Newbie here! Calculating expenses

[FireAnt]

Hi all-

This is my first post, hopeful one of several. My husband and I are interested in pursuing FI and I think we are already in a decent position. I'm having some difficulty on where to start in terms of calculating costs (I'm a social worker - is that a good excuse? Probably not.) Can any seasoned FIRE's can give me some good direction? I am trying to calculate my monthly expenses, but for determining what my net worth needs to be, do you include extra payments you are already making or ones that you foresee are temporary (i.e. a car payment which will be paid off in a year with putting extra $700 month towards, mortgage where we are already putting extra $200 towards, and student loan payments which are on track to be forgiven in 13 months... hopefully.) Thanks in advance.

[Davnasty]

https://forum.mrmoneymustache.com/case-studies/

There is a sticky here with a link to the case study spreadsheet, but before you fill it out I would recommend looking through some of the already submitted cases. Different people use different methods to account for debt repayment and looking at examples you'll see which methods make sense to you.

When it comes to putting extra towards loan repayment, my personal preference would be to not account for it as an expense, but rather lump it in with savings. In my mind you're not spending money, you're just adding to an account that happens to be negative at the moment. It makes sense to include minimum payments as those must be accounted for on a monthly basis, but after that you should be pouring any extra money into the debt. Of course, that's assuming the interest on said debt is greater than returns you can expect from investments. This sticky can help with that decision:

https://forum.mrmoneymustache.com/investor-alley/investment-order/

[FireAnt]

Thank you! I already looked over the case study thread a few days ago. I wanted to actually fill out and post my case, but the excel spreadsheet completely overwhelmed me when I opened it. I think I just need to take a closer look at the details of the spreadsheet.

[NYCWife]

Welcome aboard! We're happy to have you join the community.

In terms of your specific questions:

1. I would recommend Mint to begin your work of calculating monthly expenses. It's free and connects automagically to your credit cards and banks so that all your charges are inputted as soon as you use your credit/debit card. It's categorization algorithm is about 80% accurate in categorizing your grocery bill as food and your car payment as "auto and transport." You can teach it the other 20%. When my husband and I first started, we tracked our spending on Mint relentlessly to get an accurate picture of our monthly expenses, then worked on ways to cut back. It was the first time we had full visibility into where our money was going, exactly. If you don't choose to use Mint (some people are gun-shy about pooling all their financial information on one website), you can do this yourself with a spreadsheet or Quicken, which I believe is software that lives on your computer, not in the cloud. Using Mint has been a game-changer for us---propelling us from no non-401K retirement savings to over $400K in 2 years.

2. Once you have a sense of your exact categories of monthly expenses, the easiest way to calculate the money needed to retire (in my opinion as a fellow liberal arts major) is to multiply your annual spend by 25. Then, if you want to remove some expenses from your annual spend, you can. We decided not to, because we figure we will repurpose things like mass transit to work with extra travel expenses. YMMV.

Good luck!

[ixtap]

Hi all-

This is my first post, hopeful one of several. My husband and I are interested in pursuing FI and I think we are already in a decent position. I'm having some difficulty on where to start in terms of calculating costs (I'm a social worker - is that a good excuse? Probably not.) Can any seasoned FIRE's can give me some good direction? I am trying to calculate my monthly expenses, but for determining what my net worth needs to be, do you include extra payments you are already making or ones that you foresee are temporary (i.e. a car payment which will be paid off in a year with putting extra $700 month towards, mortgage where we are already putting extra $200 towards, and student loan payments which are on track to be forgiven in 13 months... hopefully.) Thanks in advance.

In a case study, folks would ask your % on each of those loans in order to help you determine if you are really making the best use of funds by paying down the car aggressively, for example.

However, you need to account for at least your minimum payments that will continue for the next year. You can redirect those funds or do a new case study when the situation changes.

[FireAnt]

1. I would recommend Mint to begin your work of calculating monthly expenses. It's free and connects automagically to your credit cards and banks so that all your charges are inputted as soon as you use your credit/debit card. It's categorization algorithm is about 80% accurate in categorizing your grocery bill as food and your car payment as "auto and transport." You can teach it the other 20%. When my husband and I first started, we tracked our spending on Mint relentlessly to get an accurate picture of our monthly expenses, then worked on ways to cut back. It was the first time we had full visibility into where our money was going, exactly. If you don't choose to use Mint (some people are gun-shy about pooling all their financial information on one website), you can do this yourself with a spreadsheet or Quicken, which I believe is software that lives on your computer, not in the cloud. Using Mint has been a game-changer for us---propelling us from no non-401K retirement savings to over $400K in 2 years.

Thank you so much! We've been using Mint for years-- maybe 6-8 years? This is where I'm getting my initial number of $34k of living expenses per year. Although with everyone's advice I need to add my minimum payments for our car and student loan so that will change.

[BiggerFishToFI]

Personally, I would consider principal payments towards the loans as savings and any interest as an expense.

[ixtap]

Personally, I would consider principal payments towards the loans as savings and any interest as an expense.

