Are We Financially Independent?//Breaking Down the Budget
In our last post, we shared that our annual spending was up approximately $10,000 compared to the previous year. We are pretty anti-budget, and we appreciate having the ability to be flexible with our spending.
However, we are even more anti-being ignorant of important stuff. I think knowing where our cash is flowing qualifies.
Our solution is to track where we spend our money and then review it periodically. Today, I am going to break down where our money went in 2016. As we approach implementation of our “Ultra-Safe Early Retirement Plan” several things are of particular interest:
- How much are we spending on particular categories?
- Do we need to further investigate/optimize any of these categories?
- What expenses do we expect to go up or down in the future?
- Could we support all of our “essential” spending with investment income?
We are fairly loose with our tracking. For example, our “Grocery” category includes all receipts from the grocery store or Sam’s Club. We don’t try to break down food versus household goods. It is all just groceries in our world. Our “Giving” category combines donations to “real” charities as well as what we would consider “gifts”, but are not technically charitable donations by the IRS. Again, we are looking at the big picture.
Breakdown by Category
Our spending breakdown for 2016 is as follows:
- Groceries: 23.6%
- Housing/Cars: 21.6% (Property taxes, Gas, Insurance, Maintenance, Utilities, etc)
- Giving: 11.3%
- Medical: 8.4% (Insurance, Deductibles, Copays, etc)
- Travel: 7.9%
- Taxes: 7.1% (Taxes on investments that we have to cashflow, above and beyond income taxes)
- Daycare: 6.8%
- Dining/Entertainment/Gear: 4.1%
- Random Cash Spending: 4.1%
- Everything Else: 5.1% (Cats, Life/Umbrella Insurance, Clothes, Kid Stuff, etc)
The purpose of this post is to share where we spend and how we analyze things. The obvious place to start any optimization is with the biggest expenses. We manually track our spending in a spreadsheet, so we look at our numbers on an ongoing basis.
Mrs. EE started the year experimenting with an auto-immune diet (gluten-free, mostly organic, minimal sugar, minimal processed food, and minimal grains). She also was experimenting with a lot of different supplements, which is not completely captured in the grocery number. As the year went on, particularly in the past four months, we have gotten much better at controlling these costs.
One simple reason is that, aside from her remaining gluten-free, we are no longer following any strict diet. We now simply buy more produce that is in season and thus cheaper and better quality, and plan around that. Another reason is that she discontinued all supplements except for taking a pre-natal vitamin (don’t read into that!) and Vitamin D.
We also have been optimizing our shopping. We started doing more of our weekly shopping at Aldi’s, which has a great selection of organic produce and decent selection of meat for a fraction of the price of our other grocery stores. We stock up on things like organic coffee, coconut oil and nuts from a warehouse store. We’ve been using the online Thrive Market* to stock up on harder to find items. We then fill in the gaps buying at our regular grocery store. Using these strategies has decreased our spending by about $200/month over the past four months of the year compared to the first eight with minimal effort and no compromise on quality.
For most American households, the top three expenses are housing, cars, and food. Even with no mortgage and no car payments, this is still basically true for us. For those of you that think that your primary residence is an investment, our experience is that our home is a consumption item that drives spending while hopefully keeping up with inflation. Likewise, buying a car with cash rather than financing saves a lot of money up front. However, driving is still expensive.
We were happy to see that giving was our third biggest area of spending. We have no desire to decrease spending in this area, and it is nice to know that we have the ability to give. While we always want to be able to help others, it is also nice to know that this is completely discretionary spending. If needed, this spending could be shut off completely for periods of time if need be.
Medical expenses are the scariest part of our budget. I had one sinus infection with a round of antibiotics. Little EE had only two “sick” visits and a round of antibiotics for an ear infection. Mrs EE is doing much better with her auto-immune condition. Still she had a couple of specialist visits and some blood tests for that problem. She also saw a hand specialist and had an MRI of her finger due to a climbing injury. With just that and my company increasing our share of medical insurance costs, medical expenses ate up 8.4% of our spending in a pretty healthy year. This is an area of serious concern as we look to an uncertain future. Our unknown future health and an uncertain future for the healthcare marketplace of our country are major wild cards in all projections.
The next three categories (travel, taxes and daycare) are really encouraging. They total nearly 22% of our budget and will almost definitely be reduced dramatically. We’ll discuss that below. Everything else is pretty minor at this point and not worthy of much consideration.
It is always hard to predict the future, but we will try to do that now. For the immediate future we see several things decreasing in the next year.
As discussed above, our food spending is trending down. Driving costs should decrease dramatically when I stop my work commute. Despite traveling more this year, we project these costs decreasing. We have been experimenting with travel hacking and are on pace to do most of our traveling for very little cost. I will definitely be writing more about this in the coming year.
