October Spending

It is the middle of November, and I am just now posting our October spending. The election occupied all my discretionary time-to-think, and I just didn’t have the bandwidth to compute our numbers for October. But I am quite happy with the final results, and now I can get back to managing the household budget:0)

October was another month with pretty low spending – $2327. Interesting fact: this corresponds to about $28,000 per year. As we don’t include our property taxes in the monthly summary, adding them back in gives us $34,000 per year, which is really low -156% of the federal poverty line.

There is nothing particularly interesting in our October spending. It turns out that when nothing special comes up during the month, we can pretty easily keep our spending at about that level. However, November and December will be expensive months. We have several things coming up, including some large pet expenses, some fairly large car expenses, and some large donations.
Our food expenses have settled to between $700 and $800 a month for the last few months and, given that almost everything we eat is organic, I think this is pretty good. We are continuing not to buy processed food, so I am doing quite a lot of cooking.

A popular “rule” for proper budgeting is the 50/30/20 rule. According to this rule, you should spend 50% of your income on essential like rent and food, 30% on discretionary spending, and 20% should go to savings. We don’t follow this rule, and I don’t like it. Let’s start with essentials – by the definition of “essential,” there actually shouldn’t be much flexibility here. You need a place to live, but if you choose for your family of three to live in a five bedroom house (we do this, it is just how it worked out, it is not smart), some of that expense is discretionary. You also need food, but if you choose to pay for all organic, that is also discretionary. Thinking of your rent and food expenses as essential prevents you from seeing your actual choices.

Once you figure out your actual “essential” expenses, the rest of your money is all discretionary. You have two choices for the money. You can spend it on stuff, or you can save it and essentially buy time. If you save about 65% of your take-home pay, you can retire in about 10 years starting from zero. So once the essentials are covered, you get to decide how you want to prioritize spending vs. savings to optimize your happiness. I think if we moved to a smaller house, stopped buying organic, went to one car, and didn’t spend money on child activities, we can probably get to under $2000 a month. But that would be a lot of work and a lot of sacrifice. I think we have our discretionary spending vs. savings optimized to just about the right level at the moment, although moving to a smaller house is still on my to-do list for sometime after the pandemic.

Our September spending and No Snacks September report

September spending: Let’s start with the total: $3060. That is about $600 more than last month but we spent $600 on the Child’s Spanish lessons which is a biannual expense. If we ignore that big purchase, we kept our spending the same as August.

The Child is taking Spanish classes with Homeschool Spanish Academy and we love them. All classes are on Zoom and she gets to talk to native Spanish speakers. For $10 per hour, we consider it a great deal. The lessons come in prepaid packages and this package of 60 lessons should last for about 7 months at our current rate of two lessons per week.

Our other significant discretionary expenses were a modem that allows us to control what websites the Child has access to and a chair for Funky Wife who now works from home. These are some expenses related to Covid but they are actually less than our usual expenses for gas and parking that we have during non-Covid times.

I am also happy to report that our grocery store bill is down to $771 which I believe is about the average for a family of three. We are continuing to buy a mixture of organic and non organic produce but we have cut out most pre-prepared food. Cooking from scratch is definitely cheaper although it is more time consuming.

No Snacks September was a huge success! In terms of money, there probably weren’t much savings. Our snack spending went from an average of $183/month to $32 for September but instead of grabbing sleeves of crackers and bags of popcorn, we are now eating more apples and bananas which it actually more expensive but way healthier. Most importantly, the Child is eating more healthy food (and she wants you to know she hates it). I have even lost a couple of pounds. So with a 2 to 1 vote, we are keeping the No Snacks challenge for the month of October!

How did your September go? Link your spending below.

Our August Spending

Well, it is possible that writing this blog is good for our budget. I have been keeping track of how much we spend for several years now and this is our lowest spending month in recorded history! Which shows that way too much of our spending is really discretionary. Our average monthly spending for 2019 was almost $5000 a month excluding property taxes and donations which we tend to do on an annual basis.

Shopping this month included printer supplies (about $150 worth) due to the fact that we are both working from home and homeschooling, some clothes for me ($110, I did really need the clothes) and homeschooling workbooks for the Child. Kid expenses included the Child’s violin lessons (which she takes over Zoom) and school fees (public school). We made a small amount of donations as our area was hit by a major storm so we donated to some local charities.

