Photo: My wife and I recently visited Arches National Park in Utah. This is one of the Arches that we found while visiting the park (taken December 2015).
How much you spend on recurring basis will continue to affect how fast you can invest and the more you invest, then the faster you will reach financial independence. Our 2015 goal was a 50% savings rate and we were on track to hit that goal until we purchased a house. Therefore, we did not meet our goal, but we are happy at where our finances are heading with a plan of paying off the mortgage early and investing a minimum in 15% in retirement accounts each year. I will do a more thorough breakdown of our mortgage payments and how much it will save us over the life of the loan. So, let's get started by looking at the November and December spending rates.
The image above shows our 2015 November spending rate, which shows most of our spending going towards Savings, Household and Mortgage. Below is the percentage breakdown of the spending rate:
- Savings: 23% (includes principal from mortgage)
- Household: 21% (purchase of smart TV and moving expenses)
- Mortgage: 15% (only includes taxes & interest)
- Donations: 9%
- Utilities: 7%
- Groceries: 6%
- Auto: 5% (gas and tolls)
- Other: 14%
As you probably expected, I was not that excited about the savings rate for November, but the cost of moving and buying just little things that are needed for the house can really add up. I had to make adjustments to the budget, because of these little things that you don't think about. These items were dryer vents, light switches, a trash can and much more. Even though I was disappointed with the savings rate, I am happy that savings was higher than any other expenses on the list. Next, we will look at the December spending rate.
The image above shows our 2015 December spending rate, which shows most of our spending going towards Savings. Below is the percentage breakdown of the spending rate:
- Savings: 42% (includes principal from mortgage)
- Donations: 12% (extra Donations for the Holiday Season)
- Mortgage: 11% (only includes taxes & interest)
- Utilities: 9%
- Vacation/Travel: 6% (Traveled to Nebraska, Colorado, Utah, Arizona and New Mexico)
- Household: 4% (Decided on no big purchases for the house due to the Holidays)
- Gifts: 3% (Christmas gifts)
- Other: 13%
This month was very rewarding in terms of savings. I was very happy to see the number jump back up into the 40s. This was able to happen because we did not make any large purchases for our house. Instead we used that money to pay for christmas expenses (travel and gifts). It also helped that the calendar allowed for my wife to be paid 3 times in December. We used her extra check to invest more in a Roth IRA and we put some of the extra money towards the mortgage.
It was amazing to see the difference in November and December, but that is why budgets should be done on a monthly basis, because some months you may get paid more and some months may have unexpected expenses. This is just part of life and your budget has to reflect each month individually. Our monthly savings rate is a reflection on the difference in expenses each month.
Every month was different due to different circumstances, but the overall outcome is pretty rewarding. We did not hit our 50% savings goal, but we reached 40%. By saving 40% of our income, we are setting ourselves up to become financially independent earlier in life. Based on calculations done by Mr. Money Mustache, he has been able to calculate financial independence or the point at which you can do whatever you want. He was able to retire in 10 years, because his family saved 75% of their income and only lived on 25% of their income. Our 40% savings rate shows that we live on 60% of our income. This is still a little more for my preferences, but we will continue to work on decreasing expenses. Based on an article from Mr. Money Mustache, my wife and I will be financially secure in about 22 years. This article explains how MMM calculated the numbers and will show you how long until you are financially secure enough to stop working (if you want). Plus, the article points out that the 10% savings rate will keep you working forever. By only saving 10% of your income, then you could be looking at a 51 year working career.
Our yearly spending breakdown can be found below:
You will notice that the savings rate continues to be the largest amount of our monthly spending. Below is the complete data of the yearly spending rate.
- Savings: 40% - Decreased 1% from October
- Donations: 10% - No Change from October
- Education: 8% - Decreased 2% from October
- Auto: 5% - No Change from October
- Vacation/Travel: 5% - No Change from October
- Groceries: 5% - No Change from October
- Household: 4% - Increased 1% from October
Lastly, I want to compare the savings rate from 2014 to the savings rate in 2015.
2014 Savings Rate: 29%
2015 Savings Rate: 40%
My wife and I have worked really hard to increase our Savings Rate and this year we showed a 21% increase in savings. That is a pretty impressive increase and has set ourselves up for financial success in the future. After everything that we have experienced, and learned this year, I am glad that we had a 40% savings rate and I think this is the perfect time to set a goal for next year. Based on the monthly mortgage payment and everything that comes with home ownership, we are going to shoot for a 35% savings rate in 2016. I hope for higher, but 35% is a good starting point.