Happy New Year! One of my favorite annual pastimes is to review the previous years and find out how we did financially and I’m happy to say that 2016 was a very frugal year! EC Aunt and I have only been out of college since 2012, and there’s a huge difference in our costs from then and now, so I really am only able to compare our expenditures from the last 4 years, but this year we managed to spend the least!
This does exclude buying a car in 2016 which I prefer to distribute over several years if possible (assuming that I will be able to continue to drive it during that time). This does include the cost of my previous car which we did not keep very long, so it’s cost was pretty much entirely in 2014, although we did have it for a bit in 2015. These expenditures also do not include some costs of buying our house incurred in 2013 such as the closing costs on the house. The biggest concern for costs not shown on here regarding our path to financial independence is the lack of health insurance, which I currently receive as a benefit through my employer.
A few trends that are noticeable for the past few years is the decline in transportation cost, an increase in bills, a fairly consistent expenditure on food, a huge decrease in shopping this year, and a large decrease in vacation.
The transportation costs have been reduced primarily from getting a more efficient car, a slight drop in average price of gas, and the fact that EC Aunt’s work now provides her with a monthly pass for the public transportation. I would expect once we retire that this cost would actually be even lower since the primary expenditure in this category is the cost to get to and from work.
The increase in our bills over the last few years are primarily due to moving into our townhome in 2014 and starting to pay for our HOA in addition to the other bills we already had and again increasing in 2015 and 2016 as we started to rent out our spare room. Although I feel like these numbers are high, we’re better off in this position overall since the cost to lease would be higher than the cost to own and we’re actually making a decent amount of money on the house through renting out the spare room and the appreciation of the value of our home. I’m really not sure how this category will be affected by retiring. It depends on what we plan to do, and we haven’t quite yet figured it out. I believe we will sell our home due to the high costs of bills such as the HOA, but whether we buy a new home, or rent, or just travel around for long periods with short rentals to break up trips is still up in the air.
Food costs have been relatively stable, and although we spent quite a bit less on fast food and restaurants, we spent a bit more on groceries this year. This cost would also be quite variable in retirement depending on how much we travel and when we settle down again. Traveling generally would make this cost go up quite a bit I expect, but it depends on where we are traveling since the cost of food might also be lower or higher in certain countries.
The decrease in shopping is almost entirely due to a huge cut-back from EC Aunt. After getting her new position, she has decided that working for money is too hard and it’s easier to just not spend it! The expenditure was especially high in 2015 for this category as well since EC Aunt bought a new MacBook Pro, an expensive LV purse, and an IPhone 6s… Of course, she’s still using these, so their cost should carry over a few years as well. She also cut back on buying clothes this year, although I don’t think her sense of fashion has suffered for it! We also cut back a bit on our entertainment spending, opting for less expensive activities like clamming on the coast and playing Pokémon Go, heh!
The last major category that we can control actively is vacations. In 2016, we simply did not travel as much as the last few years. A big part of this was that EC Aunt felt she was traveling a bit too much with her new job and didn’t want to do it as much. We were also both very busy with work and finding time to plan out a longer vacation is difficult. There’s also the fact that we really want to spend more time in each location when traveling but when work is waiting for us to return to, it’s difficult to really enjoy the time we travel. Of course once we retire, I expect this to be the largest portion of our budget so, this trend is not something I expect to maintain, nor do I want to maintain this low amount.
The only other trends worth mentioning would be the difference in the cost to lease and mortgage interest and property tax. In 2013, we didn’t have a full year of a lease, so the cost was quite a bit lower for these categories. We did buy the house that year, but the first payment was not realized until 2014. Of course, if we continued to lease, the price would have gone up as well, so I’m pretty happy about buying when we did. Over the last few years, we have been paying off our mortgage at a very accelerated rate. We owe about $32,000 currently. This has brought piece of mind and a greatly reduced cost of interest which of course has many pros and cons. A considerable portion of our expenditures though is our property tax which has been going up and up every year and will go up even further now that Seattle has passed a major expansion to the public transportation system… Still, as mentioned before, we’re better off owning the house than we would be to lease, so it’s just the cost of living and working in a growing city and really can’t be avoided.
The Breakdown and Its Impact on Financial Independence:
On average in the past 4 years, we have spent just under $28,000 a year, with a high of just under $34,000 and a low of just under $22,000. Using the 4% rule (ignoring whether or not it is completely valid), we would need at least $550,000 using the low, $700,000 using the average, and $850,000 using the high number. Furthermore, the high number might not actually be high enough for our retirement since we plan to travel more, we plan to have a modest budget at around $40,000 per year to cover everything, which would allow us a great deal of freedom, but would leave us plenty of room to fall back into super-frugal mode if anything goes badly. For this, we would need $1,000,000! So, to be extra sure, EC Aunt and I are shooting for a net worth of a bit over $1,000,000 in our retirement accounts in addition to the house.
Our Progress to our Goal of Financial Independence This Past Year:
This year, we managed to save much more than previous years, not only because we were able to reduce our spending, but also due to the fact that we just made more money. EC Aunt and I both maxed out our 401ks for the year, saving $18.000 each. My company matched me $3210 for the year, contributed $3100 into my HSA, and a 401k bonus of $6,100. Ending the year with a balance of just under $73,000 in my 401k, an excellent gain from my starting balance of $37,200. We also contributed the remaining amount allowed to max out the HSA with an additional $3550 for a total of $6,550 contributed for the year, putting the final balance at $23,500, up from the starting balance of $14,470. EC Aunt put in $18,000 into her 401k and received a match of $2850, she also started a Roth IRA, maxing it out for the year, ending her retirement accounts at $84,000, up from their starting balance of around $52,100. We paid off a great deal of the premium on our mortgage this year! We started the year with a principal of right at $100,000 and now we’re down to $32,000! We also started a brokerage account this year which has a balance of $41,500!
In total, we managed to save just under $170,000 for the year, an amazing feat! We also gained around $16,500 from growth of our accounts. I expect that we should be able to maintain this rate of savings for the next few years, putting our timeline for Financial Independence at 5 years without any gains! As long as the markets don’t crash, we could achieve this even sooner! Here’s to 2017! Hope it’s a wonderful year!