Living a $100,000 lifestyle on $40,000 per year – 2016 Expenses in Review
“Oh you live on $40,000 per year? Guess you like camping in the van underneath the highway bridge huh? Still enjoying those rice and beans? Three kids cost $40,000 per year right off the bat so it’s clearly impossible!”. That complainer clearly doesn’t know how we spend money.
Living well on $40,000 per year is possible and I’m here to explain exactly how by going over all of our expenses during 2016. Later in the article I’ll explain why our spending affords us a lifestyle that costs most other people $100,000 per year. And I don’t think many would argue that a $100,000 per year lifestyle is a tough way to live.
2016 was the first time that Mrs. Root of Good and I didn’t have a full time job all year (other than that one month of full time employment in January 2016 for Mrs. RoG). Now we have essentially a full year of early retired living expenses recorded. At a high level I can summarize our 2016 spending by saying “We nailed it!”. Our 2016 budget totaled $40,000 while our expenses came in just a few bucks under $39,000. On that low budget we managed to take several international vacations and purchase a 2009 minivan for cash.
Where did the money go?
At the beginning of 2016 I laid out our $40,000 spending plan for the year. We increased the 2016 budget to $40,000 after acknowledging that we could be spending a lot more than the $32,000 or $32,400 that we budgeted for 2014 and 2015, respectively.
Our spending tracked closely to our budgeted amounts in almost all categories with the only really notable deviation coming from the $8,300 we spent on the new (used) minivan. That expense plus other regular auto-related expenses reached 369% of our budgeted amount for autos.
Education and taxes were between 100% and 120% of budgeted amounts. All other expense categories were 100% or less than the budgeted amounts.
$8,200 budgeted vs. $6,031 actual spending
First off allow me to celebrate our complete lack of a mortgage payment. We paid off the last small chunk of mortgage in 2015. No more mortgage!
Our housing expenses are fairly predictable year to year. The repairs and maintenance budget of $2,500 covers big ticket items plus smaller repairs. It also covers lawn maintenance supplies and equipment like gas for the lawnmower, fire ant bait, and paint for the house. We spent $866 in this category which is only 35% of the $2,500 budgeted. I intentionally budgeted plenty for this category because I wanted the flexibility to call a repairman for tasks I don’t want to do (like plumbing).
During the year we had a few plumbing issues, some preventative like replacing all the toilet shut off vales, and some repairs (I broke a sink drain P-trap while trying to clean it; the shower faucet sprung a leak and had to be replaced). I also did a small amount of DIY plumbing repair and saved a few hundred bucks that way. I needed to replace the pressure regulator valve. It was an “unscrew the old one, screw back on the new one” repair fortunately. That is about the limit of my plumbing expertise.
For house insurance and taxes we spent $2,203 against a budget of $2,200. If only I could get all our expense categories within $3 of budgeted amounts!
Utilities are also fairly predictable since the rates are regulated for the most part. We spent $2,809 out of the $3,000 budget. The almost $200 cost savings versus the budget was due to savings on the water bill thanks to that pressure regulator valve replacement and the fact that we are on vacation five to ten weeks during any given year.
Our Home Furnishings / Furniture budget of $500 was way more than enough to cover our $153 actual spending. We’ve owned our house for over 13 years so we don’t really need to replace a lot of household items. We picked up a new couch from the thrift shop and a few other odds and ends. I probably make enough from random craigslist sales to cover our actual spending on furniture but I don’t keep track of craigslist sales that closely.
$2,900 budgeted vs. $9,428 actual spending
This is the one area where we blew up the budget with our new (used) minivan purchase. But it’s okay because we intentionally budget for these “one time” expenses by allocating $1,000 per year to our car replacement fund to account for the depreciation over time.
Here’s an excerpt from my “$50 car payment for life” car replacement strategy:
Here’s the math behind my $50 car payment. Buy a gently used six to eight year old car with low to moderate mileage for around $8,000-10,000. Run the car almost into the ground and then sell it after nine or ten years when it’s 15-16 years old for $3,000. The net depreciation (cost of new(er) car minus sale proceeds from older car) for those nine to ten years is $5,000 to $7,000 or about $50 per month ($6000 divided by 120 months = $50/month).
$50 per month is less than $1,000 per year but I wanted to keep plenty in the budget in case we need to replace the vehicle more often (and odds are we’ll be in an accident or sustain damage to the van at some point). We are our own insurance company since we carry no comprehensive or collision coverage on our minivan. We’re saving hundreds per year and can easily afford a sudden $8,000 to $10,000 loss.
I’ll probably put out a full article on it later, but so far we are eight months into owning just one car. And there have been exactly two situations where it would have been nice to have two cars (but we managed to get by just fine with one). No uber or public transit required so far (though I did take the bus downtown once for a day of museums with our four year old).
