How A Self-Made Millionaire Budgets
Have you ever wondered how much a millionaire spends per year? Do they even have budgets? What do they spend their money on? Speaking from firsthand experience as a self-made millionaire, I definitely do have a budget, and I know exactly where my money is spent every month. It’s important to know where my money is spent no matter how high my net worth is. Tracking my expenses and comparing them against my budget is crucial to attaining financial independence some day. Becoming a self-made millionaire in my 20s didn’t happen by sheer luck; it was calculated. Budgeting helped me get to where I am today, and I assure you that it will continue to help me reach my goal to attain financial independence by 40.
Monthly Budget
In my previous post on reaching my $10,000,000 FIRE number, I mentioned that my annual expenses currently average around $180,000 per year. That $180K roughly translates to what my annual budget is. I’ll break down that annual budget into a monthly budget below. Note that a few expenses are only paid once or twice a year, like property taxes, but I’ve taken the liberty of illustrating what those expenses are at the monthly level.
| Category | Budget | Reason |
|---|---|---|
| Shopping | ||
| Groceries | $600 | Whole Foods, Costco, Trader Joe's |
| Restaurants | $550 | 2-3 meals per week for a family of 3 |
| Clothing | $250 | 2 adults, 1 child |
| Online Shopping | $750 | |
| Personal Care | ||
| Personal Care Products | $250 | |
| Gym | $250 | 2 adults |
| Health Care | $50 | |
| Childcare | ||
| Childcare | $300 | Very lucky to have a family member who takes care of my child |
| 529 Savings Plan | $500 | $6,000 per year for 18+ years |
| Home | ||
| Mortgage | $5,000 | $1,250,000 30-year fixed jumbo loan |
| Property Taxes | $2,000 | $24,000 per year and rising |
| Maintenance | $300 | Gardening, cleaning, repairs |
| Home Improvement | $1,250 | Nearly 50-year-old home in Silicon Valley |
| Utilities | $450 | |
| Services | ||
| Streaming Services | $50 | Netflix, Spotify, Disney+, etc. |
| Wireless Plan | $60 | Only 1 adult. The other adult's phone and plan is fully covered by their employer. |
| Travel and Auto | ||
| Vacations | $1,250 | $15,000 annual budget. In reality, it ranges from $10,000 to $20,000 depending on if there's a multi-week international trip that year. Usually 1 trip per quarater on average. |
| Car Payment and Maintenance | $425 | |
| Gas | $150 | Shelter-in-place has drastically reduced this expense |
| Insurance | ||
| Home Insurance | $150 | |
| Car Insurance | $200 | 2 vehicles |
| Umbrella Policy | $100 | Arguably a business expense |
| Charity | ||
| Gifts and Donations | $300 | |
| Total Expenses | $15,135 |
Here’s the percentage breakdown of my monthly budget broken down by category (%):
*Note that this budget is for personal expenses only and excludes business expenses from real estate investing or blogging.
Clearly the largest part of my budget is my primary residence, occupying nearly 60% of the pie ($9000 per month)! With a $5,000-per-month mortgage equating to a $60,000 annual expense, my jumbo loan translates to a whopping $1,250,000 in debt. On top of that, my California property taxes are just over $24,000 per year.
To understand why I don’t rent instead, you have to familiarize yourself with the local real estate market. The particular area I live in has great schools, and there's not much of a rental market in this neighborhood. So those wishing to send their kids to these schools are essentially forced to buy or risk renting in a (likely old and small) condo that’s controlled by a landlord who may or may not decide to sell it at any time. For personal reasons, my partner and I decided to send our child to local public schools over private schools even though going the private school route may have been cheaper financially.
High Cost of Living (HCOL)
Silicon Valley is one of the most expensive places in the world - housing in particular stands out. According to Redfin’s 2020 housing data, San Jose has a median sale price of $1,100,000.
San Jose is a very large city that encompasses nearly 60 zip codes with over 1,000,000 residents, making it the 3rd-most populous city in California and the 10th-most populous city in the country. Some of its zip codes are much pricier than others, including the one I reside in, largely due to excellent schools and proximity to major tech companies. As an example, a nearby zip code with a highly competitive school system has a median home price of $2,960,000, which is 270% more expensive than the overall San Jose median home price of $1,100,000.
If we briefly look at how large a mortgage would be on a $2.96M home, assuming 20% down, the jumbo loan would amount to $1,856,000 in debt. With a 30-year fixed mortgage at a 3% interest rate, we’re looking at a $9,984 monthly mortgage payment. That doesn’t even count the massive property tax bill or any other homeowner expenses!
As you can see, expensive homes in Silicon Valley are one of the primary drivers for the area’s high cost of living. As home prices rise, the cost of basically every good you can think of has risen in parallel. After all, businesses own or rent the land or building they operate in. Then they decide to either eat the costs themselves or pass on these expenses to their customers in the shape of higher cost for their goods.
Want vs Need
With sky-high home prices and higher-than-average cost of goods, my budget has swelled to roughly $180,000 per year. There certainly are parts of my budget where I could cut back but I choose not to.
Whole Foods - For those of you who do shop here, you know that this grocery store is insanely pricey. Sometimes you find the exact same item at another store like Trader Joe’s or Safeway for one-fourth the price! However, they do have a huge variety of goods you can’t find elsewhere and likely of high quality.
Home Improvement - Why not reduce my $15,000/year budget for home improvement projects? After all, homes last much longer than people think. However, my spending habits are not governed only by dollar signs. My financial decisions have brought me to a point in my life where I am able to trade dollars for my time and quality of life. So my answer is simple: I want to enjoy my home for as many years as possible. I don’t want to live in an old shack that’s breaking down by its seams. Last year, I spent roughly $80,000 on a large home improvement project. So that means I spend less on home improvement in the years to come so that my annual budget of $15,000 averages out over time.
Vacations - Certainly this could go to $0 since it’s largely a luxury. However, I see traveling as a means to diversify my family’s exposure to different people and their cultures beyond the Silicon Valley bubble (within the California bubble). It creates invaluable bonding opportunities and memories as a family, as well as meaningful mental health breaks from the daily grind (especially during the COVID crisis). Seeing it that way, I view traveling less as a luxury and more as a necessity.
Admittedly, I am very fortunate to have discretionary income even after spending $180,000 per year. Despite that, I still want to stay within budget as often as possible. And instead of spending more, I choose to invest nearly all of that additional income so I can reach financial independence sooner rather than later.
Having an additional buffer beyond my budget does give me flexibility in my spending habits. I don’t have to penny-pinch day-to-day, nor do I like the idea. Instead, I’d rather exceed my budget than skimp on buying high quality goods that are best for my family. Doing extensive research on what goods are high vs low quality is an entirely different topic, but it certainly helps me stay on budget; knowing which goods are okay to make compromises on helps me decide which lower quality items are okay to purchase which, in turn, helps me stay under budget most of the time.
Lastly, I find it insightful to review my budget throughout the year. It’s important to track which categories are currently under or over my budget goals. Using budget tracking tools like Personal Capital or Mint are great ways to track them easily (and on-the-go).
Nowadays, most of our spending is done using credit cards. So when year-end statements are issued by credit card companies at the start of every year, it’s a great way to see where my money was spent the past year. By understanding where my money is spent per category every year, not only does it identify areas I should consider spending less in, it also helps me to create realistic budgets I can stick to.
I’m a firm believer that everyone, no matter how wealthy they are, should create a realistic budget. It’s certainly helped me on my journey to reach financial independence so far, and I’m confident it will continue to guide me along the way.
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