You Spend…More Money Than You Think You Do (S3 E8)

Transcript

How much do you spend every year? Seems like a relatively easy question to answer, or at least one you should be able to estimate and be somewhere in the ballpark. Unfortunately, my experience suggests this is definitely not the case for most of us. Especially for those of us with a partner because how in the world can you really know how much the two of you are spending if you aren’t tracking it? Well, this episode will challenge the “ignorance is bliss” mindset when it comes to your finances. In fact, I’d argue if you don’t have a good feel for how much you are spending, you will never reach FI.

Welcome to the third season of Invested Poorly: Sad Tales of FInancial Fails, now part of the Bold Departure Network. Invested Poorly is a short-form podcast designed to help everyday investors make wiser investment decisions by learning what NOT to do with their money. Host Jeff Harrell shares timeless stories from his former life as a financial advisor, about the poor—and irrational—choices he witnessed investors make that disrupted their journey to financial independence, or FI. Your ability to recognize, and avoid, similar mistakes could make all the difference for you along your path to reach FI.

Check out the “Introduction” episode for more background on Jeff, why he created this podcast, and how it can guide you to becoming the hero of your own investing story. Now, on with the show.

Tracking your spending is never fun, not because we don’t want to know where our money is going, although I guess that may be the case for some of us. No, the real reason is because it feels tedious and annoying.

Back in the day you had to keep written lists or spreadsheets to know what you were spending. Maybe you are even old enough to remember balancing a checkbook. Yep, this was a real thing back then. You couldn’t just log on and see your balances like today. You actually had to keep track of your running balance by making sure you wrote down all of your purchases and deposits in a check register. Man, after saying that, I realize some of you listening probably have no idea what I’m talking about. Trust me, it used to be a lot harder to keep track of your spending than it is today.

Nowadays there are a ton of resources available to not only simplify the tracking process, but also help you budget and control your spending. Unfortunately, despite the vast number of resources available, I really didn’t see many of my clients taking advantage of them. Admittedly, my clients tended to be older and we all know technology is generally something younger generations embrace faster, but that’s no excuse. These spend tracking tools are not complicated, so hopefully by the end of this episode, I will have convinced you to at least entertain the idea of using one, if you aren’t already doing so.

My personal story with respect to tracking my spending goes like this. I’ll never forget, it was New Year’s Eve, and my wife and I were just relaxing at home, getting ready to ring in the New Year. We had been married about four or five years, and this was at a time when spending and budget tracking apps were just becoming available. Obviously, I’m the finance guy in our relationship, but my wife has always been involved and I’ve made it a priority to make sure she knows everything about our finances.

It's probably worth mentioning, at that time we were DINKS (Double Income, No Kids) with higher-paying jobs, so tracking our spending didn’t feel necessary because we knew we were spending less than we were making and saving a lot of money. However, the new apps that were coming out seemed pretty cool, so I spent a couple hours before the ball dropped linking all of our financial accounts to one of those resources called Mint. I know, I’m a total party animal.

As you can tell, I kind of geek out on this stuff, so that is why once I got started that evening I couldn’t stop. I figured, it was December 31st. I had to get it all set up before the New Year, so I’d have a perfect calendar year of tracking. Fortunately, I knocked it out with plenty of time to spare and still got to see the ball drop at midnight.

After getting this set up, the first couple of months were enlightening. I was amazed at where our money was going, how much we spent on food, groceries, gas, house bills, you name it. It wasn’t that we were spending an exorbitant amount of money on any one thing, but it was fascinating to see all the little things, that you kind of don’t even think about, add up. When that year was over, we now had a baseline for our spending, but more importantly, we actually knew where our money was going.

Ever since I set this up, my wife and I meet together in January to review our spending, investments, and everything else financial-related. It has been liberating, and quite frankly this process we set up all those years ago was one of the most important steps we took to truly begin our journey to FI. Even if we didn’t realize it at that time.

You see, despite the fact I was a financial advisor, I had never bothered to really look at my own situation very closely. I was young and had decades in front of me before I was going to retire…or so I thought. It didn’t seem important to track my personal spending and finances that closely. We were making good money, saving a lot, and enjoying life. What could go wrong?

As the old saying goes, the only constant in life is change. And boy did things eventually change. I talk a little bit more about my path from portfolio manager to financial advisor to partner to early retirement in the “Introduction” episode of this podcast as well as in my bio on my website. So instead of reiterating that here I’d encourage you to check those out if you are interested in my journey. But to sum things up, I’ll just say that due to circumstances beyond my control, my career started to go down a path that I could see I was not interested in.

You see, my wife and I worked at small companies that were affiliated with each other since the early days of their existence. We both started with our respective companies right out of college and expected to be there for decades to come. But when things started to look and feel different for a host of reasons, we had a deep discussion about life and quite frankly what we were doing.

