Closing the books took a while for me. While we didn’t actually force the kids to help using an abacus, it’s not a terrible idea for next year. Might speed things up. So here’s the report; just a shade before summer.
For the year, we saved 70% of our income ($153,000)! That nudges out 2014’s 68% rate by a couple of percentage points. Similar income & expense totals as last year, although the spending categories have shifted around some.
Several things are excluded: real estate distributions (fluctuate too much each year), charitable giving (Not normal spending), and closing/renovation costs on our home move (one-time). If you include these categories, our savings almost double to $295,000. Quite a year for us.
We almost matched our expenses from 2014 – ending just under $65k for the year. Amazingly consistent with 2014 for this one being such a different year. Also amazingly far away from our goal of cutting $15,000 from our budget. But as I mentioned, a very different year than originally envisioned. I need a new crystal ball, I guess.
These expenses exclude most of the costs associated with selling/buying a new primary residence. We renovated our old house before we put it on the market, renovated our new house before moving into it, have paid for some inspection-type fixes at our old house, and bought a good bit of new furniture at our new house, and have a temporary mortgage. I capitalized all of this, including the furniture (because I write the accounting rules here, biatch). It just isn’t run-of-the mill annual expense stuff, so I’m trying to level things out for comparison’s sake. But I’ve seen the “frictional” costs of moving have been very high when added up – about $100,000 for us. But probably 2/3 of this was renovation/deferred maintenance work that really rolls into the purchase prices. I will post much more detail on all this. But I have to wait until it’s closed, or we’ll have another contract fall out!
Still, this adjusted expense level is more than one-third below our high-water mark of just over $100,000 in annual spending some years back. For us, that first cut was the most important. It created our first real margin – increased our savings rate close to the 50% level from the teens. It also dislocated our spending from our income. At about the same time, our income started growing quickly. A snowball of increasing net worth has been rolling down the hill since then.
By holding the line on expenses, our saving rate has marched up to the 70%+ level (87% if you include the real estate distributions as income). If we’d instead used our income as a spending guide – we might have a club membership, beach house, McMansion, new cars – but a minuscule savings rate. Lots of stuff, but much less independence. Scary to think about, but easy to imagine running in the same race as many that we know.
I struggled in deciding how to look at income. I decided on the more conservative way in the chart below – excluding real estate distributions. Most of my distribution income was on asset sales, and many of these had been added to my net worth previously. Going forward, I’m going to categorize real estate income into (1) operating & (2) capital distributions. I’ll count operating each year, but capital events will only show up on the net worth / balance sheet.
Excluding distributions, we brought in about 10% less income than 2014. My wife earned less, because she had two kids at home. Still earning almost 60% of 2014 amount is impressive.
Not impressive is our rental house income for the year. With a turnover, high maintenance costs, and some payment timings that make this look worse – this was about a breakeven year for the rental houses. We did amortize over $8k in debt which doesn’t show up here because my accounting isn’t fancy enough. But still not great – I like real estate returns to be three part: a cash pay, amortized debt, and value growth.
On the work real estate side, things were much rosier. I received distributions of $264,000 – more than all our other income combined. This is a bit choppy from year to year – we sold two properties, and refinanced one. Including these distributions, we created cash income of $482,000 for the year. Most ever…by a long-shot.
I also haven’t included anywhere the implied equity from several projects we started in 2015. As we initiate a project, I earn a capital account that pays out as distributions in the future if we successfully execute the project. I add these to my net worth calculation each quarter. Really, each of these is like it’s own start-up business. That is why I think of them in net worth terms only. They are assets – each has the potential to create an income stream or cash-out value if liquidated.
