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

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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.

How Can I Estimate My Spending Without Doing a Spending Journal or Log? Part One

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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

so my

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.

Related Reading

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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.