Perhaps one of the most tedious aspects of creating an usable personal financial plan is providing reliable expense numbers. It is also one of the most important parts of the planning process. First pass, many new clients underestimate expenses. A $10,000 expense gap, calculated 30-40 years out, growing at an inflation rate of 3%, underrepresents a family lifetime need by over $500,000. More often, double. The result could impact plan recommendations and priorities, and may cause a plan to fail. If you would like to get coaching on the best managing to mitigate this gap, we welcome your call.
In the meantime, I thought you might find the exercise of an anonymous contributor of self.com interesting.
~ Rich Arzaga, CFP®
Contribution by Anonymous
For one thing, coming face-to-face with my expenses helped me curb my spending.
In theory, I’m really into money management. I have at least four budgeting apps on my phone. I compare prices at local supermarkets like it’s nobody’s business. I keep extremely thorough financial records. I obsessively read about other people’s spending habits (money diaries, anyone?).
In reality, I haven’t been on top of things. I got married, and then it was the holidays, and then we were traveling, and now all of a sudden it’s April and I’ve found myself handing over the credit card first and asking questions later.
I’m a full-time freelancer, so I don’t get a regular paycheck every two weeks. Instead, I have two or three regular clients who pay me on a weekly or bi-weekly basis, and then anywhere from seven to 15 different one-offs or projects going on in the background (anything from quick news articles for $40, to long-term reporting projects for $1,500, to in-house consulting for $300 a day). Rates depend entirely on the client, and many companies’ freelance budgets will change from week to week.
Some clients pay immediately; others take weeks or even months to do so. As such, I never know exactly how much is going to come in each month—I’m theoretically owed thousands of dollars, but I don’t control when I’ll actually see that. If everything goes according to plan, I’m on track to make about $75,000 in 2018, before taxes—but that could change in an instant depending on how well my clients are doing, whether I can maintain good relationships with them, and what happens in the media landscape overall. The good news is that my husband and I are also currently on track to meet our annual savings goals of maxing out our 401(k)s and saving over 40 percent of our combined post-tax income. We are immensely privileged to be in this position and I try my absolute hardest not to take it for granted. That’s part of why this experiment makes sense for me—I still feel like I’m spending money on things that aren’t worth it for me personally in the course of my day-to-day life, which is not great when I don’t know exactly when my next paycheck is coming.
Because of this, and since tax season is (rapidly) approaching, I steeled myself to do a hard reset on my spending habits. I turned to Priya Malani, a financial adviser and the co-founder of financial planning firm Stash Wealth, to find out exactly how to do so. Before the experiment, I hoped that keeping this diary would help me identify my priorities and adjust things that don’t align with them. Here’s what Malani recommended I do.
Step 1: Track everything I spend in a week, no exceptions.
“Tracking where your money is going is an important first step,” Malani tells SELF. “Because we all think we know where our money is going, but we really don’t—and tracking your spending is a surefire way to highlight that.”
Malani asks her clients to track their spending on a one-time basis and analyzes their spending from there (most of her clients will track their baseline spending for a month, but she says that a week would suffice for my experiment). If people are living beyond their means, she works with them to find a way to scale back their spending. If they are not, she helps them set up automated transfers of their money to investment vehicles or saving accounts in accordance with their goals, allowing them to spend what’s in their checking accounts freely and without guilt.
Malani recommends writing down every purchase you make in one place, and using a credit cardfor all purchases, so you can double-check what you’ve spent. Quick note: Using a credit card for everything is only advisable if you don’t have credit card debt and if you pay your card in full every month without exception. If that doesn’t seem like an option for you, just be extra meticulous when writing down your purchases.
Step 2: Categorize everything I bought to see what was worth it—and what wasn’t.
Malani says that categorization can be super helpful. “It will make you more conscious of what you thought or felt after you made the purchase,” she says. “And it will be a good reminder of whether or not you want to do it again.” She says most spending falls into one of the five following categories:
- “I probably shouldn’t have bought that.”
- “That wasn’t worth what I spent on it.” (translation: It didn’t give me X dollars worth of enjoyment)
- “I can’t believe I spent X dollars on that.” (translation: I could have gotten this for cheaper)
- “That was worth it.”
- “I had to buy that.” (for example groceries, rent, cell phone bills)
After I tracked my spending for a week in a Google Doc, I went back and categorized them based on Malani’s list and tallied up the totals from there.
Here’s the damage (AKA, all my weekly spending, tracked):
- $2.99 on a Kindle book for my book club read, which wasn’t available at the library near me
- $121 for a monthly NYC subway card
- $29.33 on a book (Writer’s Market Deluxe Edition 2018, if you must know)
- $5.33 for an almond milk latte
- $43.79 at Whole Foods, which got me a pound of salmon, baby kale, hummus, baby carrots, celery, 2.5 pounds of grapes, minced ginger, three olive snack packs, a bulb of garlic, and two punnets of blackberries
- $10.68 on a bottle of prosecco for my book club
- $30.60 for an Uber from my book club back to my apartment
- $123.84 for my half of dinner (one entree, one appetizer, one cocktail, two glasses of nice wine, and a 20 percent tip) at a fancy restaurant for date night
- $5.37 at Pinkberry
- $7 for two late-night beers
- $7.20 on an almond milk latte for me and a large coffee for my husband
- $13.59 on extra credits for ClassPass
- $50.85 at Trader Joe’s, which got me two bags popcorn, frozen pizza, strawberries, blueberries, blackberries, celery, baby carrots, edamame hummus, two ginger kombuchas, a tomato feta soup, two prepackaged salads, one coconut yogurt, and two bars of chocolate.
