As I mentioned in my last post, I wanted to start providing a recurring financial update to include my savings rate as I continue on my journey to FI. I haven’t exactly landed on the cadence yet, but I am thinking I will post an update either monthly or quarterly. I am leaning toward quarterly at this point.
For today’s post, I wanted to start by providing a baseline financial picture for the Henry household. In the spirit of doing so, I thought a logical starting point would be to outline spending and saving as a percentage of gross income for the last two years. 21 months if you want to get technical (January 2019 – September 2020). I think this approach provides a solid reference point while still maintaining a level of privacy. As I said previously, I do not wish to publish every dollar of income and expenses even if this has become somewhat of a norm in the personal finance and FIRE blogging space. For this reason, I don’t provide actual numbers, income, or specifics to include taxes or tax rates, pre-tax savings vs. post-tax savings, etc. Regardless, I think you can still get a good feel for my financial life. I hope you enjoy the peak behind the curtain…
Note: I have utilized YNAB (You Need a Budget) for several years now to track my spending so categorizing my annual expenses for this post was relatively easy. Regardless of where you are on your FI journey, I would recommend checking out this software. I highly recommend it for tracking expenses and taking better control of your financial life. They are not spammy, have a clear mission to help people with their finances, and their fee structure is straight forward. Win, win, win.
2019 Spending Breakdown
In order to provide an overview of our 2019 expenses, I grouped every dollar spent into the broad expense categories below with the top three (debt payments, housing/utilities and food) accounting for almost 50%. Each expense category is expressed as a percentage of gross income. I also noted our total savings rate which includes everything we saved, both pre-tax and post-tax. This figure is again expressed as a percentage of gross income.
A couple of things jump out at me when seeing my finances outlined in this way:
- Our savings rate is low for FIRE standards. Many in the pursuit of FIRE seek to save 50% – 70%+ of their income so that they can shorten their mandatory working timeline to 10 – 15 years. If you recall from my earlier post, a 19% savings rate would result in a mandatory working career of ~ 35+ years based upon my safe withdrawal rate and return assumptions. Of course this assumes you are starting at $0, which we are not. It also assumes you are truly spending the rest, which we are not (see bullet 2 below). Regardless, 19% sticks out since my goal is to achieve FI earlier in life.
- I expected debt payments to be a large part of our expenses but I didn’t anticipate it would be more than 20%. That is a lot! More on that in a minute…
- 17% for housing and utilities is not too bad in my book. You will see different reference points, but in general, the traditional recommendation is not to spend more than 30% of your gross income on housing and housing related expenses. Of course if you are seeking FI earlier in life, you will likely want to be on the lower end of the spectrum.
To provide some additional insight into the specific drivers in each expense category, I have provided some additional detail for each below.
Debt Payments (~ 22%)
2019 was a transitional year for the Henry household as we focused to pay off all remaining student loan debt. ~ 19% of the 22% in this expense category was allocated to doing so and I am happy to report that we became student loan debt free in 2019! This is one of our biggest financial accomplishments to date since we were able to pay down multiple six figures in student loan debt over a relatively condensed timeline. As you will see in my 2020 YTD update, paying these off has freed up additional cashflow that is now being directed toward the savings side of the equation.
The remaining ~ 3% was attributed to an auto-loan. One could reasonably argue I should have included this expense in the transportation category. However, I have always categorized non-mortgage debt into one bucket so I have a clear picture of expenses that are directly tied to debt. The ultimate goal is to have $0 in expenses in this category in perpetuity. Or maybe I should say the ultimate goal is to have the ability/option to have $0 in expenses in this category in perpetuity. Despite the ability to pay the auto loan off, I have chosen not to because the interest rate is favorable and it seems likes the mathematically best course of action is to invest the money instead. This turned out to be a wise decision in 2019 as the market did very well. I anticipate 2020 will be the same.
Housing and Utilities (~ 17%)
This expense category includes everything related to housing. The primary expense in this expense category is our home (to include principle, interest, taxes, and insurance) which accounts for ~ 7% of the 17%. ~5% is attributed to basic utilities including water, gas, and electric, and what I consider to be housing related expenses including homeowner dues, cell phones (since land lines are largely a thing of the past), security, internet and cable, pest control and other miscellaneous expenses driven by owning and maintaining a home.
