How did I build my budget?

One of the first steps to getting yourself on course, financially, is to create a budget. Aaahhhh!

I know, many people hate the idea of budgeting, can’t make one, can’t follow one, etc. There are also a large number of FI folks who have been able to move towards FI without keeping strict budgets. However, I would suggest to you that even these people started out by getting a handle on what they were making in $, what they were spending in $, and what the difference was. This is the same as going through the budgeting process and creating a base budget.

I find budgets to be very helpful, though I don’t stick to one religiously. I have an idea of what I’ve spent in the past, build a budget at the beginning of the year, and then track how I am doing against it monthly. Typically I blow past the budget on some items, and under-spend on others. I also adjust as the year goes on, to try to stay within my revenue goals.

So how I go about creating a budget? Like most folks, I started with my actual spending and my paychecks. Remember, the key thing for a budget is to get to where Revenue – Expenses = surplus (what is left over to save/invest). If you are getting a negative number, then you need to either increase your revenue (side hustle?) or decrease your expenses (ex. Cut out the expensive cable bill).

Revenue

Looked at my paychecks and determined my take home pay. I had already adjusted my W-4 (the tax withholding form) with my employer so that I was getting taken out almost exactly what needed to be taken out to not get any money back at the end of the year (i.e. I might owe a little). Why give the government an interest free loan? I also checked how much I was putting into my employee 401K, for reference in tracking my investments. So I knew what I was getting every 2 weeks in pay. I then multiplied that by 26 (# of paychecks in a year) and divided by 12 (# of months in a year) to get a monthly revenue number. After doing all this, I arrived at 3 months of revenue = $15,603.96

Expenses

For this, I turned to my bank and its electronic statements (or you could use the paper statements they can send you). My bank lets you easily download the last 3 months of your bank statements, showing you how much you spent on each transaction, as well as each deposit. With this information I had a key decision to make: How did I want to classify each expense, so that I could determine how much I was spending on it each month? It doesn’t do much good for a budget to have too many categories (it gets hard to track) but you should have enough so that you can make decisions about spending (what to cut back, what to add to, etc.)

After review, I chose the following categories:

  • Home Mortgage
  • Property Taxes
  • Home Insurance
  • Utilities (Gas, electric, water)
  • Phone/Cell Phone
  • Auto Insurance
  • Life Insurance
  • Groceries
  • Roth IRA investment
  • Charity
  • Vacation Funding
  • Dining Out
  • Home Repair
  • Other (areas that were not easily classified)

With that I created a spreadsheet and determined what I had spent on that for the last 3 months:

Category Expense
  Home Mortgage, taxes, insurance ($5,950.47)
  PSE&G ($839.45)
  Verizon ($686.20)
  Water Bill ($206.50)
  Life Insurance ($131.85)
  Auto Insurance ($366.52)
  Chiropractor $0.00
  Groceries ($1,297.86)
  Disability ($288.90)
  Roth IRAs ($2,750.01)
  Savings ($300.00)
  Charity ($300.00)
  Vacation Funding ($750.00)
  Dining Out ($140.57)
  Home Repair ($203.27)
  Other ($489.01)
Total Variable Expenses ($14,700.61)

So revenue of $15,603.96 and expenses of $14,700.61 gives me a surplus of around $900. OK, a good start. Please note that I gave myself an allowance of $1,000/month for my personal use (gas, lunches & snacks, tolls, etc). This money was already taken out of my revenue above, and I tracked it separately. That is why you don’t  don’t see that in the expenses above.

With that in mind, I created a budget for the remainder of the year that looked like this.

Revenue Budget
Salary from Work $4,733.31
Other $0.00
Total Revenues $4,733.31
Expense
Mortgage ($1,376.29)
Insurance ($83.25)
Property Taxes ($523.95)
Gas & Electric ($313.83)
Phone ($246.14)
Water Bill ($66.50)
Life Insurance ($43.95)
Auto Insurance ($120.78)
Groceries ($378.76)
Roth IRAs ($1,000.00)
Savings ($100.00)
Charity ($100.00)
Vacation Funding ($100.00)
Dining Out ($50.00)
Home Repair ($100.00)
Other ($50.00)
Total Expense (4,653.45)
Operating Revenue 79.86

Note that my revenue went down, because I put more money into my company’s 401K savings plan.

At this point, I had an idea of how much I needed to spend each month. All I had to do was track it monthly, see how I did, and make potential adjustments.

