-categories, currently this just represents a small amount I’m putting aside each month and I may use the total in this category to adjust other category balances.

Discretionary Expenses

Discretionary V2.0 V3.0 V3.5 V4.0
Ent: Books 5 5 5 9
Ent: Music 10 10 15 30
Ent: Games 10 10 10 15
Ent: Movies 10 5 5 5
Clothing 10 10 10 10
Subscription: Credit Cards 45 23 23 24
Travel 325 225 230 230
Cash 20 15 10 10
Computing 140 145 160 160
Dining 30 30 30 30
Fitness 2 2 2 2
Gifts 78 60 60 60
Spare 5 5 5 5
Home: Improvements 0 20 0 0
Total 690 565 565 606

Entertainment: Books, Music, Games & Movies

I increased the expenses in books and music; although I stream most music this category includes going to some music concerts. I probably should have resisted buying StarCraft 2 as well this year so I added some more to the Games category.


I spend almost nothing on clothes too as I have enough to wear and they haven’t fallen apart yet.

Subscription: Credit Cards

I still keep two premium cards for their rewards: the Amex Delta Platinum card and a Marriot Rewards card which gives a free night’s stay each year. I also added a free Chase Slate card this year as it provides a free monthly credit score report.


I kept the travel budget the same as I plan to use airmiles again to travel next year to save costs. I’m trying to build up a surplus in this category for when I need to start buying flights again.

Cash, Dining, Fitness

I spend cash once in a blue moon when I have my hair cut and I think that’s about it. I cut the amount $5 as part of my ongoing anti-cash campaign. The only cash expense I have is to pay for a hair-cut.

We eat out maybe once a month so spending here is pretty small. Eating out when on vacation comes from the Travel budget. I might buy a book or video on fitness once a year, so I’m leaving this amount unchanged – I exercise at home (Pilates and bodyweight) so I don’t need any expensive equipment.


This category is towards replacing any computer equipment that might break and saving towards a new laptop. I increased this category since it’s now including my Microsoft Office subscription and website fees.


This category covers any spending on presents or charity. Unchanged from the last budget; I’ve been repaying a deficit in this category from the last couple of years.


This is just a small amount that can be used for any purpose.


The following chart shows each expense category in order of size.

The mortgage payment is by far the largest expense. It’s a little embarrassing to see Fitness as the lowest expense as if that’s my lowest priority, but walking and doing Pilates doesn’t cost any money.

This budget will have an impact on my monthly score card for next year because of the higher amount; for example my security ratio (dividend income divided by monthly budget) will be lower because of the higher monthly budget. And I’ll likely have to put some extra cash aside to shore up my Emergency Fund and Cash accounts (at the expense of new investments) since these accounts are based on a multiple of the monthly budget amount. In the long-term though this is a good thing and I aim to avoid any increase in the monthly amount when I review the budget again in June.


Quote of the day

Never look back unless you are planning to go that way.

3 thoughts on “Budget 4.0 – my new 2016 budget”

      1. haha yes you’re probably better where you are. Taxes here are crazy and I don’t think we’ll be retiring here but going somewhere cheaper and warmer!

        Looking forward to seeing your budget changes 🙂

        Best wishes,

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