Wednesday, February 11, 2015

Step Two – Keep Spending at Manageable Levels

As mentioned in an earlier post, the next rule to follow in planning for a comfortable retirement is to keep spending at manageable levels. Said another way, this is the age old adage of 'live within your means'. Of all the basic rules for accumulating wealth and planning for a comfortable retirement, this is perhaps the most important one.

To help keep our spending in check, we live on a budget, track all of our expenses, and observe our spending trends and patterns, adjusting our budget as needed (side note: our household budget file is a spreadsheet named 'money stuff', hence the name of this site). Since we have been doing it for several years, this has become more for tracking expenses and anticipating upcoming large expenses or purchases and not so much for finding ways to save additional money. I am convinced that had we not been following a budget, we would not have been able to do things like paying cash for our vehicles and large home repairs, or making it through graduate school without any student loans.

In today's culture, just the word budget seems to have negative connotations and conjures up thoughts of depriving oneself. I prefer to think of budgeting as a way for you to determine your priorities, and for you to make conscious decisions on how to deploy your limited resources. Everyone has different priorities and preferences, so allow me to share some examples from our household of how we are keeping our spending to manageable levels.

  • We currently have a mortgage (our only debt), and the minimum payment is less than 20% of my monthly income. Because it is a 'manageable' amount, we are able to pay extra on it every month. When we bought our current home, we took all of the equity from our previous home sale and applied it towards the purchase price. We currently have about 40% equity in our home and are actively working on paying off our home well ahead of schedule.

  • Our cars are all paid for. We plan in advance and save up to purchase cars and we buy gently used vehicles. I drive a Corolla, which has been great on gas and maintenance, while my wife drives an Expedition. Which is the opposite of fuel efficient, but is great for hauling kids and all the things that go with them. The total value of the cars if we had to replace them would be less than 15% of my annual income. Again, the value of our vehicles is manageable relative to our income.

  • We maintain an emergency fund of cash which allows us to not go into debt for any unanticipated expenses.

  • Our budget includes a tithe of 10% of our income to our church as well as charitable contributions to other organizations.

  • When thinking about trade-offs, one thing we prefer to spend our money on is books. To illustrate just how much we like books around here, last year we spent more on books than we spent on all other types of entertainment combined (museums, movies, movie rentals, sporting events, etc). This is our personal preference, and it works for us.

  • As I've mentioned earlier, we tend to be big do-it-yourselfers, not just in personal finance related matters, but also around the house. This allows me to learn valuable skills and save a lot of money on home and other repairs. Recent examples of this were when I spent a few hours doing a repair in the crawlspace of our home to save $500, or when I used YouTube to learn how to fix my lawnmower and save $200-300 for 2 hours of work.

  • Nowadays it seems like every new product that comes out has a monthly subscription tied to it. We think long and hard about anything that involves a recurring charge, or before increasing our existing charges. Some examples of this are that my wife didn't have a smartphone until last year, I had had one for a few years but had an inexpensive prepaid plan. We also went about 6 years without owning a TV (long story), and even now that one was gifted to us we still don't pay for additional channels (did I mention we like to read all those books we buy?).

The takeaway from this post is that you need to know where you money is going. This allows you to allocate funds towards goals like retirement. If your expenses don't allow for you to save for retirement or a rainy day, then your expenses are not 'manageable'.

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