You may recall in my October post that I provided an overview of our spending and saving through September 2020. Today I wanted to provide a final update on where we landed when the dust settled and I was finally able to reconcile our finances through end-of-year 2020. My intent is to do a financial review every year moving forward so I have a record and I can compare to previous years.
2020 Spending Breakdown
I once again grouped every dollar spent into the same broad expense categories with the top three (Housing & Utilities, Food & Dining Out and Fun Money & Consumer Spending) accounting for ~ 21%. Below is a breakdown by category.
Housing and Utilities (~12%)
In my October update, our housing and utilities accounted for ~ 10% of our gross income to date. We ended the year at ~ 12%. The chart below outlines this expense category in more detail.
As one would expect, the largest expense driver in this category is the mortgage since we don’t rent. This accounted for 53%. There are a couple of important things I want to call out in this expense category.
- We chose to refinance our mortgage with Better in December (blog post likely to come) to take advantage of the historically low interest rates. There were no actual out of pocket costs associated with the mortgage refinance. The expenses you see reflected here are related to prepaid items including interest and property taxes. These expenses would have been paid anyway so it will all come out in the wash.
- The miscellaneous/other category includes things such as homeowner’s association dues, recycling, pest control, etc. It is essentially a catch-all for items not clearly falling into one of the other categories.
As a whole, I believe we have done very well in optimizing our expenses in this area. The general rule of thumb is that your housing payment (including principle, interest, taxes, and insurance) should not exceed 28% of your pre-tax monthly gross income. [1] 12% of our gross income to include ALL of our other housing related costs is less than half of this rule off thumb recommendation. This is driven by our conscious efforts to keep expenses lower in this area in conjunction with living in a low cost of living area. Mrs. Henry and I have discussed relocating to a higher cost of living location many times in the past. However, we have not done so in part due to the roots we have already put down as well as the impact doing so would have on our finances. The result… The ability to save an extra 16% each year instead of spending it on housing and related expenses.
Food & Dining Out (~ 6%)
Our food and dining out expenses (to include alcohol) ended up being lower than 2019 in both dollar terms as well as when expressed as a percentage of our gross income (~ 8% in 2019). I am still not particularly proud of this one and neither is my waistline. Despite the lockdowns earlier in the year and our reliance more on curbside pick up and delivery for our groceries, we ended up spending ~ 6% in this area. 6% feels like a lot because it is a lot! It is one thing to track where we spend our money on food and booze but to see it expressed as a percentage of our gross income… Ouch! We have some work to do here in 2021. I have a feeling my body and our net worth will thank me if we can make improvement here over the upcoming year.
Fun Money & Consumer Spending (~ 3%)
I am actually surprised that we didn’t spend more in this area. Early in the year, the Henry household took a trip to Disney World for a week. Despite the subsequent lockdowns and decreased travel during the Pandemic, we also still managed to take a few trips to the beach for a little R & R later in the year. The expenses associated with these trips coupled with gifts for birthdays and Christmas and other consumer/entertainment purchases ended up accounting for ~ 3% our gross income. It is important to keep in mind that I lump virtually every “fun” purchase into this category. If we spent money on a consumer good (excluding clothing which is reflected in our personal care expenses below) and it wasn’t housing related, it is in this category. I say this to point out that I believe 3% is low in part due to credit card rewards. We strive to travel for free and we are largely successful in doing so. Whether it was the plane tickets to Disney world or the accommodations once we arrived, our goal was to pay little to nothing out of pocket, and if you haven’t figured it out yet, I like goals. I like achieving them even more.
Note: There will be plenty of future posts on leveraging credit card rewards for travel and cash back purposes. As a HENRY, if you have the discipline to utilize credit cards to your advantage and not the credit card company’s, you can literally travel for free. As I have said previously, with an above average income, you have above average expenses which can lead to above average credit card rewards. If you are not taking advantage of credit card rewards, you are missing out on free money.
Personal Care & Wellness (~ 3%)
If you recall from my previous post, this expense category includes health care related expenses, clothing, and other miscellaneous personal care expenses such as haircare, physical fitness related expenses, etc. Almost half of this category is was driven by healthcare related expenses, primarily for our children. Kids = expensive. Enough said.
Childcare & Child Expenses (~ 3%)
Our expenses associated for our two kids (excluding the healthcare expenses noted above) were half of what they were in 2019. This is largely attributed to discontinuing the extracurricular activities that the kids were doing after school and on the weekends in 2020 due to the Pandemic. We did hire a retired teacher to assist our kids in their virtual learning adventures throughout the year. However, even with this added expense, we ended up way down for the year. I am hopeful we spend more here in 2021 because it would mean our world is returning to a more normal state and the kids are more freely participating in the activities they love.
