Welcome to our 2018 financial year in review. I know, I know. It’s already late January and I’m only now getting around to posting this.
I was hoping to post it closer to the beginning of the year. However, it turns out that it takes a while to pull together all of the year end numbers when you are managing a full budget, tracking all expenses, and creating reports to summarize savings and prepare for tax season. Admittedly, I also enjoyed having some time off from my day job and this new side passion over the holidays.
% Change in 2018 = +3.33%
2018 was looking like another tremendous year during this bull market, that is, until December hit. The steep decline in the last month of the year took an 8% bite out of our increase to our net worth for the year. Still, we ended up with a 3.33% gain for the year, which I’ll take over a decrease any year.
Our net worth gain was solely a product of us saving money throughout the year. The 9.65% gain in net worth that was a result of socking money away offset the -6.32% return of our savings and investments.
Since we have the majority of our savings in equity investments (~90%) we are prone to larger swings in our investment returns. Since we likely still have 8-10 years remaining before we can even think of being at FI, we trust that long term market returns will more than make up for dips like the one at the end of 2018.
Prior to 2018, we tracked our expenses each month but only had general targets for spending and saving. If we succeeded each month in having a positive cash flow (more money coming in than going out), we considered it a success.
2018 was the first year when my wife and I established a detailed budget going into the year. We started by figuring out how much money we’d have left after taking out known deductions for taxes, health insurance premiums, and healthcare and dependent care FSA contributions. Next we set targets for amounts we wanted to invest, spend on experiences (travel), give to charity, and put into our sons’ 529 accounts.
Once that was input into the budget we created categories for our various expenses including:
- Childcare – Daycare, before/after school, summer camp, and babysitting
- Monthly Recurring – Mortgage, utilities, car payment, insurance, mobile phones
- Annual – Expenses paid once a year such as antivirus software and AAA
- Household – Groceries, gas, clothing, haircuts, home maintenance, and car maintenance
- Non-Recurring – This is the category where we captured specific expenses just for the single year such as kid activities, memberships, and specific purchases (like a new dining room table)
- Discretionary – Everything else that didn’t have a home fell into the discretionary spending bucket. This included activities such as eating out, buying random stuff online, taking cash for spending money, basically anything we spent money on that we really didn’t need
Putting together the final touches on the budget was a balancing act of saving vs. spending. We ended up reducing spending in some categories and moving a couple items back to our wish list in order to maintain our target saving goal.
Now that we’ve closed the books on 2018, we know where all of our money went and it looks like this:
- Expenses (36.12% of gross pay) – A little over a third of our income went right back out the door as expenses in the categories I described above. This excludes our travel-related expenses (see Experience Fund below)
- Taxes (27.23%) – Considering citizens of some countries pay 60% income tax rates I feel pretty good about our sub-30% rate. That includes my wife and I each paying 3.4567% to Philadelphia since we work within the city limits even though we live in the suburbs (yes, that’s the real Philly wage tax rate. I guess it proves that at least someone in Philly has a sense of humor)
- Savings/Investments (26.14%) – This category encompasses all of our savings and investments including pre-tax (401k), post-tax (employee stock purchase plan, brokerage accounts, bank accounts), and additional mortgage principal payments (read about why we will not be paying extra toward our principal in 2019)
- Experience Fund (3.10%) – We have decided that we want to prioritize travel and showing our kids the world. Therefore, we set aside a fixed amount per month toward those goals. We either save that amount to pay for future travel expenses or use it to pay off travel expenses already incurred
- College Savings (2.86%) – Each month we put a fixed amount into 529 savings accounts for each of our kids. I labeled it “College Savings” in the pie chart, however, it can be used for other types of higher education, i.e. trade schools
- Budget Surplus (2.17%) – This is money that we had leftover at the end of the year in our budget. Always nice to have a surplus instead of spending more than planned (take that, US government)
- Health Insurance Premiums (1.46%) – Medical, dental, and vision insurance premiums. This does not include money that was either put into our healthcare FSA and spent (included in Expenses) or put into our healthcare FSA and rolled over to 2019 (see FSA Rollover below)
- Charity (0.81%) – We put a fixed amount aside each month earmarked for charity and then draw from that fund as we donate to various organizations
- FSA Rollover (0.10%) – Some healthcare FSA plans, my company’s included, permits employees to rollover a small amount of unspent funds to next year’s healthcare FSA
One of the most popular blog posts in the FI world is “The Shockingly Simple Math Behind Early Retirement” by Mr. Money Mustache. The post focuses on savings rate and how increasing your savings rate decreases the number of years to financial independence.