Remember, we were DINKS (Double Income No Kids). We lived in Charlotte, North Carolina, but our family was located all over the country. We loved to travel, lived pretty modestly and had realized long ago that what made us happy was not more money or stuff, but experiences. It was in this moment that we did what my adorable little niece now often does, and “I changed my mind” when it came to furthering my career. I decided to trade money and prestige for time and lifestyle freedom.

The reason I’m telling you that story in the context of a discussion on spending is because without knowing what we were spending annually, we would have had no idea what our FI number was. As a reminder, your FI number is basically the amount of investments you need to cover living expenses after you are no longer employed; it’s typically calculated as 25 times your annual spending. Since we had years of data by this time, we had a very accurate number to rely on.

Plus, I started to go down the “early retirement” rabbit hole and found out there are countless others out there pursuing a similar, unconventional lifestyle on a fraction of our net worth. So, everything started to become real at that point for us.

With all the data I had on our spending, I started making projections about how much our life would cost if we hit the road and started living a “home-less,” or “home-free” as my wife prefers to call it, lifestyle. We could see all the expenses that were going to fall by the wayside if we sold our house, such as HOAs, utilities, insurance, mortgage, home improvement, or dealing with a broken water heater.

I cannot stress enough how confident I was in predicting our spending even if we quit working and hit the road full time. Of course, I had to make some estimates for our new dependence on lodging and grabbing food on the go, but there are plenty of resources to help with that. The results were amazing. In our first year of living a fully nomadic life, we spent less money than when we were living in our house. Yes, our annual financial review that first year of nomadic living left a huge smile on our faces and confirmed we had made the right decision.

Obviously, my life is significantly different than yours. I’m not trying to promote early retirement, selling everything you own, and living a nomadic life. Not at all, but what I am trying to get you to recognize is the sooner you have a full understanding of how much your life costs, the more prepared you will be to handle the inevitable changes coming your way. And that change could be a path that you choose, not something forced on you. How good does that sound, to feel fully in control of your lifestyle? All because you have a grasp of your spending.

So back to the beginning of the story when I first became familiar with the new spending apps available. The one I mentioned, Mint, is no longer available. I used it for almost a decade and was sad to see it go. However, there are a number of apps now available that blow away Mint in terms of features, and I’ve listed some in the show notes.

Personally, I switched over to Monarch Money. This is a paid app, and I would probably pay 10 times the annual subscription if they made me. I use this app every single day—just a couple of minutes each day—to track my spending. In Episode 7 of Season 3, I talk about privacy and security. This app allows me to see every charge that comes through on any account, all in one place, making it super easy to see if something fraudulent happens, and it has.

One day, when I saw a suspicious charge, I asked my wife if she knew what it was. She did not, so I began investigating and found out my card had been compromised. I made one phone call, and the credit card representative immediately closed the account, said the charge would be reversed, and sent me a new card. Was this annoying? Sure, but if I didn’t use this app I might not have caught it until more charges were placed. This is why I seriously don’t know how anyone manages or tracks their spending without such a tool.

So this is another episode where I’ll ask the question: Have I convinced you to take action on something that can help you along your path to FI? You definitely don’t have to use one of the apps I listed in the show notes. Maybe you are old school and have a spreadsheet or something where you like to list all your expenses. Maybe you simply use your credit card statements to keep track of your spending. Maybe you still balance a checkbook. Perhaps you’re a programmer or an AI superuser and you’re going to build your own spend tracking app.

Regardless, I hope this episode encourages you to track your spending because having the knowledge of what you spend annually is essential to a successful FI journey.

I sure hope you enjoyed this episode of Invested Poorly and will be able to take something from it to improve your decision making as you navigate the twists and turns of your personal investing adventure. Be sure to check out my website at AreYouFI.com (that’s A R E Y O U F I dot com) where you can find resources and show notes with the charts and graphs I mention during the episodes. These are like little treasure maps that can help you choose more wisely along your quest to reach FI, or financial independence.

Never forget, in the short-term the stock market is unpredictable, and as my mischievous little nephew likes to say, “things just happen!” So focus on the long-term, by controlling your emotions, simplify your investments, and always… ignore the noise.

I’m your host, Jeff Harrell. Thanks for listening.

Invested Poorly: Sad Tales of FInancial Fails was created for informational purposes only and should not be relied on for specific tax, legal, or investment advice. You should consider consulting a qualified professional to review your situation before engaging in any transactions. Investing involves risk, including loss of principal and past performance is no guarantee of future results.

This podcast was produced by Ted Cragg. Learn more about creating podcast mini-series like this by visiting QuickEditPodcasts.com.