This is the second of a three part series exploring various aspects of our family’s budget for 2018. Part one covered the process I used to create our budget. The second part will review our projected spending, saving and taxes in greater detail. Part three will cover how our budget fits into our broader goal of financial independence. Please also see my posts on goals for 2018, calculation of my estimated 2018 federal income taxes and our family’s financial map for additional background.
Review of PVF’s 2018 Budget
Each of the next sections will dive into a different area of our budget: spending, saving and taxes. Most of the focus will be on savings, as that’s where most of the dollars exist.
I categorize our family’s spending into nine large categories based on type of expense. I’m trying to strike the balance between having enough detail to be useful, but not so much that we have to worry about false precision. That’s also why you see most categories in big, round numbers. If you plan at too granular a level of detail, you risk losing the forest for the trees.
We plan all our expenses on an annual basis, and then divide by 12 to get a monthly estimate. Most of these occur every month, but some are bills we get once or twice a year and are treated differently. I’ll speak more on that below. In addition to the dollars, I also look at our spending as a percent of total spending, as a percent of pre-tax and after-tax resources. This allows me to get more detail behind the numbers in the pie charts above.
Housing. Includes interest on our HELOC, property taxes, HOA fees, homeowners insurance and utilities. I also include $50 a month for miscellaneous maintenance. Our housing costs are split pretty much even between those that occur every month vs. irregularly throughout the year.
Insurance. Includes all our insurance except for homeowners and car insurance which is captured separately. We have term life insurance and disability for both me and my wife, high deductible medical/dental/vision through my employer, and an umbrella liability policy. These are generally paid every six months except medical/dental/vision which is paid for through payroll withholding.
TV/Internet/Cell Phone. We haven’t had cable TV for years, but have a digital antenna for getting local news and weather. We do have subscriptions to Netflix, Hulu and Spotify which together costs a fraction of cable. My wife and I each have cell phones part of a family plan with both sets of parents and my sister. That arrangement saves us quite a bit each month too.
Transportation. This includes insurance for two cars, gas and $50 a month for oil changes, maintenance, etc. We have to carry pretty high liability limits to have the umbrella policy on top, so that is more expensive. Both our cars are paid for, so no payments, but also no collision/comprehensive coverage that lenders require.
Long-term Savings. This is the money I set aside monthly to cover one-time expenses throughout the year. These are big ticket items that we don’t spend money on every month, but aren’t a bill we expect to receive at a regular interval. This includes things like vacations, gifts, charitable donations, etc. Our true emergency fund is off limits outside of a job loss, so this gives us some flexibility in our budget because things come up.
Childcare. Our single largest category of expense, but one we’re happy to make. I recently wrote about childcare being an investment, which this most certainly is. $5,000 of our childcare expenses are run through a flexible spending account which helps reduce our taxes.
Food. Includes both groceries and restaurants. We’re really making a push this year to eat a home more often, but inevitably have one or sometimes two cheat days a week. I’m going to have to watch this category like a hawk to stay on budget.
Shopping. This is our catch-all category for all non-food shopping, like household items, diapers, etc. I also plan for $100 a month in cash spending for some walking around money. My barber is cash only, for example.
Other. This is where I put some money away for all the miscellaneous monthly spending that doesn’t fit neatly into the categories above.
As I alluded to above, some of our expenses I expect to pay monthly, some once or twice a year, and some through payroll withholdings. If I re-bucket our expenses by those categories it looks like this:
Each month, expected monthly expenses are transferred to my primary checking account, an accrued amount of irregular expenses are transferred to short-term savings (where they will be paid when due), and long-term savings goes to long-term savings. If you read my post about our family’s financial map, you’ll see that our spending budget aligns with it pretty much perfectly.
Finally, I created a view of our annual expenses showing each of the spending categories and how much was monthly vs. irregular vs. long-term savings vs. payroll withholdings.
We have four main vehicles for savings. My wife and I each set our 401k contribution percentage to max out our contribution for the year. We will make Roth contributions to our IRA this year since our AGI is just higher than the phase-out limit for tax deductibility. Unfortunately we won’t quite be able to make the maximum contribution given our income, spending and other savings priorities. We are also setting aside money in a 529 college savings account for our children. We use our state’s 529 plan, which gets us a credit on our state tax return. Finally, we have the small, positive balance for after-tax savings, which balances our budget between resources and expenditures. It also means that effectively all our savings is on a tax-advantaged basis.
In total, we are budgeting to save 37% of our after-tax income, excluding employer matches on our 401ks. Including those increases our savings rate above 40%. Given our current financial resources, I feel this strikes an appropriate balance between saving and spending. Remember too we have pretty sizeable childcare costs we’re paying right now. Once the kids are in school vs. daycare and those expenses go away, I expect our savings rate will increase dramatically.
I previously discussed how I estimated my 2018 federal income tax burden for this year’s budget. In additional we pay Social Security and Medicare taxes on our gross earned income. We also pay state and local income taxes, but get a sizeable credit on the former to the the 529 college savings contribution.
In total, we will owe just under $25,000 of taxes this year. That equates to about 15% of our pre-tax income. Unless we see a significant change in the amount or the mix of income, I’d expect to be somewhere around this level for the foreseeable future.
There you have a detailed look at my family’s spending/saving/tax budget for 2018. I feel pretty good about our saving rate, which goes a long way in helping us achieve FI sooner. I’ll be discussing that in greater detail in the next post in the series.
How does your family’s spending compare to mine, either by category or percentages? What would you change if you were in my shoes?
John started Present Value Finance in 2017 to share his experiences and insights on personal finance to help people make better decisions and take control of their financial lives.
He achieved financial independence in 2016 by walking away from the high stress world of corporate finance to focus on his family. He’s a husband, father, family CFO, and all around finance geek.
He uses Personal Capital to track his spending, investments and investments for free and recommends you do too.