Finding your Happy Place with Money

I hate tracking my expenses, but I have a goal to increase my savings by $1600 per month to support my goal of financial independence. In my post today I’m going to talk about how I evaluated my expenses to help recognize purchases that weren’t aligned to my values, setting a goal to easily eliminate them. This also requires a deep dive into two of the largest purchases we make, both our homes and our vehicles, and how much happiness they bring into our lives for the tradeoff of financial independence.

A couple weeks ago, we talked about financial independence and learned that saving $1600 per month could accumulate to a million dollars after 23 years assuming a 7% return on investment. I’m 33 currently, so this means I could save a million dollars by the time I am 56. Applying the 25x rule, my annual income could be $40,000 (assuming a 7% return – 4% for passive income and 3% for inflation).

Do you have debt? The same applies if you pay more per month so the interest isn’t constantly sucking up your monthly payment. When I graduated from college, I had over $80,000 in student loan debt, which is minimal compared to some that achieve a masters or doctorate degree before earning a paycheck. With an average 7% interest rate, my monthly payments of $620 would allow me to pay off my loans in 20 years. However, I stretched to pay $1200 per month so I could pay them off in 7-8 years. This saved me almost $50,000 in interest, and now I have extra money to contribute to savings. It wasn’t easy, but it was absolutely worth it.

So, I hate tracking my expenses, and honestly hate budgets as anything more than a guideline. My strategy has always been to save or pay off debt first, and the rest is the rest. I’ve tried different apps and programs, but at the end of the day, I never kept it up for more than 2-3 months, and it generally made me feel deprived like a diet so I would eventually rebel and feel like I failed. It’s easier for me to focus on what I can or can’t have versus trying to control to a specific limit. I’ve had the same luck with calorie tracking in that it’s never worked for me.

To improve my chances of achieving financial independence, I know I want to up my monthly contributions to my savings/investing accounts by $1600, so how am I going to do it? Well, I’m going to reflect on my past expenses instead. I learned that most banking companies allow you to export your transactions into an excel file that makes it super easy to go back and understand where your money went. It took me 4 hours to export and categorize everything from January to September 2020. Turns out I’ve been spending an average of $200 on clothes, and another $200 a month on Amazon purchases. Yikes- I’m not proud of that.

My inspiration for this came from “Your Money or Your Life“, by Vicki Robin. What I like about this approach, is that it gave me the ability to reflect on what I’ve already spent in the past, and evaluate it against my values. Vicki walks through the process of calculating your hourly wage, accounting for things like commuting time, decompress time, etc. You then understand how much you’ve spent in relation to your life energy and reflect on whether that makes you feel fulfilled, aligns with your passions and values, and if it should increase or decrease when you achieve financial independence.

I’ll be the first to admit that I skipped a few steps in this process, which is exactly what they tell you not to do, but I’m willing to accept the risk. I still exported my expenses for the last 12 months, and focused on January – September. I included purchases from the holidays to ensure I wasn’t selling myself short on seasonal purchases such as gifts for the family. I then calculated the % of my overall expenses for that category. I took time to reflect on what I expected my past expenses to say about me. For example, I expect my purchases to show me valuing my children, education and our families development for the future. I expect the results to show that I am a thrifty person who values reusing things when possible and giving to others. As I embrace the minimalist mindset, I don’t want my home or my vehicle to be excessive. Spoiler alert- I had some changes to make.

I will feel fulfilled when the purchases align with my values and my passions, and will feel unfulfilled if they don’t. This practice made it really easy for me to identify categories in my budget that clearly had to go without feeling like I’m going to miss anything. I’m actually happy to see them go, like the unwanted television in the garage my husband finally discarded after not plugging in for the last 10 years. Such a sense of relief.

Steps to Reflecting on Your Expenses:

  1. Export your expenses for the last year from your banking website
  2. Categorize and calculate your average monthly expense
  3. Calculate the percentage of your expenses that category equates to
  4. Reflect on what you want your expenses to say about you
  5. Write next to each category a plus, zero, and minus to represent the change you must make to align with your values and expectations.
CategoryAmount%Fulfillment?
Home$80020%0
Groceries$40010%
Car Payment$40010%
Charitable Organizations$30015%+
Etc…

$1600 is a huge number, but it can be done. Now I accept that not everyone can pull $1600 per month from their budget, so your amount or timeline may look very different from mine. 10 years ago I lived on less than $1000 per month and there was very little room to scrub dollars from that budget, but it can be done. Not to mention if your expenses are only $1000 per month, you would only need to save about $475 per month for 23 years to accumulate an equivalent 25x savings to achieve financial independence.

