Since I am starting this blog in July, I figured I will get everything caught up income and expense for the first half of the year in a single post. So this one might be longer than normal. At the beginning of the year, I wanted to see if I could save at least 50% of our net income. Now, by savings I mean anything that will increase my net worth. So contributions to retirement accounts, HSA, brokerage account, principle amount towards debt, and any increases in my checking account.
Now I haven’t stated my goals yet for the remainder of the year and I feel like this is an area in which can be revised upwards. I am striving to make each month better and to try to eliminate unnecessary expenses. Now between my wife and I we don’t even gross six-figures in income. In fact, I would be THRILLED if we got that high before we are financially independent. Not because the income matters, but because we will be able to get financially independent that much quicker! Really, I am just a bit above the median household income level in the US. So if anyone wants to argue you can’t save on the median income, send them my way. I am not here to prove someone wrong, I am here to prove it is possible.
Income
- Paychecks: $29,956*
- Interest & Dividends: $144
- Credit Card Rewards: $785**
- Other: $727***
Total Income: $31,612
Expenses
- Health Insurance: $742*
- Health costs: $336
- Mortgage Interest and Escrow: $4,418
- Car Loan Interest: $149
- Student Loan Interest: $346
- Water & Sewer: $158
- Electric: $251
- Natural Gas: $569
- Internet: $279
- Cell Phone: $254****
- Life Insurance: $262
- Trash: $118
- Dining Out: $214
- Entertainment / Hobbies: $141
- Personal / Household: $597*****
- Gas: $1139
- Clothing: $73
- Meals: $1,432******
- Snacks & Beverages: $214
- Car Repairs and Maintenance: $543
- Home Repairs and Maintenance: $433*****
- Car Insurance and Registration: $702
- Vacation $849*******
- Gifts: $216
- Misc: $84********
Total Expenses: $14,519
Savings Rate: 54%
Ok, time to explain the items that are asterisked up to a million times.
*Paychecks and Health Insurance. I had been receiving cash-in-lieu of insurance because it was a better deal to get the cash and save to a HSA plus pay the premium. This maybe be changing with the upcoming open enrollment based on our future health care needs. I will need to do a detailed analysis once I know what our expected costs could amount to. Or at least the worst case results.
**This includes two sign up bonuses, one in February for $400 and another in June for $250. So I only expect this to get to a range between $900 and $1000 cumulative for the year. I don’t plan on doing more than one credit card bonus per year for both my wife in I (so 2 total).
***Kind of the various category. It includes some low yielding treasury bonds I didn’t know my dad took out in my name a decade or so ago. Also includes mileage reimbursement and cash gifts received. Some other things I know that I can’t remember.
****This includes one time cost for purchasing a phone from AIO (now Criket). If you are interested in getting a referral for the $25/mo basic service with the AT&T network either ask me or dividend mantra for a referral and we will both save $25.00. A little shameless advertising, but hey, I saved money with it and if you don’t want it, don’t switch.
*****Since we just got our house in November these categories include many one time expenses like a ladder, some tools, shears, etc.
******This includes the purchase of a quarter cow for just over $500. I have 54 packages between burger, roasts, or steaks with the quarter of a cow and I seem to be using on average one package a week. So when you look at my food costs for future months, basically figure that the true cost is $40 more as I am using up the quarter of a cow.
*******This doesn’t include the main hotel blocking that was done in December. In total the cost was right around $1,400 and this includes all gas, food, lodging, and gifts purchased on our trip to Virginia Beach. Hey at least I got the front page photo out of it!
********This includes the $75.00 annual fee for the American Express card (which gave a $250 sign up bonus). Not sure if we will keep it or not, the 6% bonus is very nice for groceries, but we actually have to spend enough to make it better than the standard 3% card.
Overall, not a bad start to the year. Some purchases should save money over the year such as the cow and the phone as examples. I am hoping to find some new ways to improve in the upcoming months and increase the overall savings rate!
Photo Credit: adamr/freedigitalphotos.net
Kipp,
Really solid stuff there. Glad to see you guys are able to maintain pretty strong levels of frugality on relatively modest incomes.
I do have a question, though. You list a lot of expenses as interest only, like student loans, mortgage, car loan. Do you not include the principle payments as an expense?
Keep up the great work!
Best wishes.
Hi Jason,
Thanks for stopping by Jason! Yes, anything that increases our net worth I consider savings because we are reducing the debt we owe. It would be more of a mess in my mind to include it all, then only to adjust back on the net worth side for the principle being paid off. It also serves as a reminder that once these things are paid off, I will no longer have those expenses (save for the escrow portion of the home). That is future cash flow just taunting me :).