Debt Payments (~ 2%)
This expense is solely driven by our one car payment which is the only debt we have remaining aside from our mortgage. If you recall, we decided that we were not going to pay the loan off this year due to the low interest rate and the opportunity cost of paying it off vs. investing. Despite this decision, there were a few points throughout 2020 that I seriously considered paying it off just so I could say we were officially debt free excluding our mortgage in 2021. Even though we did not end up paying it off, I did make a couple of extra payments for good measure. I just couldn’t help it… We will completely pay this off in 2021 at which time I just may have to channel my inner terminator…”Hasta la vista, baby!”
Pets (~ 2%)
No change here from my October update. We had a pet family member pass in early 2020 and as chance would have it a new pet family member joined shortly after. The expenses in this area are attributed to the loss and addition of pets in 2020 and all that comes along with it.
Transportation (~ 2%)
Less travel, less fuel, less maintenance. More than half of the expenses in this category are driven by auto insurance costs. The remaining expenses are fuel, maintenance, and vehicle tags. Not much more to say here.
Work Related & Business Related (~ 1%)
2020 has been interesting in this area… What was once work related has become work AND business related. On the one hand, work related expenses, many of which are reimbursed from our employers, became nonexistent after February due to the Pandemic. However, something else happened. I decided to start a blog early in the year and Mrs. Henry decided to start a business of her own later in the year. About half the expenses in this category were related to some of the start up costs associated with both of these adventures. I am looking forward to what 2021 has in store for us in this area as we both continue to pursue these ventures.
Insurance (~ 1%)
Insurance, insurance, insurance… A necessary evil I suppose. This category includes primarily life insurance and umbrella insurance. It is important to disclose here that our medical insurance is NOT included in this category because our premiums are deducted from our pay check and it is a minimal expense generally speaking. We are very fortunate in this area as we have exceptional employer sponsored health insurance coverage that is low cost while still providing great benefits. I probably should incorporate this into future updates, but for now, it is not reflected.
Other (< 1%)
This category is mainly driven by subscriptions and annual fees. Recurring monthly subscriptions include things like Netflix, Disney Plus, Amazon, Ring, etc. This also includes annual recurring expenses like tax software, You Need a Budget (YNAB), and credit card annual fees. Before you question the annual credit card fees, keep in mind my previous comment on credit card rewards. I don’t have the exact number in front of me, but if I had to guess, we collected rewards that equated to 40 – 50 x the annual fees I paid in 2020. And, no, that wasn’t a typo. 50 x the annual fees.
2020 Savings Rate
I projected in October that our savings rate would land around 45% for the year with the original goal being 50%. Again, both of these targets are a percentage of our gross income.
When it was all said and done, and the dust settled to include the mortgage refinance in December, we landed at a 46% savings rate. This savings figure includes retirement accounts (pre-tax and Roth), taxable accounts, cash, and mortgage principle/equity. It also includes charitable contributions that we had for the year because I do not currently separate the two.
Overall, I am happy with our savings rate for the year. It was more than double our 2019 savings rate. In addition, as I have stated before, our goal is not to save 70%+ of our income. As a HENRY, we can have the best of both worlds. We can save a significant portion of our income leading to a better tomorrow while still spending on what we want now and living our best today. That is our goal. Mission accomplished in 2020. Our goal in 2021 is still the same as 2020. Save 50% of our income.
How Do You Stack Up?
Financially speaking, I think we had a very successful year. I am curious how others did. Since it can be difficult to relate to percentages, I wanted to provide a point of reference so you can see how you stack up to the Henry household.
The chart below provides a few sample income levels with the spending percentages noted above applied. You can also see what a 46% savings rate would equate to at each respective income level keeping mind that savings could be pre-tax or post-tax. All figures are expressed as an annual expense (i.e. if you make $150K in gross income and spend 12% on housing and utilities then you spend $18,000 annually).
The chart below is the same thing except the figures are expressed as a monthly expense. This view is likely easier to apply to your personal expenses since most people have a good feel for what they spend monthly. If you don’t, you will want to refer back to my previous post on the importance of understanding where you spend your money.
After reviewing the charts above, how do you stack up? Are you spending more in some areas? Are you spending less in some areas? It is likely a combination of both. There is no right or wrong answer. The key is (1) understanding where you spend your money (2) understanding what you value and (3) aligning the two. If you can figure these out, you can drastically accelerate your ability to achieve financial independence.
So… how about it? How did you do? Let me know in the comments or send me an email. I would love to hear from you.
Regards,
Henry
References:
[1] https://www.bankrate.com/mortgages/what-percent-of-income-should-go-to-mortgage/