Expense Categories
Over the years, I’ve been changing my expense categories to match what was important at the time. As we control of our spending patterns, our categories have become easier to manage. And as we get closer to retirement, we desire to keep it more and more simple.
To prepare for retirement, it’s been absolutely critical to make sure we understand Essential expenses. It’s those expenses that our pension and social security will cover. That will enable us to know when it’s time to comfortably retire. Our Discretionary expenses will be covered by our investment portfolio … it’s really that simple.
So, this month we changed our categories to almost as simple as we could get them until we get to retirement:
- Home (Essential)
- Transportation (Essential)
- Healthcare (Essential)
- Grocery (Essential)
- Other (Essential)
- Discretionary
We now have 5 essential expense categories and 1 discretionary category. Our discretionary expenses cover anything that is not important to our essential living: Travel, Pets, Restaurants, Gifts, Hobbies, Entertainment, etc…. And since these discretionary expenses are now one category, it becomes easy for us to know what we can spend and where.
For example, it we know we can spend $40,000 of discretionary spending in retirement each year, we can easily track just 1 category. Heck, I could go on one big and very luxurious trip that costs $40,000 and that will be all we can spend in that category that year. That’s simple!
If we know we want to spend $20,000 on travel in retirement then the other $20,000 can be spent on gifts, restaurants, hobbies, and entertainment. This is the beauty of understanding the difference between essential and discretionary spending. It makes it very simple, which is important in retirement.
I suspect the next move, if we want it even simpler, is to have only Essential and Discretionary. I want it as simple as possible when I get older and that might be the way to go.
Johnson & Johnson Stock – Dollar Cost Averaging
Stocks appear to be very expensive today and it’s hard to find value. One stock that will play a significant part of my portfolio is Johnson & Johnson (JNJ). The 52-week High/Low is $173/$133 and I’ve been chipping away recently near the highs. My wife asked me a good question the other day. She asked “Why are you buying when the market is pricey and JNJ is near it’s highs?” This was a fair question and I’m glad she asked.
I answered her in several ways:
- The plan is to buy JNJ in two manners: (1) dollar cost averaging and (2) market events (dips, corrections, bad news, etc…) for deeper discounts
- JNJ has very predictable earnings, which is the best kind of company to dollar cost average
- With an average PE of ~22 over the last 10 years, JNJ shows that their Forward PE of 17 has the stock currently undervalued (or fair value at a minimum)
- If JNJ hit’s their average PE in 2022, the stock will be valued at over $200+ producing a 20%+ total return (which I’ll take any day of the week). If this occurs, then today’s $165 will look cheap. When I retire in 4 years, I don’t want to look back at a potentially $250 JNJ stock and wish I had bought more at $165 even though it wasn’t significantly undervalued. If it goes lower then I’ll buy more.
- JNJ will likely be our largest holding and we have a 30+ year time horizon so we are building up our position over time
- I’m building a cash position for when (not if) the market corrects and the likes of JNJ, Pepsi, and Procter & Gamble go down and become accidental high-yielders. Jim Cramer of CNBC fame calls companies accidental high-yielders when they become significantly undervalued (and high yielding) because the market drags all stocks down. I love moments like those and I’m holding cash to take advantage of that moment.
Here are my purchases in order of 70 shares @ $150.66 average cost ($10,546.07):
- July 2020 = 20 shares @ $143.38 ($2,867.54)
- July 2020 = 15 shares @ $146.60 ($2,100)
- November 2020 = 10 shares @ $143.89 ($1438.90)
- June 2021 = 15 shares @ $166.29 ($2,494.43)
- June 2021 = 10 shares @ $164.52 ($1,645.20)
I get it, JNJ is not Google, Amazon, or some other rocket to the moon stock. But JNJ will be our single largest core holding someday and it will help produce predictable dividend income and total return wealth. There’s almost never a bad time to buy JNJ (unless it’s Forward PE is 50 like Coca-Cola was in 1998). I’m building wealth one small purchase at a time.
Wealth Building for Young People
Talking with my youngest daughter (23 years old) today, it was fascinating to hear her talk about her peers. Of course, Robinhood, cryptocurrency, and money conspiracies came into the discussion. Though many have liberal ideas of money and they don’t like the rich, they all want to become rich (and quickly).
That’s not her money path and my advice is simple. Before you can be financially independent at 50 (or sooner), you have to be capable of retiring at 60 first. At 60, you can access all of your 401k and IRA funds with no penalties. So the advice is simple. Contribute the maximum into her company 401k ($19,500 in 2021) and her Roth IRA ($6,500 in 2021). That’s $26,000 of annual contributions in tax efficient accounts.
If that mission is accomplished then she puts money into her Vanguard taxable money market account. From that account, we are looking to buy quality stocks (usually dividend paying) at good value. She bought Exxon Mobil at $31 in March 2020 and has seen that stock double. Her yield to cost in Exxon is over 11% as she reinvests the dividends.
She understands the beauty of compound interest and that time (and youth) is her best friend when it comes to investing. She’s also investing in her career by applying to a masters program in data analytics. I suspect that when she’s 25-30 years old, she’ll be making $100,000 annually and saving much of those funds.
Her savings rate in 2020 was 91% and in Q1 2021 it was over 70%. Those numbers won’t continue as rent, car insurance, her own grocery bill, and other expenses start eating into her income. But if she can maintain 35% or higher on a rising income then she’ll be fine.
Bottom line – This young person get’s it and she’ll be financially independent before 95% of her peers if she keeps on this path. As a father, that makes me feel good.
Thanks for reading!
Mr. TLR