October 2016 – monthly summary

My October 2016 monthly summary follows on from my October income fund update and shows spending / savings during the month. It was another quiet month for me, but not so quiet in the stock market in the run up to the November election.

My Score for October

Living Expenses Budget $3,900 😐
Security Ratio 13.8% 😐
Expenses 49.9% 🙂
Savings 17.1% 🙂
Investments 33.1% 🙂
Wet Worth $153,755 😐
Work Freedom Day 26-Oct-16 😎
Cash Reserves 3.0 months ☚
Emergency Fund 104.8% 🙂

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. $3,900 is the amount from my Budget 4.5.

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.

Security Ratio

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 $600 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. $600 a month is $7,200 a year which is about 86% of the total dividends I’m projecting to receive this year.

Living Expenses %

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

This month’s 49.9% is back to more normal levels after reaching a new record 46.0% level due to last month’s higher dividend income. I save or invest any income that I don’t spend on Living Expenses so my Savings Rate this month was 50.1%.

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 October I spent 53.1% of my income on expenses, so I’ve improved 3% points compared to last year. Although last year’s budget was $50 less at $3,850, this year’s result is helped by a higher paycheck as I reached the social security maximum earlier this 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 I started Budget 3.0 which I updated to Budget 3.5 in July.

Budget 4.0 started this January and it increased the monthly amount which negatively affects results this year. I’m now following Budget 4.5 which kept the total monthly amount the same from January.

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.

Savings %

The percentage of net income spent on Savings (excluding Investments).

As part of my revised budget and savings plans, I’m putting aside $1,280 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 17.1.% of my month’s income compared to 16.7% last year.

Last month’s saving rate was 15.5%; the percentage increased this month because I saved the same amount of money but had lower income this month.

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 33.1% of my income.

I’ve written about my October 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 $35 in October from $153,790 to $153,755. 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 remains at 26 October 2016, which was reached this month! It’s nice to think that I only need to work 10 months of the year before dividends take over.

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.

Cash Reserves

This is a new metric I’m reporting to keep a closer eye on the account balance of my Living Expense account. 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 $7,684.11 in October which means I overspent my budget by $3,783.58. The overspend was from some maintenance repairs to our deck and bathrooms which totaled $2,608 as well as my annual home insurance premium which came to $1,559. I used some of my Savings to pay towards the cost of the repairs – the home insurance premium is part of my monthly budget so had been accruing during the year.

Overall though, the amount of Living Expenses that I hold in cash has decreased throughout the year so far. The account balance at the end of October is now down to 3.0 months of living expenses, down from 5 months at the start of the year. I plan on building this amount up a bit more going forward; partly by using Savings for large expenses which I’ve been reluctant to do in the past, and next year’s Budget will be higher also.

Emergency Fund

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 dipped towards the end of the month and my EF funding level is down to 104.8% this month from last month’s 107.8%.

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 (I rely on Savings for that), 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. 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 -$3,669 Cash for living expenses decreased this month on account of the house repairs paid for by check and automatic credit card payments.
Debt -$4,586 Debt decreased this month as I paid the full credit card balance from the large purchases made last month.
Savings +$108 I saved $1,300 this month. But I also withdrew $467 to pay towards my medical bills and car lease. My longer-term savings in the Vanguard Wellington (VWELX) fund dropped $300 overall and my HSA account decreased by $100.
Emergency Fund -$926 My Emergency Fund consists of the Total Stock Market fund (VTSAX). I didn’t add any new money this month so this is the market performance.
Portfolio -$134 My Income Fund market value decreased a little as the market dropped more than my contributions. See my earlier post for details.
Total -$35 Total change in Wet Worth

October 2016 Summary

So I just about broke even in October with a tiny drop in Wet Worth. Cash decreased again but I continued to put money aside for investments which means a stronger cash flow in the future.

As mentioned above, I’m paying closer attention to the cash reserves in my Living Expense account which is almost like a little Rainy Day fund all on its own. To this end, I’ve started putting a small amount each month in a new Ally Online Savings Account at 1% interest, which has an automatic transfer facility to the lower yielding Online Checking (0.2% to 0.6%) I use for bill automatic payments and Living Expenses.

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.

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