Kitces on Spending

[USGrant1962]

Michael does his usual excellent job as he looks at spending rates versus FIRE. Too many points to summarize here, but a few key quotes:

In some of the largest categories, which tend to be financed with debt – e.g., homes and automobiles – lender guidelines place some restriction on the maximum amount of spending in each of those key categories. With the caveat that lenders don’t lend based on what is prudent for the borrower, but what will result in a permissible level of defaults and losses for the lender. Or stated more simply, borrowing guidelines are based on what the lender believes will extract the maximal amount of interest with an acceptable level of defaults… despite the fact that many of those borrowers will be in over their heads and struggling just to make their repayments!

and

And also helps to recognize that, for most middle-income households where spending is challenging, it is actually far better to focus on housing and transportation costs than trying to trim vacations, clothing, lattes and avocado toast from the budget.

Article here: https://www.kitces.com/blog/spendin...ail&utm_term=0_4c81298299-75de226c7f-57160561

Discuss away!

 

[Seagirt]

I think I was 36 when I realized that, if I kept on with my pleasant lifestyle, I'd never have anything saved for retirement. It was a cold moment of truth. I didn't really know what to do about it right away, but it guided all my future major decisions, such as moving to get a better paying job with a pension plan. I found that just by not increasing my standard of living as my pay increased, savings began to accumulate.

Taking on a large mortgage was a good strategy in my case, because of low interest my payments were mostly banked into equity, which I got back when I sold and then moved to a lower cost area.

 

[njhowie]

And also helps to recognize that, for most middle-income households where spending is challenging, it is actually far better to focus on housing and transportation costs than trying to trim vacations, clothing, lattes and avocado toast from the budget.

This is not a new line of thinking and has been proposed by others in the past. I think one of the most notable over the past decade was Ramit Sethi in his book/blog "I Will Teach You To Be Rich".

The theory is straightforward - reduce/eliminate the high cost/recurring items as quickly as possible as they will have the biggest budget impact both now, and going forward. By reducing/eliminating the big budget items, you free up that money to save/invest and make it grow over a longer period.

In our family, we purchased one "new" car 25 years ago. Since then, only used. A $30,000 auto is not in our vocabulary and never will be - that gets us two extremely nice certified pre-owned autos.

 

[sengsational]

It's just like when your hard drive gets full (back when that use to happen), you can remove 5 movies or 10,000 photos... address the big stuff and move on.

 

[Rianne]

There are so many variables in spending habits.
We spend approx. $5000/month but we own our home, cars and have only CC debt monthly which we pay off. We do not believe in paying interest.
But, no kids and no pressure to 'keep up with Jones." Our neighborhood is very laid back, some yards are gorgeous, some yards average. A guy 2 doors down has a BMW, we drive a 20 yr old Camry and a 16 yr old Camry. No judgement, we're friendly to everyone.

Our neighborhood has professors at the university, very elderly folks, young couples, middle aged working families...a really good mix of middle America.
Our property taxes are $6000'yr and we live in an average brick ranch, nothing special.
I cannot figure out how we'd get our spending down any further. I guess no vacations is one way. Eat out, Never! What's the point of retiring if not enjoying?

 

[haha]

I think I was 36 when I realized that, if I kept on with my pleasant lifestyle, I'd never have anything saved for retirement. It was a cold moment of truth.

I lived a spender life until I my wife and I had children. Then I got religion basically overnight. To save money, it helps to be at least somewhat misanthropic which is not too hard for me. My wife liked to look good, but this was a minor hindrance to saving, and a delight to me and to her personally. Kids always cost money, but not much can be better spent.

Where I live a see a lot of men who will be up against it if they outlive their active work lives. My neighbor makes good money in his own skill based service business. It is inherently tied to how well upper middle class people are doing at any time, or what on this forum are often called upper class. But he eats the best, goes out a lot, dresses very well and generally saves little to nothing. He is truthful with me, and he states he would like to learn how to save some money, but I have learned from him and others, those who want to save are saving. The rest are dreamers or bullshitters. Social security and owning their homes will have to be retirement saviors for these guys. But they will be serving less jamon ibérico or $35/lb. cheese down the road.

Ha

 

[HI Bill]

Where I live a see a lot of men who will be up against it if they outlive their active work lives. My neighbor makes good money in his own skill based service business. It is inherently tied to how well upper middle class people are doing at any time, or what on this forum are often called upper class. But he eats the best, goes out a lot, dresses very well and generally saves little to nothing.

