If you have aspirations of turning some of your working years into freedom years like I do, you’ll be hard pressed achieving that goal without paying attention to your lifestyle expenses.
I’ve worked very hard over the past 10 years or so to ensure that my yearly expenses stay as flat as possible. What I spend each year will largely dictate how quickly I can reach financial independence, and since my goal is to maximize my freedom years, I have been watching those expenses like a hawk.
Over those years, I’ve managed to maintain expenses around an average of~$50,000 per year, as shown in the graphic below:
As I plan out the next 5 years for my transition into financial independence, I wanted to do a more detailed analysis of expenses to evaluate which expenses were truly mandatory, and which were more lifestyle based. Obviously everyone’s situation is unique, and where you live can have a significant impact on expenses, although I would argue much less so with no debt/mortgage. There are many common expenses that every one of us share, here’s a peek at my own household expenses…
These are expenses which I would have a very difficult time avoiding or eliminating, they’re the bare minimum needed to keep my own particular household operational.
Based on the above table, I’ve determined that I can get by on ~$20,000 per year as a minimum expense level. My largest expense is property taxes, which tends to be high in my state of Texas, so it’s possible for me to reduce that expense even further by either downsizing or moving. I like living in a big city, and close to town, so it’s unlikely that value will drop much further in my case, with a higher likelihood of it increasing over time.
There are some obvious items missing from the above, such as mortgage payments, and transportation costs to name a few. I’ve limited the items in this scenario to the absolute minimum for my particular situation. Since I’ve already paid off my mortgage, destroyed my student loans, and eliminated car payments from my life (kind of), I can “lock-in” this expense level mentally as the goal going forward.
I think of the above as my Bronze Lifestyle Package of expenses
These are expenses which I could eliminate, but choose not to. These are primarily my own lifestyle choices, and everyone’s list will be unique. What’s optional to me, may end up being Mandatory to you and shifted to the prior category.
If I’m looking to upgrade my lifestyle a bit more, I would add the above items to the list, which would bring my total expenses to ~$33,000 per year. I consider these to be primarily comfort items and small luxuries. The two biggest items are going out to eat on the weekends, and after school care for my daughter. The latter used to be higher when my daughter was in preschool, and would have been listed under mandatory back then.
I think of the above as my Silver Lifestyle Package of expenses, it’s the upgrade to the Bronze.
These are other expenses which currently do not apply to my own situation, although they are items that may have applied at some point in time, or may need to be considered in the future. For most, some of these expenses may still be mandatory.
The biggest expense item I’m currently planning for is Travel. One of my goals when paying off the mortgage earlier this year, was to take the mortgage payment and “convert” it into a travel budget for the next 5 years. This budget will fund our slow summer travels, which will consist of spending 2 months each year in a particular city around the world. Read about our first planned trip in 2017 to Barcelona, Spain. I consider this of course to be the ultimate in lifestyle luxury.
This amount could easily be saved, but I’ve been working up to this particular goal for 15 years or so, and it’s part of the plan. I’ve always loved to read about the various travel nomads and families that just drop everything and travel full time, but felt that path was not ideal for my family. As a compromise, my wife and I decided we would keep a strong base at home 10 months out of the year, and explore during the summers to get a small taste of that lifestyle. That felt like a good balance of keeping our daughter anchored around friends and family, while still exposing her to various cultures and experiences.
This expense would push me up to ~$53,000 per year, which would still keep me below my historical expense level over the past 10 years.
This is definitely the Gold Lifestyle Package of expenses, and an upgrade from the Silver.
Cover All Bases
There are always unexpected expenses, and one-time costs that inevitably come up throughout the year. They can be home related costs, car related costs, medical costs, or some other type of costs. I would feel more secure knowing I can handle those costs in any given year without straining my finances, if I had a buffer built into my overall expenses. Since I prefer being conservative, I’ll add ~$20,000 per year as that additional buffer. This would bring my “all-in” total expenses to maintain a luxurious lifestyle to ~$75,000 per year.
With this extra padding to help me sleep better at night, I would be upgraded to the highest Platinum Lifestyle Package of expenses.
Keep a Budget
Hopefully one thing that should have come across clearly so far is the importance of keeping a decent budget. As you could tell from the earlier graph I shared, I’ve been tracking my expenses for many years, and simply do it in a spreadsheet that I update once a year. I keep most of my receipts from the year and just toss them in a file cabinet until the end of the year ritual, which I find perversely satisfying.
I’ll admit that I don’t track my expenses as closely or precisely as I used to in the early days of my financial journey, but that’s the benefit that comes along with being on a strong financial independence path.
Looking at my expenses this way helps me determine how much money I would need to have in investable assets to maintain the lifestyle package I desire or can live with.
Your own package thresholds could vary depending on cost of living, family size, remaining debt, etc…
The main point of this exercise is to calculate what your minimum lifestyle expenses could be if you stripped them down as much as possible, while also evaluating your desired lifestyle.
That should help you calculate the minimum level needed for your financial nest egg, and set a goal for the desired one. Once the desired is reached, you can start enjoying your freedom years!
I figured out that I would need between $1.5-$2M in investable assets to fund my desired lifestyle.
Readers, How do your expenses compare? Can you pull off living on <$20,000 per year? Which lifestyle package is right for you? Share your thoughts and comments below!