January 2016 – Spending and monthly summary

Here’s my wet worth update and spending summary for January – this post follows on from my January income fund update.

My Score for January

Living Expenses $ 3,900
Security Ratio 7.8 %
Expenses 55.1 %
Savings 19.3 %
Retirement (Taxable) 0 %
Investments 25.6 %
Wet Worth $ 88,527
Work Freedom Day 8-Nov-16
Emergency Fund 98.4 %

Living Expenses

This is my fixed monthly budget for living expenses and it includes both essential (e.g. groceries, mortgage, insurance), and non-essential (e.g. music, travel) purchases. $3,900 is the amount from my current Budget 4.0.

I spent a total of $4,421.12 in January which means I overspent my budget by $521.12.

Security Ratio

This is the percentage of my monthly living expenses budget that my dividend income would pay for this month.

This month’s ratio of 7.8% means that my dividend income paid almost 8% of my living expenses this month. This result is hopefully the lowest result for the year ahead. The percentage is improved by either lowering my budget (which is constant at $3,900) or by earning more income. Dividend income decreased this month and I also increased the budget amount for the year so the result takes a double hit. I earned $304 in dividend income this month; December’s income was $1,161.

Living Expenses %

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

This month’s 55.1% is a low start to the year and is directly related to the lower dividend income this month.

Any change in this number is caused by a change in either income or budget similar to the Security Ratio although this calculation takes total income into account. Non-dividend income was a little lower than last month.

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 I started Budget 3.0 which I updated to Budget 3.5 in July.

Budget 4.0 started this January and is an increased amount compared to last year which will negatively affect results this year. What is encouraging about the chart is that despite the lower dividend income and higher budget, I’m still starting the year at a better (lower) Living Expense ratio than last year (55.1% vs 55.6%). The improvement is from my salary income which is higher that the same time last year.

Savings %

The percentage of net income spent on savings.

I put aside $530 every month for mid and long term goals (any large expense or purchase due a year or more in the future), as well as $547 for my car payment and added an extra $200 into my Emergency Fund plus $88 into my Cash buffer. The savings amount increased to 19.3% of my month’s income compared to 14.4% last month as a result of lower income this month.

Retirement %

This would represent the percentage of any post-tax contributions from net income towards my retirement accounts, but I don’t have any plans to do so at the moment. You can read about my target retirement account asset allocation here if you’re having trouble sleeping. It’s a simple low-cost index investing strategy using tax-advantaged accounts.

Investment %

The percentage of net income that I invest.

Any spare money left over after savings, retirement and living expenses are paid goes into my Income Fund. This month it was 25.6% of my income.

I’ve written about my portfolio income and gains in January 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 assets).

My Wet Worth decreased $3,554 in January to $88,527. 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.

Based on current projections my Work Freedom Day has slipped back to 8 November 2016 due to the higher living expense budget. My projected income is very conservative though so I expect to see this number move ahead, hopefully even into October this year.

Note that based on my $3,900 budget, one Work Freedom Day requires about $128 of dividend income which in turn requires about $4,000 of capital.

Emergency Fund

I’m including my Emergency Fund (EF) funding in my score card this year. This value is the actual balance vs my target balance and it’s currently a little under-funded at 98.4% since this month’s target is 9.55 times my living expenses.

Sometime next year I hope to start phasing out my EF but this year I’m aiming to build it up to 10x my living expenses. I changed the asset allocation to around 70% stocks just in time for the January market drop so the total value has been decreasing this month. My goal is to keep the EF equal to a year’s living expenses minus the income from my Income Fund; so if my Income Fund is paying 2 months living expenses then my EF target will be 10 months. As it is, I’m not overly worried about it and I’m just adding a little bit more money to it each month to build it up until my Income Fund starts taking it over.

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.

There’s a small increase this month. The change in Wet Worth is caused by

Cash -$754 Cash for living expenses decreased this month. I bought a new phone in December and the credit card charges were paid this month.
Debt -$993 Debt decreased this month due to lower credit card charges and continued mortgage payments.
Savings -$420 Although I added some cash to my Savings, this was offset by loses in my investment allocation as I use the Vanguard Wellington (VWELX) fund for long-term Savings goals
Emergency Fund -$1,280 My Emergency Fund consists of cash and a stock fund (VTSMX). The loses this month were from the stock fund.
Portfolio -$2,093 My overall income portfolio decreased in value this month by -1.71%. See my earlier post for details.
Total -$3,554 Total change in Wet Worth.

January 2016 Summary

Not the best month to start the year with but I’ll take it and there were no major disruptions. I still have a long ways to go for Financial Independence but I will finish that journey one month at a time.

Quote of the Day

Don’t wait. The time will never be just right.

8 thoughts on “January 2016 – Spending and monthly summary”

  1. This is a random question but was it in one of your post that you said when vanguard comes out with there high yield dividend international stock index that you will use that instead of your vanguard total international ? Thanks !

    1. Hi Alex,

      Yes it’s my intention to switch to the International High Dividend Yield Index stock fund instead of Total International since it’s more income focused so it should offer a higher annual dividend income.

      I’ve still not heard any more news about its launch since the original press release last September.

      However this change is for my “income fund” only. I also own Total International as part of my retirement portfolio in tax-advantaged accounts and I will not be changing that as I want to own the entire market.

      Best wishes,

      1. i wonder since im already in so much Dividend growth in US for all of my portfolio that it would be smart to just do total international inside of high yield international im also 23 so maybe the high yield would be smarter for somebody my age.

        1. So I would tend to look at it this way:

          Total International is the average result of the market. If you buy it and hold it for the next 50 years you’re guaranteed to get average performance and it will contain exposure to developing markets such as India / China as well as include non-dividend paying stocks which may / may not greatly increase in value. I say “average performance” but actually average performance is hard to beat over a long time period.

          However if you were to buy the forthcoming High Yield International or Dividend Appreciation International then you’re making a bet that value or growth stocks respectively are going to outperform the average market. There’s no way of knowing if this is true and no guarantees. Just because a company pays a dividend doesn’t make it great and there are likewise many non-dividend paying companies that are great.

          If you don’t need the extra income; you’re probably better off with Total International to start with as it’ll likely have a higher total return on average. You can always add one of the international dividend funds later to supplement it.

          I came across this forum discussion today which you might find interesting. This article also gives a good background on international funds.

          When I compared a high-dividend yield fund (VHDYX) to a total return index (VFINX) in reviewing my DGI stock portfolio performance, the total return index came out the winner and was most tax efficient as well. I would anticipate similar results for international funds.

          In my case, I prefer to have the income now at the expense of total return and taxes. I don’t think this is very rational of me which is why I’m suggesting you don’t do what I’m doing! 🙂

          Best wishes,

          1. So if I’m more focused on income the high income index would be the way to go I’m guessing then rather than value

          2. Hi Alex,
            The new funds are now available. The new International High Dividend Yield (VIHAX) index will likely provide higher current income but not as much total money or tax efficiency over a long-term compared to VTIAX.
            Best wishes,

    1. Hi DFG,

      I go back and forth on this – I don’t really need it as I have my Income Fund in taxable if I really needed money, and I have good cash enough reserves in my living expenses account for unexpected costs. I’ve moved two-thirds of my EF into the stock market and next year I’ll likely start decreasing my target EF total as the income from my Income Fund increases. As I get nearer to financial independence my need for an EF reduces.

      My advice is just to clearly define what your Emergency Fund would be used for if you decide to fund one; otherwise it might be better to just build up a higher cash reserve for your living expenses with that money instead.

      Best wishes,

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