We are well into April now. The climate here certainly doesn’t realize that with all the cold spells we’ve had and here I am sitting on a Saturday morning putting together my expenses for March. I prefer doing this all manually so I can extract all the data I want and don’t use any of those fancy budgeting programs that track all your spending automatically.
This is a first post of this kind so I’ll possibly refine it as I go along. I’ll probably eventually realize that I’m missing some data that I want to track and add it somewhere down the line but for now I’m starting with the basics. The idea is to track how much I save on both a gross income and net expense basis.
The goal of early retirement planning is to maximize my savings rate. With this tracker, I can see if there’s any opportunities to do that or if I’m already living as frugally as I’d like to live.
I think that is the key point when it comes to early retirement.
You can live as frugally as possible and get to early retirement ASAP or you can live as frugally as you’d like and get to early retirement a bit later. There’s no one clear path for any person but outside influences can guide one person down one path versus the other. I would certainly be more likely to try to get there ASAP if I hated my job with a passion than if I loved what I do.
I’m no high spender but I’m 100% sure I could cut certain elements from my life even before looking at the data. However, I’m still not sure I want to sacrifice quality of life now for something down the line.
The idea isn’t to just retire early – it’s to enjoy life now and also retire early. The definition of early certainly differs for some people and 100% thriftiness is possible for some people but I’m not sure I’m that type of person but I certainly don’t want to rule that out before I even look at the data and what it shows me. If I want to retire in 15 years as is my plan then thriftiness is certainly not something I can automatically rule out if I want to stand a shot at reaching that goal.
This gross income breakdown is an interesting way to look at your finances but it isn’t how people normally look at savings rate for one important reason.
Taxes, both state and federal and FICA(SS+Med) take away nearly 1/4th of my gross income before I even do anything.
That number won’t be nearly as high when I retire because most of my retirement income will not be subject to FICA – that’s 7% off the overall number.
On top of that my gross income in retirement will likely be much lower which means a lower tax bracket. It will more closely mirror my expenses as I’ll no longer have a need to save 30%+ of my gross income which means my tax exposure will be much lower. The only tricky thing around this assumption is that my benefit costs will also be much higher due to no cost sharing with my employer.
However, I think most people, myself include believe that the actual expense outlay in retirement will be greatly reduced in retirement making the 30.5% this analysis shows a bit misleading.
Still, I think this is an informative way of looking at it since it shows the entire landscape of my income and exactly where my money is going right now.
It’s also a good what if scenario for retirement and my savings rate if I want to keep my gross income at the exact same level and expect my other costs(benefits + taxes) to remain just as high in retirement.
If my savings rate is only 30% in that scenario then I’m not retiring in 15 years which is my goal here and I need to step my savings up a bit – even if you remove FICA which won’t be a problem in retirement then a 37% savings rate still isn’t quite getting me there.
Now we have one of the numbers that matter. I’m sitting on a 30% savings rate on a gross income basis. One point to mention is that these numbers don’t include my employer contributions. If I include those then my savings rate is 35% on a gross income basis including employer contributions. If I exclude FICA and include employer contributions then we’re back up to 42%.
Now let’s take a look at another way of calculating your savings rate – one that’s a bit more accurate as it more accurately estimates your expenses in retirement.
The idea here is to compare the total amount saved versus your total expenses(expenses+savings) to give your savings rate.
The basis behind this is that my overall expenses are more relevant as an estimate of my retirement income as they are what I’m aiming for in retirement. If my annual expenses are $40000 then I really don’t need my assets to generate much more than $40000 after tax in retirement.
What’s great about our tax system is that a lower income greatly reduces tax liability. One top of that the removal of FICA plus the likelihood that my expenses will likely be lower in retirement(higher benefit costs but likely lower living costs as I’ll probably own a house outright and have no car payment by the time I retire) means the calculation is a lot more relevant than the gross income one.
As a reminder the savings rate calculation mentioned above is laid out below.
SR = Savings/(Savings+Expenses) x 100
Now let’s take a look where my savings rate lies when calculate in this format.
A savings rate of 41.8% for the month of March isn’t bad at all and actually higher than I expected. That number jumps to 48.3% when including employer contributions. That’s not bad at all guys and I’m actually quite happy with that number although I’d like to see it closer to 50% on a regular basis. If I’m using the simple calculator I talked about here then a 50% savings rate allows me to retire in 16.6 years assuming a 5% post inflation return.
I’m nearly there after employer contributions but it doesn’t leave much room for error and is still above my 15 year retirement target.
