You need a budget!
No. No you don’t.
OK, fine. But then you need to track your spending. Every dollar!
Yeah, I’m not so sure about that, either.
If you’re a born spender and have never met a credit card you didn’t like, you would benefit from both a detailed budget and the tracking of every penny going out the door.
Personally, I’m more of a born saver. Or maybe I learned to save. Frankly, whether it’s nature or nurture is immaterial.
The fact is that I somehow became financially independent after about ten years in the post-residency workforce without budgeting or tracking my spending.
Tracking your spending a good way to learn about your habits, though, and I did it for the better part of three years once I started blogging, but the process is not without issues.
Top 5 Reasons Tracking Spending is Problematic
#1: Everyone Does It Differently
Spending is a hot topic in discussion forums, especially when it’s all doctors talking as it is in the Physicians on FIRE Facebook group or you’re dealing with big spenders like some of those in the fatFIRE group.
When someone asks what others spend the most on, the responses inevitably include things like:
- “my kids’ college tuition”
- “the mortgage”
I guess I “spend” or have spent money on all of these things, but when I was tracking and reporting my spending, I didn’t include any of them. Let’s look at each one in more detail.
Income tax is a byproduct of having earned income. If you’re employed, roughly 90% to 110% of it is withheld from your paycheck, so it never even hits your accounts in the first place. When you stop working, this tax could go away completely. I’ve never considered income tax paid to be money spent.
It helps to consider why we wish to track spending in order to decide whether or not to count a particular line item as spending or not. With the focus of this site on financial independence and retiring early, we’re generally tracking spending to determine how much money we need to be FI and to be in a position where work is indeed optional.
It makes sense to disregard income tax as money spent. For future planning purposes, consider only the amount of income tax you would anticipate owing as a retiree, which ought to be small if you don’t have huge tax-deferred retirement account balances or continued earned income.
Income tax isn’t the only tax we pay, though. There’s also property taxes and sales taxes and I actually count both of those in the spending column.
Property taxes (real estate taxes) are a byproduct of owning property. If you choose to own a large, valuable home or live in a state with high property taxes (or both), you’ll spend a lot on property taxes.
If you live in a small home or a state with low property taxes, you’ll spend less. If you’re a renter, you’ll spend nothing on property tax. The cost is a result of the choices you make, and paying property taxes is essentially a form of consumption.
I do count property taxes when determining my spending, and they’re not going to change in retirement unless your living situation also changes. If anything, they’ll just keep on rising.
What about property taxes on investment property? That’s tricky, because you do have to write the check, but the cost is hopefully offset by the income or appreciation from the property. I probably wouldn’t count it as spending, but it could be a gray area.
Sales taxes are baked into the price you pay for goods and some services, so these taxes are obviously included when calculating spending.
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My Kids’ College Tuition
Some people do spend a heck of a lot of money on not only their kids’ college tuition, but also those $300 textbooks, random fees, room and board, beer, and more.
Some choose to cash flow it, paying as they go. Others save well in advance, shoveling tens or hundreds of thousands of dollars into 529 plans.
You might bear this cost for two years if you have one child in a trade school, or it could span decades if you have several kids a few years apart who take different paths. You know, a lot of people go to college for seven years, or so I’ve been told.
When I was diligently tracking my spending, I did not count our 529 contributions as a form of spending. It felt more like investing, but it’s really more like pre-paying for a future cost, which sounds an awful lot like spending.
I was probably wrong to disregard that as a non-spend, but, as I said, everyone does it differently. At least I know it’s one cost that will go away eventually.
A reference to everyone’s favorite mutual fund, the Vanguard Total Stock Market Index, many people say their most expensive purchase every month is VTSAX or whatever investment they’re loading up on.
For reasons that should be obvious, I don’t think it makes sense to count money that you save and invest as money spent. Nevertheless, if that’s where most of the paycheck goes, I can see why some people say it’s the most expensive thing they buy.
Here’s another gray area and another place where I may have been doing it wrong.
A substantial majority of our charitable giving is done in an indirect manner. I donate the most highly-appreciated mutual funds from our taxable account to a donor advised fund. This is typically done in one big chunk towards the end of the year.
Throughout the year, we make grants from our donor advised fund(s). Each year, we give away $10,000+ to charities requested by readers and a similar amount to charities of our choosing.
Although I don’t count any of this is spending, the funding of the DAF does decrease our net worth. However, when I no longer have earned income, I don’t anticipate making substantial further contributions, but I will have a sizable pot of money to dish out over my remaining lifetime.
The principal portion of your mortgage payment does actually improve your net worth. Should only the interest portion be counted as spending?
If you do own your home outright, should you factor in imputed rent as a hidden spend? There is a hidden cost to parking that money in a home, as there are probably other investments that would be expected to offer a higher return over the long haul.
Home ownership is a messy mix of consumption and a high-fee investment. In terms of calculating your spending, well… it’s problematic.
#2: When Spending Isn’t Spending
Speaking of home ownership and messiness, try to keep the Lego confined to one room. Also, how do you categorize costs related to home improvement?
For example, you might remodel a bathroom for $12,000 and expect the renovation to increase the value of the home by $10,000 to $15,000.
Did you spend $12,000? Or only $2,000. If the value was truly increased by $15,000, can you give yourself a $3,000 spending credit? Was it anti-spending?
You might spend money to improve investment property. If the outlay increases the amount of rent you can charge or makes it more appealing to Airbnb guests, surely that’s not spending, right?
