Last weekend, I was curious to see, where all of my available funds were actually going. So, I added another tab to my family income and expense workbook and started with one of my favorite activities: Calculating potential outcomes and planning the future (I have to admit that this spreadsheet of mine is getting huge!!!!). Anyhow, …
My first step, was figuring out my Net Income for Early Retirement purposes
I calculated my FI Net Income as follows:
Gross Income minus Taxes minus Health Insurance – minus Disability Insurance. Then I added back in the Net Income from my little side hustle.
That was my 100%.
My second step, was listing out all of the Bills and Expenses I am responsible for in our household.
So, as shared before, I pay all the bills, and some food. My spouse pays the rent and some food plus his business expenses. This works for us. So you may say, that my savings rate is not complete, but I still consider it as valid. My spouse, though not dreaming of FI and early retirement, also has a pretty solid savings rate of about 50% going.
Should we ever separate, I would live in a much smaller house, with less rent, less utility costs, no TV and would have reduced costs for food. So in that case, many of MY expense categories would decrease, while the rent would be added in. Anyhow, since this is not on the horizon, I will continue with my cost breakdown below:
RED Category – Bills
- Transportation (Bus Pass and one Tank of Gasoline) – $ xxx.xx – 7%
- Utilities (Water, Electric, Gas, Garbage) -$ xxx.xx – 3%
- Communication (Cellphones, TV, Internet) – $xxx.xx – 6%
BLUE Category – Needs (and some wants)
- Food (Groceries, misc. household goods and eat out) – $ xxx.xx – 8%
ORANGE Category – Bills that will be reduced or eliminated within one year 🙂
- Child Care for Kid 1 (This one takes up a huge portion of my paycheck – but luckily only until the summer. Then our daughter will be in Kindergarten and we will only have to pay for after-care, so this category will be reduced by 2/3 !!!) – $ xxx.xx – 21%
- Child Care for Kid 2 (This can also be reduced or eliminated within a year) – $ xxx.xx – 4%
GREEN Category (the best one!) – Retirement Savings / Long-Term Investments
- Retirement Savings – 401K and HSA (this is not the percentage given to my employer, who deducts based on my salary’s gross income) – $xxx.xx – 21%
- Retirement Savings – IRA (I add about 2/3 of my side hustle net income into this account) – $xxx.xx – 10%
- House Savings – (Either for down payment, closing costs or house expenses. We will buy next year. Funds for the down payment are saved up separately, mostly by my spouse) – $xxx.xx – 6%
LIGHT GREEN Category – Emergency Savings
- Emergency Savings – 3 Months EF (currently working on increasing this to a few months of expenses) – $xxx.xx – 5%
BLUE/RED GRADIENT Category – Short-Term Savings
- Short-Term Savings – Irregular Bills/Birthdays/Christmas (this is a mixed category including some irregular bills, but also food for holidays, gifts, summer camp and things like that) – $xxx.xx – 4%
PURPLE Category – Kid’s Savings
- Savings for Kid 1 and Kid 2 (I will open accounts for them here in the US this month and start investing a little bit each month for them. This will only be a little bit, but that is better than nothing. Luckily for us, higher education is mostly free in Germany, and at least our son has expressed interest in moving back when the time comes. So there will be some relief here in that we probably won’t have to come up with 150k in University funds. Not sure what our little one ends up doing though …) – $xxx.xx – 3%
LIGHT BLUE Category – Remainder
- I am pretty sure, that I forgot some things, such as clothes, hair cuts and eventual increases or decreases in bills. Here is some room for error on my part and fluctuations. Can be counted towards bills/needs/wants categories. – $xxx.xx – 2%
My Third Step was tallying up the categories to find my FI-Savings Rate
Isn’t this pretty? Right now, of my own FI-Net Income, I spend 26% on bills and food, 25% on child-care (how is that even possible? Good, that this will be almost gone by next year), 37% on Retirement Savings and 18% on emergency, kids and short-term savings.
Considering only the current savings rate, I am on the path to retire in about 20 years. My goal is to be FI or retired a few years before that though (by the time I am 45). So, once those expenses in the orange category are mostly eliminated my savings rate will hit somewhere between 55% and 65% (which means around 11 years to financial freedom!). By reducing the day-care costs, I will reduce my “prison sentence” by almost half!
Here is the handy table indicating the years needed to work considering the actual savings rate:
My company gives raises and bonuses in November (so this month). Since I only just started in the spring, I am pretty sure that I won’t be getting a raise (but I sure hope that there will be a little bonus in the works; who knows…. )
So, this entire calculation above will probably get some adjustments (hopefully mostly with regards to savings rates).
MY side hustle does not provide fixed income. It did end up netting between $500.00 and $900.00 every month since spring, but I can’t count on this, since my items are a little bit seasonal. The winter months may be slower.
How should I best spend my BONUS?
Just kidding, should I get bonus, here is what I am thinking:
- 15% will be deducted and added into the 401K before I see any money
- 15% or so will go to taxes
- Of the remainder:
- I will put 1/3 into the Emergency Fund
- I will put 1/3 into the IRA
- I will satisfy my “Keeping-Up-With-the-Joneses-Disease” (10%)
- I will put the remainder into the House Savings Fund
So, I will add some of this money to the long-term savings categories and use only 10% (after taxes at that) to buy something nice for the family/kids/me (depends on the amount).
A $5,000.00 Bonus may look like this then:
15% 401k ($750.00) – Remainder: $4250.00
15% Taxes ($637.60) – Remainder: $3612.50
1/3 Emergency Fund ($1204) – Remainder: $2408.50
1/3 IRA ($1204) – Remainder: $1204.50
10% For the Joneses ($361.25) – Remainder: $843.25
House Savings ($843.25) – Remainder: $00.00
All my little freedom buckets would get a little bit. I like this plan.
And how should I spend my Salary Raise?
I am not really sure yet. It is hard to plan with unknown numbers. The bonus is easily split up into percentages. Should I get $1,000.00, I can still work with the same split (or dump the entire bonus into one of the buckets). Should I get $10,000.00 (haha … I wish), I can also use the same split (but reduce the Joneses-bucket (no need to spend 3600.00 on fun stuff if that money can help fully fund one of my retirement accounts).
With a salary increase, one may have to consider the following things:
- My bills won’t increase (just adjusted for inflation and the monthly fluctuations in amounts)
- My food won’t increase (again, just adjusted for inflation and monthly fluctuations)
- I will have to see, what my new net income looks like, but then I can calculate the increase in net income and assign that to increase the savings into my freedom buckets:
- 1/3 increase into Emergency Fund Savings
- see how much is missing towards funding the IRA for 2018 and fill up if possible/necessary
- Increase house savings with any remaining funds.
It is so exciting to plan everything out, once the stupid credit cards are no longer an issue.
If there is one goal you should tackle for 2019, it is getting rid of debt!!! Those are shackles, nobody needs. And I have to say, that it is fun to plan out how to save my eventual bonus, how to split up my salary increase into investments and savings and to see, how many years I have left having to work after these adjustments (instead of wanting to work on my own terms!!!).
Have you calculated your savings rate? You should. It sure is a kick in the bud!