If you only do one annoying adult task this year, this is it. Knowing how much you expect to spend is the linchpin for just about everything about your financial life. Knowing this number lets you make decisions -- right now -- about:
- The size and funded status of your emergency savings account.
- How much you can save in workplace savings accounts, IRAs, 529s and/or any other account or purpose.
- Whether you can afford wants like vacation, a new TV to waste time watching the Seattle Mariners, or anything else that isn't a need.
- Considering changes to make sure you're on track to meet your spending needs now or in the future.
- Quite literally nearly every other financial decision, because they all connect to spending in one way or another.
We just did our spending tally over the weekend and found that we expect to spend less in 2021 versus 2020, even though we have a new family member! Spending does tend to deflate when you allocate no dollars for vacation, dining out, or concerts, and you have no reason to buy new clothes. The pandemic is having a radical effect on most people's spending habits and yours is probably no different.
OK, it's a Really Big Deal, but how do I actually do this?
We start by using the recent past as a baseline. What you spent last year should be a pretty good proxy for what will happen this year. There are always unpredictable one-time expenses that will muddy the waters, but every year brings a new set of one-time expenses. The most important things to remember when projecting your 2021 spending:
- Be honest. This is not budgeting. It's just taking stock of what you expect to spend. Don't treat this as what you'd like to spend given changes in your behavior or reactions to seeing the numbers on paper. Budgeting can come later, if need be.
- Always round up. Not sure if something is $20 or $30 per month? Assume the higher amount. $30 it is.
- You don't have to be perfect but you need to be in the ballpark. No one can predict their spending down to the last penny.
- Don't forget inflation. It's fair to assume a yearly 2-3% increase in price for most goods and services, all else equal.
- Don't factor money you expect to save. Yes, it's a cash flow item, but it's not a true "expense" for this exercise.
Step 1: Decide how you'll record the numbers.
You can use the options I've created, your own spreadsheet or papers, or one the many other online options like the spending tool in
your client site,
YNAB, or
Mint.com, etc. Decide what works for you and run with it.
Here's the (clickable) one-pager I've created, which you may have already seen a dozen times:
You can also use the digital version of this one-pager by creating your own copy in Google Sheets - tap
here to do that.
Step 2: Go to the sources.
Wherever your money is spent - via credit card, debit card, ACH bank withdrawal or a traditional checking account - log in and start poring over last year's statements or annual summaries provided. (And most of the digital spending trackers will help you automatically categorize spending via account aggregation) If you use the one-pager above, just work through each category starting at the top, and compile an estimated monthly or yearly amount in each category. Some categories you'll already know off the top of your head, but others will be hard to calculate, like "Dining Out." Some categories won't apply to you - skip them.
Special note: The "Other Spending" category should be one of your biggest line items. This is where you add all of the things that couldn't be categorized, but it's also for the random one-time expenses you can't predict.
I recommend this amount be set to at least 10% of your spending if it ends up blank at first. Random, unpredictable spending really is that significant. Leave it blank and you're faking it.
Step 3: Is it realistic?
Once you come up with an expected spending number, ask yourself: Does this number make sense? If your expected spending level is predicting you will be able to save an abnormally high amount of money then maybe it's time to double-check your numbers. Or if you're projecting to spend more than your income, but you are normally a good saver and nothing major has changed in your financial life, then maybe you got a little too aggressive on rounding the numbers up.
Step 4: Share it with me so we can update our projections.
Knowing your expected spending will help everything else fall into place. We can use this number as an important factor in all kinds of decisions about your future and recommendations for your investments. If have any questions about this task please don't hesitate to reach out.
Happy tasking!
