Annual Spending Rate Calculation
I invite you to discover your own “spending strategy”, the one that allows you to live “your best life”–free from financial stress and filled with possibilities and joy.
Step1: Let’s determine the “size” of your “spending jar” – your annual spending rate (ASR). Take some time and, using Excel spreadsheet, make 2 columns:
- “Must Have—Must Pay” and
- “Nice to Have—Choose to Pay”
Step 2: Enter your monthly “necessary” expenses into the “Must Have—Must Pay” column: rent, food, cloth, transportation, utilities, medical insurance, student loans, taxes, etc.
Next, enter your arbitrary expenses into the “Nice Have—Choose to Pay” column: phone, computer, car insurance, gas, TV subscription, entertainment, eating out, etc.
Step 3: add the monthly amounts from these 2 columns and multiply by 12. This amount is your annual spending rate, ASR.
Make sure that your “Nice Have – Choose to Pay” amount doesn’t increase every year! If you truly want to achieve financial freedom, you must know your ASR in order to be aware of your spending habits. Your monthly spending rate is very important but I prefer to calculate the annual spending rate because there are a few expenses that you have to pay annually.
Bottom line: make your spending “money jar” big enough for you to be able to enjoy life but small enough to allow you to fill your saving and investing “money jars” fairly quickly.
Read more on this topic next week.
To your Health, Wealth and Happiness,