Andy Hough

Earning More is Better than Spending Less

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This might be a strange thing for the writer of a frugality blog to say but I believe it is true. If you want to get ahead financially increasing your income is more important then reducing your spending. I have been able to keep my spending at a very low level for years but I haven’t been able to save much money. This year since I started working my better paying full-time job in addition to my part-time job I’ve managed to save well over 50% of my income. I’ve long thought that if I could just get a decent paying job it would be easy to save money. Now that I have a decent job I’ve found out that I was right. It is easy to save money now. I’m not really making that much money either. At my current rate I’d make a little over $40,000 for the year which is about the average annual salary in the United States.

My views on this subject might be somewhat skewed by the fact that I have always found it easy to keep my spending at a low level. When I read articles on how to save thousands a year by cutting cable and skipping lattes they weren’t any help to me because I never developed wasteful spending habits in the first place. I suppose if you are a spendthrift then it would probably be better to learn how to control your spending rather than increase your income since a spendthrift will likely just increase their spending to match any increase in income. For most people though, increasing income is better than reducing spending. There is a limit to how much you can reduce your spending. There is no limit on how much you can increase your income. I think the big advantage that cutting spending has over increasing income is that it is much easier to cut spending. My job will be ending next month and I doubt I’ll be able to get my income back to its current level any time soon. It is easy for me to find ways to make a little extra money but I’ve had a hard time finding ways to make decent money. That is something I will work on for the rest of the year.

February Safe Withdrawal Rate – 62.54%

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February was a great month on my progress towards financial independence. My SWR went down to 62.54% from 80.47% the month down. My goal is to get my SWR down to 4% at which point I’ll consider myself financially independent. I’m seeing big declines in my SWR right now because I’m saving over half of my income and I’m reducing my monthly expenses. The way I am determining my SWR is by tracking my trailing 12 months expenses divided by the amount of my investments. Since I don’t think the preceding 12 months accurately reflect my expenses going forward I am using my monthly expenses starting in November 2012 to set the average so every low month of expenses makes a big change in the average right now. The big drops in my SWR will slow down once my trailing 12 months average is closer to my current monthly average.

My goal is to save 50% of my income each month and I managed to crush that goal in February. I made $4499.91 and managed to save $3400. That amounted to a 75.55% savings rate. I’m not going to be able to match that this month since I have a $1500 tax bill but I’m still aiming to save 50% of my income. My full-time job ends on April 15th which will make it much harder to maintain my 50% savings rate. I do have a three week job lined up to start as soon as my full-time job ends. It doesn’t pay as well as my current job but I should still have a chance at saving 50% if I manage to sell a few things from my apartment as well.

The 4% SWR translates into having 25x your annual expenses in savings or 300 months of expenses in savings. I have 19.18 months of living expenses saved now. I managed to save almost 5 months of living expenses last month. I won’t be able to do that again this month but I’m sure I’ll add at least another month of living expenses. Seeing my SWR go down every month and my months of living expenses saved go up every month is keeping me motivated.

My $1500 Tax Bill

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I did my taxes last night and I did not like the results. I owe about $1500 on my federal and state income taxes including a $22 penalty on my federal tax for not having enough taxes withheld during the year. I knew I would owe taxes this year but I didn’t think it would be so much.

If you’re self-employed you should pay quarterly taxes. I’ve been able to get away with not doing that until now because my self-employment income was relatively small and my total income was very small so that with credits and deductions I owed very little or got a refund. I thought about paying estimated taxes in 2012 since my online income had increased quite a bit. After the Google hit in spring though I figured my income wouldn’t add up to much and my tax bill wouldn’t be too high. I did claim zero exemptions on the W-2s for my jobs and contributed to a traditional IRA to help reduce my tax bill. That wasn’t enough though and now I’ve got to pay $1500 all at once. It definitely hurts more to make one big payment then to have it taken out gradually over the year. Luckily, I do have a decent paying job so coming up with the money won’t be a problem. I just won’t be able to save any money this month.

This should be a lesson learned that I should pay my taxes quarterly. However, I do expect my online income to be smaller this year and I am having more withheld from my jobs so I once again do not plan on paying estimated taxes. If my online income increases substantially this year then I will reconsider whether I should pay estimated taxes.

February Income – $4499.91

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Here is a breakdown of my income for February.

Online Income

 $889.67

Interest

$0.71

Dividends

$18.56

Cash Back

$106.13

Mystery Shopping

$7.50

Medical Study

$350

Jobs

$3127.34

Total

$4499.91

My income was great in February. That wasn’t surprising since it was the first month that I had two paychecks for complete pay periods for my full time job. My online income was better than I expected, but it seems to vary a lot.  I expect my online income to be much less in March. I had the $350 in medical study income which helped a bit.

It will be difficult to match this total in March. I will have five paychecks this month, since there are five Fridays, which will help some.  My part time job will be the one that pays three times rather than my full time job so the extra paycheck won’t make that big of a difference.  I have been trying harder to work overtime at my full time job, but since I’m already working 65 hours a week between my two jobs I don’t usually feel like working any extra hours.  I’m thinking I  should make close to $4000 in March and be able to keep my expenses under $1000 which will still be a pretty good month.

 

February Expenses – $885.91

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Here is a breakdown of my expenses for February.

Household

$372.00
Entertainment

$70.81

Transportation

 $149.43

Food

$94.22
Debt $5.00
Phone

$26.81
Health

$88.56
Electric

$14.96
Internet

$64.12

Total

 $885.91

My February Expenses were up slightly from my January expenses but I’m still quite happy with the total.

The slight increase was mainly due to having a trip to southern Missouri which increased my gas expense and paying a $50 installation fee for internet. Yes, I have succumbed to lifestyle inflation and gotten internet in my home and will be paying $15.96 a month for that luxury.  Valentine’s Day and my girlfriend’s birthday were both in February too.  Even though my girlfriend knows I’m frugal, it seemed smart to spend at least a little money for those occasions. 🙂

I did manage to bring my food budget under $100.  That probably sounds good to most people, but there is actually room for improvement there.  I barely made a dent in the food in my refrigerator.  Most of my food expense was for fast food, sodas and sweet tea, and junk food.  There were only four days during the month that I didn’t spend any money on fast food/junk food/sodas, sweet tea.  I’m going to start making my own sweet tea and make more of an effort to eat the food I already have rather than buy junk food and fast food.  If I do that I should be able to get my food expenditure down to $50 for the month.

My health category was a little lower in February because I switched health insurance providers and didn’t have any insurance coverage for eight days.  I got away with that but it would have really sucked if I had gotten injured or ill that week. I probably won’t do that again.

I expect the rest of my expenses will be roughly the same in March. Keeping my expenses below the level of a minimum wage income, which is about $1274 a month has been pretty easy so far.  It looks like I should be able to keep my annual expenses below $12,000.  There will be some traveling before the year is over though which could increase my spending a bit. I’m off to a good start for the year and hope to keep it going.