In the first blog posts I described how you can assess your expenses. You simply added together your expenses for each month and wrote them down. Starting with the first month. So let us say you did this now for several months and you got something like this:
March (last year) = 2345 EUR
April (last year) = 2265 EUR
May (last year) = 1345 EUR
June (last year) = 1800 EUR
July (last year) = 1765 EUR
August (last year) = 1584 EUR
September (last year) = 1880 EUR
October (last year) = 2359 EUR
November (last year) = 1650 EUR
December (last year) = 3652 EUR
January (this year) = 1900 EUR
February (this year) = 1557 EUR
That means we have now March of this year which made it possible for you to create above list. That is great. By the way, if you have only expenses of the last month (February of this year) then just assume that all other months beforehand had the same expenses. So in this case all months would have the value “1557 EUR”. That would of course be wrong but better than nothing. When time moves forward you will have new correct values that will improve the number we are calculating. Also, for this example we used the example from the earlier blog post that you can read again here.
So this is it, these are the expenses of a whole year. But why are we doing this? Well as you can see above the expenses usually change over the course of a year. Maybe you like to give presents to people or you go on holidays in December and that is why your expenses are higher in December. Using just the expenses of one month to understand yours would not be good enough.
All you have to do now is add together all numbers and divide them by the number of months, creating an arithmetic mean as mathematicians would say. But in the end it is nothing more than primary school calculus teaches you. So let us do this.
2345 + 2265 + 1345 +1800 +1765 + 1584 +1880 +2359 + 1650 +3652 +1900 + 1557 = 21102
Now divide by 12, due to the 12 months that we are averaging and you get 21102 / 12 = 2008.5 EUR. To simplify we always round up expenses to the next round number so you get 2009 EUR average expenses.
This means your L12M (Last 12 Months) average expenses = L12M_avg_exp = 2009 EUR
That is it. You just created the first important KPI (key performance indicator) that you have to know to become a financial unicorn.
Now just try the calculation for your own example and see how easy it is. Of course if you have not collected more than one month of expense information, the average of the one month is equal to the expenses of the month. But once you do this for more than 12 months, this is a super powerful way of understanding your expenses. Just make sure to always use 12 months to average over so you can get rid of seasonal effects. Using more than 12 months is a bad idea and might result in misleading results.
I hope this explanation of the L12M_avg_exp KPI was helpful. If not, feel free to comment below, so I know that I have to go into more detail. You will definitely profit from it when we go forward and weigh expenses against income, which is of course the core of understanding ones financial situation.