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How our family’s $22150 Annual Expenses means for our Financial Security and Financial Independence

Awareness.

Something we think we are doing well but in reality it may shock us how unaware we are.

And one of the things that we are least unaware of is how much we spent.

So for last year I review and show everyone how much I spend for the year, this year I will do the same.

Why should we do this review?

Sharing about how much I spend is not about vanity or how crazy I can live with only eating rice and drinking plain water.

It is firstly doing a recap to provide some form of accountability to oneself.

The main benefit of doing such a review is awareness.

What awareness?

We may each have a certain expectation or idea how frugal or how spendthrift we can be. No one will know the extend of how much or how little we spend until we record down what we spend.

Then we ask the questions:

  1. Does this shock you?
  2. Was it more or less than what you expect?
  3. Most important: Does this match the kind of life you want to live?

The third  reason is to figure out for this kind of spending and this lifestyle, have I theoretically achieve financial security or financial independence.

The household configuration

There are three people in this household, my dad and mum and myself. Both of them retired and me the sole breadwinner.

Dad and mum received allowance from my brother which moved out and that takes care of some of the daily expenses. The rest I take care of.

Do note that part of the expenses covered by my brother is included here. This would include what we eat and the utilities.

When it comes to meals, grand ma ma, joins us for the week day lunch and dinner. so the meal configuration is interesting.

Probably for 3.5 people.

The 2015 Annual Expenses

(click to see bigger table)

Here is what I can take out from my personal finance software for 10 years Quicken.

There are still a few days missing but more or less I think there won’t be much difference.

Last year, we spent $23.7k while this year its almost the same at $22.15k. When most of what you spend is pretty planned out, there isn’t much surprises.

The main outliers was that I spent much less on my medical problems and that there was some surprise emergency expenses in the household.

I thought the fridge would break down and I would have to spend a fair bit but the fridge went on working again.

Overall if we were to average out, the monthly spending comes to $1845.

This gives me an idea that based on this lifestyle configuration, we can live on $2000 or less.

It is simpler for our household because everyone do not have ostentatious tastes and for the 2.5 person, they are rather small eater.

The biggest eater is probably me, which takes the portion of 2.5 person. So I am the glutton in the family.

If I were to eat less I believe we can hit $400 for meals per month.

My Financial Security and Financial Independence Status

You would ask what is the difference between Security and Independence. To me, Financial Security is the first milestone to reach before reaching Financial Independence.

Financial Security happens when your Wealth Machines, which produces cash flow other than your main job, generates enough to match your Annual Survival Expenses. These will be the expenses that, without them, you cannot survive.

Financial Independence is similar to Financial Security, but instead of matching your Annual Survival Expenses, it matches your CURRENT expenses.

There is a formula to calculate how much you need to reach financial independence or financial security, you can read it here.

Taken from the post:

Wealth Fund required in FI = (Next year’s Expenses in FI /mth x 12)/Rate of Return to generate cash flows in FI

  • Next year’s Expenses in FI /mth: How much expenses you need to cover in financial security or independence
  • Rate of Return to generate cash flows in FI: This is your long term rate of return of your way of wealth building during the period of financial  independence or security to generate the cash flows to distribute an annual amount to you.

In my case, a conservative rate of return for my Wealth Machines to produce cash flow is 5%.

While this is higher than the 4% commonly used, I subscribe to the variable withdrawal strategy method if I need to spend down my Wealth, so having a somewhat higher withdrawal rate is ok, as long as I can soundly shift up or down when the economic conditions change.

(click to see bigger table)

I added 2 more rows, the Financial Security Mthly Amt and Financial Independence Mthly Amt. This is my estimation based on these 2 years average spending, my current survival expenses, and the expenses when I am financial independence.

Subsistence expenses come up to almost $1325/mth or $16k/yr while full expenses is $1655/mth or $20k/yr.

On the right side, I computed the Wealth Machines requires to generate the cash flows for each at 5%.

I realize that my liquid net worth satisfy all three amounts, including the current expenses.

My current dividend distribution from my portfolio doesn’t generate that much, but its the idea that had I deploy the cash if I really am forced, or I forced myself to do it, I can cover these 3 amounts.

The amount in Wealth Machines needed isn’t big but very personal

One thing you will realize is that this figure is not the huge $1 million figure that is on everyone’s mind. It is rather small.

Once you work out the math, what are the assumptions that it entails, it is quite powerful.

As a proof of point, I believe I am not the rare few who did this tough thing. Take a look at this guy here , this guy here and this guy here. They are all 30 years old or under, not reaching this figure but 5 years younger than me.

Their expenses configuration will be very different from me but I believe they have no problems reaching there.

Awareness of this Optionality

The power of knowing this piece of information is that it gives you optionality:

  1. You are not trap in a job that you have to keep because your whole family depend on it
  2. You know that you can quit and take a more risky but lower paying job
  3. You can devote more time to family when they really need you
  4. You can still do what you do if you still love it
  5. You can do a semi retirement
  6. You can even do a quarter retirement like this guy before 30 years old

Just because you can doesn’t mean you have to. But you can also say in some sense that it is not having the courage to do it in reality.

