One aspect of my journey that I have always taken for granted has been my focus on keeping living costs low. After reading about the stories of others on their way to financial independence, and following personal finance blogs written by people who were in huge debt, I believe that I was wrong to never really stress the importance of frugality in my wealth building process.
I believe that frugality is one of the most important factors behind my success. I define my success as the ability to cover monthly expenses through investment income. Based on my projections, I can cover somewhere between 60% - 80% of my expenses with the dividend income that my portfolio generates. The best part is that when I really started my journey in 2007, I only had $2,000 sitting in my checking account.
I try to keep costs low, and try to be smart about finances. This means that the more I manage to save by keeping my expenses low, the more I will be able to invest for my future. I believe that being smart with my finances in my 20s is important. This is because the money I invested in my 20s will be able to compound for me for the longest period of time. By front-loading my savings and investment early in life, I will be able to enjoy compounding my money for the longest period of time.
I believe that frugality is something that everyone can choose to embrace. Saving and investing money is something that everyone can achieve. The discipline to get there however, and persistently follow your plan for over eight years is the tough thing to do. This is where many deviate from the plan, because deferring gratification could be painful in the short run. I myself have been truly inspired by those who have followed a plan for much longer than myself, and who have been living their dreams for decades.
I realized early on that I can control only a few things in life. I can control my savings rate to a certain degree, and I also control what I invest my hard-earned money in. I believe that by saving money, I create more options for myself in case something bad happens ( like a layoff for example). By investing my money in a portfolio consisting of over 60 dividend paying stocks, I create a stream of income which is diversified. If one company fails outright, the other 59 will pick up the slack by raising their dividends.
If my employer decides that I am no longer needed on the other hand, I will be in a real pickle if I didn’t save much. In reality, I can breathe easier during layoffs, because I save a large portion of my income every month. By being frugal, and keeping my costs low, I have more flexibility and more options.
In this post I will share my expenses from the past four months. I track my expenses using a simple spreadsheet. My personal finances are not very complicated. I spend my money either from my checking account or from a single credit card, which I pay off in full every month. I earn rewards points from that credit card, which is an instant rebate for doing something I would already be doing anyways. I track expenses based on major categories.
Expense Type
|
June
|
July
|
August
|
September
|
Grand Total
|
Rent
|
$ 470.00
|
$ 470.00
|
$ 470.00
|
$ 470.00
|
$ 1,880.00
|
Grocery
|
$ 264.78
|
$ 318.69
|
$ 510.39
|
$ 307.81
|
$ 1,401.67
|
Eating Out
|
$ 233.05
|
$ 65.50
|
$ 48.73
|
$ 96.00
|
$ 443.28
|
Utilities
|
$ 82.53
|
$ 103.21
|
$ 111.20
|
$ 98.28
|
$ 395.21
|
Travel
|
$ 113.31
|
$ 52.92
|
$ 180.86
|
$ 347.09
|
|
Blog Related
|
$ 69.00
|
$ 87.34
|
$ 69.00
|
$ 83.41
|
$ 308.75
|
Car Insurance
|
$ 196.63
|
$ 196.63
|
|||
Other
|
$ 31.22
|
$ 24.86
|
$ 21.06
|
$ 93.74
|
$ 170.88
|
Health Insurance
|
$ 38.20
|
$ 38.20
|
$ 38.20
|
$ 38.20
|
$ 152.80
|
Medical
|
$ 133.29
|
$ 133.29
|
|||
Gas
|
$ 8.40
|
$ 50.57
|
$ 30.28
|
$ 27.75
|
$ 117.00
|
Drinks
|
$ 9.71
|
$ 46.93
|
$ 53.11
|
$ 109.75
|
|
Internet
|
$ 20.00
|
$ 20.00
|
$ 20.00
|
$ 20.00
|
$ 80.00
|
Car Related
|
$ 66.12
|
$ 66.12
|
|||
Grand Total
|
$ 1,473.49
|
$ 1,474.85
|
$ 1,499.72
|
$ 1,354.42
|
$ 5,802.47
|
As you can see, my expenses hover around $1,500/month. Since I want to have a margin of safety in financial independence, my range of safety is monthly dividend income of $1,500 to $2,000/month. My expenses of course fluctuate from month to month, and the amount spent on categories fluctuates as well. This is why I believe that looking at expenses over several months is more helpful that looking at the expenses for a single isolated month.
