We had a hemorrhage recently. It was bad. It was a financial hemorrhage. There was a lot of fun involved, and no serious damage, but we did learn some lessons. Long-time readers will recall the Loosening the Purse Strings series from a couple of years ago. It demonstrated a very deliberate thought process where we spent on some things that we thought would bring us additional happiness. This hemorrhage was quite a bit more haphazard and chaotic. In fact, in some ways, we're still trying to figure out what happened.
The Set-up
The events that set this hemorrhage into motion are easily recalled. After having worked very hard as an emergency medicine attending for a decade and on The White Coat Investor for over half that time, I decided it was time to cut back a bit at work. I gave about a year's notice to my partners in hopes of being able to cut back about 3 shifts a month starting in April of this year. Then we lost a doc and my shift count actually went up last Fall. Well, April became May, then June, then July, and finally in August I was able to cut back from 16 shifts a month to 12. Well, in preparation for this event I started scheduling trips. There were trips with the whole family, adventure trips with the guys, a trip with the Boy Scouts, and even a trip with just my wife. By the time the end of July rolled around, I had 9 trips scheduled in the next 3 months. Meanwhile, my wife had scheduled some long-planned home improvements. And the older Sequoia needed some work. We started getting really busy. So we ate out. A lot. Many of these trips required some expensive, specialized gear to take them. A shotgun. Backpacks. Canyoneering gear. You name it. Then there was the airfare, the hotels, the rental cars, the restaurants, the gasoline, the entrance fees, the tour guides and it goes on and on and on.
Some people might think I'm a little bit miserly. Let me assure you, I have no trouble finding stuff to spend money on. And when I'm working less, I have more time to travel, more time to adventure, and more time to spend. In fact, we got so busy that we couldn't even find time for our monthly “budget meeting.” So we put it off. In fact, we put it off for the whole three months. And when we finally got around to adding up the damage, it was pretty impressive. Our typical “variable” spending category is about $5,000 per month. For each of these three months we spent about twice that, and that doesn't include the $6K we had in our “home improvement” account and the $2K we had in our “vacation account,” which we also blew right through. The good news is that we can afford it. Thanks to having no payments aside from a very affordable mortgage, having already maxed out our retirement accounts and 529s (at least up to the tax-deduction limit) for the year, having a nice clinical income (even with the fewer shifts), and having the highly variable but growing WCI income, we still spent much less than we made over this time period. But I can understand now how people with less income, or less “space” between their income and their fixed expenses, can get into financial trouble in a hurry.
At any rate, now that confessional time is over, let's get into the lessons learned section of this post.
Experiences Over Stuff
The happiness literature is very clear that the best way to spend money, at least if your goal is to increase your happiness, is to spend it on experiences with people you care about rather than on stuff to impress people you don't care about. I guess the home improvements don't fall into this category, but they were things we'd been planning for some time (and had obviously budgeted for as a priority.) But all of the other purchases were for things we'd be using on these trips with people we care about, or the actual expenses of those trips.
Budget/Track Expenses Regularly
One of the best reasons to have a “budget meeting” once a month is so you can put the brakes on quickly if your wheels come off the track. If you're too busy to have the meeting, chances are you're hemorrhaging money.
Creating memories or hemorrhaging cash? You decide at Moraine Lake, Banff
It's Okay Sometimes
I've written before about how budgeting is for rookies. If you have set up your life such that your earning power and your saving muscles are sufficiently strong, then a splurge, even a huge one every now and then isn't going to sink your ship. We keep our fixed expenses quite low, and have significant income. That provides for a lot of variable spending power, and sometimes it is good to use it.
Getting Busy Is Expensive
If you're trying to control your spending, getting busy is usually a bad thing. When you are busy you have less time to prepare your own meals, plan out the cheapest way to do something, ride a bike instead of driving, do your own repairs etc. If you're busy because you're trading your time for money that's one thing. If you're busy because you're planning five vacations at once while catching up from your last one, that's completely different.
Beware the Sheer Number of Transactions
One of the more impressive things as I reviewed our spending was the sheer number of transactions. Since 75% of our spending is done with a credit card, and most of the rest is via ACH transfers out of the checking account, it is easy to count the number of transactions on the spreadsheet for the month. I can remember when there were only maybe 15 on there. In August there were 119. That's like 4 a day! Even if every transaction is only $50 (gas, restaurant) that adds up in a hurry.
