Wednesday, February 08, 2006

Spend as much on crap as you can afford

Just don't spend more. Shocking as it may seem, you can be financially responsible and splurge on stupid things.

The $50 doggy vest, the $200 night out, even the $1,000 ski vacation are all acceptable and even healthy expenses IF they come from your disposable income. If they go on your credit card, you're living beyond your means.

Disposable income is the money you have left after you save for emergencies and long term goals and after you pay for your necessities. (income - necessities - savings = disposable income)

The future growth of our economy depends on people buying more unnecessary crap (and/or working less). As an economy, we covered our necessities (food, clothing, shelter) at least 100 years ago. You need look no further than the fact that only 1% of the US GDP is agriculture (and we are a net-exporter of food) to see that we're covering our necessities just fine (source: CIA World Factbook). We're still having some difficulty with the advanced social necessities of healthcare and education, but on the basics of living we're doing fine (with some unfortunate exceptions).

The biggest challenge is figuring out just how much of the money in each paycheck is disposable income. The easiest way to do this is the 60% solution: Keep fixed expenses to 60% of your income, put 10% to retirement, 10% long term savings (house, car, college) 10% to short term savings (health care deductibles, car maintenance, home maintenance), 10% to fun money. If you're going to do this, I would highly suggest setting up individual accounts for each of these (e.g. 60% for fixed in your checking, 10% to your IRA and 401(k) for your retirement, 10% to a brokerage account for long term savings, 10% to a high yield savings account like ING Direct, and 10% to a 2nd checking account and only use the debit card so you can't spend more than you have). By separating your money at the beginning of the month, you know just how much you can spend on crap that month.

The worst thing you can do is adopt an "It'll all work out in the end, so I'll just do nothing" mentality.

I don't follow the 60% method because I have a more detailed budget that I update at the end of every month (see my series Budgeting Made Easy) and I have a much more granular breakdown of my money (I have separate ING accounts for car maintenance, medical expenses, car insurance, etc. - separate post on that later). But I am anal retentive when it comes to most matters of money and I enjoy knowing where my money goes to the last cent.

Bottom line: Spending money on crap is not the problem. Spending too much money on crap is the problem. Limit your spending to your disposable income and it doesn't matter if you buy diamond encrusted trash-bags.

7 comments:

Anonymous said...

Can you elaborate on how you use ING direct with multiple accounts?

I have no ING accounts.
Can you do bill pay from ING Direct?

Do you transfer money from checking to multiple savings accounts, and then back into checking when you want to spend it?

tt said...

Anon,

ING lets you set up an infinite (or so it appears) number of different savings accounts. So for me I use these accounts to 1) pre-pay expenses that don't come monthly, 2) hide found money out of my mental reach, or 3) take advantage of float.

I have auto-transfers set up for most of these so they require very little effort to maintain.

Yes, when I spend the money I either transfer it back into checking or to my credit card payments.

ING has no bill-pay that I know of, but you can use it for ACH auto-payments (when they do an electronic check)

Car Insurance - I pay $691 every 6 months so I have $116 transfered into this account every month.

Incentive Money - Every time I get money for opening an account (like at ING direct), taking a survey, etc. I transfer the money here. Once it gets big enough I'll put it into a sharebuilder account.

Car Maintenance - I put $20 a month here to take care of the minor problems that inevitably come up owning a car. I have an extended warranty, and thus I think $20 is fairly reasonable. W/o the warranty, this would be more.

Credit Card Payments - I pay my citibank card every month from this account. If I have 0% APR cards or pay off the card every month, I use this account to maximize 'float' - the fact that I get their money for free for a period of time before I have to give it back. I take advantage of this by keeping that money at 3.8% APY as long as I can.

0% Balance transfers - I don't currently do this, but many people will get a $10,000 credit card with a 12 month 0% balance transfer. They transfer the $10,000 to either themselves, or to a cc and ask for a rebate. They then put the money in an ING style account. $10,000 --> about $350 in interest. This is then pretty much free money for them.

I'm not sure I'm going to keep doing this. The advantage is that it helps set up money "envelopes" of sorts so I know how much I really have to spend. The down side is that it takes a decent amount of time to maintain.

Debt Hater said...

I would like to read your series on "Budgeting Made Easy," but couldn't find it right away from this post. How do I get there?
I am torn when it comes to budgeting. On my blog I said "screw budgeting," but at least know where the money is going. I've done spending records and set limits on some things, but that's about it. I'm in much better control of my money now that I once was, but I still wonder if I still need to bite the bullet and create a budget.

Joy

tt said...

Joy,

the series is available here http://retireat30.blogspot.com/2005/11/budgeting-made-easy.html

I just read your post. And I think it is dead on. But, you havent forsaken a budget. You recorded your expenses, deemed which ones were unnecessary, and restricted certain spending categories.

That is a budget as far as I would use the word.

TT

Debt Hater said...

Thanks for the post. I read the series and I am happy to say I already do some of that. I set up automatic tansfers to a savings account when I started my new job. Some of my bills are automated (rent, car loan, car insurance), but I'm working on automating the whole shebang out of one checking account and holding another just for spending money... but I have to make some "budget cuts" first. I bought Quicken last summer but it confused the heck out of me! I stopped using it. Any pointers? Joy

Anonymous said...

This is a great frame of mind, I love it!

hillbilly2be said...
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