By Dr. Jim Dahle, WCI FounderSpending intentionally is the key to a successful spending plan, aka a budget. Be generally frugal and selectively extravagant. Figure out what you really value, and spend your money on that, guilt-free. This is called intentional spending.
Steps to Intentional Spending
Here are some tips to help you do this.
#1 Figure Out Where Your Money Is Going
The first thing anyone should do when they are interested in figuring out their finances is to find out where they stand. This includes calculating your income (easily found on your Form 1040) and net worth (everything you own minus everything you owe). Adding up your debts might require pouring a stiff drink first! Most importantly, you've got to figure out which way you're going on the financial escalator of life. Are you going up (earning more than you're spending), or are you going backward down the escalator as you're failing to walk faster (earning) than the escalator is moving (spending)? The escalator never stops completely (you will always need to spend something), but you can slow it down and walk faster.
Go find your credit card and bank statements from the last three months. Add up and categorize all of your expenses. Maybe you'll miss a few that you paid cash for. No big deal; just put them in a category like “ATM withdrawals/cash.” Believe it or not, this is the start of a budget. Now, take a look. Is your money going toward those things you value most? If you're like most people who do this for the first time, there are a few categories where you are spending a lot of money on stuff you really don't care all that much about.
More information here:
How Much This FI Physician Family Actually Spends in a Year
#2 Consider Anti-Budgeting
Some people hate budgets. They use an “anti-budget” or a “backward budget.” This is simply a way of saying they are paying themselves first. Basically, they first pull out something like 20% of their income to save for the future, and then they spend the rest until it's gone without worrying about exactly what it gets spent on. While this is an effective recipe to eventually reach financial independence, it really doesn't do much to ensure your money is actually going toward what you care about most.
#3 Spending Is Work Too
What a lot of people don't realize is that there are five financial activities in your life, and they all require work to do well. You are likely better at some of them than others. They include:
- Earning
- Saving
- Investing
- Spending
- Giving
Each is important, and each can bring happiness. However, all of them can be hard to do well. Don't expect intentional spending to be easy. Everyone thinks the hard part is having the discipline to not spend money you don't have. That's not the case for many of us. We're natural savers. Sometimes we don't buy something because we don't want to take the time to shop for it. I tend to shop like a man who needs to find a deer to feed his family tonight. I go out in the forest (Walmart, the mall, or Amazon) and shoot the first deer I see, throw it over my shoulder, and haul it home. While that reduces the amount of time I have to spend shopping, it also means I usually don't get the best deal. I save money simply by not going into “the forest” very often, not because I'm actually good at spending.
More information here:
#4 Avoid Buyer's Remorse
Shopping in a hurry is a recipe for buyer's remorse. I once bought a set of goggles and a facemask to go play Airsoft with my son. Despite knowing better (from experience playing paintball), I didn't take the time to get a mask/helmet that also covered the top of my head. Guess who came home with several painful welts on his scalp? Buy nice or buy twice indeed. Yes, my vision is protected, but spending just a little more time and money would have been very worthwhile. The same thing can happen with bigger ticket items like vacations, cars, outdoor equipment, furniture, and even homes.
#5 The Waiting Period
An even better way to avoid buyer's remorse is to institute a waiting period, at least for items above a certain price. Maybe that's a week or a month or even longer. If you still want it a week later, you can go get it. But you might be surprised at the percentage of items you actually still want a week later.
More information here:
Dealing with a Shopping Addiction
#6 Beware Future Expenses
Variable spending is spending that you can reduce should something happen to your income. Fixed expenses are not. As a general rule, you want to maximize the ratio of variable to fixed expenses in your life. When you purchase things with ongoing costs, you are doing just the opposite. Weigh very, very carefully any expenses that involve future expenses.
- Subscription services (Netflix might not break you, but NetJets will)
- Toys and tools that require significant maintenance or insurance (boats and planes are at the top of this list)
- Skis (the equipment can sit in the garage for years, but you might pay $200 every day you use them)
- Storage costs (the larger the item, the more housing costs you will have to store it)
- Timeshares (not only do you have to pay an annual fee, but you now feel obligated to go to the same place over and over to get your money's worth out of it)
I'm not saying you can't buy anything with ongoing costs, but take the entire cost into account when purchasing.
#7 Maximize Happiness from Each Purchase
Delaying and planning for a major expense can also help you maximize the enjoyment from it. Consider a well-planned vacation. You can enjoy it before going, you can enjoy it while there, and you can enjoy it for years afterward while looking at photos and talking about it. The happiness literature is pretty clear that the way to maximize happiness from spending is to spend on shared experiences with people you care about. Do more of that and less retail therapy and collecting.
More information here:
It’s a Lifestyle, Not a Vacation
#8 Forget the Latte Factor
David Back in The Automatic Millionaire was famous for talking about just how much can be spent on a fancy daily coffee. It's true that a ridiculous amount can be spent when it is done at frequent intervals. There are two very good counterpoints to the latte factor argument, however. The first is that it's usually the “big rocks” that sink a budget: i.e., housing and transportation. Get those under control, and you can visit Starbucks every day. Second, frequent small purchases may actually bring more happiness than one great big purchase. You may very well get more enjoyment out of buying a new video game every month and driving a beater than getting that brand new truck.