Revenue Budget Actual YTD Variance
Salary from Work $56,619.50 $62,816.57 $6,197.07
Other $0.06 $5.08 $5.02
Total Revenues $56,619.56 $62,821.65 $6,202.09
Expense
Mortgage ($16,515.48) ($16,515.48) $0.00
Insurance ($999.00) ($999.00) $0.00
Property Taxes ($6,287.40) ($7,205.47) ($918.07)
Utilities ($3,765.98) ($1,498.98) $2,267.00
Phone ($2,953.68) ($3,472.88) ($519.20)
Water Bill ($798.00) ($396.93) $401.07
Life Insurance ($527.40) ($527.40) $0.00
Auto Insurance ($1,449.36) ($1,316.59) $132.77
Groceries ($4,545.12) ($3,970.84) $574.28
Disability $0.00 ($96.30) ($96.30)
Roth IRAs ($12,000.00) ($11,995.00) $5.00
Savings ($1,200.00) ($1,200.00) $0.00
Charity ($1,200.00) ($1,824.90) ($624.90)
Vacation Funding ($1,400.00) ($2,350.00) ($950.00)
Dining Out ($600.00) ($1,343.96) ($743.96)
Home Repair ($1,200.00) ($1,318.00) ($118.00)
Other ($600.00) ($2,032.39) ($1,432.39)
Total Expense ($56,041.42) ($58,064.12) ($2,022.70)

So I ended up making about $6K more than expected (didn’t account for pay raise) and spent about $2K more than expected. I could then make additional adjustments for the new year.

Overall, it’s a fairly flexible budget. I make enough money and have a sufficient emergency fund to be able to account for the minor ups & downs, and can make adjustments as things go.

So how do you guys budget?

Other Links to budgets:

 

Well, I took the plunge….

If you remember in some of my previous posts on draw-down strategy and the Power of Zero, I talked about using money from my “fun money” value investing account to do a Roth conversion on a significant portion of my regular IRA funds. The objective would be to reduce my 401K amount and reduce my Required Minimum Distributions from them by transferring money to Roth’s now, while the tax rates are so low.

I’ve been bouncing back & forth on this because of my job situation (somewhat sketchy) and the potential impact of getting let go. If let go, I would be due a significant (six-figures) deferred payment, which would shoot me past the 24% tax rate. I’d rather not hit that.

Now that it seems secure, I traded in my two value stocks, Gilead and Cia Saneamento Basico – both of which were in negative numbers for the year. I’ll be able to offset some other stock gains, get out of the value investing business (which I apparently suck at) and convert money to the Roth. A triple win!

Mrs. 39 Months has her regular IRA & Roth at Troweprice, and I have mine at Vanguard. Both of them make it relatively easy to convert money from their regular IRA to their Roth IRA with a few clicks of the mouse. I rolled them right into the exact same index funds that they had previously, so hopefully, no harm/no foul.

The one issue for both of them is the default is that you want taxes taken out of the money you shift over (rather than paying the taxes separately). This would cause you both to lose the money from your IRA and potentially force you to pay a 10% penalty due to early withdrawal before age 59-1/2. Make sure if you do this that you pay attention to the questions you are asking and don’t pay your taxes out of the money you are transferring.

I think I may do this one more time, in 2019, based on the job situation. Then I’ll be in pretty good shape as I cruise to my FIRE date – July 2020!

Mr. 39 Months

Using FIRECalc tool to determine FI status

One of the nice free tools that are available on the internet is the FIRECalc tool (see list to right). This tool allows you to put in a variety of data and variables, and try out different scenarios to see if you meet your goal, based on historical performance. The tool uses stock market history and your portfolio choices to try and predict how well you should do for a certain period of the future.

While not perfect (nothing is) it is a good first step towards exploring your goals and how close you are to FI. I will be discussing other tools in the future, but this is an excellent first start.

When you open the FIRECalc page, it provides a description of the model, what it does, how to navigate, etc. It is here where you start, putting in your annual spending, your portfolio value (401K, IRA, 403b, etc.), and the number of years you expect to be “retired.” The program will use this as a basis for determining your success.

The next tab is where you put in “other income” during retirement, above and beyond your retirement assets. Here is where you would put in your Social Security or pension benefits.

The next tab is the “not retired” tab, where you can put in how many additional years you intend to work before acting on your early retirement plan. It also provides a place to show the additional money you intend to invest during this time.

