It’s April already! Where does the time go? I’m an accountant, as well as a personal finance nerd, which means I use excel a lot. . . So lets crunch some numbers and see how things turned out in Q1 (first quarter 2018). There’s some good news . . . and there’s some bad news . . . Let’s start with the good news: We contributed 14% (of combined base salary) to our retirement (including the company contribution), we are on track to fully fund our health savings account (HSA), our net worth increased about $14,000, we stayed on budget (spent less than our income), paid off about $5,000 on our debt (still have mortgage and auto debt). We spent less than the national average on food, housing, utilities, and transportation (as a percentage of income, see chart below, national average per BLS consumer expenditure survey).
The bad. We spent more (than the national average) on healthcare, entertainment, charity, and miscellaneous. Even though we stayed on budget for the quarter, the miscellaneous category was a bit of a problem. We spent a lot on healthcare – medical care is really expensive (I know, I know, stop the presses. . .). The mortgage debt doesn’t bother me too much (for now) – but I am disappointed that we still have a car note and owe about $1,000 on a credit card, left over from my new computer purchase. . . See a previous post on my recent computer odyssey.
In finances, you aren’t competing against your neighbor or your co-worker; you’re competing against yourself! Are you making progress toward your goal of financial independence? Or are you getting in your own way? Let’s walk through 6 ways to measure financial success and see if there are any areas we need to work on? I’ll put my answers in blue.
- Your net worth. Is your net worth going up or down? Remember that net worth is everything you own (e.g. house, 401k, etc.), subtracting everything you owe (e.g., mortgage, student loans, credit cards, etc.). Our net worth went up about $14,000 in Q1 (woo hoo).
- Your credit score. An excellent credit score will result in a lower interest rate; that can make a big difference. Let me give an example. A 4% 30 year mortgage on a $300,000 house would have over $215,000 in interest over 30 years! (a 15 year mortgage would have less than $100,000 in interest, but that’s a topic for another day); that same 30 year mortgage would include about $280,000 in interest at 5%. Going from 4% to 5%, on the mortgage, will cost you an extra $65,000 in interest payments! (for the same house. . .) A good credit score is an indication of paying your bills on time and being conscientious to pay-off your debt. I would rather you not had any debt at all (other than a 15 year mortgage), but if you already have debt, don’t neglect your credit score and end up paying more in interest. . . A very good score is 740 (or higher). Mine is 835; that’s actually not entirely a good thing. It means I’ve had, and continue to have, way too much debt. . .
- The number of months your emergency fund will carry you. Most financial planners suggest 3-6 months worth of expenses be saved in a savings account (not stocks, bonds, CDs etc.). What would happen if you lost your job or had another financial emergency (examples include medical emergencies and necessary home repairs (e.g., a leaky roof). What would happen if you lost your job tomorrow? Would this involve lots of credit card debt. . . See a previous post on possibly losing your job.
I’m not doing so well here; I usually only keep $1,000 to $2,000 in savings. Plenty of room for improvement. . .
- Your retirement saving percentage. Millionaires invest at least 20% of their income, according to the Millionaire next door (Thomas Stanley). My retirement investment %, including the company portion, was 21% of my base pay, or 17% of my total pay (including incentive compensation), or 12% of total household income (including my wife’s pay as well as dividends).
- Your debt-to-income ratio. To calculate your debt-to-income ratio, take the total of your monthly debt payments (e.g., car payments, student loans, etc.) and divide it by your gross monthly income (for the month). It’s optimal to be debt-free, of course, but according to bankrate.com, lenders look for a target debt-to-income ratio of 36% or less. What’s yours? Mine is 18% – still too high. We did manage to pay-down about $5,000 of debt in Q1. It’s not much, but it’s progress. . .
- Your giving percentage. Personally, I believe a true measure of personal financial security is the ability to give. I don’t just say that as a Christian (Christ was a giver, John 3:16, just sayin’). Giving will change your perspective on life – I promise.
Remember, its not about you (purpose driven life by Rick Warren). Research indicates that giving to others makes us happier than spending money on ourselves. I’m a Christian so I believe this percentage should be at least 10% – the Bible tells us not to steal from God. Mine was only 8% this quarter. Made a minor miscalculation regarding my incentive compensation in March. Plan to correct that in April. . .
|our %||national %|
1) Housing – a little better than the national average; probably because we haven’t “traded-up”; we’ve lived in the same house for over 13 years now. Also because we haven’t done many of the updates we could or should have. . . See my previous post on whether you should “invest” in home improvements?
2) Transportation – a little better than average – which is kinda surprising because we still have a car loan – see my separate post on cars.
3) Food – a little better than average – which is also a little shocking because we could/should do better – especially eating out at restaurants – see below a separate post on food.
4) Insurance/Social Security – kind of a weird BLS (bureau of labor statistics) category – we are over budget here but I think that’s because I took out a new disability policy and it’s a little pricey due to some previous health issues (cancer, stroke, etc.). Including social security is a little odd but that’s the way the BLS did it. See below a separate post on whether (or not) you’re actually going to get any benefit from social security?
5) Healthcare – a little worse than the national average; I have some chronic health conditions (so does my son) including Crohn’s disease and high cholesterol, which entails some expensive prescriptions; at least we fully fund our health savings account (HSA) each year and get a bit of a tax break by paying for medical bills and prescriptions from the HSA; it also serves as a sinking fund; monthly out-of-pocket health care costs don’t impact our monthly expenses (i.e.,. take-home pay expenditures). This helps to avoid a cash crisis due to a medical bill. Don’t neglect your health! HSA is funded via a payroll deduction.
6) Entertainment – a little worse than the national average – probably because we spent a little too much at Christmas, paid that off in January. . . Spending too much on my son is one of my weaknesses.
7) Charity – a good bit higher than the national average. I’m a Christian and believe that the Bible strongly encourages us to give to others – especially to the church – in order to help the needy and tell people about God. We are supposed to be Christ-like and God was a giver – John 3:16 – just sayin’. See below an inspirational video – it’s worth watching – trust me. . .
8) Miscellaneous – a good bit higher than the national average – this is mostly due to Mark’s private school tuition – a choice I will definitely make again because I know how much better Mark does when his education is specialized for his autism.
9) Taxes/savings – a little better than the national average (BLS consumer expenditure survey from April 2018 – it’s actually 2016 data but it’s the latest available) but I confess this is an unusual category. I “plugged” (a.k.a., “derived”) this category to get the total average annual expenditures (per BLS) back to the total income before taxes per the BLS. The BLS April survey shows income before taxes of $74,664 but only $57,311 in total expenditures. Therefore, I have concluded that the difference in these two numbers is due to either taxes or savings (neither category is listed in the BLS summary). Our taxes are relatively low (as a % of income) because we itemize, but we tend to spend most of our take home pay . . . I decided to look at expenses as a percentage of income before taxes to get “the big picture”.
Let’s compare to how the rich spend their money.