Know Your Expenses

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Financial independence begins with awareness of your true needs and wants. To be financially independent means to be able to pay for all your living expenses from your savings (investments and retirement benefits). There are essentially three variables in this equation: your expenses, your savings, and the rate of return you are able to achieve on your savings. Of those variables, expenses are most easily under your control.

So, like it or not, you simply can’t retire if you don’t know how much it costs you to live. That applies whether you are a 60-year old kindergarten teacher, a 45-year old mechanical engineer, or a 30-year old Internet tycoon. Your cost of living dictates your required income, and your required income dictates your required savings. As imprecise as the relevant calculations may be, only by having an estimate of your required savings, can you say whether financial independence is imminent, possible, or out of the question.

Your cost of living is one of the most personal and variable parameters in the retirement equation. I believe it’s possible for different retired couples in the U.S. to live on anywhere from about $2,000/month to about $10,000/month, without a measurable change in happiness and satisfaction. And, while most of us will fall somewhere in the middle of that range, it is well within our power to optimize our needs and ratchet down our wants in order to live on less, and thus retire sooner.

But in order to control your expenses this way, you must first be aware of and understand them. You can’t control or optimize what you can’t measure. Tracking your money helps to create awareness, which leads you to the essential reasons you spend, and control over your emotions. Once you become aware of your spending, you can begin to make intelligent choices about whether it fits in with your personal ideals, financial priorities, and long term goals. Over the long haul, being aware of your spending is one of the most important actions you can take to build wealth and retire comfortably!

Action Items

  • Recognize and overcome the roadblocks to tracking your expenses.
  • Commit to finding a simple tracking system that works for you.
  • If you don’t already have a solution, then evaluate Quicken and and choose one. (There are other options, but start with these.)
  • Set up simple spending categories and take time each month to review your spending in each.
  • If you absolutely cannot, or will not, track your expenses automatically, then perform a one-time spending analysis.
  • Organize, automate, and simplify your personal finances.
  • Eliminate debt.
  • Look for hidden expenses that are ripe for savings — especially small recurring amounts that could add up, or major purchases that could be economized or deferred.

NEXT: Saving: Where to Put It

Valuable Resources

  • The Best Retirement Calculators can help you perform detailed retirement simulations including modeling withdrawal strategies, federal and state income taxes, healthcare expenses, and more. Can I Retire Yet? partners with two of the best.
  • Free Travel or Cash Back with credit card rewards and sign up bonuses.
  • Monitor Your Investment Portfolio
    • Sign up for a free Empower account to gain access to track your asset allocation, investment performance, individual account balances, net worth, cash flow, and investment expenses.
  • Our Books

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