You will produce a yearly spending base for life after work, split into essential and flexible costs.
You have a total from your statements, a split into essential, flexible and lumpy, and a list of costs that would move if you stopped working. Right now they probably live in three places: a banking app, a notes file and the back of an envelope. This exercise puts them on one sheet, line by line, so that the figure at the top is one you can defend to a sceptical friend, or to yourself in ten years.
Set aside about half an hour. Open a blank spreadsheet and have twelve months of bank and card statements to hand, plus any cash or e-wallet spending you tracked.
Make five columns: the spending line, its group (essential, flexible or lumpy), what you spent last year, the adjustment for life after work, and the adjusted yearly figure. The last column is simply the third plus the fourth.
Use one row for each line of spending that matters. Twenty to forty rows is about right. Fewer than that and you are hiding things inside large categories. Many more and the sheet becomes a chore you will not update.
Fill the third column from your statements and resist the urge to estimate. Lesson 1.1, Your number starts with spending, not a round figure, showed why: memory keeps the regular bills and loses the irregular ones. If an item was paid from a second account, by a partner, or in cash, add it anyway. The aim is the true cost of your life, whoever paid it and however.
Check the column total against the figure you worked out in lesson 1.1. If they differ by more than a few percent, something is missing or counted twice.
Now take the list of falling and rising costs you made for lesson 1.3 and go through the sheet line by line. Put each change in the fourth column: negative for costs that fall, positive for costs that rise. A cost that does not exist today, such as private insurance to replace a group plan, gets a new row with zero in the third column and the full amount in the fourth.
Write a short note beside any adjustment that is a guess. You will revisit those first.
Every lumpy cost goes in as a yearly average: the cost divided by the years between occurrences, as lesson 1.2 described. Include the ones that did not happen last year. If you did not replace your laptop or fix the bathroom last year, they still belong in the sheet.
Then add a row called healthcare, even if it is rough. Put in what you would pay for hospital cover, outpatient visits and dental care without an employer. Module 7 replaces this rough line with premiums by age band. For now, a sensible placeholder is better than a blank.
Leave inflation out of this sheet, and write every figure at today's prices, meaning what the item would cost if you bought it this month. The model you build in module 4 uses a return after inflation, also called a real return, which you met in How money works, lesson 4.2, Real return is roughly the nominal return minus inflation. If you inflated the base here as well, you would count inflation twice and push your date years too far out.
The one exception is a cost you know will grow faster than general prices, such as insurance premiums as you age. Do not inflate it here either. Module 7 handles it by age band.
Here is how Priya's sheet comes out, using the made-up figures from lessons 1.2 and 1.3.
Last year, from statements: essential S$24,600, flexible S$12,000, lumpy S$9,000, a total of S$45,600.
Adjustments to essential: minus S$1,800 for transport to work, S$600 for work clothes, S$2,400 for office lunches and S$3,000 for her income tax bill, then plus S$1,500 for private hospital and outpatient cover, S$800 for extra outpatient and dental costs and S$400 for higher utilities. That takes essential from S$24,600 to S$19,500.
Adjustments to flexible: minus S$500 for office collections, plus S$2,500 for travel and S$1,500 for hobbies. Flexible goes from S$12,000 to S$15,500.
Lumpy stays at S$9,000, because none of her lumpy items depend on working.
At the top of her sheet she writes three lines: essential S$19,500, flexible S$15,500 and lumpy S$9,000, for a total of S$44,000 a year at today's prices. Her healthcare line is S$2,300, inside essential, marked as rough.
Two things stand out when she looks at it. Her essential spending is now under half the total, because the work-related costs she removed were all essentials. And her mortgage is still in there, since the loan runs past her planned stopping age. She adds a note to come back to that when she builds her model.
Read down the adjusted column once more and ask of each line: would I really spend this, every year, in the life I am planning? Look for anything you have quietly shrunk to make the total feel better. A base that is too low is the most common reason plans fail, because every later calculation multiplies it.
When the sheet holds together, you are ready for the activity below, which asks you to put the three totals and the total where you will see them every time you open the sheet.
Complete the spending base sheet and write your essential, flexible and total yearly spending at today's prices at the top.
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