Underestimating Living Expenses

[KarenF]

We use YNAB and are on our retirement budget now. We really like YNAB and it has helped us to prioritize - less eating out and more for travel, for example.

[mountainsoft]

Now that 2019 is over I was able to download my transaction data from my banks and analyze our expenses. We spent just over 45K, which is right where I expected it to be.

Over the last six years (2014-2019) we averaged $44,100 per year, or a median value of $44,900. Our expenses were lowest in 2014 at $38K, and highest in 2018 at $52K. 2018 was a crazy year, so no big surprise there.

So with six years of fairly consistent expense records, I feel fairly confident with my 45K estimate. Of course, I will keep monitoring over the next few years until we retire.

It's embarrassing now, but I did make a couple of really dumb mistakes when trying to tally up our expenses.

First, I initially downloaded our credit card transactions, deducting those expenses while also deducting payments to our credit card. Essentially, I was counting credit card transactions twice. It's obvious now, but it took me a while to figure out why our expenses were so high. Now I just ignore the credit card transactions and only count the payments to the card as expenses.

Second, I was counting transfers between accounts as expenses. It didn't occur to me till just recently, that we weren't spending that money, just moving it to another account. Another one of those Doh! head slap moments.

[pb4uski]

Quote:

Originally Posted by mountainsoft ...Another one of those Doh! head slap moments.

Like this.

[W2R]

Quote:

Originally Posted by mountainsoft Now that 2019 is over I was able to download my transaction data from my banks and analyze our expenses. We spent just over 45K, which is right where I expected it to be.

So glad it all worked out!!!

[DireWolf]

Quote:

Originally Posted by mountainsoft Now that 2019 is over I was able to download my transaction data from my banks and analyze our expenses. We spent just over 45K, which is right where I expected it to be. Over the last six years (2014-2019) we averaged $44,100 per year, or a median value of $44,900. Our expenses were lowest in 2014 at $38K, and highest in 2018 at $52K. 2018 was a crazy year, so no big surprise there. So with six years of fairly consistent expense records, I feel fairly confident with my 45K estimate. Of course, I will keep monitoring over the next few years until we retire

Don’t forget to adjust for inflation if you aren’t already. You can see a pretty big creep over this 5 years from that (the 38k is more like 42k, for example). I’d normalize everything in the past to today’s dollars.

[mountainsoft]

Quote:

Originally Posted by DireWolf Don’t forget to adjust for inflation if you aren’t already. You can see a pretty big creep over this 5 years from that (the 38k is more like 42k, for example). I’d normalize everything in the past to today’s dollars.

Thanks, yeah, I use a 3.2% inflation rate in my estimations (using Flexible Retirement Planner software). However, I need a "starting point" for the calculations. We've been fairly consistent around 45K for the last several years, but until we retire I will check again each year to make sure my starting point is still accurate. It's also a way to double-check my estimates to make sure I'm not overlooking something (one year shouldn't be wildly out of line with other years unless there's an obvious explanation).

[scrabbler1]

Quote:

Originally Posted by DireWolf Don’t forget to adjust for inflation if you aren’t already. You can see a pretty big creep over this 5 years from that (the 38k is more like 42k, for example). I’d normalize everything in the past to today’s dollars.

While I do have separate inflation rates in my spreadsheet for medical versus non-medical expenses, I can say that my actual expenses by category rise or fall for reasons which have nothing to do with inflation. For example, my net medical expenses vary depending on if I get sick or not. They also vary a lot depending on my ability to receive an ACA subsidy. After staying off the subsidy cliff in 2014-2016, I have gone over the cliff in 2017-2019. But I will not go over the cliff in 2020 because I liquidated the stock fund whose huge distributions were shoving me off the cliff. Similarly, my income taxes have spiked when I have too many cash distributions from cap gains, something I have also remedied with the aforementioned liquidation.

My electric bill for the year often depends on how hot the summer was because that drives my costly A/C usage. I did buy a new A/C back in late August (after the old one died), so we'll see if this energy-saver model offsets and rise in the expense.

My cable TV/internet/phone bill has risen and fallen a lot over the years, starting in 2010 with the end of a great deal I had with the provider when they required everyone to use a TV descrambler box. Since then, I have seen increases in my rates and some decreases, too, depending on the availability of discounts when I call them every year to threaten to terminate my service.

My property taxes have fallen a lot in the last few years due to some new state property tax rebates although one of them may disappear due to the state's budget problems.

So, it's hard to measure my own inflation rate.

[Teacher Terry]

Our biggest variables are insurance deductibles like the year I had 2 cataract surgery’s and travel. Travel is discretionary so can be cut.