There are other situations where spending maybe isn’t spending.
It’s not just home improvement; what about personal improvement? You buy a book that helps you become a better entrepreneur. You enroll in a $500 course that will save you many thousands of dollars each year. You go on a restorative retreat that allows you to be more productive at work upon your return.
Each of these examples requires an expenditure, but the return on investment may offset the cost ten times over.
#3: Past Performance May Not Be Indicative of Future Results
As I mentioned earlier, the main reason for tracking spending is to get an idea of what your future spending might look like and allow you to determine how much you need to save (or how much passive income you need to generate) for retirement.
Three quarters of the way through the third year, we were on pace to spend about $66,000. Then I went out and dropped nearly $30,000 on a car.
So the final year, if I would have stuck with the tracking and tallied it up, the final number would have ended up being about $100,000 that year.
Throughout this time, our health insurance has been heavily subsidized by our employer.
There are a lot of “one time” expenses that come up more often than you realize. For the rare ones, like buying a vehicle or doing significant home repairs or improvements, an actual or virtual slush fund should probably be accounted for when determining your spending needs, if not your actual spending.
If you spend $20,000 to $30,000 on a new car every 3 to 5 years, you should count that as a $5,000 to $10,000 annual expense. I didn’t.
Additionally, your family size will not remain constant over a lifetime. If you’re a parent, your kids’ appetites will grow. They’ll learn to drive and will drive up your auto and umbrella insurance bills. They’ll leave home and maybe boomerang back and perhaps one day have kids of their own.
They may get into legal trouble or have expensive medical issues. They might be wildly successful financially or woefully helpless without your continued support. They’re basically one giant question mark.
But hey, so are you.
Your wants and needs will change. The hedonic treadmill can suck you in despite your best intentions. New friends can mean new expenditures. You’re not going to make them go on that Danube River Cruise alone now, are you?
Tracking spending is useful to get an idea of what your spending looks like at one slice in time, but don’t expect the pie to be cut into equal slices as life unfolds.
#4: The Gamification of Spending
If you have a competitive streak in you, once you start keeping score, you pay closer attention to how you’re playing the game. In terms of tracking your spending, this could be a very good thing or a not-so-good thing.
When I’ve closely tracked my caloric intake, as I’ve done for a month at a time a couple of times, I tend to snack less and eat smaller portions. I want to get a good score, and in that game, I’m going for a low score (yes, I know all calories are not the same, etc…).
The same can be true when tracking spending. You might try to beat your previous “high score,” which is actually a low score, and may be unnecessarily depriving yourself.
Granted, most people would benefit from this gamification. After all, people who take it upon themselves to track every dollar spent are usually doing so in an effort to identify where the money is going and how more money can be saved.
When taken too far, or if you’re already spending a relatively low amount, you might run the danger of acting cheap. I see nothing wrong with being frugal, but it’s not cool to be cheap. Yes, there is a difference.
#5: Tracking Spending is Kind of a Pain in the Butt
It used to be that the only good way to do this was by manually entering every purchase onto a paper ledger or computerized spreadsheet.
The good news is that it has gotten easier, and much of your tracking can be at least semi-automated. Websites like Mint and Personal Capital will automatically track any expenses you put on a credit card or pay from a checking account as long as the accounts are properly linked with the free online service.
Those services aren’t perfect, though.
They do their best to categorize every purchase, but too often they’re just plain wrong.
Sometimes, something like an investment, a credit card payment, or money transfer between accounts will be counted as money spent. You can manually change these miscategorized transactions, but to catch them, you need to review the ledger line by line.
If you want your spending totals by category to be accurate, you’ll have to split some individual purchases into multiple categories. If you swung by Walmart and picked up some beef jerky, a bottle of whiskey, a fishing pole, and some duct tape, I’d be very curious as to what exactly you’ve got planned for the evening.
I’d also say you’ve got four items that fall into four different spending categories. If you want the numbers to be accurate, you’ll have to manually enter the prices of each object, one of which may not have sales tax applied (the jerky) and another that may be taxed at a higher rate than the others (the whiskey). Or you could cheat like me and call it all “groceries,” not that I ever left the store after picking up exactly that shopping list. I prefer beer to whiskey.
Cash purchases also require manual entry. We’re still a ways away from being a cashless society, so every time you pull out a greenback, you’ve got to make a mental note to enter that transaction or pull out your phone and enter it in the app right then and there.
Should You Track Your Spending?
If you’ve never done it before, it honestly is an insightful exercise. I learned that this post-retirement life will probably cost me about $220 a day, and that’s a very useful number to know, even while knowing it’s certainly subject to change.
It’s true that different people will calculate spending in different ways, and there will be some gray areas. If you’re consistent in the way you track itand make some reasonable judgment calls, you’ll end up with some useful data yourself.
It can be a pain in the butt, and that’s one reason we stopped tracking it as closely as we once did. We also learned that our spending didn’t vary much from year to year, although we recognize that it will change, perhaps drastically, as we enter into different phases of our lives.
Is it problematic? It is, but I do recommend at least having a rough idea of how much you’re currently spending and what kind of lifestyle you’ll want to support in retirement.
It’s less useful as a comparison with other people’s numbers because we all live different lives and may count or leave out different things.
I no longer keep track like I once did, but I have a good idea of what our spending needs are going to look like, and that’s good enough.
Do you track your spending? To what level of detail? What have you learned from keeping track of your expenditures?