The remaining ~ 5% was attributed to the purchase of home furnishings including new furniture. As I have said in previous posts, my goal is not to pursue financial independence by cutting my expenses to the bone and living like a miser. As a HENRY choosing to pursue FI, I still want to spend money freely as long as I believe the purchase will add value to my life or bring a measurable return on my happiness. The decision to spend 5% in this area was intentional and there are no regrets.
Food & Dining Out (~ 8%)
This expense category includes food related expenses including groceries, dining out, and alcohol. Yes, I know alcohol is not food, but I have chosen to lump the expense in here for ease of tracking. Food and dining out is typically one of the top three expenses for most households, so this one doesn’t surprise me. There is definitely room to optimize here as with most people, but the facts are the facts.
Childcare & Child Expenses (~ 6%)
As those with children know, they can be expensive. In the Henry household, ~ 6% of every dollar spent was spent on our children or childcare related expenses. This doesn’t even include the birthday and holiday related gift expenses noted in the personal care category. I can only imagine if we had more than two in the Henry household. It is important to note that ~ 2% of the 6% is directly attributed to childcare expenses while the remaining ~ 4% is driven by extracurricular activities and random expenses that come along with raising children.
Personal Care & Wellness (~ 4%)
This expense category is somewhat of a “catch-all”. It consists of tangible personal care items including clothing, household items, personal care products, etc. It also consists of healthcare expenses (not health insurance) and gift related expenses (i.e. birthdays and holidays).
Transportation (~ 2%)
This expense category includes car insurance for our two vehicles, vehicle taxes, fuel, and vehicle maintenance costs. Luckily, there were no major vehicle repairs in 2019 so the majority of expenses were driven by car insurance and fuel. It is important to note again that I did not include our auto-loan payments in this category, even though one could reasonably argue it should be included here. If I had included the auto-loan, it would have added an additional 3% resulting in a total of ~ 5% being allocated to transportation expenses.
Work Related (~ 2%)
Since the majority of work related expenses are reimbursed, I don’t necessarily consider this category an expense. However, in the spirit of capturing every dollar spent, I went ahead and included it. Technically, there are some unreimbursed work expenses in this category including miscellaneous food and drinks, but they are trivial in the grand scheme of things.
Insurance (~ 2%)
The largest expense in this category is health insurance. Other insurance related expenses include umbrella and life insurance policies noting vehicle insurance was included in the Transportation expense category and homeowners insurance was included in the Housing and Utilities expense category.
Fun Money (~ 2%)
This expense category includes entertainment related expenses. For the Henry household, this represents random trips to the bowling alley, movie theaters, arcades, etc. It also includes the random date night for Mrs. Henry and I.
Misc. (< 1%)
This expense category includes primarily pet related expenses to include pet related medical expenses, food, boarding, etc. This expense category also includes recurring monthly and annual subscriptions including but not limited to YNAB, Amazon, Netflix, Apple, etc. Throw in a speeding ticket or two (yeah… I know…got to put the expense somewhere), and you round out the miscellaneous category.
2019 Savings Rate
As I noted in the beginning, our savings rate of ~ 19% is low for FIRE standards. Since much of 2019 was spent focusing to pay off our remaining student loans, our savings rate was obviously impacted. Luckily, I have never viewed debt repayment and saving/investing as a binary decision. As a result, we have steadily been making student loan payments AND aggressively saving/investing along the way. In hind site, this likely turned out to be the optimal approach considering the historic bull market we have had for the last 10+ years.
2020 YTD (January – September) Spending Breakdown
For 2020, I once again grouped every dollar spent into the same broad expense categories with the top three (housing/utilities, food and personal care/wellness) accounting for ~ 21%.
A couple of things jump out at me when comparing to 2019:
- Our savings rate jumped from ~ 19% to ~ 44%. That is a difference in a mandatory working career of ~ 35 years vs. ~ 19 years if we were starting from $0. Now we are getting somewhere!
- Debt payments went from 22% to 2%. This was anticipated with the elimination of all student loan debt as noted above.
- Housing and utilities went from 17% to 10%. There are several reasons for this which I note below.
To again provide some additional insight into the specific drivers in each expense category, I have provided some additional detail for each below.