One significant reason our spending is down is COVID and the fact that both of us are working from home. That decreases our transportation expenses (normally I pay $6-$7 per day for parking and we both drive to work) but it also decreases my random and totally optional daily purchases. When I am at work, I often end up buying lunch or buying coffee and these things add up!

During the first weeks of COVID, our spending didn’t go down, it shifted. I tried to buy things that I hoped would protect my family from the dangers. I stocked up on food, toilet paper, soap, and Clorox wipes. I also bought various masks that I hoped would be good enough to keep us healthy. I have reached the point where I have bought everything that can possibly be useful. All of these things are sitting in our basement as at the moment we simply don’t leave the house but I feel slightly better knowing they are there.

Our low spending (for us) is of course largely due to luck – nothing went wrong this month. The pets didn’t get sick, no appliances failed, no storms damaged our roof or flooded our basement. It is easier not to spend money when there are no emergencies. Still, I do think that writing about money helps me be more thoughtful about how I spend it. It’s a win!

Can we bring our spending lower and is it worth it? Probably we can and probably it is worth it.

Our main financial goal is to be financially independent. That means to be able to live entirely on the passive income generated by investments. The common rule is that to be financially independent, you need to have investments equal to 25 times your annual income. Making some reasonable (everyone hopes) assumptions about the return on stocks, this should allow you to live on passive income forever. I tend to be more conservative, so I am taking 30 times our annual spending to be our financial independence number. Small changes in your annual spending, can have a big effect on this number. For example, if we can live on $40K per year (an average of $3,300 a month) then we need $1.2 million in investments (this doesn’t count money that is not invested such as the value of your home, cars, or money you like to keep in cash). If we need $73K per year (the amount we spent last year), then we need $2.2 million. That is a big difference! In general, cutting your spending by $1000 a month, translates into a decrease of $360,000 in your financial independence number. And of course if you are spending less, you are saving more to reach that smaller number even faster.

The Super-Power of Discretionary Income

Life is a series of experiences. Some are trivial like brushing your teeth, others are memorable, like your wedding day, or that cruise you took to Alaska. Some experiences are fun (maybe your last vacation is on your list of fun experiences), some are neutral (your list depends on your personality, washing dishes is on my list), and some suck (like getting a root canal). The most awesome power of having discretionary income is that you can opt out of some of the things you hate doing and opt into some of the things you love.

When I was younger, I didn’t understand this super-power you gain as you develop a discretionary income. I thought of money as something your exchange for goods. Paying to opt out of an experience is a more abstract transaction – you give away money but you don’t get an object in return. Of course, when I was younger I also didn’t have discretionary income so it was hard for me to understand its power. Sadly, this super-power is somewhat limited — you will still have to get that root canal yourself, no matter how much discretionary income you have.

When the Child talks about money, she always talks about the things she wants to buy – a huge mansion with a pool, a fancier car, the latest cell phone. She doesn’t yet understand that this is not where the power of money lies. Lots of adults also either don’t know this super-power or just don’t agree that it is awesome–based on the choices they are making with their money. Maybe owning the newest cell phone does optimize their happiness profits but somehow I doubt it.

There are lots of things I enjoy doing that other people outsource. For awhile we had a person who cleaned the house and I hated it. I don’t like other people in the house, I don’t like the weird chemicals they use, and I always worry about the pets. That service wasn’t optimizing my happiness profits. On the other hand I will call a repair person for the simplest things. I don’t like fixing things. It makes me anxious, it always takes more time than I predicted, and much of the time I have to call the repair person anyway. Instead of spending 5 hours trying to fix a leaky faucet, I can have an expert fix it in 5 minutes and I can spend my time messing with the yard which I love.

Today, I decided that I will have someone else build the website for this blog. I feel slightly guilty about it because I know I am perfectly capable of figuring out how to do it myself. But I only have so much time, I have a full time job, a child I am homeschooling (schools are closed because of the pandemic), and I am taking classes to complete my Masters in Finance. I don’t want to give up any of these things and I want a nice blog so outsourcing is the logical move.

I am a big fan of Mr. Money Mustache. His followers would vehemently disagree with this post. Mr. Money Mustache lives on a ridiculously low budget and in part he achieves that by not approaching problems from the perspective that he can just spend money to fix the problem. I am pretty sure he repairs his leaky faucets himself. I admire that attitude and I agree – if you want to minimize your spending that is the way to go. But this blog is not about minimizing spending, it is about optimizing happiness profits so on this particular topic I will not follow his advice.