Spending is an important part of any financial plan. Done well, it can bring you great happiness. Done poorly, it can make you miserable. Spend intentionally and live without regret.
What do you think? Do you spend intentionally? Do you overspend? Does your budget stress you out? Do you need a break? I want to hear your intentional spending stories!
A good reminder! All things in moderation. I completely agree with your backwards budgeting- this is what we’ve always done in our household. It helps that my husband and I are both frugal (and on the same page, financially)- so we never needed a more restrictive budget. It came as a surprise to us how much we could comfortably spend, without jeopardizing our goals. But knowing this doesn’t always make it easy to do so. WCI’s “Loosening the Purse strings” post comes to mind.
-PFB
Random question Dr. Dahle: any particular magazines you recommend on investing or (personal) finance? thanks! having a subscription/paywall is not an issue – just kind of miss holding and reading a magazine
No, I don’t know a single magazine I can feel good about recommending. I think you’re better off with books and for up to date information, forums and blogs like this one.
Love your comment on the importance of travel planning- which is a favorite pastime of mine and so vital for a relaxing and satisfying vacation! Love a well planned trip, and for me the researching ahead of time is as fun as the actual event.
Academic research has examined buyer’s remorse significantly, referring to it as cognitive dissonance or post-purchase dissonance. It’s more likely to crop up when the purchase decision is important to the individual, the individual has difficulty in evaluating the alternatives in a purchase decision, the purchase decision is difficult to change afterward, or if the individual is anxious or has low self-confidence. Common strategies for reducing it include searching for positive information about the alternative chosen, searching for negative information about the alternatives not chosen, attempting to minimize the importance of the decision, complaining, and reversing the purchase decision.
The money I regret spending the most, is money spent on things that make me do more work or make me spend more money.
Hi Dr Dahle,
This week there was an email circulating at my work about Vanguard and its effect on Climate change. My ER Dr husband and I are big passive index investors but I also want to be intentional about our money (investing as well as spending) given I care about the earth that I leave behind for my children.
Overall, I hope this campaign pushes Vanguard to create an index/401k fund that is more Climate aware. Is it an oxymoron to get great returns but also invest in the future of clean energy? I hope not but it is certainly not proven yet.
Just curious your thought on this! More info below on the email from my work.
—-
The Vanguard S.O.S coalition launched an external campaign urging Google (Vanguard’s largest client) to pressure Vanguard (the world’s top investor in fossil fuels) to offer a climate-safe 401(k) plan.
Supposedly so far over 2000 emails have been sent to Google and Vanguard Execs. There was also this recent op-ed in the San Francisco Chronicle from Bill McKibben and Alex Wright-Gladstein and the March to Retire Big Oil. So momentum is building! Particularly with more and more data confirming the increasing financial risks of fossil fuel investments. And because 19% of Big Oil’s market share comes from our 401(k)s, cleaning up our retirement investments can have a huge impact toward insuring a livable planet.
https://vanguard-sos.com/email-google-and-vanguard/
https://www.sfchronicle.com/opinion/openforum/article/401k-plan-oil-gas-18649808.php
As one of the “owners”, I hope Vanguard ignores this campaign for reasons discussed here:
https://www.whitecoatinvestor.com/esg-investing/
If Vanguard creates more ESG products, I’ll continue to ignore them just like I have their past ones (and those of all other companies.) I separate my money making activities and my charitable/world improvement activities and my opinion is that I am right to do so.
Dr. D,
I don’t know where to put this but it may have to do with spending, so I’ll try here: What would you do with a windfall payment for a year (that you had to pay tax on)? Let’s say the gross amount is between 4-5x your common salary, so the take home would be about 1-2 years salary. First, would you hire a tax man to do your taxes for that year? I typically and pretty easily use a computer tax software program. Next, would you give more to charity that year, if you commonly do so? I do, so it seems smarter to also give more when getting more, all the way around. Thanks,
Dr. McBuchy
Your marginal tax rate is 60-75%? What country do you live in? Even California doesn’t have marginal tax rates that high and many windfalls are tax free anyway.
1) I have a tax preparer every year now, but not because of a windfall issue. Many windfalls are not particularly complicated and I’d feel very comfortable using Turbotax in that sort of situation. If you need help, hire help. You’re vague on the type of windfall so I’m not really sure how to advise you there.
2) I do give a lot to charity each year and when my income is higher I give more. Lots of people don’t give to charity at all. Certainly you can reduce your tax bill by giving some of the windfall to charity.
Thanks for the reply. Yes, it seems like in a fairly uncomplicated situation, a software tax system would be fine. Best always, Dr. M
Good post! I especially agree about avoiding buyers remorse. I like to repair things as a hobby and need things like voltmeters and infrared thermometers. I previously bought cheap meters off Amazon for 20 bucks and all became unusable for some reason. So as far as this kind of equipment is concerned, there is a company called Fluke Corp, named after an engineer who started his own company after leaving GE. They always cost a small fortune (10 to 25 times as much) but were known for high quality and reliability. After buying those, they have lasted years up to the present, and I regret not buying them in the first place. But it seemed extravagant at the time.
A good friend of mine who spends very intentionally, summed it up: better to buy a class A once than a class C lots of times.