Budget Check & Cash Flow Update - December 2020
|Budget Check & Cash Flow Update - December 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 December was a nice bounce back after November low point. Total income came in at $6,738.66 although that's still well below the TTM average of $7,705.00. I do expect income, at least after-tax work income, to continue trending down from here although it should normalize somewhere around the $5k level per month which is plenty to keep with the savings and investing plan. The bulk of my income, ~79%, came from my day job, le sigh; although that should come as no surprise since we're still in the accumulation phase. Dividends were the next largest income source at 18% with interest and writing accounting for the remaining 0.3% and 3.4%, respectively.
Total expenses for December came in at $4,248.47 which was a noticeable uptick from November, but still in line with levels over the last year. Considering that includes $1,550 of extra debt payments on the car loan I'm fine with how total expenses ended up. The TTM average now sits at $3,967.26 although that doesn't include the property tax payment we'll be making in January that we last made in December 2019 and has since rolled off of the average. Amortizing the property tax payment that we'll make would push our TTM average up to $4,473.40.
Looking at just core expenses, December's total came to $2,343.37 which is well below the TTM average of $2,467.28. Once again though that is with the property tax payment from December 2019 rolling out of the average. The adjusted TTM average climbs to $2,973.42 after amortizing the property tax payment we'll make in January.
For the month we ended up with a net positive cash flow of $2,490.19 when looking at all income sources. Based on just work income, but including all expenses, the net positive cash flow came to $1,047.11.
Our savings rate from all income sources came to 37% while our savings rate from work income alone was 20%.
*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 7% 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.
I believe this gives a better idea of our "free" cash flow each month that can/will be used for debt reduction, saving and investing.
My net work cash flow was a solid $,2952.21 for December. That was still a bit lower than I'd like, but I can't really complain about it. The 6-month average is still a solid $3,600.11 and if I can maintain those levels moving forward I'll be extremely happy as it will allow plenty of cash flow for investing.
Non-Work Cash Flow
Passive income for December totaled $1,214.55 and covered 51.8% of core expenses. Meanwhile, non-work income totaled $1,443.08 and covered 61.6% of core expenses for December.
With 10 full months in my new job role I've got a pretty good idea of what a "normal" month will look like. Due to the way I get paid and that expenses will change monthly there will be some fluctuations but it looks like I should have anywhere between $2.5k to $3.5k per month of cash flow to work with just come my work income. That will go a long way towards building up the investment accounts and in turn the future dividends.
We've been going back and forth a bit in regards to whether we should just take a chunk of our savings to pay off the remainder of the loan for my car. We had kind of settled on just paying it off through monthly cash flow; although it might be best to just pay it off and be done with it since the cash in the savings account isn't exactly earning anything. Of course at this point in time I'm not sure if it makes a whole lot of difference since we're only talking about shaving off 1-2 months.
The thing that's held me back from jumping forward with using the cash savings is the fact that come late March/early April my wife will be giving birth to our next child. My wife will be going on medical leave and lose her income while she's out and I'll be going on bonding leave so my income will drop. We have enough cash to get through even if we had no income coming in, but cash on hand is never a bad thing. It might be best to pay off the balance now, but funnel the amount we were making in monthly payments back into savings rather than plowing it all into the brokerage account. There's lots to think on, but we're set up in a pretty good position.
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Do you think we should take some of our cash savings and pay off the loan on my car to be done with it now or just keep paying it off through cash flow and get it paid off sometime in February/March?