I have a software engineer friend who just bought a $1M+ house, drives the most powerful BMW (I forget what model), goes on lots of vacations, dive travel, and supports two kids from another marriage. He's in his late 40s, and is in a leadership role. If he were to lose his job, he'd lose 'everything', because everything he has was purchased with borrowed money. Living high on the hog now, but what happens when his software skills become obsolete, or he gets too old for the industry?

 

[Cut-Throat]

But they will be serving less jamon ibérico or $35/lb. cheese down the road.

Ha

Mikey, What's your favorite $35/lb. Cheese?

 

[W2R]

I like Kitces's statement that "what really matters is not the savings rate, but the spending rate." I suppose both really matter, and one affects the other, but anyway spending less can do wonders sometimes.

I also like this quote

And also helps to recognize that, for most middle-income households where spending is challenging, it is actually far better to focus on housing and transportation costs than trying to trim vacations, clothing, lattes and avocado toast from the budget.

Maybe this is why having a paid off house and car is such a pleasant experience for some of us.

When I read scare stories in the news about how the market is going to drop to zero, or whatever the latest scare story is, it's nice to know that I don't have to pay rent in order to have a place to sleep. OK, property taxes, but for my house that's a lot less than rent.

 

[daylatedollarshort]

We spend fairly similarly to the people in The Millionaire Next Door book: nice house in a good public school district, good value cars, shop at Costco and otherwise cheap dates (hiking, art museums, college events, beach days, seat filler tickets). We're still living below our means by choice in retirement and trying to declutter instead of buying more stuff.

We avoid putting money into depreciating assets. Most long time homeowners in our area have came out pretty far ahead with their houses after factoring in costs vs. appreciation.

 

[BoodaGazelle]

Agreed

This is not a new line of thinking and has been proposed by others in the past. I think one of the most notable over the past decade was Ramit Sethi in his book/blog "I Will Teach You To Be Rich".

The theory is straightforward - reduce/eliminate the high cost/recurring items as quickly as possible as they will have the biggest budget impact both now, and going forward. By reducing/eliminating the big budget items, you free up that money to save/invest and make it grow over a longer period.

In our family, we purchased one "new" car 25 years ago. Since then, only used. A $30,000 auto is not in our vocabulary and never will be - that gets us two extremely nice certified pre-owned autos.

DW and had good incomes. We have been debt-free since our 40’s. We first paid down, and then off, our mortgage, and put away most of what we earned after that. Oh, and my 2004
Toyota RAV4.

 

[Out of Steam]

I like Kitces's statement that "what really matters is not the savings rate, but the spending rate." I suppose both really matter, and one affects the other, but anyway spending less can do wonders sometimes.

We went about $30K over budget in buying our current house.

We've enjoyed the house and the extra $30K wasn't a big deal, but owning more house and land than necessary over the past 15+ years has really mattered. There's been less maintenance I've been able to do myself, and a significant renovation has meant we'll owe as much when we sell as we did when we bought it.

 

[Teacher Terry]

Yes houses and cars are the big items. Our cars are paid for. We have a small mortgage of 500/month on our home. Can’t rent even a room here for that price. We drive our cars until they are junk or costing too much to repair. We have always done this. We have bought and sold too many houses though.

 

[Midpack]

And also helps to recognize that, for most middle-income households where spending is challenging, it is actually far better to focus on housing and transportation costs than trying to trim vacations, clothing, lattes and avocado toast from the budget.

I found that just by not increasing my standard of living as my pay increased, savings began to accumulate.

These two things plus working hard/advancing quickly over my career and investing entirely in stocks until my 50’s are what allowed us to reach FIx2 early. That simple in hindsight.

 

[big-papa]

The Pareto Principal at play: https://en.wikipedia.org/wiki/Pareto_principle

 

[marko]

I have a software engineer friend who just bought a $1M+ house, drives the most powerful BMW (I forget what model), goes on lots of vacations, dive travel, and supports two kids from another marriage. He's in his late 40s, and is in a leadership role. If he were to lose his job, he'd lose 'everything', because everything he has was purchased with borrowed money. Living high on the hog now, but what happens when his software skills become obsolete, or he gets too old for the industry?

