What Do You Spend?

I’m sitting in Paris above a busy retail street, about to head to Sierra Leone to help subsistence farmers increase their crop yields and incomes so they can afford education, healthcare, food, and shelter. I feel like a traveler on an ancient highway, an opulent market filled with wonders on one side and destitute workers on the other. How much of my gold should I spend at the market, and how much should I use to help the workers? Before I can give money to help subsistence farmers, I need to know how much I need to feed my own family and meet my own goals.

You actually have four options for your money; spend it, give it away, save it, or pay taxes. We’re going to talk about the first and most important one, spending. Spending is the most important part of a successful financial plan, and the easiest to control.

How do we figure out what we spend without painful amounts of work? Who wants to write down every single expense in a little notebook, or keep envelopes with cash for each area of our spending? I find that only a fraction of the population has the patience to link every account to Mint or Quicken and accurately categorize every penny. I remember sitting up late into the night, poring over reports, adding up categories, linking newly-opened credit cards, all in a laborious attempt to come up with one simple number: what did I spend?

Here’s my shortcut. Let’s imagine you’re playing a game in which you start with 100 marbles in your bag. During the game, you gain 10 more marbles, and at the end of the game, you have 90 marbles left. How many did you lose during the game? Add 10 to 100 to get 110, subtract 90 and you find that you lost 20 marbles.

It’s the same with your spending. All you need to do is figure out (the simple version):

  1. What you started with, in cash, in all your bank accounts at the beginning of the month.
  2. Plus what you deposited – make sure to leave out any new deposits from borrowing.
  3. Minus the cash you have at the end of the month.
  4. The result is your spending!

In reality, it’s a tiny bit more complicated.

First, I assume you pay off all your credit cards every month (if you don’t, you need to read a different blog). Also, if you’ve been carrying credit card balances and are paying down more than what you spend on your cards each month, that “extra” should be subtracted from step 4 above.

Second, income taxes and contributions to your investment accounts should also be subtracted from your total to come up with your true ongoing spending.

Third, you may have some lumpy expenses in there like annual property taxes, or you may be missing others, like the annual insurance premiums you paid a few months ago. To fix these, you can try doing this exercise for a full year, which should mostly smooth out the lumps. You could also take the lumps out of the monthly number, convert each lump to a monthly number, and then just put in the single month back in. If that sounds intimidating, your CPA, your nerdy cousin, or a financial planner can help you.

Now that you know your spending, you can decide if it’s too much, not enough, or just right. If you’re working with a financial planner, they can now use reliable numbers to build a financial plan to help you make that decision to save your money for your future goals or to give it away to make the world a better place for others.


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