theFIREstarter

Hello readers! I’ve decided that the next few posts are just going to be a brain dump of all the things I’ve been thinking about recently ¹, so they might be a bit shorter or less well researched than usual (hey, no sniggering at the back!). Most of these subjects seem to have come to a head or fruition recently at the same time, so I feel I need to get them all out there quickly otherwise they’ll just sit in my draft box for ages and probably never get posted as the moment will have passed! I will call this the TFS Brain Dump Series (catchy eh?), and I’ll try to post these topics every other day. The first topic is going to cover some thoughts on expenses, how we track them, and so on.

If you haven’t seen it yet, you better go and have a look at my last post on our ridiculous level of spending for the last 6 months. Ok, all up to date? Let’s move on!

Since posting that, while fiddling with MoneyDashboard, and looking at others expenses reports a few thoughts have sprung to mind which I think are worth discussing…

When is an expense not really an expense?

In Mr Money Mustaches post he states that they’ve spent $80,000 on the new house renovations yet this is somehow not included in his yearly budget. What gives? Well his fully logical reason is that they are coming out well up on the deal from selling the old house and moving and renovating the new one. This seems fair enough, but what if someone decided to move out of say, a 1 room bedsit into a 2 bedroom house they got at a bargain price because it needed renovating, and were on their way to FI so had to pay for those renovations up front. I guess they’d have to include it in their spending? This hardly seems fair to me. I’m not saying one way is right and the other is wrong but it is surely only fair to compare apples to apples, i.e. all spending is an expense, full stop. But then it seems ridiculous to compare someone who spent $80,000 on home renovations to someone who didn’t in any particular year as well. Like I say, I don’t really think there is any “fair” way to do it.

One final point on this, do we really care? It shouldn’t be a competition to see who can be the most frugal, and people should be allowed to spend what they feel is right, and reduce as and where they see fit. Otherwise we are just getting into exactly the same sort of dick measuring competitions that people who buy expensive cars are doing, and I’m not particularly into that sort of thing.

Moving on from the more general questions on this subject, let’s have a look at some specific examples where expenses become a very grey area:

• We often pay for something for a group of people and then receive the money back in dribs and drabs. Sometimes this is accounted for in our “spending” column which is obviously not 100% accurate, but then the money back goes into the income column and so is cancelled out. However it makes it look like we spent more than we did.
• We sold Mrs TFS’ iPhone 4s 8GB with cracked screen for £70 and bought a 16GB one with a non cracked screen for £80, overall actual “spend” was therefore £10 on that exchange but it shows up on MoneyDashboard as £80 spent on personal electronics in black and white. Similar to the above, the £70 is included on the income side of the sheet so overall it probably affects the savings rate calculation by 0.01% or less. In fact let’s do a simple example to check that assumption out:

Say my base figures are expenses £6000 and £10000 income then savings rate is 4000/10000 = 40%. Now let’s buy and sell an iPhone as we did, our expenses would be £6080 and income £10070 for a £3990 / £10070 = 39.62%. If we just added the £10 difference onto expenses side then we get £3990 / £10000 = 39.9%.

• So actually as we can see even a fairly small transaction like that can skew the figures by a fraction of a percent. So it looks like I may have mugged myself off a bit on the savings rate side of things. I can live with this for now though, but will track things properly in future.
• A *hypothetical* example for both MMM and myself: What if I bought a laptop for my “online business” (which I’m planning on doing over the next few months). Would I include that? I probably wouldn’t if it was paid for via a business bank account, but this seems a bit unfair on people who haven’t got an “online business” like myself that went and bought a laptop and then had to include that in their spending that they posted on their blog. Likewise with MMM, what about all those powertools he’s acquired over the years, no doubt they came out of his private building/carpentry business accounts and therefore do not show up on his yearly spending reports. I can see the logic again here as both purchases are really an investment into a business, but what about those who are just investing in those purchases for themselves who haven’t currently set up a business ²
• Likewise one off expenses. I had many of those over the last two years, what with the wedding and house move, and when comparing our savings rate to our expenses for FI, which is clearly what we are all interested in here, I think it’s fair that they should be ignored. I’ll take more in depth look at this in the next post, see how we can realistically cut from the core expenses, and see how it works out (it will still be “too much” but not look as bad as it did, obviously).
• We also have a couple of large one offs coming up this year, we want (need?) to remodel the bathroom, (going to do all the work myself to keep costs down), and we need to replace our 30 year old boiler. The second one is also kind of an investment because the new boiler will be more efficient which will lower our gas bills. The alternative is I am looking at Air Source Heat Pumps which are even more efficient than a new boiler, but would cost even more upfront, so it’s a tough decision (one of my brain dump posts will go into this in more detail!)
• Stability is key for a smooth journey to FI (or after you’ve reached it) – Just to underline the two points above I thought that was worth repeating. Once you’ve lived somewhere for a few years, have worked somewhere for a few years, and have had all of your children you might be thinking of having, your income and expenses will have reverted much closer to your long term average, so it is easier to forecast and stick to a yearly budget. Hopefully that will be us in a short amount of time (although 2015 will not be it due to already mentioned items above, unfortunately!)
• Finally, I did notice that MoneyDashboard, for all it’s glory, was tagging some things up in the wrong category. Obviously this doesn’t impact overall spending but as an example of the few I found, some mortgage fees (one off expense) got tagged as Supermarket (not a one off expense), which was a bit odd and may have skewed my figures. I only checked one month (June) then decided it probably wasn’t worth checking the whole 6 months, but we need to check this more rigourously going forward.

Solutions going forward

For the expense tracking issues mentioned above I have the following solutions:

• Use the MoneyDashboard “split transaction” function – this was broken for around the last 3 months of 2014 but is now back and working better than ever. For awkward transactions such as the iPhone one I would then split the £80 spend on the new phone into £10 spend, and £70 “current account transfer” which then will appear neither on the income or expenses side of your electronic leger. 🙂
• Same goes for when we pay money for a group activity, we can just split that between what we paid, and then the other lump as a current account transaction, and then when they pay us back, that also gets tagged as a current account transaction.
• I’ve set a reminder on my phone every Wednesday night to go through the previous weeks transactions and will check every single one to make sure it is under the correct tag, and split correctly if necessary. I’d imagine a maximum of 20 transactions per week to check over so this shouldn’t take long!

The above should give a much clearer picture of overall spend and savings rate.

I’ve said it before and will say it again, it wouldn’t have made much inroads into nearly £25K’s worth of spending, but these are still relevant points to bring up I feel (i.e. if you are bothering to track things you may as well do it properly!)

Well that’s it for today! Not really sure what questions to ask on this one apart from… well… what do you think I suppose? Am I talking bollocks? You decide!

image from: http://galleryhip.com – if this image is copyrighted please let me know and I will take it down asap.