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Do IT this week: Layering
Non-discretionary expenses must be paid but there's latitude on costs to sustain your personal lifestyle
By Scott Burns
Published on Monday, Sep 01, 2008
Spending goes in only one direction. Up.
This is a fundamental law of the universe. It is always possible to spend more money. This was true when I got my first job out of college, a whopping $500 a month in 1962. It is still true 46 years later. My wife and I can easily spend more income than we have, in spite of enjoying an income far larger than we ever expected.
Many readers can say the same. It's just the way it is. This is a world filled with beautiful objects, things to want, meals to have, wine to drink and moments to celebrate. And America is the Land of the Infinite Upgrade.
Note that I'm not talking about going broke.
I'm talking about ''drift'' — discovering that you've spent in ways you neither wanted nor expected. It's altogether too easy to let your dreams dribble away simply because you stopped paying attention. Get too relaxed and things happen. The next Visa bill will be large enough to empty the checking account. Stay ''relaxed'' for a period of months, and you won't be able to spend money where you really want to spend it because, well, you dribbled it away on something else.
Yes, this is a great problem to have. But it's still a problem.
How do we solve it?
We solve it with a spending plan. It's not a budget. It's not an act of self-punishment. A spending plan is a blueprint for what income you expect in the coming year and how you intend to spend it. It's a statement about what you want to accomplish. It is an act of intention. It is the first step toward taking charge of what happens in your life rather than discovering what has already happened.
If you do that, you'll find that much of your spending is already committed. We certainly did, in spite of the fact that we are near-retirees with no debt, no tuition payments, and no kids to feed and clothe.
That's why my wife and I now divide our expenses into two broad categories. If we are successful in one, we will be successful in the other.
The first category is ''core.'' This includes all kinds of fairly predictable recurring expenses, such as the cost of operating our cars, house, medical/health expenses, and household expenses such as groceries, meals out, telephone, cable, Internet, etc. It also includes expenses such as clothes and personal care.
An economist would call some of these expenses ''non-discretionary'' in that they simply must be paid. We all must pay the bill for car insurance, the bills for our utilities, etc. But the truth is that we all have a lot of latitude when it comes to food, meals out, clothing and many other things. So ''core'' expenses are really what it costs to sustain your chosen personal lifestyle.
In an advertising-driven economy, these core expenses start drifting very easily. Call it ''expectations inflation.'' Worse, a little bit of drift in core expenses has a major impact on other spending, because core spending is a large part of income for most people, including the affluent.
That's why we have a second category.
We call our second category ''gifting & feasting'' — short for gifting, feasting and sharing — because most of it is directed outward, toward sharing our pleasure in the world and helping others. This category includes charity, gifts to children, grandchildren and friends, special occasions, holiday decorating, vacations, and feeding the hundreds of birds who visit our gardens. An economist would call this spending ''discretionary,'' because it's a choice, not a necessity.
Your second category doesn't have to be gifting and feasting. It could, for instance, be everything you do to prepare for a year of traveling. It could be about going back to school for an advanced degree. It could be the slow landscaping of your home. Whatever it is, it's something that won't happen if you let core spending drift. That's why it is important to make it another category.
Let the core expenses drift, and there will be less money for gifting and feasting, traveling, or going back to school. Let core expenses drift badly, and it might be necessary to cancel or delay spending that probably means more to your present and future than most of the money you spend on core.
Questions about personal finance and investments may be sent by e-mail to scott@scottburns.com or by fax to 505-424-0938. The Web site is http://www.scottburns.com to comment on articles, find referenced Web links or discuss personal finance topics. Questions of general interest will be answered in future columns and on the Web site.
Spending goes in only one direction. Up.
Get the full article here.
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