My adjustments for 2016

There will be quite a fair bit of spending in 2016 which I find necessary.

Some stuff is breaking down so they need replacing like the fridge, the stove and hopefully not anymore.

I want to see if I can bring on board a water filtration system since water quality bring better health for the family (if you have some thoughts here about this do comment below!)

Then my phone may any day die on me (I sold the IPhone 6S this year) and so that may need to be done.

I probably need to get a rice cooker and steamer.

To align with my goal of cooking 2 main dish for next year (will talk about it next time) I may need to waste some money on food.

I would also think whether I should cancel my Cable TV but with digital TV its a damn problem.

How difficult is it to track the expenses?

I been doing this for almost 10 years. I use this offline Windows application called Quicken.

Is it good? It is flexible. It does envelope / jar / zero-based budgeting and that is what I think is effective.

You got to enter the transactions one by one, they also do scheduled transactions.

Something highly sought after is YNAB is You need a budget.

I build this as a habit:

  1. Remember what you spend in the day
  2. When you get home, before you do anything, input the transactions
  3. Review once per month

That is all.

To collate the data, I just spend 30 minutes pulling the data from reports in Quicken.

To be honest, if you have develop this awareness of what you spend, be able to evaluate your choices based on your value system, you don’t really need to budget. But not many people have that awareness really.

Summary

I’m pretty satisfied with how things are going but this amount changes with the economy. I don’t take it for granted.

The journey is more important, as well as the philosophy of why we work towards this goal and why we prioritize this goal over many things. Even if we do not reach it, what we learn in this journey will enable up to be more competent, more flexible and more resilient to what this world throws at us.

How was your 2015 spending. Was it what you expected? Or you have no idea how you are doing?

I ran a Dividend Stock Tracker that Updates Nightly the dividend yields and various metrics of the popular dividend stocks such as Blue Chip Stocks, REITs, Business Trusts and Telecom Stocks In Singapore. Start by bookmarking it and view it daily.
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RN

Sunday 27th of December 2015

Kyith,

$3.7K on insurance is quite high. Care to share more detail?

You're fortunate... no mortgage loan?

Kyith

Sunday 27th of December 2015

hi RN,

I don't own a flat as i stayed with my parents. i thought the insurance is rather low actually haha, i cant remember well i think it includes a $2k disability income, a $1k disability income, a 50k limited whole life including CI rider, $400k worth of death, ci, tpd

LP

Sunday 27th of December 2015

Hi Kyith,

Haha, if your subsistence level is 1.6k/month, it can certainly be covered one day by dividends alone. Mine is a higher 3.5k/mth, all inclusive, which also includes mortgage for housing which I pay in cash. Once the amt is paid up in perhaps another 12 to 15yrs, I can live with 2.5k/mth, which will be much more manageable. That's assuming I don't have kids. If I do, then it will be bumped by again by 1k/mth, which is the amt that is very conservative from what I gathered.

Whatever that amt is, I think it's good to have that number. It's important because it will trickle down to other financial goals, haha!

Good post!

Kyith

Sunday 27th of December 2015

hi LP, thanks for the support. I think i am special in that i didn't have a mortgage, with that you need a bigger figure. but knowing the subsistence level is good in that, worse come to worse, you can loook for a job that covers just the mortgage. or you can forefully rent out one of your rooms and take on a part time job or drizzle down to one student to cover the mortgage for you isn't it.

being able to cover $300 in meals is also quite a good feat to think about.

Jasmin

Sunday 27th of December 2015

Hi Kyith I am impressed by your meticulous tracking on expenses. I certainly can't do so but I am sure I spent much less than my salary and have savings from each month. Thank you.

Kyith

Sunday 27th of December 2015

Hi Jasmin,

and that is good enough! not everyone needs budgeting, but awareness of how much gives an idea about your retirement figures. i wouldn't say i am meticulous, its just that its habitual. i really don't think that much. its like u know from ur home to work how much it cost for transport, u go ntuc got receipt or in the credit card. most of the time i came home i just go through i had lunch, dinner, i travelled here and there, i bought this and this to eat, then i record them. if i missed out 1 buck or 2 bucks, the world is going to end.

so its accept failure and continue to do it.

Dowz

Sunday 27th of December 2015

Thanks for sharing - inspiring to read about your annual expenses. I started YNAB this January, and i am also looking forward to doing my annual review too, and this time with more solid data.

i read that you are going Paleo, or Low Carb High Fat... would a slow cooker be a better bet than a rice cooker?

Kyith

Sunday 27th of December 2015

Hey Dowz, YNAB is great and i think its the finesse if you learn more of what we can do with the App. I think after a while you realize data isnt that big of a problem.

I am rather low carb and trying high fat, got to get more coconut oil. I am curious of the slow cooker, but dad and mom still need the rice cooker to steam and cook. its hard to influence them that we don't need something like that.

slow cooker is interesting for working adults.

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