Housing and Utilities (~10%)
This expense category again includes all housing related expenses to include mortgage principle and interest, taxes, insurance, utilities and other housing related expenses. The 7% reduction in 2020 can be attributed primarily to the home furnishing/furniture expense incurred in 2019 that will not be incurred in 2020 and the optimization of some of our recurring expenses.
Food & Dining Out (~ 7%)
There has not been much change in this expense category which is somewhat surprising considering the COVID-19 Pandemic. Dining out expenses obviously dropped when the country began to lockdown, but they returned in full force shortly after when curbside pickup and delivery became commonplace. It is looking like we will land in the 7% – 8% range again for 2020 but this is definitely an area where we can optimize further both from an expense and health perspective.
Personal Care & Wellness (~ 4%)
This expense category is also holding steady at 4%. However, the expense drivers in this category changed in 2020 as more than 2% of the 4% was directly attributed to medical expenses. Did I mention kids were expensive?!?!
Childcare & Child Expenses (3%)
This expense category is down 3% from 2019. Like many families this year, we experienced a reduction in childcare expenses as schools were delayed/closed and the kids were home. Our kids continue to learn virtually with some hired support but this expense continues to track less than 2019. We will likely land somewhere around 4% at the end of the year.
Pets (~ 2%)
You may have noticed this expense category jumped up in 2020. 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.
Fun Money & Spending (~ 2%)
This expense category is roughly the same as 2019. It is funny how easily we found a way to redirect our spending in this area during the Pandemic. Can’t go to the move theatre… No problem! How about we pay for an early release movie or another subscription…. Can’t go bowling or to the arcade…No problem! How about virtual bowling or a new gaming system… In 2020, the Henry household managed to stay entertained and you can see it here.
Debt Payments (~ 2%)
Now that is more like it! The only debt payments aside from our primary mortgage are the one outstanding auto-loan. Again, I have chosen not to pay this off due to the interest rate, balance, and the opportunity cost of paying it off vs. investing.
Insurance (~ 2%)
No change in this expense category as the Henry household still needs insurance. How does the old adage go? There are only two things that are certain, death and taxes. I would argue when you are young with a family, you can add insurance to that. Insurance for potential high cost medical care. Insurance in case you were to become disabled. Insurance if you were to be sued. And last but certainly one of the most important, insurance to protect your family in case of your untimely death. Hopefully, I will never actually NEED any of these with the exception of routine health insurance needs. Regardless, I consider these necessary at this stage in life. Death, taxes, and insurance.
Transportation (~1%)
There has been a reduction from 2% in 2019 to 1% in 2020 in this expense category. Seems trivial but another way to say it is there has been a 50% reduction in transportation related expenses from 2019 to 2020. This is the Pandemic in action again. Less travel, less fuel, less maintenance.
Work Related (~ 1%)
There has also been a reduction from 2% in 2019 to 1% in 2020 for this expense category. This is primarily attributed to less work travel again driven by the Pandemic. I did offset some of the reduction in travel with some new “work related” expenses associated with the blog. Since it technically isn’t work, I should probably put this in the Fun Money category. Alas, the expenses are minimal and this is where I chose to put them.
Subscriptions (< 1%)
We are holding steady in this area. We got rid of a few subscriptions and picked up a few more for good measure. The result is effectively a wash when comparing 2020 to 2019.
2020 YTD Savings Rate:
Now that our student loans are a thing of the past, our savings rate will likely land around 45% for the year. If I am being honest, this is short of the goal I set at the beginning of the year of 50% but it is still solid. I am hoping there is nothing unforeseen over the next three months so we can end up in the 45% – 50% range for the year.
Conclusion:
I can say there were no surprises in preparing for and writing this post as I have been tracking my expenses for several years now. I think more than anything, it just reinforced what I already know. There are areas where we can optimize further if we want to increase our savings rate. There are also areas where can loosen up and spend more if it aligns with our values and increases our happiness while still allowing us to achieve financial independence on our desired timeline. Life is ultimately a series of choices and opportunity costs. There is no right or wrong answer. There is only what works for you are your family. So, what about you? Do you know your spending and savings rate? Do you know which areas you spend your money and how that relates back to your total income? If not, I encourage you to take action and find the answer to these questions. They may surprise you…