Last week I published a few “journally” entries that lacked much focus on personal finance. I could write about how today is the 13th anniversary of my wife and my first date. That’s boring and not worth wasting words on. (Oops too late.)
It’s a new quarter and my baseball calendar tells me spring is officially here, so let’s get back to personal finance.
Let’s talk about expenses
“Where did you come from, where did you go? Where did you come from, Cotton-Eye Joe?”
[Imagine this in John Oliver’s voice…]
Expenses. They are like Cotton-Eye Joe. The song is necessary for any hoe-down, but no one wants it. Nobody likes anything about the song or expenses. Expenses are just like Cotton-Eye Joe who “brought disaster wherever he went.”
[There’s a reason why John Oliver is paid much, much more than me.]
For years I’ve been reading blogs that treat expenses as a single unchanging number. The answer to whether you are financially independent often is whether you have passive income more than whatever your expenses are. The narrative is that you can easily estimate your income by using the 4% rule.
Calculating expenses is also deemed as an easy exercise. Simply add up what you spend your money on.
Does this work for anyone? It sure doesn’t work for us.
We have a TON of expenses, but we expect them to be extremely different 2, 5, 10, and 15 years from now.
Here are some examples:
- Childcare – We have a 3 and 4 year old. Childcare is tens of thousands of dollars a year. If they go to a public school, our expenses would drop dramaticly.
- Transportation – We’ll have the cars paid off in the next couple of years as well. Sure, we’ll need to buy new ones, but hopefully not for more than 6 more years after that.
- Solar Panels – We are looking to have these paid off in 4 or 5 years. After that our electricity expense should drop to $0 (or very close to it) for the next 20 years.
- Primary Mortgage – Our biggest non-education expense is scheduled to be paid off in about 10 years. That’s tens of thousands of years of expenses gone.
- Rental Property Mortgages – These are also scheduled to be paid off in about 10 years like the primary mortgage. In this case, the disappearing expense leads directly to income.
If I were to add these all up, we probably are close to paying $6500 a month or $78,000 a year!
That’s insane right? We haven’t even eaten yet. We are crazy spenders!
There are lies, damn lies, and statistics and this is a combination of all three.
It’s almost impossible to claim financial independence with those kind of expenses. However, if you look at these 12 years from now, many disappear and what’s left is a car payment (we’ll need new ones) and profits after rental properties more than pay off the taxes and maintenance on our primary home. Those profits should cover food too.
I know that financial independence is just a label as nebulous as trying to define retirement. In the grand scheme of things it doesn’t matter what you call it.
Expenses: A Modest Proposal
I think the lesson here is that expenses aren’t simply one number. For some they may be. For other others, they are many different numbers over a timeline.
What if we took expense estimates and averaged them over a span of 25 years?
Yes, there will be surprises and it would be hard to be completely accurate. However, we play that game all the time in projecting our income based on the investment averages.
Later this week, I’ll give a shot at calculating my expenses using this method. We’ll see where it goes.