As I alluded to in part 1, I knew we’d be a bit better of on the Fiscal side of things. Reaching Financial Independence has been a goal we’ve been working towards, and while there is definite room for improvement, we are in pretty good shape fiscally:

2018 Income and Spending:

Well, we lived on $49k for the year, and ended up with a 61.7% savings rate. Depending on who YOU are that might seem really low, or if you are more badass than us it might seem pretty high, or even extremely high. My wife’s reaction when seeing the spending numbers was discouragement that our spending was so high as we’ve been focusing on getting it lower.

Let’s also take a deeper look at where we spent those living expenses:

The good news from the above chart is that we don’t have a ton of total bullshit spending like car payments, entertainment, hired housekeepers and other home services from lawn to dog walkers, and we are usually pretty good about not shopping for the sake of it or as a fun activity or stress relief outlet. Note that “Shopping” above is anything from a story or Amazon that we haven’t categorized so could include baby stuff, definitely includes our new espresso machine (which is why coffee shop isn’t a big line item for us).

However, $38k is a shitload of money to spend for 2 people, a baby and a dog. Looking at the details we can see that Food & Dining is where we spend the lion’s share of our money at a whopping 43% of our total spend. In subsequent posts we’ll dive into these categories and see what we can do to optimize them further.

The other thing we want to understand is our total spending without mortgage interest. This is important because part of our plan to reach financial independence (have assets generating income greater than our spending, forever) includes  a paid off house, so it’s useful to estimate our total spending without interest as a rough proxy for future spending. The number from 2018 is: $43,397.

A few notes re Income:

• I work at my job full time, and my wife has taken the past year off to take care of our Son, who just turned 1! The income includes some trailing income from when my wife was doing paid work, but excludes a couple of things like our income tax refund;
• Clearly not everyone makes this sort of income, and we’re in a good spot on this front. I’ve worked really hard to be successful in my career, but there is also privilege, luck, and the support and kindness of others involved.
• If you don’t currently have an income at this level, don’t be discouraged – improvements in your finances and even Financial Independence are within your reach (read on!);

A few notes re Expenses:

• I’ve split these into two categories: Living expenses and Mortgage Interest, Property Tax & Insurance.
• The reason is that the Living expenses are really what we track on a monthly basis to compare how we are doing as they are what we have the easiest control over on a day-by-day basis. The housing related expenses aren’t subject to a monthly change (although of course, every expense IS a choice). This helps simplify the situation: while I can happily pour all over all of our financial details each month, this isn’t really fun for everyone, and a simple approach that

Moving on to Net Worth* as of 12/31/2018:

So we ended the year at just under half-a-million bucks of net worth. Not too shabby. This is a big pick up from when we started the year, as you can see from the fact that we had decent savings in 2018.

A few notes on Net Worth:

• A traditional way of showing a balance sheet like this in a business is to show all Assets (cash, property, investments, etc), then total Liabilities (things you owe – credit cards, mortgage, student loans, etc), and then Assets minus Liabilities = Net Worth. I show it this way because it’s more useful for me for personal finance planning;
• We also have two used and fully paid off cars: a Honda Fit** and a Hyundai Elantra, but we don’t include the value of those as assets, because, uh, they aren’t assets. Sorry, but cars are convenience, but we’d be fooling ourselves to think our financial position is improved by buying a car. Any money going out for personal vehicles is simply an expense;

Overall Financial Assessment

• Strong income from W2 job, of which we save a respectable 61.7%;
• Net Worth of $472k including $373k of investments
• $43.4k of spending per year for everything excluding mortgage interest
• The above equates to our investments being 8.6x our annual spending ($373k/$43.4k) –  this is a key measure of our progress towards financial independence.
• $169k left on the mortgage

In the next Financial post we’ll set some goals and chart the path forward including accelerating our path to 25x investments! (more on why 25x later)

Next steps for you:

Pull together a summary of your financial life. You can do this with a pen and paper, a spreadsheet, or you can get some help and automate this with a program such as Mint.com which is what I use. With Mint and similar programs, you simply link up all of your financial accounts, and it allows solid tracking of everything you need. There are some types of accounts that aren’t available to link, but you can add those manually. Then, you need to:

• Start tracking your income and expenses! This is probably the most important step you can take on your journey to improved finances;
  • Calculate your savings rate: Remember, payments on debt count as savings. So take all of our cash outflows, less debt payments and that is your spending.
• Pull together all your assets: Cash, checking/savings/money market accounts, investment accounts, 401k’s from current or former employers, IRA’s, the savings bond your grandma gave you, the loose change sitting around from when you used to be a waitress (future story coming!).
• Pull together all of your liabilities, things you owe: Credit card balances, student loans, mortgage, money you owe to relatives or the IRS, other personal loans, car payments, etc.
• Put together a basic Net Worth statement based on the assets and liabilities you have
  • At some point I’ll come back and update a spreadsheet template to make this easy;

Once you have this basic information, you know where you stand. It’s not easy to face our own problems square in the eye, but it’s the only way to start improving.

See you on the next post!

*A note on “Net Worth” – this is normal terminology for equity, and really the formula of Assets minus liabilities. However, the Mrs. really dislikes this term, because clearly a person’s “worth” is far more than their financial standing. No argument here, however, for simplicity we’re sticking with the perhaps outdated term “Net Worth.”
**Another note from the Mrs re the Honda Fit: “The freaking best car ever with 6 airbags, 8 cup holders, and plenty of room for 2 adults, a happy dog, and a rear facing car seat in the middle position.”