We went to a Counting Crows concert in August – see photo attached. We try to go to a couple of concerts each year – this year we went to a total of four. In other news, it’s time to look at the numbers in my August monthly summary. This post follows on from my August income fund update. Did summer end on a good or bad note?
My Score for August
|Work Freedom Day||26-Oct-16||?|
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 Budget 4.5.
I spent a total of $10,154.03 (!) in August which means I overspent my budget by $6,253.36. This month happened to be a perfect storm of a year’s worth of Auto-Insurance ($3,497 for two cars in Michigan), the credit card bill from our UK trip ($1,154) and some purchases I made using money from my Savings account ($1,985). Both the insurance and travel spend were planned and part of my regular budget so I’ve been building up a surplus for a year in anticipation of this month.
This is the percentage of my monthly living expenses budget that my Income Fund pays for. This metric is no longer tied to the actual dividend income per month. Instead I’m automatically withdrawing a flat monthly amount of cash from my Income Fund that’s fueled by dividend payments. The current amount is $540 a month which is 13.8% of my current $3,900 monthly budget.
I’ll change this amount once or twice a year as dividend income increases. $540 a month is $6,480 a year; that’s about 80% of the total dividends I’m projecting to receive this year as I want to build a small cash buffer for smoother cash flow.
Living Expenses %
The percentage of net income that’s spent on living expenses. Lower numbers are better here.
This month’s 52.2% is a slight improvement over last month’s 51.9% due to higher dividend income this month. I save or invest any income that I don’t spend on Living Expenses so my Savings Rate this month was 46.1%.
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 and not just dividends. This value uses the planned budget against income; not the actual spend.
Last August I spent 53.8% of my income on expenses, so I’ve done a littlee better compared to last year. Although last year’s budget was $50 less at $3,850, this year’s result is helped by a higher salary since dividend income was fairly similar having only a $13 gain.
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.
The average percentage value should decrease over time because salary and investment income should increase faster than living expenses.
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.
The percentage of net income spent on Savings.
As part of my revised budget and savings plans, I’m putting aside $1,380 every month for mid and long term goals (any large expense or purchase due a year or more in the future). The savings percentage was 18.7% of my month’s income compared to 16.5% last year.
Last month’s saving rate was 20.7%; this number decreased this month primarily because I didn’t add any extra contributions to my Emergency Fund.
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 29.1% of my income.
I’ve written about my August 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 $3,531 in August from $149,758 to $153,289; a new record 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.
Based on current projections and including the last dividend amounts, my Work Freedom Day has moved forward to 26 October 2016, that’s a little over a month away!
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. Financial Independence then requires about $1,600,000 at a 3% yield.
This value is the actual balance of my Emergency Fund vs my target balance which is 10 times my living expenses (i.e. $39,000). The stock market increased my EF funding level to 107.0% this month, up from last month’s 106.7%.
Currently my EF is 100% held in VTSAX, a low cost stock market fund. It is not recommended to hold your Emergency Fund in stocks. Economic conditions where you might lose your job would likely impact the market and cause lower prices. Also if you’re relying on your EF to pay an large unexpected expense, the money might not be all there when you need it due to stock market drops.
However, in my particular situation, my EF is dedicated solely to covering loss of employment and so I feel comfortable with this risk when judging the chance of losing my job. Especially so since our household has two incomes. In an extreme case where the market drops 50%, I still have 5 months of living expenses. More importantly, every day I move closer to Financial Independence reduces the need for an EF to protect against job loss.
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||-$3,976||Cash for living expenses decreased this month due to a higher credit card payment.|
|Debt||-$6,543||Debt decreased this month as I used cash to pay off the bills from my UK trip and yearly auto-insurance.|
|Savings||-$1,531||Although I saved $1,400 this month, I also withdrew $2,060 to pay for a new laptop. My longer-term savings in the Vanguard Wellington (VWELX) fund and my HSA account increased this month.|
|Emergency Fund||+$115||My Emergency Fund consists of the Total Stock Market fund (VTSAX). It grew by $115 all on its own.|
|Portfolio||+$2,380||My Income Fund had a flat month from new capital and capital growth. See my earlier post for details.|
|Total||+$3,531||Total change in Wet Worth.|
August 2016 Summary
My Cash accounts took a beating this month from the large credit card bill which was paid in full. I have enough cash reserves in my Living Expenses account to cover the payment but it was sorely tested this month and I need to start building my cash reserves up again. My new Savings approach will help with this as it means I’ll use Savings more for unexpected or for large planned purchases.
Despite this however August was another good increase for Wet Worth and I reached a new record total!
Quote of the Day
Today is life-the only life you are sure of. Make the most of today. Get interested in something. Shake yourself awake. Develop a hobby. Let the winds of enthusiasm sweep through you. Live today with gusto.