April 2017 review – a look at my finances for the month

April 2017 reviewHere’s my April 2017 review following on from my April income fund update. It’s almost like a balance sheet statement, but different!

My Score for April

Living Expenses Budget $3,970 ?
Freedom Ratio 20.2% ?
Expenses 52.6% ?
Savings 15% ?
Investments 32.4% ?
Wet Worth $231,646 ?
Work Freedom Day 20-Oct-17 ?
Cash Reserves 3.8 months ?
Emergency Reserves 9.0 months ?

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. $3,970 is the amount from my Budget 17.0.

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.

Freedom Ratio

I’ve changed the name of this metric from ‘Security Ratio’. I haven’t changed how it’s calculated, but I realized it describes how close I am to Financial Independence in percentage terms. So 100% means I’m free! 🙂

It’s calculated as percentage of my monthly living expenses budget that my Income Fund pays for. The current amount is $800 a month which is 20.2% of my current $3,970 monthly budget. So I’m 20% of the way to Financial Independence.

I’ll change this amount once or twice a year as dividend income increases. I aim to keep this number as a sustainable number, so it’s a little below the maximum dividends from the Income Fund.

Living Expenses %

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

This month’s 52.6% is back to more normal levels after March’s 42.5%. I save or invest any income that I don’t spend on Living Expenses so my effective “Savings Rate” this month was 47.4%.

Like the Freedom Ratio, any change in this number is caused by a change in either income or budget. However this metric takes total monthly income into account including actual investment income. This means it jumps around more, especially in the third month of each quarter.

The average percentage value should decrease over time because salary and investment income should increase faster than living expenses as I try to limit lifestyle creep and personal inflation.

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.

Living Expense History

Last April I spent 52.8% of my income on expenses, so I’ve improved 0.2% points compared to this time last year. Although last year’s budget was $70 less at $3,900, this year’s result is helped by a higher paycheck and income. In other words, salary + investment income increased at a higher rate (2.2%) than my cost of living (1.8%).

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 2015 I started Budget 3.0 which I updated to Budget 3.5 in July.

Budget 4.0 started in 2016 with an increase to the monthly amount which I held constant in the mid-year review of Budget 4.5.

This year I’ve adopted Budget 17.0 which increased monthly spending to $3,970.

Savings %

The percentage of net income spent on Savings (excluding Investments). Savings represents cash plus a long-term holding in Vanguard’s Wellington fund (VWELX).

As part of my revised budget and savings plans, I’m putting aside $1,310 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 15% of my month’s income compared to 16.9% last year.

Last month’s saving rate was 17.7%; the percentage decreased this month because I forgot to transfer some money to savings and invested it instead.

Investment %

The percentage of net income that I invest.

All spare money left over after savings and living expenses are paid goes into my Income Fund. This month it was 32.4% of my income.

I’ve written about my April 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 $8,803 in April from $222,844 to $231,646. This is yet another all-time high and so far this year there’s not been any decline. 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.

My current estimate of my Work Freedom Day is now 11 days earlier based on higher income and now falls on 20 October 2017 for this year! It’s nice to think that I only need to work 10 months of the year before investment income takes over.

Note that based on my $3,970 budget, one Work Freedom Day requires about $132 of dividend income which in turn requires about $4,400 of capital. Financial Independence then requires about $1,584,000 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 $8,578.72 in April which means I overspent my budget by $4,607.99. The over-spending was planned and some of it was covered from my Savings. About $4,000 of the spending was from buying flights back to the UK in the July which I’ve been saving up for the last year.

This means that the amount of monthly Living Expenses that I hold in cash has decreased this month. The account balance at the end of April is now at 3.8 months of living expenses, compared to 4.3 months in March.

Emergency Reserves

After my recent Emergency Fund shuffle, I’m now holding $35,781 in VBIIX as part of my Income Fund. This would fund 9.0 months of living expenses (at $3,970 a month) in an emergency.

With over $350,000 in my taxable account, it seems redundant to keep money sitting around in a 1% savings account in case I lose employment. I have Savings which cover other unexpected expenses. So I’m calling this bond allocation in my Income Fund simply “Emergency Reserves”.