Now let’s take a look at the part of this pie I can control by seeing where all the outflows are going.
First of all – it became pretty clear to me as I worked this up just how important splitting costs are when it comes to early retirement. If you want to live a relatively comfortable lifestyle and still want to maintain a healthy savings rate without earning a ton then having a roommate to split costs with is essential.
As you can see rent makes up nearly 30% of my expenses which I think is relatively reasonable. However, I ran the numbers of what it was before my girlfriend moved in and paid a portion of my rent and it was 42% of my expenses! Ouch, that’s a big high,
Just that one change alone made a huge difference in my ability to save. My gross income savings rate drops all the way down to 28% without her contributing to rent and my savings rate drops to 36%!
That’s a huge difference and it makes the idea of roommates of any sort a lot more attractive when it comes to thinking about early retirement. It’s certainly a lot more attractive when it’s your girlfriend whom you love and enjoy spending time with over a random guy on craigslist but that might still work out for those not lucky enough to have found their true love yet!
On top of that she sometimes gets groceries and pays for me at restaurants and for movie tickets, etc. Maybe your craigslist roommate will do that too!
My rent without splitting costs is high as I’ve mentioned in other posts. That’s a factor of the high COL area I live in but also a factor of the quality of apartment I chose. I can certainly save a few hundred bucks and live in an older place but I love the area I live in right now. The place is great and energy efficient which means lowers bills, it’s close to work and in a very safe area and offers nice walking paths within the complex which is great for night time walks with my girlfriend and dog plus other amenities.
I have started looking for a house recently as well and plan to buy one in the next year or two but that might not do much for expenses as my mortgage payment + taxes + bills may end up being higher as house costs around here are also high and a larger house will cost more to heat and cool.
Groceries are 2nd in line. I do have a medical condition that requires a special type of diet which can lead to some expensive trips to the grocery store but I could certainly cut back here a little bit too. I only eat certain foods and most of the stuff I buy is fresh and high quality which tends to lead to higher grocery store bills. End of day, I think health is the most important thing when it comes to my life and should be the last thing one cuts if possible.
My car payment is the 3rd highest expenses and will be for a while as I pay it off. I bought a new car last year with a 5 year loan.
I could have paid cash but the low interest rate made it appealing to borrow. I’ve been paying the payment + more principal each month(how much principal varies) but it’ll generally be 1/5th to 1/6th of my expenses for the month for the near future until I pay it down with the next year or two. I do like the idea of borrowing money at a rate lower than inflation but also hate the idea of debt so I’d rather pay it off faster than I have to and lower my expenses even more. Once the car payments are gone, most of that money will go straight into savings which will certainly boost my savings rate.
I could certainly just pay the payment and invest the excess in the stock market which is likely to grow at a faster rate but the satisfaction of having no debt sometimes outweighs the reasonable part of me and I just throw extra money at it when I can.
Restaurants are 4th in line on the expense chart.
I’ve said before that I like my food and fancy meals are one of my favorite things. My girlfriend does pick up the tab quite often too which lowers my expense on that end. Dinners with her are always a great time and perfect one on one time and dinners out with friends are a great social experience as well.
I don’t go out excessively but I can’t help but enjoy a nice meal about once a week. The one thing that’s good is that neither me or my girlfriend drink which can certainly cut down on the cost of a night out.
Those four expenses make up 70% of my overall spend. There are obvious places where I can cut if I want to boost my savings rate but they’re also areas that are important to me.
What defines good quality of life for each person is different but for me it comes down to living comfortably in a nice safe apartment and eating good food with people I love. I think my budget reflects that pretty clearly.
The other 30% this month comes from a variety of expenses – ones that will change month to month.
Internet/Phone includes my internet and cell phone service and any streaming services like Netflix or Hulu.
I did cut back on both my internet and cell phone expenses a few months back reducing my data plan on the phone and buying a modem instead of renting one. I was paying $10/month to rent a modem from Comcast – can you believe that!? It’s crazy how much stuff you miss when you don’t pay attention to your bills and have them on auto pay.
I spend so much time on the internet and watching Netflix that I feel this is totally worth it as the cost is well offset by the entertainment/hr both items produce. It’s also the lowest cost I can get for the service I’m getting so there’s not much flexibility there. I could save money by going to lower internet speeds but that’s just crazy!
Personal health is basically drug costs(I take a prescription) and any supplements I may use. That’s slightly above 5% this month because I refilled some supplements but will generally be lower.
