Truly assessing annual spending

[stephen902]

I track everything I spend on a spread sheet updated every few days because I like the flexibility. I track as accurately as possible to determine how much passive income I would need to FI. There is one variable that haunts me.. torments me really... and I have not figured out a way to account for it - eventual large expenses. For example eventually we'll need major things done to the house (roof, water heater, flooring ect) as well as the need to obtain high-cost items (car, tools, bikes ect). And of course, there could be costs of things like weddings/deaths.

How do you put these types of variables into spending? Eventually they will come into spending, so I'm positive they need some considerations. I know typical budgets with no end in sight would utilize the idea of an emergency fund, but that's still not really accounting for the actual costs. I prefer to do it as an annual rough average. I don't think there is a great answer. What do you guys think?

Thanks,
Stephen

[Metta]

We have an $80 a month House Repair line item in our budget that accumulates for appliances and other house stuff.

We have a "Car Payment" that accumulates into our savings account for the day that our car belches its last and we need a new one.

We also have a special emergency travel fund to pay for unexpected family events (deaths, marriages, etc.). If we know for sure one will happen (they sent us an invitation to their wedding or my father has been given 3 months to live), we budget for the expected expense directly.

[Catbert]

How long have you been tracking spending?  Owned a house? How many more years until you hope to FIRE?  You may find a pattern that will help you predict the future costs.

I own several rental properties as well as a 90 year old personal residence.   Over the long haul I've found there every year there about 25K in one-off expenditures.  Some discretionary (e.g., kitchen remodel, new-to-me car) and others less so (e.g., eviction and resulting rehab of rental or new roof and condo special assessment). 

[Retire-Canada]

How do you put these types of variables into spending? Eventually they will come into spending, so I'm positive they need some considerations. I know typical budgets with no end in sight would utilize the idea of an emergency fund, but that's still not really accounting for the actual costs. I prefer to do it as an annual rough average. I don't think there is a great answer. What do you guys think?

So estimate those expenses and figure out an amortization period like:

- $10K roof repair every 10yrs = $1K/yr that needs to be budgeted for in FIRE
- $2K to attend a wedding/funeral/graduation once every 5yrs = $400/yr
- $15K for a new used car every 10yrs = $1.5K/yr

Then you can add them to your FIRE budget to determine what your planned spending will look like.You don't have to be perfect in your estimates. Just shoot for something reasonable.

[englishteacheralex]

We have data on our spending dating back to 2011, so we have a fairly accurate estimate of how much we spend in categories that involve large expenditures that are predictable in nature but unpredictable as to timing.

We then use sinking funds with capital one 360, which will allow you to set up multiple accounts for free. We budget a monthly amount that approximates the amortized annual expenditure on such items, and actually transfer that money into the various sinking funds. Then, when we spend the money, we take it out of the sinking funds.

This is more accounting than many people choose to do, but it has the advantage of allowing us to know with a fair degree of accuracy what our yearly budget costs us. It also is a good way to limit our spending in any category, since we have an accurate understanding of how much we actually have prioritized that category as it relates to the other categories.

For fun, here are our sinking fund budgets and categories, per month (we are a family of four and we own our primary residence, which is an 850 sq/ft condo):

Travel: $300
Gifts/hospitality (this includes Christmas, spontaneous giving, wedding/baby shower gifts, parties, and food/beverages for potlucks): $200
Car repair/oil changes/tires/maintenance/registration: $75
Haircuts: $20 (I get a really nice haircut once very 6 months, and our son gets a $13 cut every 3 months, DH is bald, DD is also bald at the age of 12 months)
Car replacement/appliance replacement/furnishings replacement/home repairs: $500
Medical expenses (contacts, bandaids, OTC medication, etc.): $40
Clothes: $40

[wenchsenior]

We do it through a combination of 2 numbers.  1) What we actually have spent on repairs, appliances, maintenance on two properties. This can vary a lot from year to year, so it took more than 5 years of tracking for me to feel our running average was starting to reflect what I would need to budget going forward.  2) Planned large expenses that can be roughly predicted.  For example, we had our roof replaced 15 years ago, and it's showing some real wear now.  We can expect to replace it within the next 5 years, probably, so I can budget for that.