In the last post I reviewed all of our income for the previous year and discovered some fun surprises. For instance, I expected our new full-time jobs to be the bulk of all our income for the year. And while it was the largest chunk of income, it amounted to a smaller percentage than I anticipated. I was surprised to see that 35% of our income came from other sources! Hopefully that can continue into the next year.
As we make the shift into expenses for this post, let me give a quick preview by saying there are some surprises here too. In fact, the biggest surprise to me was that we spent WAY more than I ever expected! It was an expensive year! But what can you expect? I bought a vehicle this year, bought an engagement ring, moved to another city and state, bought a duplex property, had to furnish an apartment, buy lots of tools, and more. It all adds up.
It was an expensive year!
In total, it appears we spent $130,624 for the year. Whoa… Ridiculous, right? That’s what I thought! We only made an income of $76,916 for the year. So that would put us at an immediate $53,708 deficit. This is not the kind of financial start I would want in our first year. There has to be an explanation here. Well thankfully, there is. Take look at the following chart to get started:
You can see the BIGGEST expense we had were car and property purchases. Of the $130,624 in total expenses for the year, this alone represented 35.9% of it all, or just above one third. That’s huge, considering there were only two things purchased here the entire year: one car and one duplex property. The next largest were All Other Expenses at $36,739, Investments at $32,871, Taxes at $12,612, and Loan Principal Paydown at $1,520 I’m showing this because I’ve personally found it very helpful to see a top-level picture of where our money went.
A quick note, I’m including Investments and Loan Principal Paydown in this top-level view of our “spending” because we did direct significant money towards these categories over the past year. And of the two, more went towards Investments. In our young age, investing IS a priority and therefore IS an expense that we need to budget for appropriately. I don’t see it as optional. It may not be an expense in the true sense of the word, certainly not when compared to our food, gas, or utilities expenses as an example. But I still wanted to track how much our Investments category compared to these other top-level categories.
The pie chart tells a good story
Moving forward, each of these categories will be broken down and explained in much more detail as we continue in the expense review. These are five simple categories and the pie chart tells a good story. For instance, I’m excited to see the Investments category at such a high number. To have saved $32,871 in Investments for the year is remarkable in my opinion. I read an article on CNN in July that said the typical American household had $18,750 saved for retirement. In just one year….no, one half-year of “full-time” working we managed to save considerably more than that paltry number. I know all our savings isn’t for retirement. Some is for future house, etc. And I know we are both earning very good starting incomes out of college. But just taking it at surface-level, saving $32,871 feels like a great achievement this first year.
We are living below our means
When you take out the car/property purchases and taxes, we almost managed to save MORE than we were actually spending overall. Just looking at the “all other expenses” category, it’s very close in size to the “Investments” category. That feels like a big deal too! It tells me that my fiance and I are prioritizing savings and investing very highly. We *could* have loosened up and spent more, but instead, we are choosing to live below our means.
But let’s get back to our overall spending for a minute. I don’t want to get too far down without addressing the elephant in the room.
Why were expenses so high in 2005?
It’s a simple answer: the car and property purchases caused our overall expenses to be so high. And that’s it! Everything else was within reason and within budget. I’ve looked through all the reports and nothing is hidden. Buying a car in the Spring and a duplex property in the Summer were special expenses during the year and were the only reason for the spike in expenses. If you take those out, now our total expenses for the year is down to $83,742. Much, much more reasonable. But…..again, it’s still MORE than what we earned in total income for the year. So you may be asking…
How could we spend more than we earned in total income for the year?
Another great question with a surprising simple answer: a family loan and our savings! When you combine (1) our total income from last year with (2) money from a loan and (3) our existing savings, that is how we could actually spend $130,624 for the year. Those three things combined give us spending power that is higher than just our income alone.
Let’s go back to the the purchase of the car and duplex property. Both cost a considerable amount of money. But they were not spontaneous events. They were well thought out and planned expenses. I’ve been saving money all throughout college, knowing I would eventually buy a house. My fiance was the same way with saving money — although her goal was to use her saved-up money for student loans. But she changed those intentions to a house after our engagement. In short, we both were saving money for years. It was sitting there in our accounts, ready for its intended purpose.