Entertainment is a catch all that includes things like movies with friends(Batman Vs. Superman and Zootopia this month) and other various things like two tickets to see a musical in a few months. I don’t have a set budget here and generally just go whenever my friends suggest something. However a lot of our entertainment comes from free things like hiking and staying in playing board games.
Bills are gas and electric bills. The good thing about living in a new apartment is that these types of expenses are rather low due to the efficiency of new constructions. I had friends who were paying 2-3x as much for bills in their rentals or houses during certain months this year so that’s something one has to consider when talking about rent as well.
Gifts are gifts to family and friends for special occasions. In this case it was a present for my mom’s birthday! Happy birthday mom!
Health insurance is next in line followed by parking. Health insurance is subsidized by my would be a much bigger part of my expenses if it weren’t and it’s something that’s likely to go up quite a bit once I retire. High parking costs are an unfortunate symptom of working in a relatively big city and can’t be avoided either unless I want to take the bus which isn’t very convenient where I live.
Gas expenses are relatively low due to recent gas prices and the fact that my car is pretty efficient. It’s not a big part of my expenses despite my proclivity to drive quite a ways to get to some of these nice restaurants I like although gas prices this low are always appreciated.
Personal grooming includes haircuts and items of that nature. Things that make me look presentable and smell nice. I did get a haircut in March and I do spend a little bit extra to get a nice cut from an excellent barber as the experiences I’ve had with certain bargain places were not great.
Finally, last but not least clothes come in at a very low number as I only bought minor things this month like some shoe laces as the ones on my dress shoes broke! I generally buy my clothes in big batches and buy stuff that I hope lasts quite a while so my purchases are quite erratic and will likely be near 0 most months.
Looking at this now that it’s complete, there are some expenses that stand out right off the bat.
It’s obvious that I could save on restaurant expenses by cooking at home more often and eat a slightly less varied diet and save on my grocery expenses. I could likely move to a less expensive apartment and save money there but the question lies in whether or not I want to do these things.
There’s certainly potential to up my savings rate quite a bit but I often ask myself if I’d enjoy my life as much as I do now if I did any of those things. I think my expenses are far from extravagant because if this month is any indication, I can likely live on less than 40k/year and still enjoy a lot of the things I like to enjoy.
After all, a lot of the best things in life have no costs like hiking with friends and spending a beautiful day outside in nature. Howver, some of other best things in life do have a cost and the question comes back to; is that cost worth it?
Personally right now, I think the answer is yes but this experiment will help me test that. This is just one month of expenses and certainly doesn’t give me a long term view yet.
I already told myself I wouldn’t change anything for the first few months just to get a clear picture of what my regular life looks like and where my savings rate truly lies and I might extend this until the end of the year to capture the full expenses that come with months like December.
There are expenses out there that haven’t shown up yet. There are costs related to my pets(a dog and a rabbit), doctor visits, vacation costs, etc. that will negatively impact my overall annual savings rate.
If the goal is to hit at least 50% and this is the best month then I’m clearly not getting there keeping things as they are now.
I already know that April is an expensive month as I bought the iPhone SE to replace my current phone which was having battery issues.
This is the first time I’ve tracked my expenses in any significant way and it’s certainly interesting seeing where it all goes.
At the end of the day if the goal is to retire in 15 years which will likely require a savings rate of about 50% before employer contributions then I don’t think that goal will be achieved without some changes(or a higher income!).
The question is whether or not a 50%+ savings rate lifestyle is a lifestyle I want to live. There are certainly people who can easily live off 20k/yr and be happy but I’m not sure if I’m one of those people.
And that’s why I started to this journey – it’s not just about seeing where I am but also seeing where I can and want to be in the future. There are still a ton of questions I have to answer; not just about my savings and expenses but also about myself.
Do I really want to retire in 15 years if getting there is an absolute slog where I have to cut out all the things I like about life?
Is the freedom from work worth it or would I rather work a bit longer but do all the things I like to do?
Is 15 years realistic or do I modify my 15 year plan once I get a better view of what I can actually achieve by analyzing the data.
If the data tells me I can’t retire in 15 years keeping my current lifestyle, do I want to try living on a let less and see how it fits me?
These are all relevant questions that I have to consider but I need the data first guys and that’s what this is all about. There’s certainly no one size fits all approach to early retirement and while I think I may know what I want and how to get there, it’s becoming pretty clear that while I may be ahead of some people, I’m certainly still far from figuring everything out and answering all the important questions. But at least now I’m asking all these important questions and I’m eager to find out the answers!