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Tuesday, 25 December 2018

Merry Christmas to me! Lifting the budget

Once upon a time I decided I wanted to retire early just like Mr. Money Mustache. I was convinced I would get my spending down below $30k a year, and have hundreds of thousands saved by the time I ticked over 30.

I was sure I would be a DIY queen, and flip houses like Mr. 1500. I'd make amazing food like Mr Tako, and retire to the countryside like the Frugalwoods.

Alas, as I sit here at (almost) 28, it is clear that these things take longer than anticipated. If I want to kick my FIRE into overdrive, I should be cutting back costs so I can save and invest more.

Instead, my Christmas gift to myself is permission to spend more.

In what might be seen as a frugal fail, I think it's time to cut myself a bit of slack, and loosen the purse strings. There are a few reasons why...


Firstly, let's talk inflation, specifically Consumer Price Inflation. We're all affected by this, and it's a strange economic phenomenon where the exact same loaf of bread that used to cost me $3.40 a loaf is now costing me $3.50. It's the baffling part where my energy efficient changes haven't made a dent in my power bill, despite my usage rates having dropped by 15%. It's seeing clothes on special that cost more than you paid for them at full price five years ago.

There are many reasons why inflation happens (and if you want to dig into it, you can start here) but for the sake of this post let's just agree that it does happen. It's the reason most employers give you a small pay rise every year - so that you can maintain the same lifestyle. 

For the last three years inflation has fluctuated between 1% and 2%, mostly towards the upper end. This means that something that cost you $100 three years ago will probably cost you $106 now. Or on the flip side, spending $100 now should get you the same product as spending $94 three years ago.

Putting this into perspective, three years ago I set my budget for $40,000 a year. That same amount of money now only buys me $37,650 worth of goods.

Business Expenses

Once upon a time I strove to do just as well as the personal finance gurus. MMM and family lived on $30,000 a year in the early days of his journey, and Mr 1500 planned for his family of four to live on $40,000 a year. The first thing I noticed about this was a significant difference in living costs between Australia and the US. The second thing I noticed was that this didn't include business expenses. However, given that I was just spending for myself, and not for a family, surely I could reach those levels.

Here I stand three years later to say that maybe that was ambitious. However, it's not because I lack self control (I just spend a week debating with myself the value of spending $7.50 on a video game that was on super special). It's because I'm trying to cover the costs of an investment property with that money, including $8,500 a year in interest repayments.

The biggest expense in the Holy Trinity of Big Expenses is housing, and I'm paying for two of them! In fact, my annual budget is $15,000 for house number 1 (that we live in), another $15,000 for house number two (that I rent out) and a measly $10,000 left over for myself - that needs to cover medical, groceries, my phone bill, and still have some left to Have A Life.

Reductions in costs

But, wait! I hear you saying. If my biggest expense is paying two mortgages, then surely over three years since setting a $40k budget, my interest repayments have reduced as I paid down the principal. I am paying principal and interest on my loan, but I'm only paying the minimum, because I'm a firm believer in using the equity in your home to build wealth elsewhere. 

As an employee of the bank, I enjoy fee free loans and I've taken full advantage by restructuring my loans twice, and pulling out as much equity as I can. Coupled with that, while the Reserve Bank interest rates have not changed, all the major banks have snuck their interest rates up in the last couple of years. As a result, I paid $732 interest in October 2016, and $708 in October 2018 - a whopping reduction of twenty-four dollars!! Wow! A whole $288 over the year.

Except remember that according to my (very rough) inflation calculations above, my spending power has reduced from $40,000 to $37,650. I'm down $2,350 in spending power, but up $288 in interest savings!! That's... not brilliant.

Life is calling

Here though, we come to the crux of the issue. Life is calling me. I can throw up all the numbers I want, and I can come up with inventive ways to lower my costs. And while I will continue to do so, certain things defy even the most frugal of magicians. Here's a couple of pieces of life I want to experience, before I'm too old to enjoy them.

The grass is always greener

Have you seen grass? Smelt freshly cut grass? Have you lain in a hammock under a shady tree on a warm day drinking a glass of champagne and reading while the hours drift by? I haven't... because I have no grass. Our house is small, we have approximately 15m2 of dirt that is split between my chickens and my vegetable garden. I love both of these things, and wouldn't sacrifice them for a small patch of grass, but I'm keen for a bigger garden.

I want to step out my back door and gaze over the lawn. To see my chickens scratching in the near-distance. To see bees buzzing around the flowers. I want some space to stretch out, and of course...

It's time for a dog

When I was young I dreamed about all the pets I would have when I moved out of my parents house. Right now it's packed to the rafters with Mr. FIRE, FIRE-cat, four chickens, seven quail and a budgie. 

Mr. FIRE and I coo over pictures of puppies. We debate whether our dog will run mountain biking trails with him, or learn to do tricks and agility competitions with me (it's both right? definitely both). We tease the cat about how she's going to hate us when she has to share the couch with a dog. FIRE-cat ignores us, because she's a cat.

Realistically, we probably won't get a puppy. I've worked in shelters in the past and I know that puppies are noisy, and stinky, and they cry, and they poop and they chew things. We'll probably bring home an adult that's settled into themselves. But regardless of the age, we're so keen to have a dog. A big one.
This is not me. But hopefully,
soon it will be

I believe I can fly

This is an odd one, but I really want to hang-glide. And I've been watching the budget for years and there's never enough wiggle room. As inflation takes hold, the purse strings get tighter and hang-gliding gets further and further away. 

What's in a game?

Lastly, and least importantly - I miss the relaxed childhood of video games. I can't ever recapture a time when I could play games for hours on end, only taking a break to eat the dinner mum had cooked, which was generally my first meal of the day. 

I have responsibilities, see above for a cat, four chickens, seven quail and a budgie.. all of who like to be clean and fed. On top of that, I've sold 40 hours a week of my life to an employer. But I still sneak in a game here or there, and on my current budget each one I purchase sends me into an overspend-shame spiral. 

What now?

While staying accountable for my spending will keep me on the road to FIRE, my current level of tightness is getting too restrictive. I'm finding it hard to agree to events with friends, because while I don't resent spending on them, it means I have nothing left for the rest of the month. 

While it hasn't really hit yet, I'm not interested in being miserly-FIRE. I've been chasing the finish line for three years, and it's still at least 7-8 years away. I don't intend to spend those years refusing to spend on things I know will make me happy, because it might shift the finishing line by a year.

Based on the numbers above, I could raise my budget to $42,500 without feeling a smidgeon of guilt. It's the equivalent of 2% a year since I first set the budget. However, I have also been reducing my spending in the last three years - at first I recorded $46,000 in a year, then $44,000, and then down to $42,000. While it would be nice to assume the downward trend will continue, there's no signs that I'll hit $40k this year. In fact, it looks like I'll spend a bit higher, while still feeling pinched.

So, I'm giving myself another $924 a year to play with. It might seem like an oddly specific number, but that's because I'm shifting my monthly allowance from $3,333 up to $3,400. A nice round number. 

Of that $77 a month, $40 is being split between my properties, $10 into groceries, $10 into pets (in preparation for a doggo!) and $10 into travel, with the odd leftover $7 going into the 'Other' category (where most fun stuff is bought).

While this isn't a hugely exciting splurge, it's a healthy update. I'll still be striving to reduce boring spending like utilities, mortgage payments, and groceries by seeking better deals and inventive approaches. But hopefully I'll stop eyeing off the categories that pay for living a good life.

There's no point in reaching FIRE if I don't enjoy the journey there.

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