In the past, I used to go through and publicly list my necessary expenses. These are expenses that I consider necessary. There likely is a debate to be had about what qualifies as necessary, but for the most part, I'm including things that are necessary for living and/or protecting my income. This means that an internet connection for me is necessary. However, a Netflix subscription is not.
One thing to note is that these expenses represent my portion of what we pay per month. In cases of shared expenses like rent, groceries, and utilities, that's half of what both me and my wife use. Why half? The idea is to come up with a number for my expenses and use this to compare to my income. My wife has an income as well. I'm not at liberty to discuss that income. Due to that, isolating the example to myself helps illustrate the value of calculating necessary expenses. So as you read this, pay note that your families costs may be double or more (especially if you have children).
- Housing: $1500 - Our rent is nearly $3000 a month. Silicon Valley is very expensive, but my wife's salary is adjusted for that expense. If it weren't, we wouldn't be here.
- Transportation: $200 - I pay around $76.41 a month for insurance. Since I work from home, I drive very little, usually just to the dog park about 3 miles away and back. At 6 miles a day, I can get nearly a month on 1 tank of gas, which costs me about $50 (California gas is expensive). My 2001 car has been paid off for 7 years now, so there's no cost there. What's the other $75 for? Let's call it sundry expenses: when I need to drive more, when I need car maintenance, when I take public transportation, etc.Since this is for my car and my wife has her own car this is a personal expense for me and is not divided like some of the other costs.
- Groceries: $150 - I had previous had this as $50 for the month back in 2007. At the time, my work was providing me lunch and dinner most of the time. Now that I work from home, I lose that perk. In addition we've added on more hungry mouth feed - our 75 pound Huskador (husky - labrador mix).
- Internet: $25 - This is simply half of our Comcast bill for the Internet. It is somewhat of an estimation because without cable television it might be more expensive (it wouldn't be part of a package)
- Gas and Electricity: $75 - In Northern California we use a lot less gas and electricity than we did in Boston. That's what happens when you don't need AC and only need heat about 3 months of the year. Though this cost varies, the $75 is probably as good an estimaion as any.
- Water: $20 - This is a pure guess. My wife actually pays the water bill and she's not available to ask at the time of this posting.
- Cell Phone: $25 - I'm on a grand-fathered Virgin Mobile plan that costs me just $25 for 300 minutes, unlimited data, and text. Since this is my phone and my wife has her own phone this is a personal expense for me and is not divided like some of the other costs.
- Home Phone: $3 - I picked up free lifetime Ooma service for $150. What's the $3 a month for. There's still some taxes that are necessary (911 service for example). I didn't even bother dividing this half to represent my half of the taxes.
- Property Insurance: $30 - This is just my half of the property insurance. It's possible that we could potentially save some money on this expense. It's time to look into what coverage we have here.
- Dog Care: $50 - Once again, I'm doing a little guessing. I've included his food in the groceries. This would cover vet visits, heart worm pills, flea medication, etc.
You'll notice more than a few things are estimates. For me, that's good enough, because in general they are fairly close. It establishes a benchmark for comparison. For example one were to do these expenses a decade ago, they might find that their home phone bill was $45 a month. Some people doing this now will have a cell phone bill over $100.
Some ask why one would want to review their necessary expenses. I have three reasons:
- Keep lifestyle inflation in check - There is a temptation to spend more money when you make more money. I don't want to be caught up in that. I want to keep my necessary expenses down even if it means making some compromises on my cell phone selection.
- Gives me a view into how close I am to financial freedom - This blog currently makes more than all these expenses put together. What this means is that in some ways I have a sense of financial freedom by being my own employee - as long as business continues to stay the course. That's always a question mark.
- Prepare for disaster - Most people say that they want to have a 6 month emergency fund, but it's hard to know how much money that is without knowing what your necessary expenses are. This gives me a very good figure to go on for that.
Final thoughts: When you add it up, I have about $2,078 in necessary expenses each month. The biggest one by far is the rent. I'm sure that's true of many people. It's a particularly high number for us, but our plan is to move to an area of lower cost living which would likely reduce the number significantly.
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