The formula
How to calculate monthly expenses
Annual budgets and monthly cash flow are different mental models, and most people are fluent in only one. Converting between them — and into the capital they imply — makes the same spending easier to reason about.
A month is not four weeks. Dividing by twelve and dividing by four give figures roughly 8% apart, which is the source of a surprising number of budgeting errors.
What to enter:
- Annual spending
- Withdrawal rate (%)
The result updates on every keystroke. The URL updates too, which makes the filled-in version easy to bookmark or send to someone else.
Worked example
Take the figures the calculator starts with:
- Annual spending: 38,000
- Withdrawal rate: 4 %
That gives:
- Per month: 3,166.67
- Per week: 730.77
- Portfolio required: 950,000
Reading the result
The capital line is the useful one for planning. At a 4% withdrawal rate, every £1 of annual spending needs £25 of portfolio, so an extra £50 a month costs £15,000 of capital.
Where this goes wrong. Assuming an even monthly spread. Real spending is lumpy — December, the summer holiday and the insurance renewal month can each run 50% above average, and a budget built on the average will feel wrong in most months.
Because a year has 52.18 weeks, not 48. Using four weeks per month overstates the weekly figure by about 8%, which compounds into a meaningful error over a year.
About £900,000 at a 4% withdrawal rate, before tax and before any pension income. Guaranteed income reduces the portfolio requirement pound for pound at 25 times the annual amount.
The headline figure is per month. With 38,000 annual spending and 4 % withdrawal rate, that comes to 3,166.67. Change any field and the figure moves with it.