I saw an article where someone was talking about the key math calculations you need to be able to do in order to plan for retirement….but they were about things like being able to calculate interest on loans, credit card balances, etc. It got me to thinking about what calculations I do as a “sanity check”.

Full disclaimer…I cannot do math to save my life.  I almost had to take accounting again in B-school but passed by 2 points. I need a calculator always.  But having said that, I absolutely rely on numbers to tell me how I’m doing. The key is…what numbers?

So here are the numbers for me:

1. What is my total annual expense number roughly…and how much of that is fixed vs variable?  The first number gives me a sense of what I need…let’s say it’s $100k for everything. Food, mortgage/rent, insurance, taxes, credit cards…everything.  Then I like to know how much is fixed and how much is variable.  So out of the $100k, let’s say $30k is variable, meaning I control it. If push came to shove, I could give up things like HBO Max, Starbucks, new clothes, Amazon. I track my actuals every month to refresh the year end number because expenses like real estate taxes and insurance premiums tend to go up not down.
2. Based on my savings, how much time do I have before I need to earn income? So if I have $100k in savings, technically I have a year to find a job. Or I could go a year without earning income and still pay my bills. The more time I buy, the more relaxed I feel…and it incentivizes me to keep my total annual expenses in check (do I really need Amazon Prime and Netflix and Hulu????)
3. If I am generating income off my savings (interest/dividends), how much of my expenses is that income covering?  For me, this is the holy grail. It’s by no means guaranteed…companies can cut their dividends in a heartbeat and interest rates are at an all time low. But even if the investment income is reduced, you hopefully still have the capital…and it’s a good incentive to keep saving.

Now, there are major life events where it’s necessary to commit large amounts of money: e.g. buying a house. But hopefully the house will have equity, and appreciate over time… it’s a long game play and still a valid piece of your investment portfolio. But the fancy car that loses value the moment you drive it off the lot? Not so much.