[mountainsoft]

Quote:

Originally Posted by Teacher Terry Our biggest variables are insurance deductibles like the year I had 2 cataract surgery’s and travel. Travel is discretionary so can be cut.

We live fairly lean already so we don't have a lot of areas we could cut back on. I'm sure we could if we had to, but I wouldn't intentionally plan that for the next 30+ years.

Restaurants and Recreation (includes travel) is probably the biggest area we could cut back, but we only spent $6500 for the year as it is.

Our biggest expense by far is groceries at $9100 for the year. Might be able to trim a bit there and help our waist lines as well.

We should spend less on gas and a few miscellaneous items, but most of the rest of our spending isn't stuff we have much choice about. Of course, healthcare will definitely increase from the $325 we paid this year.

I'm starting to get the "one more year" feeling about our retirement plans, but we're still a few years out. There are a few things that could tilt our plans one way or the other before then. We'll just keep saving as much as possible and hope for the best.

[harley]

Quote:

Originally Posted by mountainsoft It's embarrassing now, but I did make a couple of really dumb mistakes when trying to tally up our expenses. First, I initially downloaded our credit card transactions, deducting those expenses while also deducting payments to our credit card. Essentially, I was counting credit card transactions twice. It's obvious now, but it took me a while to figure out why our expenses were so high. Now I just ignore the credit card transactions and only count the payments to the card as expenses.

As somebody who uses a credit card for 99.8% of all transactions, as well as being a really crappy tracker of expenses, I have made the same mistake. But if all you do now is count the card payment as an expense, how do you (or do you at all) categorize the transactions? If you just call it an expense, credit card category or something like that, you are missing a significant amount of costs in certain categories.

I guess if you don't track expenses in categories, and just keep track of dollars, it's not a problem. But I'd really like to know how much I spend on things like SALT, food, auto expenses, etc. I just haven't figured out an easy way to do it.

[mountainsoft]

Quote:

Originally Posted by harley As somebody who uses a credit card for 99.8% of all transactions, as well as being a really crappy tracker of expenses, I have made the same mistake. But if all you do now is count the card payment as an expense, how do you (or do you at all) categorize the transactions? If you just call it an expense, credit card category or something like that, you are missing a significant amount of costs in certain categories.

I kind of did this in two separate operations. The first was just to calculate what our total spending was for the year. I didn't really care "where" the money went, just how much we spent so I would know how much to plan for in my estimations.

Then I did a second analysis to determine what the individual expenses were for the year. In that case I focused on the actual credit card transactions (99+% for us now too), and the random checking expense (primarily gas for the cars).

I recently started using Alzex Finance Pro software for this and it makes it fairly easy to load in the CSV transactions from my banks and categorize everything.

I probably could have done this all in a single operation, but I was trying not to confuse myself more than I already was. Over the last year I've really been trying to organize our spending patterns so they'll be easier to track in the future. 2019 was kind of a transition year so it was harder than most to track.

[scrabbler1]

Quote:

Originally Posted by harley As somebody who uses a credit card for 99.8% of all transactions, as well as being a really crappy tracker of expenses, I have made the same mistake. But if all you do now is count the card payment as an expense, how do you (or do you at all) categorize the transactions? If you just call it an expense, credit card category or something like that, you are missing a significant amount of costs in certain categories. I guess if you don't track expenses in categories, and just keep track of dollars, it's not a problem. But I'd really like to know how much I spend on things like SALT, food, auto expenses, etc. I just haven't figured out an easy way to do it.

In my enhanced checkbook register spreadsheet, I have a column for credit card expenses. However, if the CC expense happens to fall into another broad category then I simply subtract it from the CC expense and post it in its own category. My car insurance and some medical expense payments end up getting diverted from CC to their own categories.

[Teacher Terry]

MS, that’s a lot to spend on groceries. We only spend 4800-year. We usually spend between 5-10k on travel.

[mountainsoft]

Quote:

Originally Posted by Teacher Terry MS, that’s a lot to spend on groceries. We only spend 4800-year.

Yeah, I wish we could get ours down. Our daughter still lives at home so that factors in some, but she's hardly ever here so it's not a big part. The $9100 includes wine and beer, which we should cut back on. For the most part we only have a couple drinks on weekends, but we have a couple boxes full of wine corks. When I look at those boxes and assume $10-15 spent per cork (we have cheap tastes) that's a lot of money! I've been tryng box wines lately, so no corks for evidence.

We do splurge a lot on things like colossal scallops, fresh tuna, lobster, and occasional rib eye steak. But I'm betting a good portion of our grocery bill is on junk food (chips, cheese, snacks, etc.) and frozen dinners. I also spend a lot on cold cereals, coke, and bottled tea.

Quote:

Originally Posted by Teacher Terry We usually spend between 5-10k on travel.