The spending models tab allows you to input the plan for inflation, how your spending power will go (i.e. adjusted for inflation, high expenses to start and less as you grow older, using a percentage of your portfolio, etc.) This lets you look at a variety of options on how you plan to spend, to see if you can achieve your goals.

The next tab is for your portfolio. Here you can use a consistent historical average, or provide your own asset allocation. Again, this allows you to look at the range of options and “play” with them to see how it would affect the result.

There is an optional tab for portfolio changes, lump sum additions to your portfolio (like inheritance, home sale, etc.)

The last tab shows a variety of investigation options you can get from the result, including changes to your allocation, delaying retirement, and spending levels. Just another set of options to play with to further analyze and refine your plan.

Once you are done entering all your information and options, just click on the “submit” button at the bottom to get the results. It will determine, based on the period it studies, how often your plan will succeed or fail, and will provide the lowest, highest, and average portfolio balances for you at the end.It should give you a “big picture” view of how your plan worked out. Now you can go “tweak” some of the entries to see how you might do.

Good luck, and I hope it provides you with some good news!

Mr. 39 Months

Investment update for Nov 1, 2018

I think this post is going to be similar to a lot of FIRE posts in early November. The stock market, bond market, and every other market in the US got crushed near the end of October, and almost everything went down. Ouch!

Retirement Accounts: Remember, my allocation for these is:

  • 30% Bond Index Fund
  • 17.5% S&P500 Index Fund
  • 17.5% International Index Fund
  • 17.5% Small Cap Index Fund
  • 17.5% REIT Index Fund

So for the month, I’m down about 5.5%, with the big losers being the S&P500, Small Cap and International . My Bonds and REITs were down , but not as much.

  • S&P500: -7%
  • Small Cap: -10%
  • International: -8%
  • Bonds: -1%
  • REITs: -2%

My 401K/Deferred account at work is down even more, -7.6%. This is primarily due to it not having a REIT option, so since it is heavier with stocks, it suffered more.

Dividend Income Account: Allocation:

  • 25% Dividend Stocks
  • 25% REITs
  • 50% Bond Index Funds

This account didn’t suffer as much. Part of that is its high weight in bonds & REITs (which didn’t suffer as much) and part of it is that the stock picks, especially Verizon, actually were up. Overall, its only down -2.8%

Value Investing Account: Allocation (remember I refocused this at the beginning of February):

  • 40% in individual value stocks I picked myself (2 each, 20% for each) – SBS and GILD
  • 20% USAA Market Index (my brokerage is USAA)
  • 40% in Vanguard Value Index fund

Gilead was down -11.7%, USAA was down 9.8%, and Vanguard value was down 5%. Surprisingly, Cia Saneamento (which has done terribly for the entire year) was up 25.8%! Very odd.

So what do you do after such a shellacking? I stay the course. For 2017, I had a tremendous year (the market was up 19%), so I got to reap the benefits of that. Now in 2018, with rising interest rates and the FANG stocks of the S&P getting hammered, it looks like its going to be a null year. You have to be willing to take the good with the bad.

How did you do in October?

 

Mr. 39 Months

Medical Costs in year 1 of early retirement

As we get closer to FIRE, one of the things Mrs. 39 Months and I (and so many others) get concerned about is paying for medical costs prior to hitting age 65. In the US, Medicare picks up at that age, and though there are still medical bills, Medicare does help pick up a lot of the slack.

The current plan is to retire early at age 56 for me, 58 for Mrs. 39 Months, so that means 7-9 years in which we will have to pay for our own medical. I’ve written before about how, after reading “The Power of Zero”, I want to try to minimize or eliminate taxes for us in the first 5-10 years. If we do that and they keep the ACA subsidies in place, we should be OK. The problem is that first year.

The plan is to retire early in July 2019. Doing that, I would have several issues pop up which would make us ineligible for Obamacare subsidies:

  • Six months of pay at my six-figure salary
  • A deferred investment account my company has, which will yield me roughly $204K, all of which I will receive on the first day after I leave, and all it taxable
  • The need to live for the remaining six months, and thus to draw money from somewhere.

So my initial plan to use Obamacare won’t work for year 1 of my early retirement. I could use the Cobra to get my work insurance (Cobra is a program where you can get health insurance for up to 18 months after you leave a job, provided you pay both your part and your company’s part). Currently I’m paying about $9,800/year for my Silver plan at work, so I’m expecting that to pick up my company’s contribution, that would at least be double that = $19,600/year ($1,633/mo.).