As always, there's a difference between a good paycheck and wealth. As Buffet says: "when the tide goes out, you see who's swimming naked"

A good friend of mine, an attorney, lived extremely high (as your friend above) but at age 42 died unexpectedly.

Everybody (his wife and myself included) thought he was doing very well with his law practice until after his passing and there was a huge "uh-oh" moment. Actually it was more of a "WHAT?" realization.

Wife had to sell everything just to pay-up and moved to a three room condo. It all looked good until it didn't.

 

[JoeWras]

Good reminder from Kitces.

I see too many people buying houses on "what the bank will lend" versus what is enough to be comfortable. Same with cars. Etc.

Been in the same house over 30 years. One of the major reasons we can FIRE.

 

[deserat]

We spend fairly similarly to the people in The Millionaire Next Door book: nice house in a good public school district, good value cars, shop at Costco and otherwise cheap dates (hiking, art museums, college events, beach days, seat filler tickets). We're still living below our means by choice in retirement and trying to declutter instead of buying more stuff.

We avoid putting money into depreciating assets. Most long time homeowners in our area have came out pretty far ahead with their houses after factoring in costs vs. appreciation.

Yup - I found that living in a neighborhood that is a bit below your actual 'earning power' level and then paying off the house allows savings to accumulate at a rapid clip. Moreover, minimizing spending on depreciating assets helps. I also noticed the decision making process towards those
ends tended to permeate all things: how can I do this as inexpensively as possible to generate the most value for me (and my time - combination of 'Your Money or Your Life' philosophy (minus 100% bond or CD portfolio) and 'Millionaire Next Door' philosophy). If one just takes a breather or a little bit more time and makes well-informed decisions, they can truly have a great life at a much lower monetary cost. Opportunities are around everywhere - just need to do a bit of research and have an open mind.

 

[ncbill]

Housing & transportation remain the biggest discretionary expenses.

Back in the Great Recession one of the scariest stories I read was couples draining their creditor protected retirement savings because one had lost their job & they had counted on both incomes to make the mortgage payment...often that home was underwater & they lost it all.

Note my emphasis.

I'd leave the keys on the kitchen counter and risk a deficiency judgment before taking a dime from my retirement accounts to pay a mortgage.

 

[Rianne]

Housing & transportation remain the biggest discretionary expenses.

Back in the Great Recession one of the scariest stories I read was couples draining their creditor protected retirement savings because one had lost their job & they had counted on both incomes to make the mortgage payment...often that home was underwater & they lost it all.

Note my emphasis.

I'd leave the keys on the kitchen counter and risk a deficiency judgment before taking a dime from my retirement accounts to pay a mortgage.

Yes, but can they come after your assets? Including retirement accounts? I'm going to ask our CPA what exactly are considered assets, say in a lawsuit or if medical costs exceed what you thought they would.

 

[MarieIG]

Yes, but can they come after your assets? Including retirement accounts? I'm going to ask our CPA what exactly are considered assets, say in a lawsuit or if medical costs exceed what you thought they would.

I believe that his point was that all assets, from a creditor aspect, are not created equal. You CPA may explain to you, i.e., the superior protection from creditors given to the 401(k).

 

[MarieIG]

Housing & transportation remain the biggest discretionary expenses.

Back in the Great Recession one of the scariest stories I read was couples draining their creditor protected retirement savings because one had lost their job & they had counted on both incomes to make the mortgage payment...often that home was underwater & they lost it all.

Note my emphasis.

I'd leave the keys on the kitchen counter and risk a deficiency judgment before taking a dime from my retirement accounts to pay a mortgage.

Agreed.

 

[haha]

Mikey, What's your favorite $35/lb. Cheese?

Velveta, man, Velveta!

 

[MarieIG]

Thinking back we did stretch a bit thin when we bought our house, but did put down over 20% to avoid the PMI. It was paid off in seven years, and we did not upsize, and did not buy new cars as our children were becoming increasingly more expensive.

 

[ncbill]

Yes, but can they come after your assets? Including retirement accounts? I'm going to ask our CPA what exactly are considered assets, say in a lawsuit or if medical costs exceed what you thought they would.

Sorry should have clarified.

In the USA, 401k accounts are protected under federal law.

IRA accounts have various levels of protection usually depending on state law.

In my state all IRAs including inherited IRAs are exempt from creditor claims.