I calculated both our gross savings rate and net savings rate. Gross savings rate is based on gross pay alone whereas net savings rate subtracts taxes from gross pay prior to calculating the savings rate. Net savings rate is the “savings rate” typically tossed around and debated on personal finance and FI blogs and forums.
40% savings rate? I’ll take it! Sure, it’s not the 75+% that I read about and hear about from “popular” people in the FI blogosphere but, let’s be honest, that’s pretty rare air. Having two young boys, prioritizing travel, and living in a moderately high cost-of-living area definitely impacts our savings rate.
Instead, I like to look at the flip side. The personal savings rate in the US was at 6.0% in November 2018 per the Federal Reserve. That puts us at almost 7 times the national savings rate. Go us!
The money we managed to save in 2018 was split across three categories: pre-tax, post-tax, and additional mortgage principal payments.
We already both contribute the maximum allowed to our pre-tax 401(k) plans so there is nothing more we can do there other than continue funding them fully in the coming years. As we continue to try and increase our savings rate, our post-tax percentage as a percentage of overall savings will likely grow as a result of the cap on how much we can invest pre-tax.
In 2018 we put some money toward extra principal payments on our mortgage. Going forward, however, we’re going to invest that money and trust that over the next decade stock market returns will be greater than our mortgage interest rate (3.75%).
I’ve purposefully excluded the money we put into our sons’ 529 accounts from the chart above. We consider that money to be theirs and therefore I consider that an expense and not part of our savings.
One of the areas I like to examine as we plan our future is the amount of our expenses that go to what I call work-related expenses. These are expenses that would drop to $0, or close to it, if we decided to stop working our 9-5 jobs. As you can see below, our work-related expenses are significant.
Childcare and transportation to/from work make up the majority of our work-related expenses. Both my wife and I take public transportation to our jobs so it’s relatively easy to calculate that expense. Note: I did not include an estimate of fuel and wear and tear on the car that comes from our five minute drives to and from the train station that would likely get replaced by other short daily trips if we were not going to work.
When I look at preliminary FI estimates for our family I use our non work-related expenses as one of the inputs in addition to other inputs such as health insurance. Splitting out the work-related from non work-related expenses also helps us answer the occasional question we ask ourselves about whether or not it makes sense for both of us to work vs. one of us being a stay-at-home mom/dad. For the time-being, it still benefits us (financially) for us both to work.
I look back fondly on the year that was 2018 for a few reasons:
- Family – Our family had an exciting, happy, and healthy year. Financially speaking, we used our experience fund to travel to England and the Netherlands and to pay part of the cost of a Disney cruise. And thanks to the kids getting older and finally getting out of daycare our healthcare costs plummeted and we actually had some money left over to rollover into this year’s healthcare FSA
- Finances – We managed to not only create a detailed budget for the year, but we also stuck to it. I found that it helped me relax a bit about miscellaneous spending on things like a coffee here and there since at the end of the month it didn’t impact the big picture. We still had to be careful not to go crazy with spending, but we certainly didn’t want for anything
- Future – We hit our savings goals for both our pre-tax and post-tax targets. We took a small bite out of our mortgage principal. And we saw our net worth rise even with a stock market that ended up in negative territory for the year. One step closer to achieving our long-term financial goals
Looking forward to new adventures and new learnings in 2019!