My major expenses include Rent and Groceries. I characterize any expenses that I make at big store retailers such as Wal-Mart (WMT), Target (TGT), CostCo (COST) as groceries. The truth is that I can pick anything from clothes, presents, supplies, electronics, pharmaceuticals from those places. Because of the infrequent nature of those expenses, and the lower weight in expense item category, I do not find it worth the time to categorize them further. After all, I doubt I will glean any additional information if I added a separate line item for helium balloons for a special event, for underwear, for a child's present, or a for a coffee mug I bought at the store.
We enjoy exploring new restaurants, and treating our selves from time to time. Plus, when you travel, you eat out. This explains a high portion of that expense.
Some of the items I have included are deceptively low. My health and dental insurance is only $38/month. However, this insurance is provided through my employer. The boss pays an additional $200 for health insurance every month. If I were laid off, I would likely have to pay more than $200/month for a roughly similar healthcare coverage. I am very lucky to have such a great insurance. I have always had insurance since I started living on my own at age 18, though it has not always been subsidized.
My rent expense is low, because I share an apartment with a significant other. Before moving in, my rent was over $700/month. Plus, I didn’t get to share utilities. This is the type of synergy that I discussed during my goals post for 2015. I do not think I can lower rent expenses much further. If I were to purchase a home where the total monthly mortgage, taxes, and maintenance were around $1,000 - $1,200/month, a large portion of this “expense” would be capitalized for me.( meaning that it would grow my net worth)
You can also see that I have blog related expenses as well. If/When I decide to call it quits on the DGI front, this expense will likely disappear. That being said, I am the only blogger that has managed to keep posting on their original site about dividend investing for almost eight years in a row. This
I was lucky that I didn’t have much in car related expenses over the past five months. If something doesn’t work, I can easily have to pay several hundred dollars on the spot. I drive a 15 year old car that might die in a few years. My next car would likely be a used Toyota that I will buy in cash. I am lucky that my work commute less than 10 minutes. I could possibly walk to work, but the weather is not always cooperating. Plus, I do not want to cross major intersections where drivers might run me over – I may save some money by walking to work, but the risk of getting run over by a car far outweigh any monetary and health benefits. I would not bike to work either.
I have not included taxes in my expenses. Taxes are a very real expense that I pay with each paycheck. I also have to pay taxes on dividend income and any side income I generate. My tax expenses for 2014 could possibly cover most if not all of my living expenses for the year. This is why I have attempted to max out any tax-deferred account I am eligible for – 401 (k), SEP IRA, Roth IRA and Health Savings Accounts (H S A).
While being frugal is important, it is also important to avoid being miserly. I do not count every penny, nor do I want to spend my precious time clipping coupons, making my own laundry detergent or wait in line for hours in order to save a few dollars. While my budget looks low, it still has flexibility built into it. For example, I have managed to travel abroad four times over the past five years. Each of those trips lasted at least a couple of weeks.
Other than that, I have hobbies that are very low key and low expense. While I do like to go meet my friends over for a drink, I also like to read, research investments, attend wine/beer tastings, cook with/for loved ones, visit a local museum or just go for a walk in the park. Spending time with people I care about is important, and is actually very precious to me. Somehow, this doesn’t cost an arm and a leg. Another hobby I have is writing on this site. I enjoy writing on my site, otherwise I wouldn't have done it for almost eight years in a row without a break. I would not want to be a full-time blogger however, since that would increase my stress from this activity. If blogging starts feeling like a job, and I would depend on it for paying my bills, I would likely burn out, sell out, and never come back again.
The information in this post is something that is frequently covered at the basic personal finance level. I wanted to type something up, since I have not really covered this topic before.
Thank you for reading.
How much do you spend per month?
Relevant Articles:
- 7 Years Dividend Growth Investor
- My Dividend Goals for 2015 and after
- Margin of Safety in Financial Independence
- My Goals
- My dividend crossover point
