What Inflation Rate Should I Use for the Cost of Electricity? How Much Does Electricity Go Up Each Year?

Unfortunately you can’t just set a budget once and use it for years. The costs of budget items keep changing even if your usage stays the same. As we approach retirement, I keep trying to get a clearer picture of what our costs will be not just for year 1 but for 20-30 years, should we be so lucky. Recently, I decided to check into how much our cost for electricity has been going up each year above the so-called rate of inflation.

What Total Amount Do We Pay Per kWh for Electricity Including the Taxes, Surcharges and Other Costs?

In Ontario, we pay a high rate for home use of electricity. Partly that’s because we’re still paying off all sorts of costs related to setting up and maintaining our nuclear reactors, shutting down our coal-fired generating stations, and paying huge amounts per kWh to people who set up solar arrays.

I took a look at our annual total spending on electricity divided by our total annual usage to see what our historical annual charge per kWh has been.

Year    $/kW         % Change

2015    0.156         6
2014    0.147         7
2013    0.137         7
2012    0.129       24
2011    0.103        -3
2010    0.107      -10
2009    0.119         8
2008    0.111        -6
2007    0.118      -21
2006    0.149         8
2005    0.138         9
2004    0.127         7
2003    0.119      -13
2002    0.137       22
2001    0.112

What Percentage Did Our Electricity Costs Go Up Per Year for the Past 10 Years?

If you look at the chart above, you’ll see it jumps around a lot. That’s because some of the rates were before “time of use” billing. And some years we used less or more electricity depending on the weather. And various government incentives and penalties came on and off.

You can see it’s going to be very difficult to pick a number to use for our rate of inflation. Some years our hydro rate per kWh actually decreased substantially, even though our usage has been fairly constant. That’s because this rate includes all those “non-variable” costs like delivery charges and debt retirement fees.

For planning purposes, I’m going to use 7% for the annual rate of increase in hydro costs. It’s probably wrong but I have to use something!


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What do you use to estimate the increase in the cost of electricity per year in your budget? Have you ever had to cut from other budget categories because your hydro costs rose faster than you expected? Please share your experiences with a comment.

How Can I Estimate My Spending Using a Black Box Method Instead of Keeping a Spending Journal or Log? Part Two

In the previous part of this article, I explained how I kept a spending log when I was a student and a new graduate but how I stopped once our income greatly exceeded our spending. As retirement approaches, however, I wanted a good idea of what our actual annual spending is. So I started doing the math but using a Black Box annual calculation rather than writing down every $1.75 spent on a parking meter. Here’s how I estimate our annual expenses and spending without keeping a log or journal.

The Black Box Method of Estimating Our Annual Spending Now With Investments and Multiple Income Streams

Nowadays, the equation is the same but much more complicated. It’s still

SPENDING = IN – CHANGE

But the “IN” and “CHANGE” values are more difficult to know. And I want them to be very accurate.

It matters because it is critically important to identify all of our sources of income or we will underestimate our spending. That would make for a very bad retirement plan.

What Were Our Income Streams Or Sources of Money Coming In During the Past Year?

Some of our income sources were easy to remember:

  • payrolls
  • restricted stock units, RSUs
  • annual bonuses
  • income from small businesses (like the whopping $16 generated by NaturalCrooks.com. Still that’s equivalent to a movie ticket and it needs to be accounted for)

Other income sources from investments were fairly easy to remember thanks to paying taxes on them:

  • UCCB payments (which were ultimately clawed back for the most part but still must be shown going in)
  • CRA tax refunds (even $158 has to be included: that’s enough to pay a quarterly water bill in retirement)
  • interest from bank accounts (this gets large when you maximize the return on your emergency fund and short-term savings goal funds)
  • dividends from non-registered stocks when that amount pays into your regular bank account
  • interest from bonds or GICs if that amount pays into your regular bank account (which it does for our emergency fund savings)

Income sources that were more difficult to remember or overlook

  • repayments from our health spending account or health benefits for items purchased the previous year (Repayments for items bought within the year cancel each other out. You do need to remember to include those refunded costs separately in your retirement spending planning though if you won’t have health coverage when you retire! We received back a significant amount of money in January, however, for a dental expense paid for in December of the previous year.)
  • the withdrawal from a work savings plan

I had to find the values for each of the above income sources and add them all up to know how much money we had coming in last year. (Note: DON’T compare this amount to your combined gross pay. It’s not particularly inspiring to see that the government finds your hard work so profitable even if you wholly support the idea of the able and blessed helping to support the less fortunate through government programs.)

