Happy Labor Day weekend! After a very busy stretch of work and a thesis committee meeting a couple days ago, I know I’m ready for it! In addition to the experiments I’ve conducted in lab this past month1Mostly a series of disappointments, with a few glimmers of hope., I’ve also been trying another experiment of sorts.
Believe it or not, I’ve actually never fully documented my expenses in detail before. My excuse for this was that I try to think logically about every purchase, and avoid buying things that I don’t really need or aren’t useful. Really, my goal is to run my life like a business, with the goal of maximizing well-being2of myself and others while minimizing waste. But what business doesn’t clearly document their costs? It’s probably important to do so in order to more accurately identify areas of waste. So in August, that’s what I did. And below, exclusively for M+M readers, is the result!
Here’s how I’ve organized the sheet. The left column is income from whatever source. To the right are separate columns for different categories of expenses. I’ve included categories that are either major categories for me or common categories for most people. At the bottom of each expense column is the total for that category, and the cell just below that is the percentage of my total expenses taken up by that category. For example, rent was just under 34% of my total expenses in August. I’ve organized it like this, rather than as a percentage of my income, because I’d rather identify major areas of spending instead of thinking of my expenses as a portion of my income. In my mind, it takes a fixed amount of money to buy everything I need to live comfortably, and that’s independent of income level. Under the income/expense area is my total income and my total expenses for the month. The net profit is simply the difference between those numbers, which ultimately all gets invested. Since I’ve maxed out IRAs for the year, the only type of tax-advantaged account available to me as a grad student getting a W2, I invested this month’s profits in a regular brokerage account.
Pretty straightforward this month–mostly just the stipend and a couple other small things. I occasionally have other side income, and the stipend amount should go up a bit next month as I just adjusted my tax witholdings3I estimate that I’ve had a little too much withheld so far this year. .
It’s useful to think about individual expense categories in terms of the wealth needed to support those expenses. According to the 4% rule, you need 25 times your annual expenses to be financially independent. Another way of saying that is 300 times your monthly expenses. Let’s call this the rule of 3004borrowed from Jacob at Early Retirement Extreme. We’ll come back to this in a minute.
My biggest expense in August was rent, and I suspect housing is also the biggest expense for most people. As the largest expense, it provides tremendous opportunity for optimization, which we’ve previously discussed. I live with Joe and the Third Roommate Who Shall Not Be Named. I pay a little more than a third of the rent since I have the largest room and my own bathroom. We live conveniently close to work, downtown, grocery stores, nice parks and everything else we need. The biggest factor keeping our rent low is living with roommates, as the average rent for a one bedroom apartment in our city is around double what I’m paying. Could I pay a little less for rent and still survive? Yes, but I’d argue I’m getting pretty good bang for my buck here. By the rule of 300, rent of $600 would take $180,000 to support. Good to think about if you’re considering renting versus buying.
The second biggest category, by a lot, was the miscellaneous category. This category has been a mystery for me, as I’ve always felt that a lot of my money disappears here. The major costs were an activity fee we have to pay for grad school every several months and a cash wedding gift whose amount is apparently dictated by the standards of society5Although I didn’t really feel bad about this, since it was a good friend who paid for his own wedding. . One really stupid purchase was a phone case for a phone I ended up returning, and I would’ve had to pay for shipping to return the $4 case. Hopefully next month I can do a good bit better in this category.
The third largest category was groceries, which is something I’ve struggled to keep low in the past. I’d call this month a decent start, especially considering the feast pictured in our featured image and some other fancy meals. It’s definitely not impossible to eat very well on well under $200/month/person, and hopefully I can get that number down closer to $100. The key is to balance the splurges like the ribs above, which came in at just over $5/person/meal, with still delicious meals like the ones below for less than $1/meal/person.
Of course, it all goes to crap if you have ridiculous eating out costs. Although mine were all in social situations and also somewhat affected by travel, I didn’t do so well in this category. By the rule of 300, it would take more than 24k to support such spendy eating habits.
Next came charitable donations. You may not know this, but Joe and I are both Christian, and charitable giving is something I want to be a major part of my life. Whether that’ll come in the form of regular larger contributions or just a huge lump sum, Sylvia Bloom style, is yet to be determined. I won’t say more on this now, as we have a very exciting guest post on the topic in the works!
Besides that, the other categories were kind of low. I’m pretty into running (Wildcard Wednesday about this coming soon!), and that hobby has some associated costs. Although it does, rarely, generate a bit of income. The cell phone bill included a one year pre-paid plan and a new case for the phone I’m actually keeping, so this category should be $0 for the next year or so. Pretty soon I’m going to do a full, in depth review of cell phone plans for intelligent people6I’m very excited about this post!. I actually did a good bit of travelling this month, but costs were kept reasonable through the use of credit card rewards and common sense things like splitting hotel rooms with friends.
Savings Rate: The most important part.
Ok, that’s enough rambling about stuff I buy. Really, the point of all this is to maximize one number–your savings rate. Mine was right around 25% this month. While I like to use my low income as an excuse, 25% is pretty bad. At this savings rate, it would take nearly 32 years to reach financial independence. You can calculate your own time to financial independence here, or just check out the graph below7This conservatively assumes an after inflation rate of return of 5% on your investments.. Importantly, the only thing that affects time to financial independence is your savings rate. You can play with the numbers and see for yourself. Here’s what it looks like visually:
Fun fact: do you know what the average savings rate in the US is? Somewhere around 5-6%. That is pretty scary–64 years to reach financial independence! According to this LA Times article, many financial advisors–in their infinite wisdom–say that a 5% savings rate is not enough. I wonder how much these people get paid for such profound insights!
Alright, time to wrap this up:
- It’s possible to live a luxurious, semi-wasteful life on less than $2000/month or $24k/year.
- The most important number in your financial life is savings rate.
Was this exercise worth it?
Yes, I’d say it was, and I recommend it. If you want to save yourself 5 minutes of work, just let me know and I can send you my spreadsheet. It takes just a bit of time, but it’s good to get an accurate picture of where your money is going. And, at least for me, I was less likely to make stupid purchases since I knew I’d have to document them. And show them to all of you!
I’m debating whether or not to regularly post these, so let me know how you like this. Happy Saturday!