It’s worth mentioning that we didn’t come close to spending our $400 gas budget. We only spent $191 during 2016. I planned the gas budget assuming 4,000 miles of driving around town at 30 miles per gallon while paying $3 per gallon for gas. It turns out all three assumptions were wrong.
We drove much less than 4,000 miles during the year (I count road trip related expenditures such as gas in the “Vacations/Travel” category). We replaced the 30 mpg Honda sedans we owned at the beginning of 2016 with the minivan that probably gets 19-20 mpg in the city. And gas prices were closer to $2 than $3 throughout 2016.
$8,000 budgeted vs. $6,330 actual spending
We budgeted $7,000 for groceries and $1,000 for dining out. By year end, we spent a total of $5,753 on groceries (82% of budget) and $577 on dining out (58% of budget).
We manage to save on groceries without Extreme Couponing (hint: Aldi and grocery store loss leaders are your friends). We eat pretty well with a variety of fresh fruits and vegetables (and meat of course) plus purchase a ton of Asian and Latino ingredients throughout the year to make some tasty ethnic dishes (here’s what a month of grocery shopping looked like for us a couple of years ago). We love cooking and enjoy the challenge of making awesome meals out of whatever random stuff is in our fridge.
When dining out, we tend to frequent the same few restaurants. For those restaurants that take them, we buy discounted gift cards from Raise.com (and you can get $5 off your first gift card purchase at Raise by clicking here). But we really don’t go out to eat very often.
Other Core Living Expenses
$6,300 budgeted vs. $5,378 actual spending
We spent about $1,000 less than budgeted in this catch all category that includes phone, internet, medical and dental, clothing, education, and taxes.
For phone, cell phone, and internet, we go the extremely cheap route. The $422 per year that we pay for phone, cell, and internet is less than some households pay in one month!
Our phone is hooked up through a $50 Obihai VOIP adapter using Google Voice for free monthly service. My smartphone service is free through Freedompop. Each month I get 200 voice minutes, 500 texts and around a gigabyte of 3G/4G data for free. I never come close to any of those limits.
Our internet is 50 mbit/5 mbit service through Time Warner Cable at $35 per month (and we bought our own cable modem for $30 to avoid the $10 per month cable modem rental fee). The regular rate for internet is $40/month but I call or go online each year and snag an extra $5-10 discount by asking politely.
We have a prepaid T-mobile dumb phone on a legacy plan that costs $10 per year. We rarely use it, but keep it activated for convenience and for emergencies. It has saved us several times while overseas since it works worldwide (for higher per-minute rates).
Our medical and dental expenses were $2,162 for the year which is 72% of the $3,000 budgeted. Our health insurance premiums (with heavy subsidies from the Affordable Care Act) were about what we expected at $125 per month. We planned on $440 in healthcare expenses and didn’t spend all of that. Dental expenses were budgeted for $1,000 since Mrs. Root of Good and I don’t have dental insurance. We were lucky and didn’t have any expensive dental procedures in 2016 (just routine cleaning and exams).
“What will you do when the Affordable Care Act / Obamacare goes away?” someone will ask. Check out my discussion and the comments in my December 2016 Financial Update post to learn more about my thoughts and our plans.
Clothing purchases totaled $452 for the year. How do we do it with a family of five? Some hand me downs, some thrift shopping, and some retail store purchases. Since the adults in the house are no longer working, our wardrobes are pretty basic. Swimming attire and shoes are probably the largest clothing subcategories these days.
Education expenses of $267 were 107% of the $250 budgeted for 2016. Now that our oldest child is in middle school, the field trips are getting more expensive. As are the required graphing calculators.
We paid a total of $2,075 in taxes during 2016 versus a budgeted $1,750. This primarily comes from rounding up when paying quarterly estimated state taxes to spend in even $100 increments. North Carolina charges $2 per $100 when paying with a credit card so I try to get as many points or miles as possible. Paying taxes with a credit card is a great way to meet minimum spending requirements from new credit card bonus offers. And who doesn’t love free travel? (Check out Jeremy at Go Curry Cracker – he graciously allowed Uncle Sam to buy him a free family trip to Hawaii!).
For those curious about our tax liability in 2016, we’ll owe a couple of thousand dollars in federal tax due to the self employment tax I pay on blog income (partially offset by $3000 in child tax credits). We are in the strange situation of paying higher taxes during early retirement than we were when working full time and earning $150,000 per year while paying only $150 in taxes. I still think our overall 2016 tax burden is very reasonable considering I took some capital gains and converted $4,000+ from a traditional IRA to a Roth to start my Roth IRA Conversion Ladder.
Purely Discretionary Expenses
$14,600 budgeted vs. $11,812 actual spending
This is where the fun is. Vacations, entertainment expenses, and electronics primarily.