When I started to evaluate where I could reduce spending, I began with things that clearly made me squirm as I reflected on them. My car payment, clothing purchases, my kids clothing, amazon purchases, and multiple subscription services. Did they bring the appropriate level of happiness into my life for the money I was spending on them? My reflection told me no. To achieve my goal of $1600 per month, I also noticed that I would need to make long term changes, or potentially pull from expenses that were contributing to my feeling of fulfillment. This included house payments, contributing to charities, saving for my children’s education or paying for daycare. I concluded that $1400 of my monthly budget could be reallocated with minimal impact to my happiness, and for the additional $200, some more significant changes were needed unless I reevaluated my priorities further.

In the chart below, I breakdown the expenses I can easily remove with minimal impact to my feeling of fulfillment or happiness.

CategoryMonthly Expense
Monthly Subscriptions$54
Gym Membership$30
Amazon Prime$10
Amazon Purchases$200
Monthly Clothing Subscription$210
Kids Clothing$99
Whole Life Insurance Policy$100
Vehicle Maintenance$180
Take Out Food$92
Medical Bills$333
Groceries$100
Total$1408

Now some of these categories seem odd to reduce spending on such as vehicle maintenance, medical bills, or kids clothing. Typically, it is recommended to include uncommon purchases because suddenly every month is an uncommon month. However, with a vehicle payment of $400 per month, I don’t expect to average $200 a month on vehicle maintenance. If this trend continues into 2021, my action plan is to reevaluate my car situation and downsize to a smaller more reliable car. In 2020, my medical bills were unusually high due to hospital bills with our second baby being born. If this trend continues into 2021, I will identify an action plan but this isn’t expected. As I reflect on clothing purchases for myself and my children, this is not an accurate reflection of my values to reuse clothing versus purchasing new. By canceling my amazon prime membership, I am removing the temptation for convenience impulse purchases that in most cases I can live without.

All of these purchases were quickly identified as minimal contribution towards my happiness. However, to achieve my goal of $1600 per month, I either need to make long term changes such as downsizing my vehicle or our house or eliminate expenses that significantly add happiness into my life, such as selling my motorcycle to save on insurance, eliminating purchases that benefit my health, reducing how much I spend on gifts for family, books for personal development, or donations to charitable organizations.

For most people, the ability to save $1600 per month is impossible without accounting for some long term changes. Two of the largest purchases we make that contribute to our budget are the homes that we purchase and the vehicle we drive. Next, we’ll look at how changing our mindset of these purchases can significantly change our monthly commitment. Let’s start with the larger of the two, our mortgages.

Purchase PriceDown PaymentInterest RateTerm LengthMonthly Payment
$100k$15,0004%30 yrs$405.80
$200k$15,0004%30 yrs$883.22
$300k$15,0004%30 yrs$1360.63

The chart above gives a rough idea of how different home prices can quickly eat up from your monthly income. This is simplified and doesn’t account for things like PMI insurance, home owners insurance, heating bills, maintenance, cleaning services or the many other increases we see with larger homes. Is the $100k difference in purchase price worth $470 per month? Agreed, you will build up some equity in the home, but a significant amount of the monthly payment is going towards interest. While downsizing your home could help reduce the monthly payment, you could get stuck with realtor fees that eat up the benefit that you gain. Other options could include renting the property to cover the mortgage and purchasing a smaller home for yourself, you could rent out a room of the home full or part time for additional income, or you could sell your home and rent something smaller to try before you buy. When I lived on my $1000 monthly budget for example, my rent was only $300 per month by splitting a small apartment with a roommate. Obviously there are trade offs between buying and renting, and considerations if you want to rent out your property that we can talk about in detail later.

How about the next largest purchase we typically make, our vehicles?

Purchase PriceDown PaymentInterest RateTerm LengthMonthly Payment
$10k$02.5%5.5 yrs$162.33
$25k$02.5%5.5 yrs$405.82
$40k$02.5%5.5 yrs$649.31

The chart above shows some examples of how different vehicle purchases impact our monthly budget. Again, this is simplified and assumes no money down, doesn’t include taxes, warranties, maintenance, or fuel costs. Regardless, the decision to purchase a car that is $15k higher could result in $243 higher monthly payments that takeaway from your savings potential. Again, you may build up some equity in your vehicle, but this will depreciate in value very quickly versus potentially building interest if invested. Similar to a house, if you’re looking to downsize, it is important to be aware of the transition cost such as taxes on a new vehicle you will pay that may offset the benefit you are expecting. Other options could include selling your vehicle to share with a spouse, ride a bike to work, or evaluate public transportation options. When my expenses were $1000 per month for example, I lived in a city where I could purchase a bus pass for $40 per month, replacing vehicle payments, maintenance, fuel, and registration fees.

So while $1600 per month may seem like a significant amount to put aside each month, it is doable, especially once we account for larger purchases like our home and vehicles. Personally, I find it beneficial to push the limits of what we can live with while still being content and happy. The more opportunities we can take to find happiness in the world around us without purchasing possessions, the better. The lower our dependency on money each month, the easier it will be to achieve financial independence since your 25x goal will be significantly lower when your monthly expenses decrease and you will increase how much money you save each month, achieving your goal even faster.

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