It’s month two of tracking my expenses and savings rate!
I already mentioned a relatively major expenses in another post and that was the purchase of a new phone to replace my dying iPhone 5. I got that phone about 4 years ago and it served me well.
There are a few things I get a lot of use out of and my phone is one of them. I certainly could have gone with something cheaper but I thought the price point for the one I got was attractive for the features it offered so I decided to make the upgrade. It’s always nice to treat yourself to something you wouldn’t normally buy and each year, I try to make my birthday as the time to do that and this year was no different!
A large one time expense will certainly have a negative impact on the savings rate any given month but it wasn’t the only thing affecting it in April for me.
My 401k plan has an employer match that requires me to make contribution each paycheck in order to get the match for that paycheck. In order to take full advantage of that, I had to reduce my 401k contribution % last month and these were the first paychecks impacted by that change.
I was getting ahead of where I should be for the year in contributions due to my bonus a few months back so the reduction was necessary. Otherwise, I’d have maxed out my 401k before the year ended and missed out on a few weeks of my employer match. That means getting a bigger paycheck now but the bad news is that on a monthly basis, I’m paying more taxes than I did last month due to my taxable income being higher.
We go from 23% in taxes and 30% in savings in March to 26% in taxes and 26% in savings this month. Most of the reduction in savings is losing the bigger 401k contribution and paying higher taxes but some of it is due to the one time expense.
My take home pay is now higher but I’m paying more in taxes and saving less automatically. I had no additional savings this month beyond the ones that are automatic from my paycheck(401k, HSA, ESPP) due to the higher expenses.
26.2% of my gross income went to savings this month which is a bit disappointing. The number above doesn’t include employer contributions and if I add that, I get it to 31.2% of my gross income. That’s down from 30.5% and 35.2% respectively last month.
Now let’s take a look at my savings rate this month. This number and the above will go hand in hand so I’m expecting this one to be lower as well.
As a reminder the savings rate calculation I’m using is shown below.
SR = Savings/(Savings + Expenses) X 100
I had a savings rate of 35.6% this month. That number jumps to 42.3% when including employer contributions. Now you know why I had to reduce my 401k contributions to make sure I get that employer match as that’s a big chunk of the savings pie in the end. Those numbers are decent but far from where I need to be especially when compared against last month where I hit 41.8% and 48.3% respectively on those two numbers.
I mentioned last month that my goal is to hit 50% on a regular basis. It’s tough to tell what my actual savings rate is going to be by the time I have a full twelve months of data but that 50% goal is a bit out of reach so far.
Despite the one time purchase, my expenses actually didn’t go up a huge amount this month.
That means a lot of of this decrease is driven by the inability to save as much as I did in tax-advantaged accounts last month and going forward. I’m getting more total dollars in my paycheck but the total dollars allotted to potential savings are lower due to the fact that 100% of my dollars were going into the 401k but only ~70% of those dollars are now flowing into my paycheck after taxes are deducted.
That right there is why 401k and tax-advantaged accounts in general are so important for financial independence – because they allow you to pay less in taxes and thus allow your savings rate to be higher than it would have been if you weren’t using them at all. If I weren’t using them at then I’d be collecting more money in my paycheck but my overall savings rate would suffer as my tax liability would go up quite a bit too. Avoiding taxes(legally of course) is pretty important when it comes to maximizing your future portfolio size.
I mentioned before that my expenses didn’t go up that much this month. In fact they only went up about 3% on a month to month basis so let’s take a look where my money went this month.
Rent is still the biggest piece of the expense pie followed by groceries and the car payment just like last month but now it’s followed by electronics – a new expense for this month and one that won’t be showing up too regularly on this chart.
I typically use my electronics until they die or start to fail on me. The PC I’m writing on is likely going to be the next upgrade I’ll need as it’s given me 5+ years of service already. It’s still working fine though and does what I need it to do so I’m in no rush to upgrade it as long as it keeps working(knock on wood).
The next expense is a new one. I combined gifts and short term savings into one category to make the graph easier to read as both are recurring events are either expected or planned for.
Gifts are self explanatory and are anything that I give to anyone for any reason(usually a birthday or event).
Short term savings are cash set aside for special expenses that are 100% certain and necessary. I could track these all in the month they occur but as a planner, I prefer to have the money set aside and ready for when I need it rather than have a shortfall in a certain month. That would mean having to dip into my emergency fund/savings which would have to happen since my automatic check deductions wouldn’t change.
I also plan to add a long term savings category for continued future home purchase savings. I just haven’t had any extra funds in the past two months to pull into that account.
Restaurants which were 9.2% of my expenses last month drop all the way down to 3.81% this month – a lucky offset to the phone expenses. This wasn’t a conscious decision on my end but one driven by some celebrations and visits that caused others to pay my bill – something I certainly won’t say no to if offered!
I won’t go into detail on the rest as they’re nothing new aside from pets which is anything related to my two pets(food, vet visits, or medicine).
That’s it for the month. That 50% savings rate still eludes me but I haven’t decided yet if that’s something I’ll be able to reach without sacrificing my quality of life too much.
As I mentioned before, these first few months or even the first year will be a baseline that will allow me to see my current savings rate living my current lifestyle. After I have the baseline set – I’ll be able to see if I can hit my financial indepedence/retirement goals on that savings rate or if I have to make some changes.
The question will be whether I want to change my savings rate or change my expected retirement timeline. As of now, the goal is to hit it around 2025 but that may change if I decide I’d rather save less, live more now and retire later OR it may change in the other direction sometime down the line I decide I want to save more and live on less now!
There’s certainly no right answer to this question and I’ll have a lot to ponder once I actually get that data! I initially planned for a few months to set the baseline but now I’m thinking I may need a full year of normal living to make sure I have the right data set to analyze.
That’s it for this month’s update. Hope your savings rate was solid this month and that you expenses didn’t get away from you! See you in the next post.