I bumped our entertainment and toys budget up to $2,500 from the $1,000 in 2015 and previous years. At $522 total entertainment spending for the year we still didn’t spend the $1,000 let alone the $2,500 “new and improved” budget. What can I say? So many free or cheap entertainment options mean we don’t spend a lot in this category. Most of the $522 is outdoors/sports related expenses like bike tires/tubes, rollerskating admission, and city swimming pool passes. Liquor ($176) is included in this category. There’s a miscellany of computer/video games, supplies to build crazy things, and half of a netflix subscription.
Vacations represent the bulk of our discretionary spending. We somehow managed to come in just $43 under our $10,000 budget with $9,957 total vacation spending in 2016.
In 2016 we did some serious traveling:
- Three Caribbean cruises (some of the cost was incurred in 2015)
- 3.5 week, 2,400 mile road trip through Tennessee, Kentucky, Detroit, Toronto, Niagara Falls, and Washington D.C.
- Purchased all airfare and all lodging for our 9 week summer 2017 trip to Europe
We stretch a buck till it hurts. Travel hacking helps a lot. Check out credit card sign up bonuses and get you some free travel too. The European lodging is all through Airbnb (save $35 on your first trip!). For cruises we usually book through Expedia but click through Ebates to get a 10% cash rebate (and you get an extra $10 when you sign up for Ebates through this link).
Our electronics budget of $1,000 was big enough to accommodate our $885 in tech gadget purchases. The majority of the electronics spending was a pair of brand new HP ProBook 430 g3 ultralight computers for $350 each (Black Friday special pricing). They have similar specs to macbook pros that cost 3-4 times as much (except ours came with no Apple logos). We mainly bought them for our 9 week summer trip since we’ll be carrying nothing more than regular size bookbags for our trek across Europe. These new toys are faster, smaller, and almost half the weight of our old 15″ laptops.
Our $1,000 gift budget went mostly unused. We spent just $381 throughout the year on various gifts for Christmas and birthdays. Our families aren’t huge gift givers fortunately so we get by without much financial outlay. We’re also opportunistic gift acquirers, so if we see a nice deal on a gift for someone then we’ll purchase it months ahead of time.
I’m going to get some nasty comments for this, but here it goes. We gave almost nothing away to charity in 2016 and I’m totally okay with it. We only spent $67 out of our already scrooge-like $100 budget. Maybe we’ll give hundreds, thousands, or millions to charity some day. We still have three young kids to take care of and several other financial unknowns. Health care costs in the future are uncertain. In the meantime we are active in the community and volunteer our time in various ways.
2016 was a huge year in the Personal Finance blogging community. It was pretty awesome when Mr. Money Mustache gave away $100,000 of his loot to charity. Then Physician on Fire did the same thing. Newcomer to the FIRE blogging world TJ Pridonoff gave away $17,000. I believe all of them received some decent tax breaks from making these sizable donations (in some cases to their own donor advised funds), and I hope to one day turbocharge the value of my giving by finding some tax breaks too. That time is not today.
I’m a big fan of letting each person choose how they spend their money and not shaming others into giving it away. I know at least one other major FIRE blogger feels the same way but I’ll never tell who!
A quick note on discretionary expenses: over one third of our annual budget falls in the discretionary category. And that’s a great situation to be in since we can very easily slash discretionary spending if we enter a prolonged period of poor stock market returns. Cheap vacations or skipping them altogether combined with deferred toy purchases would lower our total annual expenses to roughly $30,000.
Living well on less than $40,000 per year
So that’s the story of our $40,000 per year budget and how it played out in practice over the past year. Sometimes I’ll hear from high spending folks that there is no way anyone could live on $40,000 per year, and certainly not with three kids.
However if we gross up our $40,000 per year budget to account for things we don’t pay for, it’s easy to see how we’re living a $100,000 per year lifestyle only minor sacrifices:
- +$20,000 mortgage payment
- +$5,000 new car payments
- +$10,000 extra tax bill
- +$5,000 dumb financial moves (credit card interest, extended warranties, investment management fees)
- +$10,000 rough annual value of travel hacking free hotel rooms and free flights
- +$10,000 work related costs (lunches out; fancier wardrobe)
So if you’re like me and spend around $40,000 per year, realize that you might be living a luxurious six figure lifestyle without even knowing it! And welcome to the club.
How to track spending like a pro
When I was working I kept track of spending but never budgeted. We always had a surplus of funds and spent like we wanted to. I used a simple spreadsheet to keep track of our expenses.
Then a few years ago I switched to Personal Capital to track all of our expenses (full review). Personal Capital also tracks all our income (including dividends and interest), and summarizes a couple dozen investment accounts into one screen. It is completely free to use Personal Capital whether you have $10,000 or $1,000,000 or more. If you don’t already track expenses, try Personal Capital, since it only takes 10 minutes to sign up and link all your accounts.
How was your 2016 spending? Who’s going to win the biggest spender award? And the tiniest spender award? Impress me with your numbers!