ChooseFI Podcast Episode Show Notes

Episode Title: Calculating Annual Expenses and Determining Your Fine Number
Hosts: Jonathan Mendonsa, Brad Barrett
Episode Summary: Calculating annual expenses and determining your fine number are crucial steps toward financial independence. Understanding what those expenses entail, including taxes, utilities, and discretionary spending, offers clarity on retirement planning. The episode emphasizes that traditional retirement calculators often start with an irrelevant metric—current income—rather than focusing on actual living costs. Achieving financial independence requires precise calculations based on actual expenses and understanding life’s seasons that can affect these costs. Additionally, the importance of early retirement account contributions, understanding compound interest, avoiding consumer debt, and maintaining a sustainable lifestyle to accelerate savings are discussed.

Key Takeaways

• Annual Expenses:

  • 00:07:01 Understanding what comprises annual expenses, including real estate taxes, property taxes, utilities, food, and discretionary spending.
  • Calculate your life costs today to properly plan for financial independence. 00:10:49

• Understanding Fine Numbers:

  • 00:18:14 Your fine number is a simple calculation based on your life costs; it's essential to base it on actual expenses rather than income.
  • Your fine number is determined by multiplying your annual expenses by 25. 00:20:14

• Retirement Calculators:

  • 00:08:14 Many traditional retirement calculators start with current income, which can be misleading. Instead, focus on actual living expenses to determine needs for retirement.

• Financial Lessons for Graduates:

  • 00:32:09 Key financial tips for recent graduates include starting 401k contributions immediately, understanding compound interest, managing credit card debt, and maintaining a budget.

Actionable Takeaways

• Start contributing to your 401k as soon as you get your first job. 00:33:17
• Understand your annual expenses to better plan your financial independence journey. 00:10:49
• Automate savings from your paycheck to secure your financial future. 00:38:06
• Avoid carrying a credit card balance that exceeds what you can pay off monthly. 00:38:24

High-Impact Quotes

• "Understand your current living costs to plan for financial independence." 00:10:49
• "Calculate your fine number based on real-life expenses, not income." 00:20:14
• "Master compound interest to supercharge your savings!" 00:34:20

Discussion Questions

• What do you now understand about calculating your fine number? 00:20:14
• How can understanding compound interest impact your financial decisions? 00:34:20

Related Resources

• Root of Good Presentation on Retirement Smile: Link to Resource 00:29:29

Episode Mentions

• Episode 176: "Flexible Spending Rules with Michael Kitsis" 00:29:27

Conclusion

Engaging with these concepts will provide clarity and a structured plan towards achieving financial independence. Remember: the right frameworks can guide you through your financial journey, from understanding your expenses to making informed investment decisions.

Your Path to Financial Independence: Mastering Expenses and Fine Numbers

Achieving financial independence is about understanding your financial landscape so that you can make informed decisions about your future. This article will guide you through the critical components of calculating your annual expenses and determining your fine number, which are essential steps toward reaching your financial goals.

Understanding Annual Expenses

What Are Annual Expenses?

To effectively plan for financial independence, you need to have a clear grasp of your annual expenses. This includes:

• Housing Costs: Mortgage or rent payments, property taxes, and homeowner's insurance.
• Living Expenses: Utilities, food, transportation, and health insurance.
• Discretionary Spending: Entertainment, dining out, vacations, and other personal expenses.

Understanding what your life costs today can help you predict your needs as you approach retirement. 00:10:49

Steps to Calculate Your Annual Expenses

1. Gather Your Financial Information: Pull together bank statements, bills, and any other records that detail your spending habits.
2. Categorize Your Expenses: Use categories as mentioned above to create a spending profile.
3. Review and Adjust: Look for areas to cut or optimize your spending. This could include reducing discretionary spending or finding more affordable options for housing.

By following this process, you can build a comprehensive view of your financial commitments and prepare for the future more accurately.

What is Your Fine Number?

Defining the Fine Number

Your fine number is a crucial figure that represents the amount of money you will need to retire based on your current expenses. It is a straightforward equation: multiply your annual expenses by 25 to determine how much you would need saved to retire comfortably. 00:20:14

This formula is based on the 4% rule, which suggests that you can withdraw 4% of your investments annually without depleting your savings.

How to Calculate Your Fine Number

1. Determine Your Annual Expenses: As detailed above.
2. Multiply by 25: If your annual expenses are $40,000, your fine number would be $1,000,000 (i.e., $40,000 x 25).

This will provide you with a goal to work toward as you start saving and investing for your future.

Retirement Calculators: A Flawed Approach

Many traditional retirement calculators inaccurately start the planning process by focusing on your income instead of your actual living expenses. This is a fundamental flaw because your financial needs in retirement will differ significantly from your current earnings.

To accurately assess your needs for financial independence, it’s vital to remove income from the equation and refocus on what it costs to sustain your lifestyle, including any changes that may occur as you age or if your family dynamics shift. 00:08:14

Lessons for Recent Graduates

Start Saving Early

One of the most critical lessons for young adults is to begin contributing to your 401(k) as early as possible. It’s advisable to at least take advantage of your employer's match, which is essentially free money. 00:33:17

Master Compound Interest

Understanding how compound interest works is fundamentally important. As the saying goes, "the earlier you start saving, the more your money can grow." Mastering this concept can help supercharge your savings over time. 00:34:20

Budgeting and Debt Management

Set Budgets and Automate Savings

Establish a budget that accounts for both necessary expenses and discretionary spending. Automate your savings to ensure you consistently contribute towards retirement and other financial goals. 00:38:06

Avoid Consumer Debt

Be mindful of your spending habits, especially concerning credit card debt. It is vital to not charge more on your credit card than you can pay off each month to avoid interest accumulation. 00:38:24

Conclusion

Achieving financial independence requires diligence and an understanding of your financial landscape. By calculating your annual expenses and determining your fine number, you can create a clear roadmap towards your financial goals.

Navigating the journey to financial independence is complex, but with a solid plan, smart budgeting, and an ethos of saving, you can successfully pave the way for a worry-free retirement. Embrace the principles you've learned, take actionable steps today, and enjoy the freedom that comes with being financially savvy.