But Which Bank Account Do I Use for My CHANGE Value or Black Box?

It was easy as a student with only one bank account to figure out the annual CHANGE value for the black box equation. It’s more complicated now.

For our estimate we did not include our

  • RRSPs
  • TFSAs
  • RESPs or
  • Non-Registered Trading accounts

inside the Black Box. That worked because we did not withdraw any money from any of those accounts during that year. We did make contributions to all of those accounts.

Those contributions will need to be subtracted from our SPENDING result since some of our spending was actually used to increase our savings.

Our black box was drawn around our

  • 5 chequing accounts
  • 6 savings accounts
  • emergency fund GICs

So for each of those accounts and for the GICs, I determined the value on January 1 of the year and at the end of the day on December 31.

Estimating Our Total Spending for the Year Without Tracking, Journaling or Logging Our Expenses

Once again, the final equation was simple:

SPENDING = IN – CHANGE

What Annual Spending Could I Identify Easily?

Of course, I nearly fainted when I did that math. Our SPENDING looked huge. Then I looked a bit closer. Included in that amount was

  • $5000 per child contributed to their RESPs (we are catching up on the years we did not contribute by making a contribution of $5000 each year to get the maximum grant of $1000 per year)
  • $10000 per each of us for our TFSAs that year, so that was $20 000 (that was the year the government tried to buy votes by boosting the TFSA limit)
  • $x to our RRSPs (darn those pension adjustments: I’d rather have the pension funds in my RRSP to invest than in the company DC plan that is very limited in its choices)
  • $y to charity (that’s just the donations for which we got receipts and could therefore claim the amount on our income tax return. The actual number is higher.)
  • $z for our extravagant vacation to the wilds of LaHave, Nova Scotia (No all-inclusive tropical resorts for this family.)

When I took out those large chunks of money from our spending, I felt much better. Our spending was now significantly lower.

What Else Can I Easily Identify for Our Annual Spending? How Much Is Our Discretionary Annual Spending?

I keep track of what we pay each month and year for

  • natural gas
  • water
  • electricity
  • telephones
  • internet
  • TV (zero!)
  • property taxes
  • home insurance
  • car insurance
  • license plates, driver’s licenses and CAA
  • gasoline

Including the ridiculous amount we pay for car insurance (we’ve never had an accident or ticket in over 30 years of driving) and the fact we drove to our Maritime vacation and back, our(mostly) “non-discretionary” expenses are about $16 000 a year. Note that doesn’t include rent or a mortgage as we’ve paid off our home.

So

DISCRETIONARY SPENDING = total SPENDING – Known Expenses

That number was still annoyingly high. But not exorbitantly. And some of those costs MIGHT drop in retirement if the kids ever grow up and leave home. Certainly if we are not employed out of the home, the costs for putting money in the envelope every second day for another retirement, birthday or transfer will end!

Checking Your Annual Spending Once a Year Makes Planning Easier

I’ve been checking our annual spending using this Black Box method for the last few years. It’s helpful. It tells me we aren’t significantly changing our spending patterns. It gives me an idea of how inflation is impacting our real spending. It motivates me to keep buying necessary items when they are on sale rather than ignoring the pricing cycles for everyday groceries and household goods.

It makes it easier to plan for retirement knowing a realistic number for our spending, rather than using one of those “You need 80% of your pre-retirement income” rules. That’s particularly important for us as we are saving more than half of what we make now.

Obviously the only reason we’d need 80% in retirement is if we suffer a serious health setback!

I’ll keep checking this way for now. I may have to go back to writing down every cent I spend once we retire but for now, this is enough detail for us.


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Do you track your actual spending or do you use a Black Box method to estimate? Were you shocked the first time you realized just how much you’re spending on non-identifiable things? Please share your views with a comment.