One important caveat to this post. Notice that the super-power of opting out of experiences exists only if you have discretionary income. When I was younger and didn’t have discretionary income, I did fix my own leaky faucets and much more. Those experiences weren’t fun but I don’t recommend buying yourself out of experiences if you don’t have enough money to meet the basic needs of your family.

Having super-powers is awesome and it is worth working hard to get them!

Get to know us through our numbers

National averages from the Bureau of Labor Statistics

One fun way to get to know someone, is to check out what they choose do to with their money. It is not something that we often get to find out about people but our family is an open book so here is what we spent in 2019 together with some US national averages. Starting in September 2020, we will post our monthly spending with a bit more detail than this annual summary.

Housing: $14,918 (avg. $1243 per month)

This includes bills/utilities: $5,756 (avg. $480 per month), property taxes: $5196, and home maintenance and appliances: $3,966 (avg. $330 per month).

Food: $14,774 (avg. $1,231 per month)

Yes, that is a lot! And $11,000 of it is on groceries, not eating out. The average US household spends only $7923 on food. We are vegetarian and drink almost no alcohol. I guess we eat a lot!

Pets: $9978 (avg. $831 per month)

We started the year with four cats, two dogs and a gecko. Sadly, two of our cats passed away during the year and a good chunk of these expenses were incurred in their last weeks of life. The average US family spends less than $1000 per year on pets.

Shopping: $7,667 (avg. $641 per month)

This breaks down to Amazon: $4,057 (avg. $340 per month) and Non-Amazon: $3610 (avg. $301). This includes clothes, shoes, household items, books and workbooks for the kid, as well as some pet food not included above.

Kids: $6,078 (avg. $506 per month)

We have an 11-year-old and a 20-year-old (who is financially self-sufficient). This number includes after-school care, summer camps, and a few relatively cheap activities like soccer. We choose to put the kid in camps all summer. It is expensive but we consider it a good investment into her social and academic development.

Auto/transportation: $2,890 (avg. $241 per month)

This is mostly gas, parking, and an occasional car maintenance expense. We own two newer cars which we bought for cash so no car payments. According to Expedia, 85% of new vehicles and 55% of used vehicles are financed.

Insurance: $2496 (avg. $208 per month)

This includes our home and two cars. Health insurance is mostly covered by our employers and what is not covered is deducted from our paychecks before taxes so it is money we never see.

Health: $1,091 (avg. $90 per month)

We are lucky to have excellent health insurance.

Other: $4586 (avg. $382 per month)

This includes a period during which I had a gym membership, cash withdrawals (about $3,000 total) which I can’t track but much of it went to pay babysitters, and random other expenses.

Donations: $8,694 (avg. $725 per month)

Our donations were on the low-side for us this year because we had made several end-of-the-year contributions in 2018 and were planning to do first-of-the-year contributions in 2020 for itemizing deductions purposes. We typically aim for about 15-20% of our annual spending to go toward donations/charities.

TOTAL: $73,202

Mortgage-free: the pros and cons

If you looked at our spending for last year you noticed that we have no rent and no mortgage payments. We paid for our house in cash. We waited to buy our first house while living in very cheap shared housing (that was before we met and while dating) and our first house was small and cheap ($120K). A few years later we acquired the kids and moved into a much bigger house ($240K). We always lived way under our means and so we were able to pay cash.

Living mortgage-free is a priority for me because I tend to be anxious and knowing we can’t be foreclosed on (yes, I know we still have to pay our property taxes) is important for my peace of mind. And as the motto of this blog is to spend your money to optimize your happiness, paying off the house is the right decision for our family. However, security and peace of mind are probably the only pros for living mortgage-free.

There is a long list of cons:

  1. Unless you make significantly more than you spend, you won’t be able to buy a house for a while. This is an even bigger issue in parts of the country with high housing costs. In some parts of the country, even a “cheap” housing option can be over half a million.
  2. The kind of house you can buy will be much more limited than if you are willing to take on a mortgage.
  3. While renting to save enough cash for a house, you are spending money that is in no way increasing your net worth. There are many positives of renting but that will be a topic of another post.
  4. If you have the money, spending it on a house is probably not the best investment. Historically, mortgage rates have been below the rates of market growth. So even if you have the money, mathematically you may be better off taking a mortgage and investing your cash in the stock market. However, it is important to account for RISK. You know for sure you will have to pay the interest rate on your loan, you don’t know for sure what the market will do.

So, as with most decisions related to money, don’t make this decision to optimize the money, optimize your happiness. For us, living mortgage-free is the best decision but it might not work well for your family.