August 2018: A look at my finances

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

My Score for August

Freedom Ratio 21.7% ?
Expenses 53.5% ?
Wet Worth $382,742 ?
Work Freedom Day 30-Sep-18 ?

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. Cash reserves were low due to a large yearly auto insurance payment.

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 53.5% is back to more usual levels and is worse than last August’s 52.7% 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 46.5%.

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 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 $7,106 in August from $375,636 to $382,742. 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 stays at 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.

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 -$4,087 Cash decreased due to insurance premium payment.
Debt -$2,829 Debt decreased due to large credit card payment.
Savings +$2,316 Savings are boosted from capital gains in my HSA account and the small cap stocks in my Savings account.
Income Fund +$6,048 My Income Fund market value increased this month. See my earlier post for details.
Total +$7,106 Total change in Wet Worth

August 2018 Summary

Cash Flow Forecast

I’m glad the insurance premiums for the year are out of the way. Coming up next month is a large purchase for installing wood flooring in a couple of rooms in the house.

Looking forward to higher investment income next month too as the stock funds pay their quarterly dividends! I’m hoping to exceed total income compared to this time last year.

In other news

Nothing too exciting this month really. Or if there was, I’ve forgotten it in the last 6 months.

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

Quote of the Day

Our greatest glory is not in never falling, but in rising every time we fall.

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