July 2018: A look at my finances

July 2018 review coverI’m still in my time-travel machine, trying to catch up to March 2019. Here’s my July 2018 review following on from my July income fund update. It’s almost like a balance sheet statement, but different!

My Score for July

Freedom Ratio 21.7% 🙂
Expenses 54.9% 😐
Wet Worth $375,636 😎
Work Freedom Day 30-Sep-18 🙂
Cash Reserves 3.7 months 🙂

Only one record (😎) this month as my Wet Worth reached another all-time high! My Living expenses peaked again this month due to low investment income.

Freedom Ratio

My Freedom Ratio is the percentage of my monthly living expenses budget that my Income Fund ‘withdrawals’ pay for. The current payment is $875 a month which covers 21.7% of my current $4,040 monthly budget. So I’m 21% of the way to Financial Independence!

I’ll adjust this amount based on the average monthly investment income from the first quarter of next year. The first quarter is typically the lowest income quarter so should be a safe withdrawal rate. Surplus investment income for the remainder of this year will be re-invested.

Living Expenses %

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

Living expenses includes both essential (e.g. groceries, mortgage, insurance), and non-essential (e.g. music, travel) purchases. I fix the amount at the start of year. $4,040 is the amount from my Budget 18.0 which I’m not changing for the remainder of 2018.

This month’s 54.9% is back to more usual levels and is worse than last July’s 52.8% due to lower net salary. I’ve started to maximize my 401(k) contributions this year so my net salary is lower.

I save or invest any income that I don’t spend on Living Expenses so my effective “Savings Rate” this month was 45.1%.

The average percentage value should gradually decrease over time. This is because salary and investment income will hopefully 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 spending since both numbers are impacted by a higher budget.

Living Expense History

The chart below shows the change in living expense percentage since 2014. The values are worse this year in the first two months of the quarter, then improve due to higher investment income in the third month.

The table below summarizes the evolution of the monthly budget. I’ve been aiming for a yearly increase of two or three percent.

2014 $3,960 Budget 2.0
2015 $3,850 Budget 3.5
2016 $3,900 Budget 4.5
2017 $3,970 Budget 17.0
2018 $4,040 Budget 18.0

Savings & Investing

Any monthly income left over from paying living expenses goes towards Savings or my Income Fund. For 2018 I put aside about $1,200 monthly for Savings and invest the rest.

I’ve written about my July 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 $19,259 in July from $356,377 to $375,636. 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.

The current Work Freedom Day estimate moves forward to 30 September 2018 based on projected income. The exact date won’t be known until later in the year as I’m using conservative estimates to predict the date.

Note that based on a $4,040 budget, one Work Freedom Day requires about $134 of dividend income. Financial Independence then, requires about $1,800,000 at a 3% withdrawal rate.

Cash Reserves

Here 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 $3,430.07 in July which means I underspent my budget by $610.

Wet Worth detail

I’m showing my Wet Worth in this post – this is the cost of my liquid assets minus debt. Assets and retirement accounts are excluded 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 +$1,622 Cash increased due to low expenses and an insurance refund .
Debt +$3,770 Debt increased due to large credit card charges for auto insurance.
Savings +$2,090 Savings are boosted from capital gains in my HSA account and the small cap stocks in my Savings account.
Income Fund +$19,317 My Income Fund market value increased this month. See my earlier post for details.
Total +$19,259 Total change in Wet Worth

July 2018 Summary

Cash Flow Forecast

My auto insurance premium showed up as a credit card charge (debt) so will be paid out of cash in August. My insurance company (Amica) pays dividends however, so although the premium is higher, this year they paid back $737 based on company profits.

I still have a large purchase looming for installing wood flooring in a couple of rooms in the house.

In other news

I’ve simplified my report card this month. The more I work with my finances, the simpler I’m trying to make things.

Anyway, it all adds up to one more step in the right direction towards Financial Independence!

Quote of the Day

Life is 10% what happens to you and 90% how you react to it.

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