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 -$2,006 Cash for living expenses decreased due to large expenses on my credit cards for planned spending on clothing and travel.
Debt -$4,704 Debt decreased $4,704 this month as I paid off the larger credit card charges.
Savings +$2,135 Savings increased from regular savings plus a generous Tax Refund.
Income Fund +$3,969 My Income Fund market value increased in April. See my earlier post for details.
Total +$8,803 Total change in Wet Worth

April 2017 Summary

The taxman cometh…and left a little poorer

I received a tax refund this month. It’s best to file as early as you can if you expect a refund. However some of my investment tax forms take a while to finalize so I couldn’t file sooner. I received a refund on Federal Taxes and owed State taxes, with a net refund of $3,159.

I don’t include this as income since it distorts all of the monthly comparisons. The money went into my Savings account where it will be put towards my roof repair as well as a new work wardrobe.

I’m also slowly trying to get over my irrational tax behavior. To reduce taxes I increased the amount of my 401(k) contributions a little (1%) this year and may adjust that again later this year. And I discovered that I can contribute in my 401(k) with after-tax contributions. Lots of think about there.

Pay increase

I increased my income fund withdrawals from $700 to $800 this month. I’m also capping the Income Fund cash I keep at three times the monthly withdrawal amount ($2,400) allowing the quarter to be paid without any cash-flow drama. Any surplus cash is re-invested.

The roof, the roof is on fire damaged

The roof repair I mentioned last month is not yet started or paid for, although I have signed a contract. I’ve chosen to have a completely new roof installed for $7,900 which includes a 30-year warranty and should help lower my home insurance too once it’s installed.

In other news

My Wet Worth reached a new record high continuing the winning streak from each month so far this year. This result means that I could pay off all my debts tomorrow and still have $230,000 remaining. Of course, that’s not the plan since Mr. Taxman would want some money too.

Keeping track of my Wet Worth lets me consider myself to be debt-free. I chose not to aggressively pay my mortgage down because I can get better returns in the market and I prefer more liquidity. That said, I’ve started paying an extra $300 towards the mortgage and if I keep that up, will be done in 11 years’ time.

So despite a large unexpected expense looming (to be paid out of my Savings) April was another solid month and headed in the right direction towards Financial Independence!

Quote of the Day

We don’t stop playing because we grow old; we grow old because we stop playing.

8 thoughts on “April 2017 review – a look at my finances for the month”

  1. Being 20 pct free is a great thing. You now have the possibility to take some decisions based on needs and value, rather than money. Even when that means that the ratio will drop a little.

    1. Hi ambertreeleaves,
      It’s taken me a while to realize how to reduce my progress to a simple percentage which I find is an interesting way of looking at FI. I know there are many other ways for this too but this works for me.
      I’m certainly feeling less stressed about money and the future as I watch the number inch upwards. Keeping every dollar working hard and efficiently is another fun activity.
      Hope you had a great June!
      Best wishes,

  2. Wow! So cool to see your progress. I love the Freedom Ratio and Work Freedom Day. Very interesting perspective on your current status and progress.

    I made a good amount of progress in June too! Keep up the fire and congrats on the pay increase!

    1. Hi Dan,
      Yes I read your June update – congrats on breaking the $1k limit – that’s awesome! 🙂
      There’s so much behavior and psychology in personal finance – everyone tracks things slightly differently. Which is great too since there’s the opportunity to learn and grow from others.
      Hope you’re having a great summer!
      Best wishes,

  3. It’s nice to see that work freedom day move closer and closer to January. We’re still quite a bit away but even if it moves slowly, it’s always nice to see it keep moving.

    1. Hi timeinthemarket,
      Yes – the date jumped a bit in June so I’m working on getting that update out as I’m a bit behind!
      It looks like you had a great result in June too and hopefully will break the $2k threshold in September.
      Best wishes,

  4. DL,
    Roofs are expensive. I replace mine a four years ago due to water damage. That year I was at a loss and didnt save more than I earned. I hope I recoup the cost if I sell someday.

    1. Hi DFG,
      The joys of home ownership! Hopefully your roof will last for a lot longer yet and add value to your house if you sell.
      The damage to my roof was a couple areas of shingles that detached in strong winds. Not really sure how that happened but since it was ~15 years old I figured it was a better investment to replace the whole thing.
      Best wishes,

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