Also, this can help give motivation for paying off debt faster as you can see the results compounding by the decrease in interest every month. Much like you see your dividends growing each month, but in this case I want down not up!
Kipp,
Ahh, gotcha.
Well, it’s ultimately your finances and you have to do what works for you. However, I would be careful with that line of thinking because you’re artificially inflating your savings rate.
To not count the principle payoff as an expense is really just ignoring the expense.
For instance, counting the interest expense only on your car loan is really ignoring the expense of the car in the first place, as well as depreciation.
Think about this way: If you went out and purchased a car for $10k cash (ignoring a loan and the interest) would you not count that as an expense? To not count it because it “increases your net worth” is like saying you just bought a car for free, which is obviously incorrect. Same goes for a house, and especially student loans since those costs went somewhere (college education) but do not increase your net worth at all (but perhaps your human capital).
I could ignore the $5,400 cash I spent on a car last year, but I’m amortizing it at $300/month. I could also ignore the ~$180/month I’m spending on principle payments for my student loans. Factoring these changes in, my savings rate would probably be around 80% or more every month. Maybe higher. But it would really not be correct.
Just my thoughts on it.
Best wishes!
Hi Jason,
Well I probably do it the way I do it because I am an accountant. The principle on a loan is a past expense. It is already accounted for in my net worth statement (or balance sheet). Paying a loan isn’t really an expense in accounting, you are just exchanging an asset (cash) for a decrease in liability (loan). The interest, however, is a true current expense. So I account for that. I probably should expense the depreciation, but I am adjusting for it on my net worth (along with gains and or loss on the stock market). I am not using the purchase value of the cars, I using the most recent KBB figures as a guideline.
To your question if I would buy a $10k car would I count it as an expense, the answer is no. It would initially be a zero sum as I just traded one asset for another (cash to car). Then as the car loses value I can make adjustments. To me, the income & expense serves a purpose of building net worth. Any activity to me which increases net worth is savings in some form.
If I did things the way the way you suggested then I would not account for any of these loans on my net worth page. Then the full student loan, car loan, and mortgage would be expensed. I don’t think this would be an accurate picture of what is going on because I do owe that money now, and it would inflate my “expense”. If I made an extra $1000 payment on debt do you consider that all expense? To me it is zero sum, like the car, I am just trading cash to decrease the liability.
I understand the way for do it because you are not offsetting your loans against your portfolio. The difference is, I am. And to me, my goal is increasing Net Worth, so that is my focus. The income and expense basically gives me the increase or decrease to this figure for the month, then I need to adjust for changes in market value of stocks and vehicles.
So in essence, I do believe your savings rate is higher than you show. You car is probably not decreasing in value at a rate of $300 a month. Your student loan balance should be counted against your portfolio if you are calculating net worth (but you are not, you are just showing your investment portfolio), so principal payments then would not be considered an expense.
I hope this helps explain my reasoning and thoughts.
Kipp,
“To your question if I would buy a $10k car would I count it as an expense, the answer is no. It would initially be a zero sum as I just traded one asset for another (cash to car). Then as the car loses value I can make adjustments. To me, the income & expense serves a purpose of building net worth. Any activity to me which increases net worth is savings in some form.”
All due respect, but I still don’t get this. To say you’re simply exchanging one asset for another discounts the fact that you still “spent” money on something. It’s like saying I bought a car for free because I had cash on hand and my net worth didn’t change (even though the car depreciates the second you buy it).
It’s a zero sum on your balance sheet, although technically that’s not even true since depreciation is pretty immediate. But it’s not a zero sum on your income statement.
At that rate, anything you spend money on that isn’t immediately consumed (gas, food, beverages) is really not an expense. Clothing is an “asset” that can be sold later. Your television is an “asset” that can be sold later. So is the furniture in your house, a new addition to the house, a boat out back, etc. So using your accounting methods would technically mean that very few expenses are truly expenses, and only if you’re financing these items would you count any expense at all (the interest). I just find that completely incorrect from an accounting perspective. The depreciation then must be accounted for, which is pretty costly. And some of these items would be almost impossible to get accurate depreciation figures for. It would just be easier to count the initial expense and later recoup anything through a sale and count that as income. The difference would be your real-life depreciation.
You could certainly expense all of these assets (a car is a questionable asset) as constant depreciation, but that would be awfully time consuming. And your savings rate would have to be reflected downward pretty significantly.
