Saturday, March 08, 2008

So, Where Does the Money Go?

In the year 2007 I embarked on a quest to find out where my money went. Here is my report.

An overview of my findings can be best conveyed with this graph:

[Click on the graph for a larger image]
margin of error + or - 3.5

The first thing that is evident is that taxes take the largest bite of my income. The Federal Income tax was easily the largest obligation in the tax category. I was, however, amazed to find that sales tax was only 2.2% of my tax bill or 0.5% of my total outlays in 2007.

In a distant second is insurance, but it's not even close. Health insurance was the largest single item in the insurance category. No surprise there.

Food claimed 10% of my money last year. This may in fact be low because a goodly amount of the 5% of my income withdrawn from ATM's surely went to food. Much of the rest of the Instant CASH was given to parking attendants. Also consider that the food totals were taken from grocery store receipts where it can be assumed that a percentage of those receipts contained non food items.

The 9% spent paying interest on debt will most assuredly go down significantly next year as will the 6% spent servicing consumer debt as I have paid off all the non-mortgage debt. Conversely the mere 3% spent on gas/car could double with even one significant car repair. My car gave me no trouble last year requiring only new tires and routine maintenance.

The household category was a catchall for anything related to the house from furniture purchases and home improvements to paper towels and home computer memory upgrades. The 5% spent on "the house" is not necessarily a baseline for anything as any self financed major improvement would skew any budget plan.

The 3% given as gifts or Church/charity is low by our historical standards but due to some debt issues I chose to concentrate on paying down debt rather than charitable giving. I also embarked on a plan to build some savings/emergency funds as to avoid having to use credit cards for large purchases or unexpected expenses. In a very disciplined way I was able to put away 6%!

The following is an explanation of how the study was conducted.

1. My wife and I keep separate finances so these percentages reflect only my expenditures. Currently she pays from her income the energy bills, the cableTV/Internet and telephone bills as well as regular visits to the butcher shop.
2. Several thousand dollars was unaccounted for after all the data was collected. This is due to imperfect receipt retention and forgetfulness as well as human error. I have given this report a + or - 3.5 margin of error in any single category.

The data for the report was gathered primarily from receipts, bills, bank statements, W2 statements, 1040 forms and payroll stubs.

The Categories
Each of the 16 major categories is made up of one or more sub categories.

All taxes - Federal & State Income, FICA, Medicare, sales tax, gas tax, property tax, tax serviced within bills
Savings - all savings and investment accounts
Credit debt service - non interest portion of consumer credit bills
Shelter debt service - non interest, non tax, non insurance portion of mortgage bills
Interest - all interest paid on all forms of debt
Food - groceries, restaurants, etc
Gas/car - all car related expenses, minus gas tax and sales tax
Medical - pharmacy, co-pays, OTC drugs, out of pocket expenses
All insurance - health, life, car, house
Retirement - money paid into 401K plan
Household - household items, furniture, home improvement, garbage collection, City services, computer/office
Hobbies/entertainment - all leisure time activity expenses
Personal/clothes - haircuts, toiletries, clothing
Church/charity/gifts - tithes, charitable giving, personal gift and holiday gift giving
Communications - cell phones
All fees - anything self described as a fee (including government mandated fees)

In conclusion I can say I am not surprised that taxes are my biggest expense. Thanks to having a child deduction, mortgage deduction and charitable giving deduction my tax bill amounts to about a quarter of my income. This is as high as it ever should get in a perfect world. Without these deductions I would be closer to 50% than to 25%. It is my plan to do this again in a few years to see how it changes when my kid is no longer a deduction and my house is closer to being paid off. It should be interesting.