How to calculate the cost of your lifestyle

 

Whatever your financial goals are, it’s important to know the cost of your lifestyle. Whether you want to build wealth, or you just want to adopt better financial habits like getting out of debt and building enough liquidity to afford emergencies, the one place you should probably start is getting to know how much it costs to live your life. This is because it will be hard to pay anyone, better yet save anything if you can’t afford your own life.

Your lifestyle expenses are the recurring monthly expenses that are necessary for your level of living. They are mostly basic needs like housing expenses (rent or mortgage & utilities like water and electricity), cosmetics, cleaning supplies, etc. Lifestyle expenses also include wants. – You might like getting your weekly, biweekly or monthly massages and facials. Overall, defining your lifestyle cost determines how much you need to live and cover your standard of living.

 

Calculating your lifestyle cost

To calculate your lifestyle cost, I’m going to guide you through a little activity.

You need:

Your latest 3 months’ bank statement and different coloured pens, or highlighters

 

Use the different coloured pens to mark your expenses (Debit column) and highlight similar expenses in the same colour. For example, colour all housing related expenses in blue, use pink for cosmetics and red for entertainment expenses.

After you highlight everything on your statement, add and total up same colour recurring expenses and write down the total amount per category. Below is a list of categories you could use as examples. You can add other personalized categories too.

1. Housing expenses – mortgage, water and electricity
2. Clothing
3. Food – groceries, take away, etc.
4. Transport expenses – car payment, fuel, car wash, etc.
5. Entertainment

TonG tip: This will work well if you use your card or bank transfers to pay for all or most of your purchases. However, if you use cash to make most of your purchases, you could keep a spending diary and write down all your payments, for at least 2 months (you could go to three). I know that this may be a lot and just plain annoying, having to write down everything you buy. But you just need to commit to 2 or 3 months of the torture so you can get a clear idea of your recurring lifestyle expenses.

 

Don’t forget your non-traditional needs

In calculating their living expenses, most people tend to ignore the expenses that may not be traditionally classified as needs; but have become necessities in the 21^st century – like airtime and internet expenses. They form part of your lifestyle expenses and ignoring these expenses may cause you to neglect to plan for them, which will subsequently cause budget discrepancies. You will need to buy airtime at some point, whether you’ve budgeted for it or not.

 

Find the line to draw

Although living expenses are mainly needs, we may go overboard sometimes. For example, we do need clothing. But that can easily  blur into wants. So we may need to draw the line and be honest enough to know when you have crossed over to wanting clothes, as opposed to needing them. Now, we all know that as grown as we are, we can want and get whatever we want. That’s okay. But let’s call a spade a spade. When calculating your lifestyle cost, it can be useful to distinguish between needs and discretionary expenses.

 

So why is it important to calculate your lifestyle cost?

Most of these expenses are basic and fixed – like mortgage or rent. Because they are needs, they are usually the first expenses paid from the budget. You could say that knowing these costs sets the skeleton of your budget. 

The whole point of calculating your cost of living is to make sure you can afford your normal life. Normal, in the Growth Tribe means whatever the hell you say it means. It’s subjective. Normal expenses may not be the same for different people in different cities, in different suburbs in the same city and in different tax brackets. Your home expenses are mainly determined by your location and the size of your house. In the same way, the type of car you choose to drive, the type of food you eat, etc. are all subjective decisions. Your normal lifestyle gets to be whatever you choose it to be – as long as you can afford it.

If you are living beyond your means, your lifestyle expenses would be the ideal place to start. You could reduce cost by shifting and changing some things and habits. For example, you could move to a cheaper neighbourhood, or a smaller house, to reduce housing expenses.

The good rule of thumb to use when checking if you can afford your lifestyle would be the 50/30/20 rule. – 50% or your income should go to fixed expenses, 30% to your variable expenses This means, if more than 80% of your income is going towards your expenses, then you know you have to start cutting down on something.

TonG tip: Though I recommend the 50/30/20 rule as guidance on your spending, you may find yourself in a situation that does not allow you to save 20% right now. That is okay. The point is to just pick up the pieces. You can switch the ratios up to accommodate your current situation, until you are able to save at least 20% of your income. For example, you could try the 70/20/10, the 60/25/15 or any ratio you decide to follow. What matters is that you are doing something and will not be in the same place you are today, in a year from now.