Budget Check & Cash Flow Update - August 2020
|Budget Check & Cash Flow Update - August 2020|
The saying goes that cash is king. While that's true, a more accurate saying when it comes to finances is that CASH FLOW is king. Whether you're retired, still working or just starting out the only way you can improve your financial house is to have positive cash flow.
If you're in the accumulation phase then that positive cash flow allows you to save and invest to build up your future cash flow. If you're already retired, or FIREd, then congratulations because I'm sure your cash flow is well above what you need.
When it comes to personal finance it's rather simple: income - expenses = savings and savings x investing x time = financial independence. There's obviously two main levers there and while we'd all like to increase our income, many times reducing expenses is some of the low hanging fruit that you can go after to increase your savings.
Total income for August came in at a solid $6,181.31 although that was well below the TTM average of which was well above the TTM average of $8,340.71. The bulk of my income, ~89%, came from my day job, le sigh; although that should come as no surprise since we're still in the accumulation phase. Approximately 5% came from dividends which is always nice since that required ZERO on-going effort on my part. Interest on our cash savings contributed another 0.4% with 4% coming from my side hustle and the remaining 1% come other income.
Total expenses for August came in at $4,613.88 although that included an extra $1,500 in debt payments that we made on the loan on my car as well as $820.98 for a new oven for our house. The TTM average total expenses continued to decline after August and now sits at $4,535.32.
Looking at just core expenses, August's total came to $2,292.90 which is right in line with the totals seen over the previous 4 months since I started my new job role. The TTM average core expenses continued to decline and is now at $3,260.46. With 5 months now in the books in my new job role the average monthly core expense has been $2,277.77.
For the month we ended up with a net positive cash flow of $1,567.43 when looking at all income sources. Based on just work income, but including all expenses, the net positive cash flow came to $875.12. In my opinion that's pretty good considering the $800+ oven expense.
Our savings rate from all income sources came to 25% while our savings rate from work income alone was 16%.
*A few notes about the cash flow check in. All income is only income that I receive and does not include my wife's income likewise for the expenses. We've found it's easiest for us to just keep separate accounts since I'm gone most of the time for work. Also, pre-tax withholding for the 401k (I currently withhold 6% in order to get the full 5% employer match) and the ESPP through my employer (4% post tax withholding) are not included in the above savings amount.
Net Work Cash Flow
While my net cash flow above includes all income and all expenses, I wanted to get a more granular look at the cash flow that is available each month. So I started calculating my Net Work Cash Flow which is calculated as post-tax income only from my work and core expenses. Think of it more like a free cash flow for a business.
The above might be the true cash flow each month; however, it's not really representative of our "free cash flow" each month. The idea is that all other income sources outside of work income are already going directly into savings or investing or in the case of dividends remaining in the brokerage account. On the expense side the majority of our expenses fall into the core side and most of the other expenses are extra debt payments rather than further discretionary spending.
Moving forward, I believe this gives a better idea of our cash flow each month that can/will be used for debt reduction, saving and investing.
My net work cash flow continued to be quite strong in August with $3,196.10. What's really crazy is that despite the reduction in income due to my new work role, my net work cash flow is still in line with the levels when my income was higher due to much lower expenses. Our 6-month moving average for our net work cash flow is holding strong and if we can keep this up then we'll be back to regular investing soon. The 6-month moving average for our net work cash flow comes to $3,755.09.
Non-Work Cash Flow
Passive income for August totaled $360.89 and covered 15.7% of core expenses. Meanwhile, non-work income totaled $692.31 and covered 30.2% of core expenses for August.
With 5 full months now in my new job role I believe we have a good baseline to start using on very rough forecasts moving forward. Thus far our cash flow hasn't taken much of a hit with my new job role mainly due to decreased expenses, but even if it did I'd still be more than happy with the trade-off of being home every day and getting to see my wife and kids.
With your free cash flow each month, excess cash flow above core expenses, there's 3 main uses for that free cash. Those are build up cash, accelerated debt reduction, or investing. Moving forward our plan is to go with roughly a 50/50 split between debt reduction and investing since our emergency fund is more than adequate right now.
I'd love to go full-bore with either debt reduction or investing, but I think the prudent thing would be to allocate our cash to both rather than focus exclusively on one. If either one is likely to get cut it would be the investment bucket and that would be dependent on whether I can find any attractive opportunities or not.
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If you were in our situation would you funnel all cash flow towards debt reduction or splitting the difference like we're planning?