Where did all my income go? This a question that most folks would ask themselves if they have slogged in a corporate job for a decade or so. It usually arises at a point when they are discontent with the regular grind or probably at the end of a bad day or week. You should also ask this question if you are focusing at financial indepedence. Some people track their income and expenses on daily basis, some do it monthly and some don’t. I fall into the last class who hasn’t bothered to explicitly track income and expenses, but have never lived beyond my limits. No matter what the frequency, it’s never too late to perform such a study and learn from the results.
Just before I started this blog and decided on my first financial target to reach the 8 digit mark, I had a look at my income over the past 12 years to figure out the drain holes. On summing up the gross income earned (pre-tax) to date, I was surprised and happy to know that the sum had already crossed my target 1. Yeah, true that I didn’t receive the entire amount on hand nor did I receive it in bulk but still it makes me believe that the target set is achievable albeit on tight schedule.
So how much did I earn in the last 12 years? Starting in a small way in a non IT job, my income has grown by 20% annualized. The career I am into historically has never been high paying. In fact I had to switch jobs to get my pay back to the industry norm.
Where did all my income go?Disclaimer: I have never kept track of my expenses on a day to day basis and this is the first time I have looked at my expenses that too a very high level. It’s been categorized here based on major outflows that I can remember and appreciation/depreciation has not been accounted.
The chart above shows the breakup of where I have put my post tax income over the last 12 years. It contains 6 major categories consisting of education, vacation, car, real estate, liquid investments and miscellaneous. Below are some of my learnings.
Education: this was the fee’s paid for my post graduation and other courses and this accounts to about 3%. These courses have improved my human capital and this is one category that has helped me in my career. With the added degree I have been rated high on salary surveys and have been able to distinguish myself from others in the department. Now my employer has a policy to reimburse fee’s paid for such courses thus making it possible to continue the learning curve without spending from my pocket. I have planned for another short course and certification later in the year.
Foreign Vacation: a couple of foreign vacations make it to the list. These were indulgences that we enjoyed, but none in the last 3 years nor any plans in the near future. There are tons of places I haven’t visited within India and probably I should make more time to explore the same with my family.
Car: I have owned two cars in the last 5 years. First one was a necessity, the second one was more of an aspirational upgrade. Having spent 21%, it’s clear that this is one asset that’s detrimental to wealth building, it might be a necessity in some cases but it’s depreciating nature makes it a liability. The car loan has been paid off, this has improved my cash flow and the new car craze has subsided.
Real Estate: A classic example of peer pressure, it’s the amount spent (15%) on purchasing a plot of land. It does not provide any rental income nor has there been much appreciation over the last few years. It’s highly ill-liquid and I will have to wait it out for years to get decent returns.
Liquid Investments: investments that were made in stocks, mutual funds, deposits etc. Note that I have used the word ‘Investment’ in this category versus ‘spent’ in the previous category. This is one category that I am proud off, the only regret being it accounts for just 32% of my income to date.
Miscellaneous: This category includes anything and everything that’s not a part of the aforementioned categories. It includes money spent on groceries, bills, insurance, local vacations, wedding expenses, home improvements etc. These I feel are part of day to day expenses required to just maintain my lifestyle and is part of ones social life. I wouldn’t complain about it,but there could some outflows that can be plugged or optimized for better returns.
From this study, I am fairly certain as to where to put my money. Do a similar study for your self to see where you stand.
Recommended Blog Reading: GEN Y FINANCE GUY has an article on how to measure the conversion ratio of your income to networth.