The Out of Control Feeling is Unpleasant
The worst part about the whole experience was the feeling of being out of control. I think we both knew we were hemorrhaging money, but we weren't really sure how much. We tried to evaluate each decision for potential increased happiness as we went along, but without an overall idea of where we stood, it was a bit uncomfortable. I imagine some people live their entire lives that way, never really knowing where their money is coming from or going to, but I don't like it much.
Less Work = More Spending
One thing I learned about myself is that if I'm not working, I'm probably spending. I like to see new places and do new stuff. And when I'm out doing stuff, I like having nice gear to do it with. This is really a concern when it comes to planning a retirement (or even just a partial retirement.) What if I dropped four more shifts? Would I spend even more? At a certain point, the increasing spending line will cross over the decreasing income line, and I'll be in trouble.
Beware What You Become Used To
An even more significant issue is one of hedonic adaptation. If our expenses double, so does our nest egg requirement for retirement. If you continually increase your spending at too high of a rate, you may NEVER reach financial independence.
These were just some thoughts I had after doing our budget meeting after the hemorrhage. While it was a little disconcerting to get so out of control, we did have a ton of fun on all these trips, and at that same budget meeting realized that our mortgage payoff fund was equal to our mortgage. We're still making progress toward our financial goals, so no harm done. But it did feel a little like a warning shot across the bow.
What do you think? Have you had a spending hemorrhage? How come? How did you deal with it? What have you done to avoid it in the future? Comment below!
“our mortgage payoff fund was equal to our mortgage. ” Are you now mortgage free?
I suppose we would be if we transferred money from the mortgage fund to the mortgage. Stay tuned for a future post.
We definitely spent more than we expected on our recent family trip to San Francisco. We booked a great price on the flight, and used points plus cash for the hotel, but we definitely splurged on all the awesome restaurants in San Francisco. It was money well spent, though. Most splurges that are travel-related usually are.
I like to use the weight-fitness analogy. A few minutes of loss of willpower over what you eat or drink can erase a whole day or week of excellent exercise and eating habits in the same way that binge spending can quickly negate one’s mostly well-conceived financial habits.
That said, if your weight and running times (for me) at monthly checks are where they are expected to be, no harm was done, and if either are creeping, adjustments are in order. Similarly, if at your monthly or quarterly financial checks, you still might be hitting your financial goals, but if not, there are usually opportunities to adjust accordingly. In your case, the overall financial picture was still on track, so no harm-no foul.
Self-deprivation was never effective for me in the long haul. I have tended to be more disciplined in any effort, be it studying as a student or resident, staying in shape, working a long stretch, or staying financially disciplined when I am regularly rewarding myself for the effort. Smaller, planned rewards tend to fend off the out-of-control binges or “hemorrhage” that you describe. To be honest, given your earning (both real and potential), it was not all that bad.
Are you allowed a little inflation for the weight and deflation for the time trials?!
Care to share your monthly budget breakdown of 5k, just to get an idea of your “usual spending”. Trying to gen an idea of how mine compares.
Well, it’s different every month and we don’t really break it out regularly. For us that was the big pain of budgeting. Having a dozen categories (clothes, entertainment, restaurant, gas, grocery, kid’s lessons, small charitable stuff, gifts etc) was super unwieldy so we just lumped it all together after a while into “variable expenses.” The incentive to keep the amount low is that we get to “keep” the amount of that $5K that we don’t spend that month (it goes to our allowances.) If we really went “Dave Ramsey Every Dollar” on that section of the budget, maybe we could come up with another $1000 a month to use somewhere else. But in our financial situation (multimillionaires, almost no debt, 7 figure income, saving something like 2/3 of our net income) and even that of an average doc, that’s no big deal. Now, if you calculate your savings rate and it’s 7%…..you probably need to start breaking down that category.
But just to satisfy your curiosity, gas is a big one. $1000 a month in the summer with all the road trips and boating and rarely below $300. Restaurants are really starting to get up there. It’s not the occasional expensive one, it’s the 20 different purchases because we got busy or we’re traveling. Groceries for a family of six are not insignificant, especially when family comes to stay. Then every month there are a few larger things like a car repair or a home improvement project, or whatever. It is really highly variable. But when you’re investing 6 times what your variable expenses are….you’ve kind of already won the budgeting game. You won it with the big items which don’t even go in that category.
The little transactions are what kill us. Every day I see a few items and it adds up. The other interesting point you made is if time off = more spending. I could definitely see how that would happen but imagine one way to control it would be doing activities with a fixed cost- I.e. Tennis at a club, etc. That way your time is occupied without huge variable costs.
