My savings rate and expenses – May update

This was a rough month on the savings side due to a quarterly tax bill that was due a few days ago. That means a good portion of May’s expenses was allocated towards keeping the tax man at bay!

As I’ve mentioned in past posts, I sold a good quantity of stock not too long as it had become too large a portion of my portfolio. Diversification is good for the long term safety of a portfolio and it was something that I had to do. The issue with selling a big block of stock is the unfortunate side effect; a big tax bill.

Long term gains are taxed at a much lower rate but they still create a pretty big bill if the gain is large enough. I sold some shares in 2015 and when doing my taxes found that I owed and underpaid by a good deal. When doing my taxes I knew that I was in for the same result since I already sold a  bunch in 2016. The solution to avoid a potential tax underpayment penalty was to either take more money out of my paycheck or paying quarterly. I chose the latter and this was the second payment but the first discussed in these updates as I had saved for the first before March.

This isn’t a long term issue as my portfolio is now at a diversification level that I feel comfortable with but it’ll certainly have an effect on my savings rate for 2016.

As I mentioned in a past update – I had already lowered my 401k contribution through my employer since I was on pace to max it out before year end and miss out on the matching contribution. That means a bigger paycheck, higher taxes and less saved automatically within my paycheck and higher expenses will certainly damage my ability to save beyond that.

My expenses which included the savings towards the quarterly tax bill mentioned above outpaced my income this month which is a further dip into my savings rate. Not only did I have no extra funds to allocated towards post paycheck purchases, I actually had to “borrow” from my short term cash stash to cover the difference. It’s replenished by now but it does affect my savings rate for the month negatively.

All of this certainly doesn’t sound like a good recipe for a high savings rate. If the aim is 50% per month then I’m sure I’m a good deal away from that this month.

First, let’s take a look at the gross income breakdown.

I started at 30.5% in March and went down to 26.2% last month. May is the worst of the three with a gross income savings rate of 21.9%. I’d like to see this number above 33.3% before employer contributions on a consistent basis since that means I’m saving at least 1/3rd of my overall income. 
21.9% is a disappointing number but expected with the short term increase in spending to cover the quarterly tax bill. If I add employer contributions to the number then I’m sitting at a savings rate of 27%. 
I don’t pay a ton of attention to this number but I’m certainly headed in the wrong direction here. I’m still not too upset here as I know it’s a short term issue. The tax expenses should not be a problem for 2017 so this won’t be representative of my savings rate going forward. 
Now let’s take a look at my savings rate this month. 
I had a savings rate of 29.84% this month. That number jumps to 36.68% with employer contributions. Not a great month and far from my 50% savings rate target but I’m expecting this to jump back up next month when the specter of the tax bill isn’t there.
There’s not much to say about this month beyond pointing to the expense side of things as the driver for the big decrease from the last two months. There isn’t much one can do about taxes and it’ll be an issue in the near term with two more payments coming up. I’ll might try to spread out the pain across each month going forward with small savings towards the tax bill each month instead of diluting a specific month like I did this time. 
Let’s take a look at the expenses. 
You can see how big the chunk for gifts/short term savings was this month. There were no actual gifts that month – it was all savings towards that tax bill that could have otherwise gone into savings. If you look at it that way then my savings rate actually wasn’t as bad as it looks.
My overall expenses went up this month but if you remove that tax bill savings then my overall spend was hundreds of dollars less than the past two months. That was a conscious decision on my part to spend less on things like entertainment and restaurants to offset the higher expense load this month. I also cut down my visits to Whole Foods where I always buy something frivolous that ends up tasting bad anyway. 
In the end – it wasn’t a great month for the savings rate but it’s explainable so I’m not too worried about it. My actual spending was actually the lowest it has been since I started tracking this so that’s always a good sign when it comes to savings rate. End of day taxes have to be paid, there’s certainly no way to avoid that. 
That’s it for this month’s update. 
How was your savings rate this month? Hope your month was a bit better than mine.
Thanks for reading and here’s to happy savings and the earliest of retirements!


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