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 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.
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!