I’ll add one more point: allow for extra (?hidden) costs when planning trips. Airfare and hotel are just a small part of a trip. Once you get there, you eat out for every meal, you fill your day with activities, you buy things you may have forgotten, some get souvenirs, etc. Not hard to spend an extra $200/day/person, depending on what you do. You mentioned it briefly with gear for hiking/climbing.
The “Time Off = More Spending” line scares me a bit, too. I’m hoping that when I’m retired, we’ll be able to take our time with our adventures, and spread the cost out. When you’re squeezing in trips between shifts and school schedules, those vacations are pretty condensed.
Example: On a recent trip west, the guy sitting next to us was on his way from Atlanta to the Rockies. He makes the flight for a long weekend every 3 weeks or so during ski season. If he were to bring his family, and stay a week, he figured he would spend $10,000 between 4 flights, $400 hotel, $140 lift tickets, equipment rental, ski school, restaurants, etc…
In retirement, I could take the whole family out west (fly or drive), buy a family season ski pass, rent a place a bit further from the mountain on AirBnB (or stay with relatives near Sun Valley), buy used equipment to keep or resell, and make $10,000 last a month or more. Slow travel can cost about the same as standard vacation travel, but last a whole lot longer.
Best,
-PoF
That last sentence is a real pearl. In fact, I’m adding that to the list of quotes on this website.
I was thinking the exact same thing. When you have a job, your vacation time is more valuable and therefor willing to spend more to make the process easier. Skiing is a great example. We ski 4-5 days out of the season therefor we want to make the most out of that trip. We stay on the mountain and pay all the extra costs related to it. If I had more free time then staying off the mountain, cooking dinner, bringing healthier snack with me is a very likely option. Another example is flying first class overseas. I rationalize the extra expense because it allows us more time on vacation. We arrive well rested and ready to explore as well as return equally rested not requiring a recuperation period prior to going back to work. I personally don’t mind extended legroom and fly that way if time is not an issue, but definitely willing to spurge when it it.
WCI, that was an awesome post as I see it happening to me. I see myself sometime blowing through a bunch of cash particularly on my days off. I can tell you this much. I know that my favorite days don’t cost very much. They usually consist of exercise, healthy delicious home cooked meals and spending time with friends/family. The vacations and expensive experiences are just icing on an already very delicious cake.
Our splurges also revolve around experiences. Travel was one of our highest expenses in 2016. When we were working we tried cutting back on our travel only to relapse the next year and travel twice as much. There is no point in suffering your way to financial independence, and eventually we found a good balance by targeting our spending to maximize happiness.
We also found being busy to be a big factor on spending. Convenience can have some big price implications on a lifestyles. Since we left our corporate jobs travel expenses went up, but expenses on things like eating out went down. In the end we spent about the same as while working, but enjoyed it a lot more.
We tend to splurge at most around vacations. To limit it we confine it to those 2-3 weeks a year when we travel. We also set an overall limit defined mostly by credit card cash back. Honestly as you step back on this financial road at some point you realize your definition of splurge or hemmorage doesn’t fit with the rest of the world. If I were to blow 5k in a week of vacation, most others would do 10k. Not to mention the rest of my life has set our finances so far ahead it’s not like that week even amounts to a foot note in our progress. The point as you said is not to make it the norm. Should I spend 5k a week every week it becomes big money.
Hey, everybody should have a good collection of backpacks, canyoneering gear and a shotgun. Definitely a shotgun–in Nevada bankruptcy, your exempted property includes one gun. (And yes, I used that logic to buy a really expensive shotgun….)
Texas allows TWO firearms (and also like 80 head of cattle and 20 chickens or something like that.)
Really? I gotta look that up and buy more firearms. I wish ammo went into that as well.
thanks for the heads up
You can pry my gun from my cold, dead, bankrupt hands.
We used to hemorrhage money like crazy, but the end of month meetings pretty much eliminated that. Sometimes the end of the month meeting are 5-10 minutes long. It’s funny what little things come up when you have them (birthday parties, dinner with colleagues, a new bed for our son). My wife was worried that budgeting would make us “penny pinching cheapskates” but the addition of a guilt-free petty cash (an equal amount for each of us) alleviated those fears. It’s like you said WCI, “spending has a narcotic like effect.” If you are not actively watching lifestyle creep, you’ll be throwing money out the window and not knowing why. That being said, you probably can afford to “throw” a little money out to enjoy b/c of savings and supplemental income.
