The first three months of 2020 were unlike anything I have ever seen before. In January we enjoyed hosting friends from out of town. February was relatively uneventful, and then in the middle March the U.S. was practically shut down to avoid the uncontrolled spread of COVID-19. We started working from home, and pulled our daughter out of daycare. Last but not least, we found out we are expecting our second child!
Before going any further, I’d like to acknowledge that we are going through challenging times. From the virus, to the dead of George Floyd, and ongoing political divisiveness. These issues are bringing suffering and anxiety to millions of people, and it’s not lost on me that what I’m about to discuss here are very much first-world problems. Yet, the purpose of this blog is to document our journey to financial independence (FI), and that doesn’t stop even in the middle of a pandemic. My heart goes out to everyone who is suffering and I hope my writing can be helpful to someone out there.
With that, let’s dive into the numbers:
Daycare continued to be our largest expense, though lower than usual since we pulled our daughter out on March 13 and were not charged for the remaining of the month. As of now (July 2020), we still don’t know when she will return, so daycare won’t be an expense at all in Q2 and probably for most of 2020.
Housing (mortgage interest, property tax, HOA fees, and home insurance) was our second largest expense at $1,566 for the quarter or $522 per month. We got a notice from the county that our home value was “re-assessed” so we’ll start paying more in property taxes starting this fall. I guess this is part of living in a fast appreciating real estate market. Because of this and because we didn’t have any maintenance expenses this quarter, I’d expect future housing costs to be higher.
Food (supermarkets + food outside) is next on the list at $1,429 for the quarter or $476 per month, which comes out to be to be $1.76 per person per meal.
Others – these are all the random expenses that don’t fit into any of the other categories. This was particularly large this quarter with a total of $1,021. Most of the damage here was from a $493 tax payment due with my 2019 tax return. I’m not a big fan of giving uncle Sam interest free loans so I’m OK with owing a little when I file my tax returns. The other big item here was $301 that I paid for hosting this blog for another 3 years. The rest are just random expenses I don’t keep track of individually.
Car Others – These are all car related expense other than “gas” and “car insurance”, both of which have their own category. The entire $977 expense for this quarter was from a clutch replacement for our 2007 Kia Spectra. This car has been very reliable and good to us since we bought it back in 2012, so I was more than happy to treat it to a new clutch.
Travel – you might be wandering what kind of travel can be done in middle of the pandemic that will run a bill this large. Back in January we bought plane tickets to Mexico. We were supposed to travel there in the middle of April, but we all know what happened, so the trip got cancelled. We now have an e-credit on Delta that we can use towards future travel.
We use Personal Capital, a very useful free online tool, to track all of our finances. From there, it is easy to move the data into a spreadsheet to have it in the format you see above. Finally, we calculate our savings rate as follows (income – expenses)/income.
Expenses is exactly what you see in this post. We don’t include mortgage principal as we don’t see it as an expense. It’s simply one asset converting to another (cash to home equity). For income, we only count net income. It only counts if it increases our net worth. Things we count towards income: cash that hits our bank account from our paychecks, 401(k) contributions, HSA contributions, other small non-recurring items (cash back from credit cards, tax refunds, etc.). Things that are part of gross income but we don’t include in our calculation: taxes withheld from every paycheck (Federal, NC, FICA), and the employee cost of health insurance that gets automatically deducted.
The entire process of tracking our expenses takes 10 to 15 minutes per month, and we get a clear picture of where our money is going. You work hard for your money, make sure you know exactly where it is going, and ask yourself if the things you buy actually make you happy. Knowing exactly where your money goes is important all the time, but it becomes more so during difficult times. I encourage you to give it a shot if you haven’t already.
With the quarterly expenses out of the way, let’s move on to the million dollar question.
How Has the COVID-19 Pandemic and Corresponding Market Meltdown Affected Financial Independence (FI) Plans?
As I discussed in the last article, we are doing fine with the day to day as we both remain employed, and have a healthy emergency fund as a result of many years of living below our means. So, today I’ll focus more on our longer term plans of being able to sustain ourselves without the need to work.
It’s no secret that the stock market took a sharp fall as people realized the gravity of the situation.
The VTI ETF aims to track the total U.S. stock market, and it is one of our largest holdings, so that’s why I’m using it for this analysis. From its all time high in mid February to the bottom (so far) in March 23, the U.S. stock market fell 35%. During the same period we “lost” $80,180. Lost is in quotes because we didn’t actually sell anything so no losses were locked in.
Our “loss” as a total percentage of our net worth was not quite 35% since we hold some international stocks, bonds, cash, and real estate (small investment in Fundrise). Still an $80,000+ decline is the largest I have experienced during my short investing career.
As you might recall from previous posts I use the Mad Fientist Lab to track our progress towards FI. The screenshot from my latest post looked like this:
Back in November 2019, it looked like we were about 2 years away from FI. While I think this number is actually higher as we’d like to be more conservative, it’s a good starting point to see impact from COVID-19.
Fast forward 4 months. When I went to enter my March 2020 numbers, the “Countdown to FI” went from 2 years and 1 month to almost 4 years. At that point the market was near its lowest and our expenses did not yet reflect 2+ months of no daycare. Not the end of the world, but it’s still disappointing.
Fast forward another 3 months or so to now (July 2020) and here is where we stand:
There are several ways to look at what’s going on here and try to make sense of it all, but first: let’s not get carried away by the 1 year and 11 months countdown to FI. While FI does feel like a very real possibility to us, there are a few reasons why this number might be optimistically low at the moment:
- Expenses for March, April, and May are lower than usual since our daughter has not been going to daycare since the middle of March. Also, air travel has not been possible, and many places remain closed. In other words, spending money these days is more of a challenge than usual.
- As I mentioned at the beginning, we are expecting our second child! While having kids doesn’t have to be particularly expensive, it’s certainly not free. At some point in the future, we might have both kids at daycare / pre-school at the same time. If that’s the case, we’ll have a couple of fairly expensive years until our oldest one starts school.
- Safety margin. While I have already set up conservative assumptions in the Lab (3.5% withdrawal rate, 5.5% growth rate), I’d like to build additional cushion before walking away from traditional employment.
Where Do We Go From Here?
The stock market has partially recovered almost as fast as it fell. The government and the Federal Reserve responded strongly to the economic crisis. While the long-term implications for the economy and the stock market remain to be seen, the response seems to have been good enough for the market, which now sits at roughly the same level as it did in November 2019.
The world seems like a much more uncertain place now than it did back in November, so the fact that the stock market is as high as it was back then makes a lot of investors nervous. While I could try to explain why this makes sense or why it doesn’t, the truth is that nobody knows what the market will do in the short-term, least of all me. So, we’ll just focus on controlling what we can control: saving and investing as much as possible each and every month while staying healthy, making the most of every day, and helping others where possible.
How are you and your loved ones doing during these challenging times? What are you doing to stay positive and motivated?