The best way to track your spending is to write down every single cent you spend and why. (If you pay by debit or credit it’s still to the penny not the nickel.) But if you don’t, won’t or can’t, you may need to estimate your total spending without the benefit of a journal or log: here’s how I estimated our profligate expenditures.
In the Beginning Money Was Tight and Controls Were In Place to Identify Places to Cut Costs
When I finished university and started my first job, I bought a notebook and started tracking my spending. Everything, from the 25 cents I put into a parking meter to save a stranger from a ticket to the $99.98 I spent on a portable vacuum cleaner (no sales tax in Alberta in those pre-GST days!) was written down at the end of the day. I knew I could lose my job at any time due to the recession and saving an emergency fund was priority one.
It was an interesting exercise. I learned, for example, that I was donating and gifting way more money than I would have estimated. Every birthday, birth, transfer and retirement in the office was celebrated by passing the envelope. Although new hires weren’t expected to contribute much, even $5 (which would be about $10 now) started adding up when you multiplied it by 2 to 4 events per month. And the endless charitable appeals, particularly for the United Way, but also for the Cancer Society and other big name charities also were surprising. Our office often had things like pay $2 to dress-down on Friday, all money going to the charity. Or selling daffodils or carnations or other flowers for the charity of that month.
I’d always known eating out was expensive and I limited myself to one lunch out a week. I made sure it was worth it, especially in terms of flavour. And I chose food that would be difficult or impossible to replicate at home so that it added to my enjoyment. Still, it was sobering to see the cost of one meal was over half what I spent on groceries for a week.
Eventually, though, my income far out-stripped my spending. So the logging of my spending in a journal stopped.
As We Approach Retirement Understanding Our Spending Becomes Important Once Again
Once retirement became closer to our current age than our first jobs were, it began to be important to understand our spending again.
We save over half of our income, so we haven’t been very worried about the details of our spending. We are both savers by nature and both people who prefer doing things to buying things so we knew we didn’t have to agonize over each time we sponsored someone’s bike trip down the Don Valley for $50.
But our retirement income will be very low. We don’t have defined benefit pension plans and I won’t get the maximum CPP. A lot of our savings are at the whims of stock market and we don’t trust equities not even blue chip dividend stocks.
So the inevitable question loomed: how much do we spend now and how much of that is discretionary? When will we have enough income to retire?
The Black Box Method of Estimating Annual Spending for a Very Simple Life
When I was a student it would have been easy to use a Black Box method to check my annual spending. In those days I had no credit card and debit cards had not been invented.
I would have been able to check
IN = total income in (add up deposits to my bank account from my jobs and from my parent’s kindness)
CHANGE = change in my bank account balance between the start of day balance on January 1 and the end of day balance on December 31
SPENDING = IN – CHANGE
For example, if I had added $ 1000 to my account during the year, and by the end of the year my account had shrunk from $2000 to $500, then
IN = $ 1000
CHANGE = ($500 – $ 2000) = $ – 1500
SPENDING = 1000 – (-1500) = $ 2500
First year university looked a lot like that as I spent my life savings on text books and train fares.
The Black Box Method of Estimating Our Annual Spending Now
Nowadays, the equation is the same but much more complicated. I’ll explain in Part 2 what I had to do to estimate our annual spending now.
- Our Expectations for Retirement
- Retirement Planning: What Rate of Inflation Should I Use?
- Budgeting for Retirement: Reduce How Much You Must Pay on a Fixed Schedule
- Early Retirement. Be Very Afraid: It Could Happen To You!
Do you track your actual spending or do you just wing it based on your credit card report? Do you realize your office is emptying your wallet but you’re not sure how, when or where? Please share your views with a comment.