Wednesday, June 3, 2020

Income & Expenses For May 2020: Saved $14,097.86, 98.81% of After-Tax Income

Since 2014, I have been tracking my monthly income and expenses. You can see a breakdown of every penny I earn and spend. For perspective, this budget is for a household of two in a small US city. 

By documenting my journey, I aim to demonstrate the feasibility of saving a significant portion of your income and provide some ideas and inspiration for your own budget.

Below are my income and expenses for May 2020. You can see all my monthly budgets here.

May 2020
Other Income$870.10
Total Income$15,556.13
Federal Income Tax$669.10
Federal Tax Pmt/(Refund)
Student loan repayment$0.00
Other Expense$10.00
Total Expense$1,458.27
Before Tax Saving Rate90.63%
After Tax Income$14,268.16
Ex-Tax Total Expense$170.30
After Tax Saving Rate98.81%

Wages remain my primary source of income by far, although dividend income is now more than enough to live on. Other income includes interest and miscellaneous non-recurring income.

Here is a chart of my dividend income by month for the past 13 months:

Total dividends for the trailing twelve months: $16,178.53, down 6.37% from a year ago. This is a positive development, as I continue to switch from high dividend paying stocks to lower or non paying ones to reduce my taxes. 

Here is a summary of my dividend income by month and year since inception of the blog in 2014:

Dividend Summary
2020 YTD$5,396.56
Tax remains my top expense by far. Since tax is proportional to my earned income, there is nothing I could do about that. Tax will go way down once I retire.

No housing cost this month.

Student loan repayment was zilch this month, as the Care Act put student loans on forbearance status and no payments will be made till October 2020. Nice! Yet another reason to love the coronavirus.

Food expense was $110.19 this month, lower than last month but higher than average. I continued stocking up for COVID-19 to minimize exposure. Cheap pinto beans (good source of protein), oatmeal (good source of carb), and peanut butter (good source of fat) make a good healthy and balanced meal. My splurges are on fresh and frozen vegetables like cabbage, collard greens, broccoli, turnip greens, mustard greens, when I can buy them for under $1 per pound.

The utility bills are typical. Other expense of $10 was spent on bike inner tubes.

After-tax expenses came in at $170.30, typical for a month without nonrecurring expenses.

Total after tax expenses for the trailing twelve months: $3,253.01, down 1.36% from a year ago. This ttm figure has been hovering around $3000. My current expense ratio, the ratio of my ttm expenses to my net worth, is only 0.18%, improved from last month and almost fully recovered from the COVID-19 bear market. Importantly, it remains far less than the 4% SWR. This should allow my net worth to continue to compound near market return.

Here is a summary of expenses (not including tax) incurred since 2014:

Expenses Summary
2020 YTD$1,164.06
Big drops in housing expense accounted for the big drops in annual expenses from 2014 to 2015 and again from 2017 to 2018. My housing expense is now near rock bottom so I don't expect any more big drops in annual expenses in the future.

Dividend to expense coverage ratio = 4.97, quite high.

Here is a summary of my passive income (dividends) to expense coverage since 2014:

Coverage Summary
2020 YTD4.64-12.87%
Below 1: Not financially independent; keep working! 
Between 1 and 1.24: Financially independent, but not much margin for error.
Between 1.25 and 1.75: Sweet spot for financial independence: passive income adequately covers expenses, with room for error, but not too as to cause tax drag. 
Above 1.75: Too much passive income, which becomes a tax liability: try to convert some passive income generating assets to zero dividend growth stocks to maximize return without excessive tax drag.

The chart below shows my TTM dividend (red line) versus TTM expense (blue line) since I started tracking in 2014. The dividend (red) line overtook the expense (blue) line around June 2015.

Given that my expenses have gone down significantly, dividends have become too much of a good thing. Any excess dividends above the amount needed for expenses incurs excess taxes and becomes a drag on my returns. I think an ideal dividend to expense coverage ratio is around 1.5, which allows room for error without incurring too much tax liabilities. 

My overall expenses are bottoming out at approximately $3,000 annually, which means $4,500 annual dividends would be plenty. My currently projected annual dividends is around $14,000, so I still have a long way to go. 

I will continue to exchange more high dividend paying stocks for low or no dividend paying ones as the bear market continues, to minimize my capital gains taxes.

I have now tracked my monthly net worth for over 3 years and have accumulated a lot of data to display my expense ratio in a chart. My annual expenses is far below 4% SWR and has been steadily trending downward, a good sign.

My after-tax saving rate (calculated as after-tax expenses divided by after-tax income) was 98.81% this month, exceeding my 95% saving rate target. I am confident I will meet or exceed my savings goal this year.

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