One of my goals for the coming year is to track all of my earning and spending. I've had a few folks ask me why I want to do this. “Aren't you financially independent?” they ask. “If that's the case, then why do you care what you spend?”
Financial independence isn't some magic place where you no longer have to worry about money. Reaching FI doesn't give you a license to spend on whatever you want, consuming every luxury in the world. Financial independence only means you have enough saved (and invested) to support your current standard of living for the rest of your life — given some reasonable assumptions.
Using my roadmap to financial freedom, financial abundance is the state of never having to worry about money again. At this point, you've saved so much money you can do whatever you want without worrying about the financial consequences. I'm not there yet…and I probably never will be.
Here's the thing about financial independence: You can lose it.
Say, for instance, you've amassed a net worth of about $1,500,000 (which happens to be close to the size my own nest egg) and you spend $36,000 per year (which is what I consider my typical spend rate). In this case, you have indeed achieve financial independence. With the parameters and assumptions we typically use here at Money Boss, a nest egg of $1.5 million ought to support annual spending of around $60,000.
But say you were to move from Omaha to someplace more expensive — someplace like San Francisco. And say that in addition to a jump in cost of living, you also experienced increased pressure to spend when you're hanging out with your new friends. If you suddenly found your annual budget was $100,000 (or more!), that net worth of $1.5 million no longer puts you in the category of financial independence. You were FI in Nebraska, but you're not FI in northern California.
Sure, you probably still have Financial Security with $100,000 in spending on $1.5 million of net worth. Your savings and investments will likely cover basic needs. But because you've changed your lifestyle, you're no longer truly financially independent.
Now, I haven't moved cross country to a more expensive city. I still live in Portland (which is plenty costly). I still walk most of the time. I'm still fairly frugal. But in the five years since I last logged my money moves, a lot of things have changed in my life.
- I moved out of my cheap apartment and bought a condo. I paid for the place outright, but between utilities, maintenance, and HOA, it costs a lot to live here!
- I swapped a low-rent neighborhood with lots of cheap places to shop and eat for a fancier area where restaurants are more expensive and all of the supermarkets feature boutique organic food.
- I went from being a newly-divorced middle-aged man to dating somebody long-term. Expectations are different in a relationship than they are for single guys!
- Kim and I got a puppy. And two kittens. These critters take money to maintain.
Plus, just like everyone, I have a tendency to give in to lifestyle inflation. If I'm not scrupulous, little luxuries turn into big ones.
Since returning from our cross-country RV trip, I've been tempted to spend more than in the recent past. Maybe it's because we intentionally did not buy things on the road. I don't know. Whatever the case, I've been updating my wardrobe, acquiring new gadgets, and rationalizing more books. In the grand scheme of things, I can afford this stuff. But that's not really the point. I'm a little worried my lifestyle has grown too large.
If you put all of this together, you have a situation where I no longer know how much I'm spending, and that makes me uncomfortable. I say I spend roughly $36,000 per year, and that's been true in the past, but what am I actually spending? That's what I aim to discover.
To that end, I'm going to track my money in 2017. In fact, I'm going to start this project as soon as I figure out which tool to use. I want to get a current baseline before I start trying to make corrections.
My short-term challenge is to figure out how to track my spending. In the olden days, when the world was young, I used Quicken. Quicken isn't perfect, but it's familiar. I like its reporting features and I like that it forces me to manually enter data. That's important because when I enter transactions by hand, I'm more aware of just where my money is going. (To me, tools that automatically record transactions aren't helpful. They make it too easy to gloss over possible problems.)
Ultimately, I hope to accomplish two things with this project.
- I want to get a clear idea of what I'm actually spending — even if it's shocking. I can't make adjustments if I don't know what I need to adjust.
- I want to encourage Money Boss readers to track their spending too, even if it's only for a month (or three). I want you to find your problem spots so that you can correct them.
As soon as I publish this article, I'm going to get started. I'll unearth my disused Mint and Personal Capital accounts. If I have to set up new ones, I'll document the process. Plus, after all of these years, I'll finally give YNAB a spin. I'll use all of these tools during December. At the end of the month, I'll write about my experience and share which tool I've chosen to manage my money during 2017.
If you have any suggestions for tools to try, I'd love to hear them!
Author: J.D. Roth
In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned how to save and how to invest. Today, he's managed to reach early retirement! He wants to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you reach your goals.