On a depreciating asset (car loan) and a sunk cost (student loan)?

[onlykelsey]

Personally, I would consider principal payments towards the loans as savings and any interest as an expense.

On a depreciating asset (car loan) and a sunk cost (student loan)?

+1.  I think that only makes sense with mortgages, although I don't even do it with my mortgage.

[Davnasty]

Personally, I would consider principal payments towards the loans as savings and any interest as an expense.

On a depreciating asset (car loan) and a sunk cost (student loan)?

It depends on how you want to use the number you come up with. You want to find monthly expenses (X), but why?

So you can determine how much you need in your emergency fund? For example EF = 3X (I would include min payments)
So you can determine how much you need to fire? FIRE = 25*12X (I would not include debt at all, just count it as savings)
Just to give yourself an idea of where you are and where you're going over the next few months/years? In this case you could make an argument for almost any method that feels right.

ETA: after re-reading OP, it sounds like you're trying to find your FIRE number. I would not account for the student loan at all as that will be repaid by then. I would include the car payment IF you intend to continuously replace your car and have a payment indefinitely (don't do this :). Otherwise you should make your best estimate at what your annual cost of car ownership will be divided by 12.

[MDM]

Thank you! I already looked over the case study thread a few days ago. I wanted to actually fill out and post my case, but the excel spreadsheet completely overwhelmed me when I opened it. I think I just need to take a closer look at the details of the spreadsheet.

Yes, one bite (or cell entry) at a time.

If you have pay stubs and your most recent Form 1040, that can be helpful.  The 'Calculations' tab starts with paycheck income and then more or less has things in the same order used in Form 1040.

See also the 'Instructions' tab for more details.

Feedback from new users is also very helpful and much appreciated so we can modify things as appropriate to help future new users. :)

[BiggerFishToFI]

Personally, I would consider principal payments towards the loans as savings and any interest as an expense.

On a depreciating asset (car loan) and a sunk cost (student loan)?

Mainly a motivating factor for me, those principal payments were increasing my net worth. If you are paying extra principal towards loans that you intend to pay off it's silly to think of that as a fixed expense. I now have all my loans paid off and all those extra principal (and interest!) payments now are "real" savings.

I never again plan to take a loan on a depreciating asset or sunk cost.

[ixtap]

Personally, I would consider principal payments towards the loans as savings and any interest as an expense.

On a depreciating asset (car loan) and a sunk cost (student loan)?

Mainly a motivating factor for me, those principal payments were increasing my net worth. If you are paying extra principal towards loans that you intend to pay off it's silly to think of that as a fixed expense. I now have all my loans paid off and all those extra principal (and interest!) payments now are "real" savings.

I never again plan to take a loan on a depreciating asset or sunk cost.

For most people, keeping a car loan payment in their budget is going to get them closer to a realistic long term budget. Even if you are becoming more frugal, that car will age, need more maintenance than it does at first, and for many readers, need replaced (hopefully with something not quite so new and paid in cash, but that just means you prepaid your payments and saved on interest).

[RWD]

There are two main ways to calculate expenses and both are useful for different purposes.

Method #1, anything that decreases your net worth is an expense. Useful for figuring out how much your lifestyle costs and should be most relevant for the 4% rule.
- Includes vehicle depreciation
- Interest on loan payments is included, but not principal

Method #2, cash flow out. Useful for ensuring that you are spending less than you earn.
- Vehicle depreciation is ignored
- Includes full amount of loan payments

[AMandM]

Good distinction, RWD.

But OP, if you're trying to figure out how much you need to FIRE, remember there are some ways your current expenses probably won't match your expenses in retirement. Your student loan will be gone; you won't have a car payment; at some point your P&I will be zero.  At the same time, you may have higher repair costs as the car ages; you'll need to replace big-ticket items (HVAC, car, roof...); your medical costs may well go up over time.  So you have to adjust the FIRE number from 25x current spending to account for those.

[FireAnt]

But OP, if you're trying to figure out how much you need to FIRE, remember there are some ways your current expenses probably won't match your expenses in retirement. Your student loan will be gone; you won't have a car payment; at some point your P&I will be zero.  At the same time, you may have higher repair costs as the car ages; you'll need to replace big-ticket items (HVAC, car, roof...); your medical costs may well go up over time.  So you have to adjust the FIRE number from 25x current spending to account for those.

Yes I was trying to figure out my FIRE number-- still new to the lingo here! I used this handy device after looking through a little more, but I think I will do a case study and post it for everyone soon.

 https://engaging-data.com/fire-calculator/?age=33&initsav=136374&spend=38630&initinc=60000&wr=4&ir=1&retspend=40000&stockpct=80&fixpct=18&cashpct=2&graph=fix&secgraph=0&stockrtn=8.1&bondrtn=2.4&MCstockrtn=8.1&MCbondrtn=2.4&tax=7

[FireAnt]

Okay, I just spent hours doing this... for those that are interested:

https://forum.mrmoneymustache.com/case-studies/case-study-social-worker-that-is-bad-at-math-but-wants-to-fire/