Our Income/Spending Stats
|Auto & Transport||($641)||($1,124)||($1,983)||($497)||($4,245)|
|Bills & Utilities||($1,278)||($1,035)||($1,409)||($1,433)||($5,154)|
|Fees & Charges||($3)||$535||($16)||($101)||$416|
|Food & Dining||($3,133)||($3,365)||($3,687)||($3,805)||($13,991)|
|Health & Fitness||($2,520)||($140)||($674)||($2,721)||($6,054)|
|Below the Line Cash Flow Items|
|Gifts & Donations||($4,049)||($4,271)||($3,691)||($5,036)||($17,047)|
|Total Savings: Below the Line||$170,851||$24,639||$16,136||($69,310)||$142,316|
Here is a comparison and variance analysis of the last two years.
|My Take Home Salary||$180,377||$178,126||($2,252)|
|Her Salary||$24,524||$9,829||($14,695)||More kids = Less time billed|
|Rental House 1||$6,513||($2,008)||($8,521)||Turnover cost, down months, pmt timings|
|Rental House 2||$6,990||$3,655||($3,335)||Pmt timings, maintenance cost|
|Total Income||$245,107||$217,728||($27,379)||Not included: $264,000 of distributions|
|Auto & Transport||$3,695||$4,245||$550|
|Bills & Utilities||$4,546||$5,154||$608||4 months of two houses|
|Student Loan||$472||$0||($472)||Finished with this in 2014|
|Fees & Charges||($651)||($416)||$235|
|Financial||$3,261||$997||($2,264)||No Financial Advisor, No Tax Prep|
|Food & Dining||$13,020||$13,991||$971||Ate out more in late 2015|
|Health & Fitness||$3,032||$6,054||$3,023||Higher doctor bills|
|Home||$7,533||$4,443||$1,785||Less mortgage cost|
|Kids||$3,301||$5,395||$2,094||More kids, and more time in preschool for oldest|
|Shopping||$7,956||$10,080||$2,124||More kids and more houses|
|Travel||$5,074||$210||($4,864)||No travel to speak of with a newborn|
|Total Expenses||$63,845||$64,579||$734||Remarkably close to last year|
2016’s Crystal Ball…
We expect the following changes in 2016:
- Auto/Transport will be high. I’ll probably buy a car this year. I’m all over the map on what, how old, etc on this. Will likely cost $18k-30k, less a trade-in value of $8k or so.
- Bills/Utilities should be high for the first half of the year since we are running two houses still. We should close in a week, and that should be back to normal.
- Food/Dining will hopefully be closer to $12k than this year’s $14k. Healthier & more home-cooked is the goal for the second half of the year.
- Health/Fitness will likely stay high, but may shift more into 2017 with some surgeries planned for next winter.
- Home will spike at some point, as I’d like to add a back deck and/or garage to my house. I might wait for a couple of years though – not sure. I’d really like to do some/all of this myself. I know it’s possible, but with our kids at 1 & 3, it’s hard to imagine the day that I could make enough time. But I believe that day will come!
- Shopping should go down some. It has some overlap on the house move, and having a you child/baby has been a constant reason for my wife to run the tab at Amazon/Target. Please, please…I have to believe we can do better.
- Travel will hopefully go up one day. Not that we have to spend a lot, but something. I’d like to get out more. I’m already seeing the light on this one. Some buddies and I went camping/mountain biking at Tsali (western NC) a couple of weekends ago. My wife and I are due a trip. Should hit the beach & mountains this summer. Mountains is close to free. Beach will include a house rental.
- Donations will go way up this year. We put aside a bunch of money from a recent bonus into a Vanguard Charitable account. It allows us to take the tax benefit this year, start growing through investment, and give the money to our charities over years. Pretty cool, and tax efficient.
Overall, I would like to get our spending below $60,000. But really if we could just aim there, and end up below $65k again, I would probably be fine. I’m having a hard time getting really motivated because we have rapidly approached financial independence, but I will likely keep working past our goal*. So I’m struggling to pulling it together on the expense side beyond what we’ve already done. I need to find a new angle for frugal motivation.
*A couple of reasons for this – but I started writing them here and it became it’s own post. More to come…