- $45 my half of $90 for our cleaning lady, who comes every other week
- $9.47 on tampons
7-day total: $506.77
This week’s spending pattern was pretty typical, with a couple exceptions. I ate almost every meal at home (except dinner out once and one brunch at a friend’s place) and socialized mainly at friends’ apartments, while on a typical week I’d eat out a couple more times at relatively inexpensive places (like tacos and a couple of margaritas with friends on a Thursday, or grabbing lunch at a salad shop between meetings). Plus, the one dinner my husband and I went to on this week was super swanky, which was lovely, but not something we should do (or actually do) regularly.
My grocery spending this week was fairly regular. I started the money-tracking week with groceries left over from a previous Trader Joe’s run, and ended it with enough groceries left over to get me through to Friday afternoon.
One thing to note is that very few of my monthly personal or shared bills were due this week, like rent and utilities (~$1100), my cellphone bill (usually around $90) or monthly gym membershipwith unlimited classes ($205).
And here’s that weekly spending, organized by category:
Following Malani’s guidelines, I categorized each expenditure after the fact.
- I probably shouldn’t have bought that:$5.33 on coffee, $7.20 on more coffee, $13.59 on ClassPass credits. (Total: $26.12)
- That wasn’t worth what I spent on it:The $2.99 Kindle book was terrible. (Total: $2.99)
- I can’t believe I spent X dollars on:The $29.33 Amazon book, which I should have borrowed from the library. I’m also going to include the fancy $123.84 date night dinner here, which I totally loved, but isn’t something we should do too often. These are things I could have gotten for much, much cheaper (or free, in the case of the book). (Total: $153.17)
- Worth it to me:The $10.68 prosecco; the $30.60 Uber that kept me from taking an hour-long, two-train journey while tipsy; Pinkberry and beers; and $45 for our fantastic cleaning lady. (Total: $98.65)
- I had to buy:The $121 subway card, $43.79 on Whole Foods groceries, $50.85 on Trader Joe’s groceries, and $9.47 on tampons. (Total: $224.84)
The final step: Figure out if my spending is in line with my priorities.
At the moment, little purchases like frozen yogurt and the occasional Uber rides are worth it to me, because they bring me happiness without getting in the way of long-term savings goals. Again, we are incredibly lucky to work jobs we enjoy that allow us a comfortable living. If we made any conscious, expensive life changes like moving to a larger apartment with higher rent, having a child, or even getting a pet, I’d likely no longer be able to justify my spending in categories 1, 2, and 3—and I’d likely think hard about whether the items in category 4 remained worth it to me, too. And of course, should we find ourselves in a personal or family emergency that required buckling down financially, these categories would be eliminated entirely.
According to Malani, in the pursuit of savings goals you should aim to be frugal, not cheap. “Frugal means you are willing to spend money on something you value,” she explains. “Cheap means you are not willing to spend money on anything.” So, figuring out what you value is crucial.
So, what did I learn from this?
One surprising side effect of this experiment was that I questioned a lot of purchases in the moment, knowing I’d have to write about them in this article. There were a few times I wanted to wander into a nearby Sephora to peruse the goods, but I knew I didn’t need anything and didn’t want to justify the inevitable purchase. Accountability works, y’all.
I have definitely impulse-shopped in the past, but I can see how writing down and evaluating all spending would curb that pretty quick. Avoiding the hassle of writing down and explaining a purchase stopped me from going into a few stores, and made it more likely I’d stick to my grocery shopping list.
Going forward, I’d like to keep spending mindfully and evaluating what purchases are worth it. Right now it’s worth it to me to spend money on fitness, time with friends, and a clean apartment. Seeing what purchases I “can’t believe I paid X for” will certainly inform my spending in the future. Based on this week’s spending, I’ll be looking for free or cheaper date-night options, utilizing the local library more, and continuing to socialize at home or at friends’ homes as much as possible. I’d also like to take a wider look at our finances to make sure we are optimizing our charitable giving and planning appropriately for our futures.
Essentially, this experiment was a thought exercise that I’d recommend to anyone interested in evaluating their money habits. Am I spending my money on things that actually bring me enjoyment while still meeting my long-term goals? For the most part, on this particular week, the answer was yes. But we really need to purchase a coffee maker.
This article was prepared by a third party for information purposes only. It is not intended to provide specific advice or recommendations for any individual. It contains references to individuals or entities that are not affiliated with Cornerstone Wealth Management, Inc. or LPL Financial.
All illustrations are hypothetical and are not representative of any specific situation. Your results will vary.