You really do spend a lot more when you have more free time. I can tell how much my wife worked in a given week by the amount of Amazon purchases!
This is one of the reasons it’s kinda silly to get too in the weeds with estimating retirement spending while still working full time.
We hemorrhaged cash in the fall which was pretty scary because I’d been laid off and half of our income was gone. Between eloping, paying for the living room remodel (that thankfully had already been budgeted for), going to two weddings some plane flights away, paying fall and January grad school tuition, buying my set of rings, the postnuptial agreement, and starting to plan our wedding reception for 2017, the fall of 2016 was pretty expensive. September and October were really expensive and then things slowly calmed back down. I know what the numbers look like overall for the year but my husband says we consciously chose to spend the money we did, plenty still went into savings, and the spending went back to normal eventually so he’s not concerned.
Will you write a post on how you completed your mortgage payoff fund in two years rather than the five you had planned for?
I did. Here it is:
https://www.whitecoatinvestor.com/state-of-the-blog-2017/ 🙂
Seriously, it’s just a function of higher than expected income. If this keeps up I may have an estate tax issue I never expected to have either. First world problems…
That said, mathematically, investing instead of paying off the mortgage was the right thing to do these last two years…
Well, 2016 was good anyway. 2015 was a bit flat if I recall (didn’t you have some issues as you tax loss harvested last year?). Anyway, I’ve been doing the same thing (investing in stocks rather than paying down the mortgage). However, I decided to lock in my gains and throw a big chunk at the mortgage last month. It does feel like dumping money in to a dark hole (albeit a smaller hole now), but I also consider it like rebalancing toward guaranteed bond-level returns.
I’m definitely ahead for investing instead of paying down 1.6% debt even including 2015. I started the “house payoff fund” in September 2015. The XIRR on that is 14.42%. Well ahead of 1.6%. However, my higher income has allowed me to do both- leave that money invested and pay down the mortgage with unexpected earnings.
That picture in Banff – holy smokes! I need to get there someday.
I enjoy this post WCI. My older brother quit his job and retired this past year. He told me he had a similar experience to yours. All of a sudden he was spending 3-4 times what he was normally spending since he was not working all the time and wanted to be busy doing something. That something turned into buying real estate and traveling, both of which are not cheap. I’ve definitely done the same in the weeks that I’m not working. I’ll look back and wonder how we blew through our going out fund twice as fast as we figured. Like they say, admitting you have a problem is the first step 🙂 Getting back on budget is the next one!
I was sick when I added up our 2016 spending and found we dropped 7K on restaurants and concerts. OK, seeing Paul McCartney for the fourth time was worth it, but do we need to go out to dinner twice a week at $40-50 each time? Must say the concerts made for more memorable experiences than all the times we went for nachos because we were too lazy to cook. We have already cut way back on that this year. The other thing that helped the cutting back was finishing our kitchen renovation–yes, another money outlay, but now we enjoy cooking at home whereas before the lack of counterspace, ancient electric stove and lack of dishwasher were creating an easy excuse for all those restaurant meals. After creating the kitchen of dreams, how can we justify “renting” a whole restaurant (as MMM says) for dinner twice a week? There was also a ton of discretionary medical spending (kid braces, expensive adult dental work, chiropractor, dermatologist for some cosmetic issues–a scar revision, preemptive removal of some skin things), so much so that I thought we might get a tax break on this; alas, we only qualified for the state tax break, not federal. When I showed my husband the total we spent on restaurant spending and suggested that we could probably cover two separate week-long adults-only all-inclusive Caribbean resort vacations with that amount, he suddenly decided restaurants and concerts were not so necessary anymore! This year we are shifting discretionary spending to vacations (experiences!) and finishing some home renovations. Also, a good portion of the cost of 2016 vacations to upstate NY and Key West were covered with credit card rewards points and CME reimbursement. Figuring out where/how you get the most bang for your buck is key to not overdoing it, I think.
We generally are of the mindset that family experiences generally result in greater degrees of happiness than the accumulation of more crap. Earlier in our careers, we did quite a bit of accumulating. Now in our early 50’s, we have been divesting ourselves of the clutter that burdened our lives and our house.
This year however, we temporarily hemorrhaged money for a remodel of the kitchen and bathrooms. I postponed and postponed, but just got too tired of duct taping and gorilla gluing the cabinets. Our ovens both broke down, and we were using toaster ovens. My wife is a great cook, and the ovens were her last straw. She finally got her Subzero and Wolf, and gutted to the studs. You may not believe this, but the new kitchen and baths also have resulted in greater happiness. After all, everyone does hang out in the kitchen area. So, does a new kitchen count as more crap?
