I like to watch Ramit Sethi's podcasts where he has an in depth discussion with a couple about their finances. These sessions usually involve the "Conscious Spending Plan", which is basically a type of budget. You can get a copy of the spreadsheet here. I was curious how our numbers compared to the guests on the show and so filled in the template myself.
My main issue was deciding what income number to use. At first, I tried using our income as reported in our tax returns plus employer superannuation contributions. That includes net investment income outside of superannuation. But then it was pretty tricky working out what amounts to put in for investment flows. I switched to using just our salaries plus employer superannuation contributions and it all made much more sense. I added a childcare and education category as that is our largest expense. For the "clothes" category I used our spending on mail order and groceries is what we spend in the supermarkets category. Transportation includes all our transportation spending including petrol, car repair, buses, taxis, e-scooters etc. Saving is our employer superannuation contribution plus the concessional contributions we make for Moominmama to our SMSF. All the numbers in the following are in Australian Dollars:
What do I notice in the results? One is that we don't really do "savings" both in terms of saving towards goals and having savings. Our savings are basically money in "checking" accounts. If we need more money we take it out of an investment account or borrow money. I am thinking I probably should get the savings buffer up more in case something happens to me. Otherwise, the family will quickly have payments bouncing without someone to make sure there is always enough money to cover bills. We used to keep about 1% of net worth in our offset account.
Our total "fixed costs" are at 76%, which Ramit considers too high. On the other hand, our investment contributions are at double the recommended level and I think they are now very low.
The amount left over in the "guilt-free spending" category is only 4%, which Ramit considers to be very low. There is a lot of flexibility here in what should fall into the fixed cost and this category. Is subscribing to e-scooters, which saves me a lot of time and is fun, something I should consider a fixed cost or "guilt-free spending"? Should private school and music lessons be considered a "fixed cost"? I have included some hobby-related subscriptions in the subscription fixed cost... But moving those would only change things by $100 a month at most.
What is in the guilt-free spending is in practice spending on eating out (mostly lunch these days) and travel - mostly the money we spent on renting a house for our vacation. The recommended 20-35% of spending is really a lot!
2 comments:
Re: "I am thinking I probably should get the savings buffer up more in case something happens to me. Otherwise, the family will quickly have payments bouncing without someone to make sure there is always enough money to cover bills."
I think this is called life insurance?
eg. For a male, 62yo, non-smoking economist in the ACT, the premium for $100K policy is around $70-100 per month. Unless I did my maths wrong, this equivalent to 0.8% to 1.2% interest $100,000 sitting in a savings account. Put another way, if you can invest $100K and expect ROI more than 1% or so more than what you can get in a savings account, you might as well leave the $100K invested and just have a $100K life insurance policy. That would cover any major bills for a year or so, and you would then only need a small 'float' of cash sitting in a savings account to cover a month or so of expenses (to allow time for any claim to be paid out).
If you were worried that the family might struggle if you were 'out of action' but alive (eg. serious accident or illness etc) then Trauma insurance might be worthwhile, as it pays out quickly for particular diagnoses. May not be cost effective, but worth looking at the cost of say $100K cover for cancer, stroke etc. vs. cost of leaving $100K sitting in a savings account earning 3% vs leaving the money invested for longer term expected ROI.
Personally I have about $185K liquid -- about $150K is sitting in an offset account so effectively earning the ROI of the investment property mortgage interest rate (6.54%) so is an OK ROI, and is 'at call' if the family needed cash while I was incapacitated. Then again, I have about 6mo accumulated 'sick leave', so my salary would still keep flowing to cover bills etc. if I had a stroke, cancer etc. in any case.
We have life insurance attached to our superannuation but could take weeks to get the money. Even though I have my salary coming into our offset account I am finding I have to shuffle money around quite frequently to stop things bouncing. Like the bill for tuition for the term for two children... We are earning the mortgage rate implicitly on money in the offset account. But as that is less than our top margin rate that we are paying I have been reluctant to just put a lump of tens of thousands in the offset account, but probably I should. I also need to write an "operating manual" and get my wife to read it...
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