Spending Ratios: Percents by Category

I attempt to show readers what is out there. What would a financial advisor say? What does the average person do? As an expert blogger who now has a grand total of 10+ blog posts, I notice my personality coming through a bit more in each one. This is my blog after all, so I am biased towards my own opinion. My intention for this piece was to give a breakdown of spending by category to answer questions like, “Am I spending too much on XYZ?” On my “Budgeting Basics” page, I averaged out what most of the finance personalities had to say on the matter. Here is a rundown of spending by category:

• Housing – 25-35%

• Transportation - 10%

• Utilities/Internet/phone - 10%

• Insurance/taxes - 10%

• Food - 5%

• Discretionary - 10%

• Miscellaneous - 5%

• Investing/Debt pay down/Saving – 15-25%

I disagree with the aforementioned for a few reasons:

1.      It is overcomplicated. So many categories. If a general idea is what you are seeking, great. The specifics are a bit much for me.

2.      Housing needs to be rebalanced. I get it, this varies wildly by location. Houses are growing and becoming more extravagant. I’ll stop before I rant about people trading financial independence for square footage, heated garage floors, and quartz countertops.

3.      Transportation, the middleclass pitfall (along with housing). Just have something reliable to make the trek from point A to point B.

4.      15% is the common recommendation for Investing/debt paydown/savings. That means the average CRNA making $185,000 gross and $138,000 net is saving $20,000 annually. Too low for The Financial Cocktail.  

Author insight: I selfishly and selflessly prioritize financial independence above all other financial endeavors. Financial independence allows my wife and I to walk away from earned income entirely for whatever reason. Bad working environment, health complications, passion projects, future family, you name it. Our financial decisions are a race to financial independence aka 25x our cost of living, which at the moment is a conservative $2.1M. That number allows my wife and I to walk away full time and have more than enough money to spare. Even now, our discretionary spending is unnecessarily high. We have no shortage of fun nor a desire for more experiences. No house, car, or vacation is important enough for me to stall my investing which is why the brokerage ALWAYS eats first. Paycheck enters my checking account on Friday. Transferred to Vanguard on Monday. My wife probably gets tired of me saying things like “the brokerage eats first”, but I like to think our monthly financial reflection makes up for it.

So yeah, that 15% doesn’t get us there. We are DINKs (dual income, no kids), which helps keep expenses low and income high. But even investing 15% of our DINK status, it would take us 15ish years to reach financial independence. We have the earning power and desire to do it faster, so why not?! This mythical unicorn of a 15% value is the second of two strikes leading to my vendetta with financial planners. They told me I was being unrealistic saving much more than that and I should look for retirement in my late 50s with a standard savings rate. The first is their fees and the disbelief that low cost index funds would outperform their mutual fund selection. Lesson learned.

Tie those shorts because this is where we get real about The Financial Cocktail budgeting and financial independence. Feast your eyes on the extraordinarily complex and idiosyncratic budget I have created and continue to live by.

The Financial Cocktail Budget:

·         GROSS income savings rate of 40-50%

·         Don’t default on your taxes

·         Live off the rest

Addressing the first bullet. Radical, yes. Doable, yes. Normal, LOL. Will this require a lifestyle change? Possibly. If financial independence is important to you…If financial security is important…If the ability to walk away when work becomes too much…If you want to see more of your family…If you want to live life on your terms…If materialism isn’t important…Then it isn’t too much to save and invest each month. My wife and I just calculated our financial independence date and it genuinely makes me uncomfortable. I know there are so many readers that make more than me and have a higher net worth and all of that stuff. But it feels almost eerie or uncanny to know how quickly the date approaches. It feels even more uncomfortable than it does to write this financial blog in the first place, which is quite embarrassing for some unknown reason. Despite our calculations, the only financial certainty is uncertainty.

Point 2 -- When it comes to budgeting for high income earners, the massive elephant in the room is everyone’s favorite check to write, TAXES. My biggest annual expense for many years now has been taxes. Ok 1099 crew, the argument for business expenses reducing the tax bill still doesn’t put it all back in your pocket, so just go with me here. Let’s assume Uncle Sam takes something like 25-30% off the top considering tax advantaged accounts and such. That leaves us with 70% of our gross income.

Bullet point 3. So yeah, living off the remaining 20-30% looks a bit tighter than the above budget considering that was based off take home pay and this is gross income. That same $185,000 gross, $138,000 net income allows for $37,000-$55,500 to live off annually, which comes down to about $3,850 per month for a single income earner.

Scenario 1 looks for a $20,000 annual investment and scenario 2 DEMANDS a $74,000-$92,000 annual investment. Feed the brokerage first = big difference. Let’s start both scenarios from scratch and see what it looks like assuming flat wages, flat investments, and an 8% return.

Another sophisticated, thought provoking graphic from yours truly. Enjoy!

I know, 4x the investment at the same rate is 4x the value. Yes. It is just a visual to show what 4x the return looks like. I hope the person in scenario 1 had 4x the fun and life was 4x as easy. Don’t mind me being facetious. I previously mentioned that a commonly used retirement formula is 25x the cost of living, or The 4% Rule. Lowering the cost-of-living decreases the base figure of the 25x multiplier. If this CRNA lived off $50,000 annually, their approximate financial independence number is 1.25M or approximately 10 years at this rate starting from $0 with a modest 8% return. Not bad. Just out of school with student loan debt, maybe add a couple years to that.

Regardless, this idea of retiring at age 65 is completely absurd to me. Retirement and financial security have nothing to do with age and everything to do with ratios. The balance of living and investing. The balance of security and materialism. The balance of living your best life and being stuck in a job to pay the bills. My financial independence number has nothing to do with when I will stop giving anesthesia, but rather it will drastically shift my focus to other priorities in my life. Money is just the tool to achieve financial freedom. Decide carefully what your money will buy.