Over the long-term, travel expenses should decrease dramatically if we move west where we we will be close to all that we love to do (ski, climb, hike, paddle). This will eliminate the need for expensive short trips to have access. We will likely travel more in the future, coming back east to visit family. However, our more relaxed and flexible schedule, ability to stay with family, and travel hacking abilities will greatly decrease travel costs while allowing us to travel for longer periods of time. I anticipate nearly, if not completely, eliminating travel expense over the next few years with these strategies.
We are planning to sell our current home and move within the next 18 months. We definitely want to downsize our home and would like to try out being a one car family. I think we will substantially improve on these numbers while actually increasing happiness by carrying a lighter load.
Taxes represents the costs of selling off investments in taxable accounts over the past few years as well as paying annual taxes on dividends and capital gains. Having completed our divorce from our financial advisor in 2016, we now hold only index funds which generate no capital gains in our taxable accounts. This means no more capital gains taxes from holding actively managed funds or selling off ones we no longer want. Index funds do still generate dividends. With our income dropping, we will hopefully eliminate taxation of our dividends as well after 2017. Therefore, taxes on our investments will be eliminated completely unless we somehow are earning too much money doing things we love. This is a problem I would gladly accept.
Daycare/preschool will be eliminated within about 15-18 months when little EE is ready for school. Assuming we find a satisfactory public school system this expense will also go away completely.
On a sad note, our three cats are all older and have been requiring a good bit of vet care in addition to regular expenses. With our desire to travel for longer periods of time to visit family, we will likely be going pet free for the next period of our life once these three are no longer with us. While our home will be a bit less joyful (but cleaner) without them, the budget will be free of this expense.
In the short term, we know that we will need to spend on updating our electronics soon. This includes needing a lap top, a new phone, and a new IPad in the next year. All of ours are very dated to the point of not even being able to accept updates of many programs.
Also in the short term, we will be switching health insurance coverage from my company to Mrs. EE’s. This means higher monthly premiums and possibly having two deductibles for the year.
We are planning a cross country move in the next year to eighteen months. We are trying to figure out the way to make that as affordable as possible, but inevitably it will be expensive. Once we move, we will be wanting some new gear we have been holding off on including powder skis with an AT set-up and kayaks.
The Big Unknowns
For the longer run, we have two big unknowns. The first is the cost of raising our daughter. While some things are already gone (diapers, special baby foods, etc) or going soon (daycare), there are others that have not even begun. For example, she now skis for free, but in a couple of years will require a pass. Aside from swim class, she currently does no organized activities. To this point, we have spend virtually nothing on her clothes, using hand me downs from her cousin. At some point we’ll probably have to buy her a pair of pants and a shirt or two of her own. 🙂
While we can’t confidently predict what our daughter will cost, at least we will ultimately have control of saying no and limiting things when we need to. This brings us to the big scary unknown: Healthcare costs.
With a new administration now in power, the prospects of Obamacare are not looking good. As both a healthcare practitioner, consumer, and finance nerd, I am aware of all of the good and bad aspects of the law. While it was deeply flawed from the start, it at least gave options to obtain health care and cap risks for early retirees and entrepreneurs. Without the law, I don’t have any idea how to even begin to estimate what medical costs will be.
Are We FI?
This is a difficult question to answer. Based on last years expenses and asset values we are not FI, based on the definition of having assets 25X spending as determined by the 4% rule.
If we eliminated discretionary spending (giving, travel, etc) we would be close, however we would not be living the lifestyle we would like.
If spending decreases as we project, markets don’t crash and the cards fall right with our health, we could be FI this year. However, those are big ifs.
If the Republicans repeal and replace with a better alternative than the ACA, we will be more confident. However, if they repeal and do not replace or have a worse alternative, we are right back to where we were eight years ago with virtually no ability to cap risks associated with developing health problems.
FI is more complicated than a simple use of the 4% rule or its inverse Rule of 25. I still think this is a great place to get started and a great target for FIRE planning. However, as we have really dug deep into doing our own planning, we have realized that there are always many moving parts.
Life is not a static model where we spend the same thing every year, adjusted for inflation. Life changes, interests and needs change, health changes, laws that govern us change. The best plan for us is the plan that gives us the most options.
Do you budget or track your spending? Do you see any blind spots in our analysis? Please share your thoughts below.
*We have established an affiliate link with Thrive Market. If you click to their site through our page and buy a membership, we will receive a small commission. Thrive is a great source for organic, gluten free, and other specialty food products as well as natural hygiene and household products at wholesale prices. They also frequently offer free products with a minimum spend. We typically avoid affiliate links to avoid conflicts of interest to our readers, but we truly love Thrive Markets products, prices, service, free shipping and company mission and are excited to share their message.
*Thanks for reading. If you enjoyed this content, you can find my current writing at Can I Retire Yet?. Enter your email below to join our mailing list and be alerted when new content is published.