Paying $10k for a car in cash, not counting the expense, and then later reselling it for $5k and only adjusting your net worth accordingly would mean you never accounted for spending $5k when you really did.
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“If I did things the way the way you suggested then I would not account for any of these loans on my net worth page. Then the full student loan, car loan, and mortgage would be expensed. I don’t think this would be an accurate picture of what is going on because I do owe that money now, and it would inflate my “expense”. If I made an extra $1000 payment on debt do you consider that all expense? To me it is zero sum, like the car, I am just trading cash to decrease the liability.”
One’s balance sheet (net worth) and their income statement are different. I could easily add a net worth page to my site and run my student loans against the portfolio as a liability, lowering my net worth. But that doesn’t change the fact that I’m still actively spending money to reduce the balance of the loans. And that balance got there because I spent money on education. To say the loans aren’t an expense because I reduce my net worth accordingly is mixing income/expenses and net worth. The money was still spent on a service. It doesn’t just not count because my net worth is lowered. Your net worth is lowered by the amount of the loan value AND your expenses increase because you spent money on education. As the loan value decreases over time (through expenditures) your net worth increases. Eventually the liability disappears, along with the expense. But it’s accounted for in more than one place.
The car expense can be depreciated, but the student loans have to be counted for as a full expense because you received value in exchange for money. And there is no “asset” you can sell in its place.
I’m really surprised that you don’t view the student loan principle repayment as an expense when you spent money on something and received no true asset in return. It’s not like you can go out and sell a degree for $30,000. It’s worthless to anyone but you. You can certainly claim value for the money spent as your human capital goes way up, and that will be fully reflected on your income statement if you take advantage of that. But that doesn’t mean the loan principle doesn’t count as an expense.
I hope that clears up where I’m coming from. Ultimately, you can run your budget however you want, but I would think you’d want an accurate picture of where you’re at.
Again, this was meant with all due respect. And I took some college courses in accounting as I changed my major late in the game, so I’m fairly familiar with how this works.
Best regards!
“All due respect, but I still don’t get this. To say you’re simply exchanging one asset for another discounts the fact that you still “spent” money on something. It’s like saying I bought a car for free because I had cash on hand and my net worth didn’t change (even though the car depreciates the second you buy it).”
The money was already spent previously, before I had it, that is why a loan exists. This loan then decreases my net worth. I agree with you that in some form I should account depreciation as an expense, but usually only new cars are the ones that instantly drop in value. Your used Toyota may even be worth more than you purchased it for. So your theory that depreciation is immediate isn’t necessarily true.
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“At that rate, anything you spend money on that isn’t immediately consumed (gas, food, beverages) is really not an expense. Clothing is an “asset” that can be sold later. Your television is an “asset” that can be sold later. So is the furniture in your house, a new addition to the house, a boat out back, etc…”
Well it is true that you don’t use everything when you purchase it in its full life such as all of the things you listed. In fact I believe it was YMOYL that suggested counting the value of EVERYTHING, including your TV, furniture, food, etc to establish your net worth. That is a bit overboard IMO. Generally you have a threshold to what you consider a “Capital Asset”. This obviously differs between you and I. You seem to agree that a house can be an asset while you question the cars.
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Ah the student loans again… you do notice that I have no human capital asset on my net worth page, right? There is no off-setting asset in play here. Just a liability that I have accounted for and I am working to decrease.
The statements may be different but they work together. My income statement effects my “retained earnings” (basically the difference in income/spending as I don’t pay myself dividends, issue stock, or anything) which then directly flows into my balance sheet or “net worth”. They are different but work together. Let me run two examples:
A.) Income: $5000
All expenses less student Loans: $2800
Student Loans: $200 – Principle $150, Interest $50.
Accounting for the entire student loan payment as an expense would yield this result on net worth:
Net worth increase: $2000
Loan balance: UNCHANGED, BECAUSE it is all expensed. If you then go and adjust this balance downward by $150, you end up increasing your net worth by $2,150… which is what I am doing by doing this:
B.) Income: $5000
All expenses less student Loans: $2800
Student Loans: $200 – Principle $150, Interest $50.
Net worth increase: $2,150.
So I think what you are saying is you like method A, because it turns your income statement to more of a feel regarding cash flow. I am saying I like method B because that is the way I have learned to account for income and expense. I have 6 years of that crap pounded into my head, kind of hard to reverse that for me now. Although, as I said, I agree I should be expensing the depreciation in some fashion other than an adjustment to net worth. But I am not depreciating my human capital as I have $0 of an asset to depreciate. I am not going to list myself as a negative asset in life :).