How to Estimate Your Annual Expenses

Quick Look

  • You should be able to create an annual spending estimate in about 15 minutes or less.
  • If you already have a MoneySwell Cashflow goals plan set up, you’re 90% of the way there.
  • If you don’t have a Cashflow Goals plan, we recommend Method #2 – adding up your statement debits on your checking and savings accounts. Remember: “Statement debits” is just a catch-all term for dollars leaving your accounts and going somewhere else (e.g. credit card company, car loan, grocery store, etc.).

Contents

Take 15 Minutes to Estimate Your Annual Expenses

Estimating your annual expenses is a useful exercise to do from time to time. Generally, it will give you a sense of how your lifestyle has changed over time. This estimate can be used for retirement planning purposes, emergency fund planning, or building a budget that balances your income, saving, and spending. (This is what the MoneySwell Cashflow goals tool helps you do.)

As you go through the exercise, just keep in mind that “perfection is the enemy of the good.” Figuring out exactly how much you spent in a detailed category breakdown is unlikely to be better than a quick “back of the envelope” calculation.

This article details three methods for estimating your annual expenses. There’s a good chance you may use a little bit of each to come up with your final estimate. And as long as you avoid the common mistakes – like counting transfers to other accounts as spending or double counting credit card transactions and credit card payments – the estimate you produce in just a few minutes of work is going to be very useful indeed.

Method #1: MoneySwell Cashflow Goals

If you’ve been using the MoneySwell Cashflow Goals tool for a while, you already have a record of your monthly spending. 

Simply go to the Review tab, look at your total expenditures, and divide that by the number of months that have passed in your plan. This will give you your average monthly spending. Then, to get to your annual spending number, multiply that average monthly number by 12.

Example: Seven months have passed since your Cashflow Goals plan start. Your total household expenses are $25,000. $25,000 / 7 = $3,571.42 average spending per month. $3,571.42 x 12 months  = $42,857.14 Estimated Annual Expenses

Before taking this number at face value, go to the Plan tab and remind yourself how you set up your spending goal. Namely, you want to make sure that it accurately reflects all the expenses you expect it would. In all likelihood, you set it up using some combination of the methods described below. Or, it’s possible you set it up as a detailed budget with spending by category. In this case, you’ll want to triple check that your category spending captures all likely expenditures.

Method #2: Statement Debits on Key Accounts

Discovering your annual expenses doesn’t have to take long. Adding up monthly statements from each account can get you a pretty accurate picture of annual expenses.

Conceptually, this method of estimating your annual expenses is pretty straightforward. In fact, if you haven’t been tracking expenses in MoneySwell Cashflow Goals, this is the most straightforward and accurate way to estimate your annual spending. This is the method we recommend.

Simply look at each statement for the last 12 months from your checking and savings accounts. Then, add up the “Debits” from each account. There should be a summary total at the top of your statement so there’s no need to add up each individual transaction.

Theoretically, combining all those debit summary lines from each statement will give you your total annual expenditures. However there are a few things to think about before you call it a day.

First, the “Debits” line is literally showing any money that moved out of the account. But not all money moving out of an account is actual spending. For example, you may have transfers from a checking account to a savings account to bolster your emergency fund. Make sure you don’t include those kinds of transfers.

A second “gotcha” is that you may have transfers that go from a checking or savings account to pay a credit card bill. Those transfers will also show up on your “Debits” line and should be included in your expenses calculation. However, if you don’t pay your credit card bill in full every month, that transfer won’t represent all spending. In this case, you’ll want to look at how much your total credit card balance increased over the course of the review period. 

For example, imagine you have a transfer every month from your checking account to your credit card for $1,000. But, if over the course of the review period your credit card balance went from $2,000 to $5,000, you’ll need to add in an additional $3,000 of credit card expenses.

Method #3: Summary Statements

Your bank or credit card company usually has a feature that’s a year-end summary of all your spending. For credit cards, these year-end summaries can be quite useful. They will present a precise picture of your total spending. It will also provide detailed breakdowns of the categories your spending falls into. 

However, even for those who use their credit cards for almost everything, there are bound to be expenses that come from your checking account. Therefore, you’ll need to add the spending from your credit card to the “real expenses” from your checking account. 

In essence, the “Summary Statements” method still requires you to do some of the work from the “Statement Debits method.” Unfortunately, by combining the two methods you may actually be making things a little more complicated for yourself. That said, taking a quick peek a the summary statement of your credit card may provide you with some useful information to estimate your total annual spending.

Summary

In all likelihood, the methods described above are imperfect for your situation. Everyone’s setup is a little different. But remember: You’re trying to get an estimate

When you’re using this estimate for retirement planning, it’s likely your spending will change before then. Even if you’re retiring soon, your spending during retirement will fluctuate year to year. 

When you’re using this estimate to build a budget for taking time away from paid work or something else similar, you may find that your habits change and spending from the previous year looks very different from the year that follows. 

Whatever the case, if you want to feel more confident in your estimate, and you want to take a conservative approach, you can always add 5 – 15% on top of what you estimated. This will give you the buffer, and the peace of mind that your estimate will serve its purpose.

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