Budget Check & Cash Flow Update - August 2021
|Budget Check & Cash Flow Update - August 2021|
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 was good at $5,680.31 although admittedly it was a bit disappointing considering that it's over $1,000 lower than the TTM average of $6,761.68. Of course the TTM average does include the COVID stimulus payments as well as the sizable tax refund that we received which gives an unfair comparison to just a "normal" month. The bulk of my income, ~78%, 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 7%.
Total expenses for August showed a big drop compared to July thanks to no vacation spending for the month. Expenses for August came to $2,983.92. The TTM average total expenses are now down to $4,387.26 which is still higher than I'd like, but still in okay territory.
Looking at just core expenses August's total came to $2,960.81. I'm still waiting on this transitory inflation the FED keeps speaking about to start working for us instead of against us. The TTM average core expenses now sit at $2,987.09 which is much higher than I'd like although we are making progress on that front.
For the month we ended up with a net positive cash flow of $2,696.39 when looking at all income sources. Based on just work income, but including all expenses, the net cash flow came to $1,443.33.
Our savings rate from all income sources came to 47% while our savings rate from work income alone was 32%. The savings rates are all based off of net take home pay and don't include the pre-tax savings towards my 401k or HSA or the post-tax ESPP withholding.
*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 completely discretionary spending.
I believe this gives a better idea of our "free" cash flow from "normal operations" each month that can/will be used for debt reduction, saving and investing.
My net work cash flow dipped some primarily due to lower than "normal" income falling to $1,443.33 for August. The 12-month average is pretty strong at $2,052.54 and if we can maintain those numbers moving forward I'll be quite happy.
Non-Work Cash Flow
Passive income for August totaled $396.53 and covered 13.4% of core expenses. Meanwhile, non-work income totaled $1,276.17 and covered 43.1% of core expenses for August.
Expenses creep has definitely hurt the cash flow over throughout the summer both on the core side as well as the discretionary expenses that were due in large part to the several vacations we took. While the cash flow would have been nice to have for investing purposes I'm not going to delay everything especially when it means I'd be forgoing quality time with my wife and kids.
We're working on getting the low hanging fruit of expense cutting since that's the most immediate way to increase our monthly cash flow. Speaking of if you haven't checked or are up for renewal of your homeowner's or car insurance definitely shop it around. I finally got fed up enough to do just that and we're now getting the same or more coverage for less than 50% of what we were paying before. The great news is that our monthly expenses should drop by ~$350 which frees up that cash for other purposes; the bad news is that I was lazy about this and haven't been doing it on an annual or bi-annual basis.
With a good dent now being made toward reducing expenses the only other big expense that we can reduce would be if we refinanced our mortgage which is very tempting. I would expect a refi to lower our monthly expenses by another $75 to $150. It's not life changing numbers, but every little bit helps especially since we have other investment opportunities between dividend growth stocks, a possible rental property and a possible business venture that would be nice to put that cash towards.
Of course we're still looking for land and building a house on it which my wife and I are still hoping to move forward on within the next 2 years.
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How often do you shop around your insurance? If you've completed a refinance in the last year or so was it relatively easy and pain free? What are you working on to lower expenses or increase your income?