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Monday, March 27, 2017

Using What You Already Own

Posted by Tim Stobbs on February 10, 2017

My wife and I use our spending cash to handle all the little things your typically buy yourself like a cup of coffee or a lunch out.  We both get $200/month each to fund whatever we want and if you don’t use it we are free to save it up for something else.  Essentially, it our way to ensure we have some money to spend guilt free without having to check in with it other.  The only expectation between us it we will use it to buy the odd bit of groceries for the house.  For example, some milk, eggs and bread.

Now January usually is a low spending month, after all, you just got a lot of stuff after Christmas so you typically don’t need much, but this month I have by accident taken it to extreme.  I have spent less than $25 of my spending cash for almost the entire month.  How did I do this?

Well I can tell you I wasn’t doing some super controlled spending challenge, or pinching my pennies till they squeaked.  Nope, it happened partly by accident and the other part of it was on purpose.

The first reason this low spending occurred is: my default state in life is to not spend money.  Pardon?!? I know it’s a bit odd, but perhaps I should approach this from the other side.  I know many people who consider that you have to spend money to have fun in life.  For example, to have fun with friends you must go out to a restaurant, pub, movies, etc.  Or to enjoy time as a family you must go out swimming or go to a movie at the theater.  Our lives are basically the opposite of that: how do I do things I enjoy without spending money (or very little money).  So to hang out as a family we go sledding with the kids at a local hill that is a five minute drive away and then we have hot chocolate with way too many marshmallows when we get home. Or we have friends over for supper and play games afterwards while the kids watch a movie in the other room.

The second reason is a bit of conscious exercise that I plan to do this year which is simple put: use the stuff I already own.  It may seem odd, but I noticed people tend to have the habit of always seeking out things they don’t have.  We want the new shirt or shoes; we want the latest movie, video game or a new book.  Yet we tend to ignore the huge pile of stuff we ALREADY own and don’t use much (if at all).

So to show a bit more respect to those previously spent dollars I’m making an effort this year to use what I already own.  I want to reread my favorite books, re-watch my favorite movies and TV shows, and use the recreation gear I already have (like roller blades and golf clubs).  I want to use our good dishes for the occasional Sunday supper.  I want to dig around my house and rediscover what I have forgotten we own (like the old Wii games or the video games that are already on my hard drive) and do projects with materials I already have.  Or cook with those spices and other food items I bought for one or two recipes and largely forgotten about.

Rather than looking for more without, I’m going to look for more within.  If nothing else, it should be a fun year.  So do you remember to use what you own?  If so, do you find it helps you spend less without much effort?

Overly Optimized Spending

Posted by Tim Stobbs on January 10, 2017

As many of you already know I have a very optimized plan when it comes to us spending our money each year.  I don’t spend more than I have to on my water bill, we borrow books from the library prior to buying them and will gladly spend money on buying a wine kit to brew at home instead of buying a bottle from the store.  Over all this results in us having a very good life on far less than most people would for a similar lifestyle.  Our spending is highly optimized to our particular wants and needs.

So for years I’ve generally considered optimized spending a strength of our plan after all when you are reducing your spending the you have more money for savings each month and you also can reduce your overall retirement goal.  For example, if you need $1 million to retire with a $40,000 per year expenses, if you drop your expenses to $30,000 you only need $750,000.  So you don’t have to save that extra $250,000 in the first place.  I always considered this a good thing.

Except when it isn’t.  Oddly enough I came across the idea it can also be a weakness to your retirement plan.  Which I thought was a bit silly at first until I realized what they were getting at (sorry I don’t recall where I read this or I would link back to the source).  Having overly optimized spending also means you don’t have much fat in your budget to cut as the core spending (like your property taxes, home heating, power or water) takes up a greater percentage of your overall budget.  It also means any jumps in those core expense have greater impact on your budget as you have less optional spending elsewhere that you can cut to cover it.  After all, when you are overly optimized you already cut most of the optional spending out years ago.

So let’s compare two cases to demonstrate this:  let’s say family A is spending $40,000 a year and they retire with $1 million saved.  Then the stock market drops 40% and inflation spikes so their core spending goes up $1000 per year.  So being reasonable people they look to cut $1000 per year out of their spending (or 2.5% of their yearly budget) and they go after a few things they haven’t optimized before and make up the difference.  Then we have family B with $30,000 a year spending and only $750,000 saved.  They have the same event and $1000/year increase in core spending from inflation.  Now they have less to cut in the first place and they have the added bonus of the increase being a higher percent of their spending at 3.3% of their yearly budget.  Over all family B’s ability to cut spending is more limited and the increased core spending dollar amount has a greater impact overall.

Hence the point that overly optimized spending can also be a weakness during your early retirement beyond being a help to get you their sooner.  So how do you deal with this issue?  Well me personally I don’t plan on changing my plan because of this, but I would suggest the idea of making sure you do have some buffer in your budget.  You might not really need that buffer most of the time, but even if you don’t use it initially that extra money could be spent on a one off event later on if you aren’t using the buffer.  For example, take an extra trip every five years if you aren’t using that buffer amount.  The size of that buffer is a personal choice and will shift with how much slack you have in your overall budget.  The more optional spending you have, the less buffer you may need and vice versa.

So do you have overly optimized spending?  What would you do to resolve the risk of higher inflation and a lower market?

The Christmas Budget

Posted by Tim Stobbs on December 10, 2016

“Sorry.” My wife says to me.

“For what?” I ask.

“I over spent on your Christmas present.” She replies.

I shrug my shoulders, “It happens. I’ve done it for you on the odd year. How much?”

“$7.” She replies with a slight grin.

You see why I love this woman right.  She feels the need to tell me she went over budget by $7.  Not because she feels guilty, but we just have a long standing policy of being honest with each other.  For the record, I under spent on her by $5 this year.

Yet to me that is a perfectly normal part of our Christmas budget.  Yes you will over spend on somethings.  That is entirely okay to do, as long as you are under spending on other presents.  So for us, this has been the rule of thumb for years.  Just because you have $5 left over in the budget doesn’t mean I NEED to spend it on one more item for their stocking.  After all do you really think buying that one little thing will make or break their Christmas? The answer is no (and if not you have an entirely different set of problems).  The result of this long standing rule, well we usually come under our Christmas budget.  Which is good because some years we have made mistakes like forgetting to include mailing gifts to the other side of the family.

What also helps is we always set the budget prior to starting to shop and limit our gifts to mostly family.  I don’t give gifts to our kids’ teachers, I don’t even know my mailman’s name and I don’t buy anything for a co-worker.  We will bring a small gift is invited to a party or supper but usually the consumable kind (like wine or dessert).  It also helps that both of our families have started gift exchanges for the adults.

In the end, I believe Christmas is about being together with people.  I like getting a few gifts (I won’t lie) but really I don’t need much to be happy.  I rather spend an afternoon drinking coffee and visiting than get another present.

So how do you keep your Christmas spending in check?