FI Toolkit
FI Secrets - Manage Expenses

Manage Expenses

Having an understanding of your normal everyday living expenses is a critical element for achieving Financial Independence. This FI secret and mastery of its power cannot be stressed enough.

Most people have a limited view of their daily and year-to-year expenses and wonder why they are not able to save more for their future. This is where tools that tie into your banking and credit card accounts that track your spending patterns is helpful. Tracking expenses does not have to be a tedious task. Tracking could be performed just a few times to establish a nominal baseline and then periodically to determine any trends or anomalies. Here are a few banking tool favorites to help with your expense understanding.

Basic "Necessary" Expenses

Basic expenses are clearly what might be categorized as "necessary" living expenses which depends on your lifestyle, your living location, your habits, among other things. And, it is totally up to you to modify, reduce, curtail, limit, alter, redefine, or so on and so on. In other words, your basic expenses can be examined with great scrutiny to determine what truly is "necessary" for you and your family and what is superfluous, unnecessary, or needs revision.

Your basic yearly expenses should reflect your real and necessary living needs that adjust yearly to cover inflationary cost of living increases

The effort you make to understand your basic needs (i.e., your expenses) and control these expenses will greatly increase the odds of you reaching Financial Independence. And, since future projections are based on your current total basic expenses amount and adjusted by inflation, it is important to accurately determine it.

Examples of necessary expenses include:

  • Mortgage or rent
  • Homeowners or renters insurance
  • Housing maintenence
  • Property tax
  • Health insurance
  • Out-of-pocket medical costs
  • Electricity and natural gas
  • Water
  • Sanitation/garbage
  • Groceries, toiletries and other essentials
  • Personal grooming
  • Car costs (payment and maintenance)
  • Auto insurance
  • Gasoline
  • Public transportation (No car)
  • Phone plan
  • Internet plan
  • Basic TV cable
  • Child care and school expenses
  • Allowance for general recreation

Other Expenses

Expenses that may not be categorized as necessary can be considered as a single or reoccurring expense added to the basic expenses. Examples of single or reoccurring expenses include:

  • Re-payment of any debt (student loan, HELOC loan, credit card)
  • Travel expenses (airline tickets, hotels, rental cars, etc.)
  • Concert and events
  • Seasons passes for events (skiing, sports events, etc.)
  • Club memberships (golf, boating, gym, etc.)
  • Dining out
  • Home upgrades
  • Capital expenditures (computers, phones, appliances)
  • Premium cable TV or streaming packages

Note that "Re-payment of any debt" is not included in the basic expenses. For the purposes of FI, repayment of a debt is not a normal basic expense subject to inflation for the purpose of projecting into future years. For debt repayment, the debt is certainly a mandatory expense that must be paid off ASAP, because holding debt is very costly. Just to be very clear, loans cost considerable money. Interest rates on common credit cards can be as high as 18%. Home Equity Line of Credit (HELOC) interest rates are 4 to 7% per year. And, student loans cannot be forgiven or waived even in foreclosure.

Debt repayment is a mandatory expense because holding debt is very costly and very detrimental to the pursuit of Financial Independence

Credit cards are nice for convenience and help build your credit rating, but the best advice about credit card use is to pay it off completely every month and never carry a balance. If you do, it will cost you 18% or more.

Reference Information