I just have a "recreation" category that includes any travel costs like hotels, air flights, trains, or whatever. But it also includes going to movies, getting massages, hiking passes, mass transit tickets, zoo tickets, etc.

Most of our traveling is local, driving within a few days from home. Our last big trip was to Fairbanks, Alaska in 2016. We went to Puerto Vallarta in 2011, a road trip to the US southwest in 2010, road trip to the Canadian Rockies in 2009, and Kauai in 2008. Generally one big trip every 1-3 years going back from there.

We've been focusing on saving money for retirement the last few years, and have been dealing with health issues with our mother's, so we've been staying closer to home.

[brett]

I do not think that this is rocket science. The best method is the one that works for you. I do not need or care about what we spend on fuel or food, etc.
Bottom line and cash flow are what interest me. Others want deeper dives.

The only 'best practice' that I can think of is understanding you exposure to unanticipated expenses-medical, capital, family, etc., and then making some provision for them.

[Teacher Terry]

MS, since I am retired I cook more and use less convenience food although we do eat out twice a week. We drink box wine. We usually take a cruise or go to Europe which is where we spend our travel money. Although we have taken 3 long driving trips to see national parks or family and friends instead.

[MrsHaloFIRE]

Quote:

Originally Posted by harley As somebody who uses a credit card for 99.8% of all transactions, as well as being a really crappy tracker of expenses, I have made the same mistake. But if all you do now is count the card payment as an expense, how do you (or do you at all) categorize the transactions? If you just call it an expense, credit card category or something like that, you are missing a significant amount of costs in certain categories. I guess if you don't track expenses in categories, and just keep track of dollars, it's not a problem. But I'd really like to know how much I spend on things like SALT, food, auto expenses, etc. I just haven't figured out an easy way to do it.

I use CC for as much as possible. I download all credit card transaction into excel and simply delete the line with the payment posting. They're generally classified fairly accurately. I recode as necessary. I manually add checks, cash and direct debits and classify them ob that same spreadsheet. Then sort by classification by alpha then subtoral each section. Then I copy paste these section totals next to budget amount so I can see how far off I spent from budget. Copy paste into a master spreadsheet for each year showing expenses by category by month. Then I can see tearly averages and totals. Takes about 10 mins a month to do the downloading and massaging. Extra 10 and of Dec to do yearly figures. I can then build my next year budget with good data.

[DireWolf]

We use credits cards for almost everything, and then a few online bill pay things through our bank. I generally don’t carry more than $10 cash and often zero. We started using Personal Capital a few years back to track expenses and it’s worked really well. It tries to categorize every purchase. I go in using their iOS app every few days and check for error charges and correct any erroneous categorization at that time. It’s been really helpful at seeing where we’re spend money and how it changes over time.

We, too, spend a lot on groceries (we have a preteen in the house). I was actually shocked how much we spent on groceries plus take out plus restaurants plus fast food plus bars/breweries (we live next to like 5 of the latter). With a little effort, we’ve got the various eating out in half. Somehow, even eating in more, we’ve cut the grocery budget very slightly. I’ve picked up more of the shopping, and am actively looking for value. Mostly switched to some cheaper stores (Food Lion instead of Harris Teeter). I wish I could cut further, it’s still a huge percent of our overall budget. Outside of health care, taxes and food/drink, the rest is a drop in the bucket.

[youbet]

Writing budgets and then controlling expenses to meet them was a big part of my job for a long time. It's not something I care to do much of now 13+ years into FIRE. Our spending rate has been fairly consistent when one-off expenses (car, remodeling, major appliances, roof, etc.) are accounted for separately. I just keep one eye on our rate of spending and look for an explanation if there is a surprise spike. We've had a handful of times over the years when we needed to do some quick research and make some adjustments. But, by far, most of the time just "winging it" has been more than adequate.

[tenant13]

I've been tracking even my smallest expenses since 2015 so when I FIRE's in May 2019 I didn't expect major surprises. I just looked at my last year's spending and I'm a few k above what I estimated but nothing crazy. But I traveled for 3 months all over Japan and it's not a cheap country - this year I'll choose something more reasonable. Since I'm a freelancer I can always go back to work whenever I feel like it so I decided to live my first 2-3 years of retirement exactly how I want to live. Then, if I feel that selling my time is REALLY REALLY financially justified, I'll consider it. As of right now I value every day of freedom so highly that I can't imagine anyone willing to pay me the amount of money I think my time is worth.

I don't see many people on this board discussing leaving US in order to adjust their cost of living but I already have it built in into my retirement plan. I've scouted several amazing countries (including my home - I'm not originally from US) where I would be much happier than being stuck in NJ.