By Brett Fellows, CFP
A recent Chase Bank study found that the average person misjudges the amount they spend each month by up to 35%. In other words, if someone estimates their personal expenses at $ 10,000 per month, they are probably between $ 6,500 and $ 13,500. This can represent a large gap, which can lead to insufficient or too much retirement savings in the hundreds of thousands of dollars, depending on the time period.
Indeed, estimating retirement expenses can be difficult for anyone. As a business owner, this exercise can be even more difficult because you may have multiple sets of expenses to track. The good news is that there are steps you can take to accurately track your spending and reduce the likelihood that you will outlive your assets in retirement.
1. Distinguish between your business and personal expenses
Many business owners mix their business and personal expenses. While there can be a variety of reasons for doing so, the ability to deduct expenses at tax time can make it tempting to manage personal expenses through the business. Of course, this can be a beneficial short term strategy. However, over time, mixing personal and business expenses can prove to be problematic.
A good practice is to have a separate account for your business income and expenses. It can be as simple as opening a business checking account or applying for a business credit card. By separating your personal expenses, you can get a better idea of how much you’re spending each month and use that number to estimate your spending in retirement.
2. Use an expense tracker app
Once you separate your expenses, you’ll want to set up a system to track your expenses over time. Fortunately, there are a variety of budgeting and personal finance tools you can use to track your spending, so you don’t have to do it manually.
Plus, many of these tools are free, so all you need to do is connect the app to your bank account and credit cards. From there, you can set goals, track your financial activities, and receive automatic alerts if you go over budget or make an unusually large transaction.
3. Make sure you keep track of all expenses
It can be tempting to cut out of your budget the television you bought for your daughter’s dormitory or the trip you have decided to take abroad with your family. While these could be one-time expenses, ignoring too many of them can dramatically skew your expense estimate.
You will likely also have various one-time expenses in retirement. A good rule of thumb is that major expenses like travel or buying a new car happen at least every two years. When estimating your retirement expenses, be sure to factor in current expenses as well as occasional large purchases.
4. Track your spending for at least four years
Since expenses can vary from year to year, it is useful to have several years of tracking data to estimate your retirement expenses. For example, many people saw their spending plummet during the height of the pandemic when businesses were closed and lockdowns were applied. As a result, the past two years may not present an accurate picture of your spending habits.
For most people, four years is usually enough time to generate a reasonable average monthly expense. Your average spending over time will be a more useful figure when estimating your future spending in retirement.
5. Hold yourself accountable
As a business owner, you’ve probably heard the saying, “If you want to go fast, go it alone.” If you want to go far, go together. While this adage certainly applies to starting a business, it can also apply to your personal finances. You don’t have to go it alone.
It’s important to have someone who can hold you accountable for your spending habits and help you make smart financial decisions. For example, your spouse, business partner, or a trusted financial advisor can help you meet your goals, so you don’t lose sight of the bottom line.
About the Author: Brett Fellows, CFP®
Brett Fellows, CFP® is the Founder and Chairman of Oak Capital Advisors in Charleston, South Carolina. As a small business owner and financial planner, Brett’s expert knowledge helps entrepreneurs successfully exit their businesses and plan for a financially secure retirement.