Optimal spending is critically important. I’m often asked about my spending:
“You make so much money. How do you even spend it all?”
“You don’t seem to spend much money. What do you do with it all?”
Lifestyles of the Rich and Famous
People have preconceived ideas about what it means to spend 200K or more per year. For the average household spending say 53K per year it is hard to imagine spending even three let alone four times that every year. They imagine a grand life filled with country clubs, high-end cars, European vacations, and luxurious mansions.
Somehow I spend a lot (despite my frugal nature) and I don’t have any of those indulgences listed. How is that? People who know me and my thrifty nature ask, “What in the world do you spend your money on?” It is a reasonable question since they see me with homemade PB&J for lunch, driving a used Ford, working a lot, buying a refurbished TV online to save money, etc. I have an iPhone but I didn’t buy it new and I pay a rock-bottom monthly service fee.
It got me thinking, “Hey that is a good question – what do we spend our money on? And what should we spend it on?” My family spends a ton of money yearly and in a way that is unique to us. You should too. No doubt all of us could be more focused and efficient with our spending. Extra income above our needs allows for a sloppy cash flow/budgeting system. We don’t count every penny or plan our spending in detail. Still, things work out fine.
The shortest answer of what we spend money on is TAXES. That is by far the largest outlay of cash every single year. It is a bit surprising. I have had tax bills over 200 – 300K. It is much more money than I ever even dreamed of making in a year. Even my family members didn’t guess that it was our largest expense.
Taxes are painlessly deducted from the gross amount of each paycheck and then there is an amount due for capital gains and dividends. It is all so complicated and we forget how big the impact really is. Maybe that is part of the plan by our friends in the IRS? For sure! Back before payroll deduction of taxes the federal tax revenue was nowhere near what was due. We are all so numb to the deductions that most think of April 15 as the day we “pay our taxes” rather than what it really is: a year-end reconciliation.
Moving on to more pleasant categories:
I made a couple of mnemonics to remember how we choose to spend our money. Some love mnemonics, some hate them. I don’t think I would have gotten through medical school without them. I’m sharing my two acronyms for our optimal spending categories.
We want our expenses to be aligned with our goals and values and also to bring us the most joy, pleasure or happiness.
HEATS (Health, Education, Assets, Travel, Security)
We value our health. We have had several health scares and that highlighted the importance of a healthy body and mind. Nothing else matters if that is lacking. We spend freely on insurance premiums, fitness equipment, tests, doctor copays, labs, preventive work, fitness classes, mental health, organic foods, etc. Optimal health does not come cheap and it is worth paying for in our view.
This also includes skills development or training. We value a good public school education. My wife and I chose to live in a more expensive city in order to have better schools for our kids. The kids’ 529 accounts are a priority for us. We buy books, go to conferences, teach in order to learn, etc. I enjoy the teaching and learning.
Unless you are growing your knowledge and skills you are falling behind in your field. It takes a lot of money to keep learning. Brian Tracy recommends investing 3% of your income on personal development and learning. That may be a big chunk of change (e.g. 3% of 200K = 6K / year). As Warren Buffett said, “the more you learn, the more you earn.”
Or more specifically income-producing assets. We put our money to work for us. Some find investing boring and they have no interest in learning about it. I find it fascinating and when my assets earn more income than I do by working all day that really gets my attention. It allows me to wake up richer than when I went to bed. What is not to love about that? Money above our wants and needs goes to buy assets that produce more cash now or in the future. That income stream can then build on itself and fund our future. It costs money to get started though. Bootstrapping in investing is difficult or impossible for most of us. There is some truth in the saying, “It takes money to make money.”
Travel comes with some inconvenience, costs, planning hassles, etc. Despite that, there is nothing more enriching than exploring a new world. The culture, the geography, the tastes, the sights, the smells of a foreign and far-off land can be invigorating. There is value in breaking your normal routine and meeting new people. It is great to expose kids to this too. We travel within the US and abroad. I don’t want to wait until I’m elderly and decrepit to experience other lands. This is a big investment though. Airfare, food, hotels, time off work and associated opportunity costs are significant. If you come back to work with a sense of renewal and rest though it can add to career longevity in addition to an increased quality of life.
This can be financial security or physical security. I value both highly and they both cost money. Since we cover financial security elsewhere, I will stress physical security here. Our house alarm and external cameras provide invaluable peace of mind. Similarly, for the few hundred dollars we shelled out for a Taser. Tasers are a great way to defend yourself before the police arrive. We live in a more expensive neighborhood that has a very low crime rate. This illustrates how we align our spending with our priorities.
POETT (Pre-payments, Others, Experiences, Treats, Timesavers)
When we pay ahead of time we often enjoy the experience more. It is a bit strange but is true for me and many others. Part of why a cruise or Disney experience, for example, is enjoyable is that prepaid seems “free” when you are experiencing it. Is there a way to prepay for goods or services in your life?
Spending money on others makes us feel better than if we spend it on ourselves. Several studies confirmed this including ones by Michael Norton of Harvard Business School. He is also the author of the excellent book on optimal spending: Happy Money. Those who give to charity earn more and feel better than those who don’t.
My wife and I started a donor-advised fund (DAF) at a mutual fund company. We also give to a church, homeless shelters, food pantries, United Way, etc. One of my favorite charities is Donors Choose. It allows you to pick an educational need, for example, an inner-city school that can’t afford books. In addition to the tax write off you get plenty of thank-you notes, pictures, and gratitude from the teachers and students. That real and personal feedback helps the giver feel joy as well as the recipient of the charity. Sponsoring a child through Children International is another great way to bask in your own charitable feelings while helping others.
I try to spend money on events or experiences as opposed to things. Goods – even luxury goods – typically depreciate over time. We enjoy them less over time as well. They often clutter our lives and become a nuisance. Larger items like a big house also add to our future expenses which in turn may force us to work more than we like etc. Once the novelty of your new Corvette wears off you may regret that purchase.
Money spent on a family vacation or lessens or adventure travel or concerts, etc. will create memories of a life well-lived. Many of those memories will be replayed in the mind for decades to come. The value may even grow over time as the minor hassles of the luggage delay in Ireland is forgotten and only the memory of a warm pub on a cool day or the double rainbow over Galway Bay is retained.
Sometimes a splurge on a pricey dinner or a carriage ride downtown or a visit to a high-end spa is “just what the doctor ordered.” It is ok to pamper yourself now and then. A rare treat –even an expensive or unnecessary one- can increase your happiness. If it is often or routine that spending can backfire but an occasional splurge is actually a great way to go. It helps remind you how rich and blessed you are. Money is for the spending and for the enjoying. Just make it infrequent to get the most pleasure from it.
Time is scarce. Time is also very valuable. The opportunity costs are extraordinary for physicians and other high-income professionals. If there is something that can be outsourced for less than your hourly rate then consider getting someone else to do it. If you make $100/hour and it takes an hour to mow your lawn and your neighbor’s kid will do it for $20 then let him do it. Likewise with housecleaners, dry cleaners, travel agents, tax preparers etc. Recently I outsourced my vacuuming to a robot! I haven’t stepped into a grocery in months since a friend told me about Shipt.
All this outsourcing will free up a lot of time for you to work or do something more enjoyable. You will spend some money in the process but your quality of life will go up. Your income could go up too if you spend that extra time on money-making endeavors.
Optimizing your spending will maximize your happiness. Feel free to discover the best mix for you. Try out some of these tips if you find them helpful. More importantly, be mindful of your own boosts in happiness after spending. Have you noticed patterns? Where should you spend less or more?