I’ve spoken about using HealthSherpa before, to assist in your searches for healthcare. When I go online there and type in my expected income for year 1, I get no subsidies. I went with a silver plan (the most popular) and a PPO (we like the flexibility there. The system is showing me an Amerihealth NJ plan for $1,569/month (ouch) with an expected annual cost for medium usage at around $21,577 (or $1,798/mo.). Double ouch! So for that first year, I’m going to need to add an extra $1K a month to my expected medical costs, because I will make way too much money to get ACA subsidies.

Something to plan for and make part of our budget. Thanks to the FI community, at least I am aware of this kind of stuff, and can prepare for it. Also, just because we hit FI doesn’t mean we stop working. It’s possible that I find another position in my company or at another, or Mrs. 39 Months keeps working and gets a job with benefits. Either way, we’ll work it out.

It pays to know what is going on, so thanks to all those who write about this stuff (see links to right). I hope all your plans work out!

 

Mr. 39 Months

Good post at retire by 40 on social security benefits for early retirees

The post gives you the math to determine your Soc Security benefits, and how retiring early will curtail them.

Most folks don’t know that the report from SSN assumes you will continue to work at your current salary till you hit your retirement age. Thus the number showing on the website for you is overstated if you retire early.

I found out that we’ll be taking about a 30% cut to our stated benefits if we decide to retire in the next year.

Interesting article in Kiplinger’s about the FIRE movement

Good article about the FIRE movement, with some examples. They’ve got most of it right, a few details off.

The examples they use is your typical high-income earning couple who made six figures in their early years. I wish we could see more examples of more normal people who do this in these sort of articles.

The article ends with  recommended steps, which folks in the FIRE movement can get behind:

To get on the road to Financial Independence, Retire Early, proponents recommend these nine steps:

1. Determine why you want to achieve FIRE, and envision what you will do once you get there. (This will keep you motivated.)

2. Calculate your net worth (total assets minus liabilities) to see where you stand.

3. Track every dollar spent so you know where your money goes.

4. Slash expenses. To reach a savings rate of 50% or more, you’ll need to cut major expenses, including housing and transportation.

5. Pay off high-cost debt, such as credit cards.

6. Build an emergency fund so you don’t resort to credit cards in a pinch.

7. Take advantage of tax-friendly accounts: 401(k)s, IRAs and a health savings account.

8. Use index funds to keep investing costs low.

9. Find a side hustle to bring in extra income and boost savings.

I’m just a “roady”….

One of the tenets of FI is to have time to do what you really enjoy. One of Mrs. 39 Months hobbies that she has picked up in the last couple of years is playing the dulcimer – a folk instrument with roots in 19th century Appalachia. It’s kind of funny, because Mrs. 39 Months is 100% Italian America (all 4 grandparents from Italy). Still, she really enjoys the instrument. Her father actually helped make one for her from a kit when she was 18 (she still has it) and she continued to have some interest over the years. Lately, though it has become quite a passion.

Part of having any sort of hobby like this is the potential to travel to various shows, with vendors, classes and a network of friends and “fellow travelers.” It also provides her with the opportunity to spend money, and the running gag in the community is, when someone asks “how many dulcimers do you have” to answer back “I still need one more.” Currently Mrs. 39 Months has 3, and may be interested in picking up “just one more.”

Going to the shows offers me the chance to travel, and to spend time with Mrs. 39 Months. When I went through various exercises to go through goals and objectives for the year, determining what makes me happy and what takes energy away, one of the things I wanted to do more of in 2018 is to travel and be with Mrs. 39 Months. So this weekend, we are up in Milford, CT at the Nutmeg Dulcimer conference.

For me, I act as Mrs. 39 Months “roady” for her dulcimer events. The official definition of a roady is “a person employed by a touring band of musicians to set up and maintain equipment.” I don’t think Mrs. 39 Months would let me touch her dulcimers, but I do the driving, help with the packing/unpacking, and generally provide the moral support. For this, I get the companionship of being with my spouse and enjoying the conversation.

She has taken various classes and is looking to buy a music book or two – but hasn’t found a 4th dulcimer that really needs to be purchased. She says she’s learned a few more things and expanded her skills – which is what it is all about.

I would urge those of you with friends and family to take the time to enjoy the comradery and life with them as you journey towards or enjoy FI. After all, it’s the journey which is the thing, not the final destination!

 

Mr. 39 Months