We tapped into $38,877 of savings for our duplex property purchase.
Therefore, when that time came in June to buy our duplex property, we both had enough money saved in checking and investment accounts already to cover our down-payment and all other expenses/fees related to the purchase. In total it was $38,877 that we used for the purchase. $37,000 of that amount was purely for the 20% down-payment, while the rest covered the other expenses/fees.
I tapped into $4,187 of savings to purchase an engagement ring.
The engagement ring I purchased for my fiance was another “special” expense for this year. And similar to the duplex property or car, I did not use income from my full-time job to cover the purchase. In fact, I didn’t even have my full-time job yet when I made the purchase! I was still in college! I had to tap into my existing savings within my checking and investment accounts to cover the purchase. And wondering why I spent so much on it? Well, let’s save that discussion for another day.
We tapped into $2,639 of savings to start life in our new city and state.
Moving to a new location costs money, and our move to a new city and state after college was no exception. We had to sign a 6-month lease upon moving, which meant paying our first months rent and deposit money. We needed basic furniture, food, some new clothing for work, and more. To help get things started without feeling pinched, I sold some investments and moved the money into a checking account. This provided an added cushion until paychecks would start to arrive from our new jobs.
We used an $8,005 loan for my car purchase.
With the car, it was a slightly different story. I had a very generous family member offer us a loan with no interest. I had the money available to pay for the car in full, but because of the zero interest offer, I decided to finance the car with the loan. The car was then purchased in the February 2005 for $8,005 using money from that loan; money that was above and beyond our regular income for the year. A quick note too: the $8,0005 amount owed is represented on our net worth statements within the “General Loan” line-item.
The $53,708 deficit is explained
To bring it all together from above, when you take the $38,877 of savings we used for our duplex property purchase, add in the $4,187 of savings used for the engagement ring, add in the $2,639 of savings we used for our move, and add in the $8,005 loan to purchase my car, you get a grand total of $53,708. Add this to our $76,916 total income for the past year and you get our total expenses number of $130,624. All should be right with the World once again.
Moving forward we should only be spending the income we earn each year, and no more.
Now let me say, I do NOT expect to tap into our savings every year. And I do not expect to take out any more loans. This was a special year with special circumstances related to starting our new life together. Moving forward we should only be spending the income we earn each year, and no more. There are no more loans and no more car/property purchases on the horizon for 2006. As for 2007 and beyond, anything is possible. But that’s why we save. Retirement is one big bucket of savings, but we continue to save for our future house too. Eventually we will use that savings to fund the purchase.
One more look at top-level expenses
I see the car purchase and duplex property purchase as special “one-time” expenses that will not be repeated during the next year. But since they were so large, they skew all the percentages and numbers quite a bit. Just look at that first pie chart at the top of the post and you can see it. The Car & Property Purchases expense category represent 35.9% of the chart. Because these were major purchases made, I want to include them at some level, but I also think there is value in looking at some charts that have them “excluded”. So in that spirit, I’m presenting the same top-level expense pie chart from above, but with the “one-time” Car & Property Purchases excluded:
This new pie chart represents $83,742 in total expenses and spending. Under this view, our largest expense category for the year was All Other Expenses. We spent $36,739 in that category, representing 43.9% of all expenses. The next largest were Investments at 39.3%, Taxes at 15.1%, and Loan Principal Paydown at 1.8%.
It’s a great baseline for comparing expense reviews in future years
This view will be important as time goes on, because it gives us a good baseline to compare to in coming years. I’ll be anxious to see if we will continue to keep Investments at such a high percentage. Will we find ways to reduce our tax burden? Will we increase how quickly we pay down existing loans? Will we keep our “all other expenses” under control? That’s why I think it was important to look at this chart, excluding the special “one-time expenses” that will not be repeated.
Breaking down the expense categories
In the next post I want to dive deeper into our Investments category and All Other Expenses category. There is some fun data that I pulled out of Microsoft Money that will be fun to share. I promise to “bare all” for the benefit of the personal finance community — even if it shames me a bit in some areas!
I hope to have it online soon.