I don’t think it’s more crap if you throw the old kitchen stuff away. It’s the same amount of crap. Just different crap!
But the key is to evaluate every purchase for happiness, because you’re trading very real life energy/time for it.
The last two points are important. Since going half-time I’ve noticed our spending has drifted up, mostly due to travel and in spite of cutting back and being more efficient in other areas. Like PoF mentioned though, we are able to get more bang for our buck by being more flexible and taking our time.
As that spending number drifts up so does the pile of assets I need, and subsequently pushes back the date of financial Independence. Hedonic adaption is so sinister. I’ve read more than most about the topic and have written thousands of words about it, yet I’m not immune. I guess I’m not a completely rational AI robot after all 🙁
My gf and I budget one paycheck a year towards vacations, which we Go on together in lieu of buying each other birthday gifts. Keeps us happy and we’re able to spend more when making more , and less when making less. Our vacations during med school were not as extravagant as they are now, but this system seems to work for us.
Do any of you independent contractors write off any of these trips as “shareholder meetings”?
I do this and try to stick to the amount recommended by our accountant. It allows for some very nice vacations but sets strict limits and requires a bit of planning.
Imagine yourself sitting across the table from an auditor. Does what is coming out of your mouth sound stupid? Then you probably shouldn’t do it. But I’ve had a WCI retreat before. Maybe we’ll do one again.
this is not the tex from the forums, fwiw
Riiiiiight
Currently, there are so many fun things to do, but so little time. After reducing hours at work (like WCI), this might become so many fun things to do, but so little money. Reading this post and the forum thread about healthcare in early retirement, I can definitely see how the FI number can just drift higher and higher. We currently spend around 50K per year, but factoring in perhaps 20K of travel/recreation/fun expenses and 20K or healthcare spending in an early retirement, we might be closer to 100K of spending in retirement, which means that FI number quickly rises from around 2 million to 4 million. I guess it’s better to figure this out now than come up short.
$4 Million for a $100K spend? That’s a very conservative withdrawal rate. You’re basically just spending dividends (maybe slightly more) at that point.
Yes, I agree that may be an overly conservative withdrawal rate. I am planning to aim for a 3% withdrawal rate, which would be 120K/yr spending on a 4 million portfolio. Reading this blog post, I started to dream big(ger) about all the exciting stuff that is possible to pursue, and some of this stuff doesn’t come cheap. I’m pretty sure I could spend 20K on all the gear and training required to climb Denali.
$20K seems a little high. I think it was $5K back in the early 90s when I did it. You could probably do it for double that today.
Make sure you really understand what a 3% withdrawal rate will probably mean for you (i.e. leaving a huge amount of money behind). Don’t be afraid to adjust as you go.
RE: Less Work = More Spending
Henry Ford saw this principle and made it part of his business by creating a 40 hour work week for his employees:
“Leisure is an indispensable ingredient in a growing consumer market because working people need to have enough free time to find uses for consumer products, including automobiles.” (or in WCI’s case, including shotguns and climbing equipment)
Going through this myself. Dropped from 17 shifts to 12 to do some admin work and spend more time with the kids. Now I have a lot more flexible time to do stuff and spend. Add in my 10 year old car that quit on me last month and a flooded house, and my savings rate doesn’t look nearly as good as it did.
Just be careful with variable income and not a wide moat. That is what got us into trouble. We spent $ for the experiences, $ that we expected to pay back through the year with a high variable income. The income was variable, alright, but the high part wasn’t quite as high. So as I try to learn wait training. Save first, spend later. And those little transactions, special equipment, last minute purchases, etc sure add up.
cd :O)
Always told husband I’d end his retirement if he was too expensive with all that time off. He’s done fine- computer games aren’t that much more expensive when you double or triple the number you purchase. Now filling MY time doing a sewing project and see myself spending $300 to make a present, handmade and fun as my hobby, that replaces a $50 or so ($20 for really low end quality) factory made item. But having lots of fun spending that $300 at quilt and fabric shops across the SE on trips, and wearing out the sewing machine. Just, when this project is done, then what? Hopefully use up the scraps without buying any more fabric! But can’t fill our and kids’ linen closets with Mom’s projects; they just aren’t that good and how many blankets do you need anyway?!?