After reading my 2016 review, you said you wanted more detail on how a “rich person” spends money (am I really “rich”? — interesting question). Well, I’m going to give you tons of money porn in a minute.
But first, I want to check in on my net worth goal, which has less to do with cash flow (i.e. monthly income minus expenses) and more to do with the big picture of smart money management. Here’s what I mean by that.
To me, the primary goal of money management is to grow net worth. (Note, I did not say this is the primary goal of life!) Net worth is assets minus liabilities, what you own minus what you owe, and a proper measure of wealth. Income and expenses are important, but mostly in the context of net worth.
Net worth is like a garden. Income streams are sun and water, and investments are plants. You need income to energize the plants at first, but as they mature they can keep growing on their own. If they’re very healthy, they’ll multiply and you’ll have fruit for years, maybe even fruit for your grandkids — if you teach them how to tend the garden.
Spending money is like eating the fruit — it’s not bad, eating good fruit is healthy. Just don’t eat too much. In a big garden overeating can make you fat and sick. In a small garden, eating your only plant means you need to start over every season so you don’t starve. Stressful. Eating should be a pleasure, not a curse. Debt is a weed that can overtake the whole garden if we’re not careful.
My goal is to have a million dollar garden at age 45. Here are my plants and how they grew in January compared to December:
My plants are 401k accounts, IRAs, a business investment (LLC) with various holdings, and an investment in Prosper (P2P lending) that I’m trimming. I have a few debt weeds, but they aren’t growing (0% interest) and they’ll be completely gone by the fall.
Ok then, on to a detailed look at my monthly income and expenses. What follows is the money porn you’ve been waiting to see!
I made separate categories for “regular” and “irregular” to account for unusual one-time items. For example, I paid for preschool this month, which is a big chunk but isn’t a regular part of our budget. It’s true that there are always irregular items, but I also wanted to see how the regular recurring expenses are doing on their own.
The list of expenses got long, so you can click in the middle to expand the list and see the complete nitty gritty.
So, there it is! What do you think?
I’ve never actually done this before. Here are some notes on what I’m seeing.
- Net worth was up in January but cash flow was down, for a couple reasons. First, I pay expenses via credit card (for cash back), so January expenses won’t hit until February. Second, I don’t include payroll deductions or investment earnings in cash flow unless I’m drawing down an investment.
- Our salaries are paid bi-weekly, so this was a normal month, but twice a year we get 3 paychecks.
- Food and travel were my top 2 expenses — right in line with my philosophy. Food was quite high though! We shop at higher priced local grocery stores rather than large supermarkets because the food is better quality. And, we’re in a foreign country. I’ll need to watch this.
- Everything else was pretty low. Travel was more than $1000, but none of it took place in January. We’re going to Spain in the spring, and I paid for a friend to visit me in February.
- Expenses exceeded income by $2501.50. But I’m encouraged that we could pay for preschool in one month without any stress.
In terms of strategy, I’m aggressively paying off our 0% debt, not because I need to but because I can. Sometimes I use 0% credit card offers in order to create a cash flow buffer for myself if a big expense is coming up, like preschool or taxes or whatever. That way, I don’t need to reduce investments in order to manage cash flow. I can tolerate a few weeds as long as the other plants are looking good.
In the fall, we’ll need to pay rent again when we move back to the US, effectively replacing that debt payment with something else. So maybe I should switch it to a “regular” expense. Still, I should see regular cash flow around $3,000 per month going forward, which I plan to use for IRAs and College Savings. I’m waiting until I see my tax bill to start any new accounts.
What do you think? What stands out to you when you see this nitty gritty? Do I have a healthy garden, or an overgrown ugly lot?