This piece was originally published on Tuesday morning. In a rush to publish before I headed up to beautiful Vancouver, BC for a mid-week getaway, I inadvertently posted what amounted to a very rough draft. I wrote the piece in the middle of the night the day before we left town, planning to go over it in detail in the morning, include correct numbers from my assumption spreadsheet and then head out of town. Well, of course, I failed to do that. Thank you to those of you who wrote pointing out my errors and thanks to those of you who politely overlooked the errors and took away the overall point. I took the unprecedented step of taking this down until I could get home to my computer and carefully correct things. Publishing this before it was ready was not fair to you, my readers, and it won’t happen again. Thanks for understanding!
I’ve never really tried to live within a budget. That has probably been a mistake.
Budgets can be powerful and great for setting yourself on a path to financial success. But I usually had enough money for whatever I needed. And if I didn’t, I typically would just wait. And being somewhat frugal by nature, I never really needed to restrict myself to a given number.
However what I have done is keep close track of what really is going OUT the door. (Which is different than setting budget goals and restricting myself to them.) This sometimes depressing look at my finances helps me rein in runaway bills and think about new ways to drive costs down.
Keeping close track of your actual spending is particularly critical if you’re pursuing pretirement. If we view pretirement as the point when our passive income becomes large enough to cover our monthly bills, knowing that number becomes all-important. And, even more importantly, the lower we can get this number to go, the sooner we can be free.
Take two hypothetical couples: (as I often do, let’s assume both have no housing costs and both have the same income for this example)
- Couple 1: Monthly bills = $3,000 (a couple car payments, high utilities and commuting costs, cable TV, expensive vacations and some spending money)
- Couple 2: Monthly bills = $1,800 (relatively frugal living but still a nice middle-class lifestyle)
Couple 1 would need a fund of more than $1 million to support their lifestyle. Couple 2 will need around $600,000 for theirs. Worse, Couple 1 probably can’t even build up enough to pretire because most of their income is likely being spent. But if we assume both couples can save a nice, round $1,000/month or $12,000/year (remember, this is pretirement, not “retirement”), the differences are vast.
Our frugal couple that only needs to reach $600,000 would be pretired in 25 years from the point when they started building their pretirement fund. Our spendy couple, Couple 1, would need to work 10 extra years beyond that to reach their $1 million goal. (I’m assuming a reasonable 5% taxable yield from their pretirement funds in both cases.)
But more realistically, because Couple 2 is frugal, they should be able to build their fund much more quickly. Let’s say the $1,200 difference between the two couples is put into the pretirement fund. Both are still saving the original $1,000/month. So Couple 1 is just saving $1,000/month and Couple 2 is building their pretirement fund with $2,200 each month. Couple 2 will now reach pretirement in around 15 years.
For our spendy couple, that’s an additional 18 YEARS OF WORKING!
Hold on a second while I add some additional exclamation points to ensure this point gets across:
So since none of us want to be forced to work an extra 18 years or more, let’s agree that driving down ongoing monthly expenses is critical to reaching your pretirement goals. But how low can we get that monthly nut to go?
This is where every person or couple is different. Our expenses may differ from person-to-person and even during various stages of life, and especially in different regions geographically. But we can agree that there are some common spending leaks that should be eliminated immediately. And if we eliminate the mindless spending from our monthly outgo, how much is left that HAS to be paid?
In discussing this topic recently with a few friends and in reading some other blogs, nearly every household said the same thing: the monthly “core” bills total to around $2,000/month. Some a little less, some a little more, but every time it comes up, it’s around $2,000. Isn’t that odd?
I was rather shocked there was so little variance so I went back and double-checked my own numbers. Here are my core monthly expenses:
- Groceries/Eating out: $350
- Utilities (water/sewer/garbage) $101
- Electricity: $78
- Gas (heating and stove): $66
- Internet and TV: $63
- Cell phones: $129
- Car insurance: $256
- Life insurance: $88
- Property tax house: $440
- Homeowners insurance house: $46
- TOTAL: $1,618
I’m not counting a few things here, which is a little misleading. Any social spending is not included, such as going out to breakfast with a friend, like I did last week. Also certain expenses and random spending money aren’t included like haircuts, my wife’s commuting costs (I don’t have an office I have to go to, except down the hall), or our small splurge at the Farmer’s Market on Sunday. So maybe we average around $1,800 or so most months. Like I said, “around” $2,000/month. But can we drive it even farther down?
The $1,600 above corresponds roughly to our current “pretirement” goal (or $800 for my both my wife and I). Now, obviously(?), we’re not going to stop building our pretirement fund once those levels are reached. Rather, it’s a difference in mindset. We want to know we’re free. And in this case, we’re just talking about the minimum. We know we’ll need a little more safety cushion and we haven’t even talked about inflation and costs related to raising our son. And, because this is lunatic America, we have to think about health insurance (but not today since my wife is still working full-time).
So how low can we get our monthly bills if we really pushed it? Without moving from our home, we feel we can get down to $1,500 for our basic bills. That’s dropping the fancy cell phone plan (already underway) and lowering our car insurance (we have three vehicles currently — long story) and using our utilities more efficiently. But the much larger savings come if we downsize to a smaller home and can pay less property tax. Or if we were to move and rent, we’d probably be cashflow-positive so we could potentially be even a couple hundred lower.
But even with those savings, and knowing we’d want to have some spending and cushion money, our realistic minimum monthly requirement is still “around” the magical $2,000. Once we hit our goal of bringing in a passive $1,600/month, we’ll declare ourselves “pretired” but we’ll keep building at least until we have a solid $2,000 rolling in.
I’d be very interested to know if readers are finding themselves close to the same number. Are you over or above $2,000/month? What is your minimum monthly requirement?