My Implicit Spending Almost Did Me In
But I finally figured out why I was repeatedly short of money
Years ago I was mystified at how consistently I ran short of money each month. I understood why someone supporting a family on a low-paying job (or two) would face financial straits. But I was earning a decent salary and living on my own — and still I came up short. That made no sense.
Then I discovered what I call “implicit spending.” Some possessions must eventually be replaced. I finally realized that, as I use one of those, I am implicitly spending money. For example, take a computer I bought for $2000. Now that I own it, I thought that using it came at no additional cost. I didn’t realize that there’s an implicit cost.
If I expect the computer to last five years, then my using it “costs” me $33 per month — because after five years, I’m “suddenly” going to need $2000 to replace it. Unless I set aside that $33 each month, I’ll come up short (again) when I have to buy a new computer. (The actual cost of replacement will probably not be exactly $2000, but having $2000 available when replacement time rolls around would be very helpful.)
Once I became aware of implicit spending, I saw it crop up all over the place — clothing, birthday gifts, annual subscriptions, car tires, and the like. The amount that I was implicitly spending each month explained the mysterious money shortages. After paying my regular monthly bills, I had assumed that the remaining money was available to spend as I pleased—that it was discretionary income. But a substantial portion of that money was already (implicitly) committed because I would need it to replace various items I currently own or meet future obligations (birthday and Christmas presents, subscription renewals, and the like).
An apartment dweller’s implicit spending each month might include a car, tires, car battery, vacuum cleaner, mattress, TV, computer, smartphone, and the like. A homeowner must also account (and accumulate) for replacing the roof, water heater, furnace, dishwasher, refrigerator, washer, dryer, exterior paint, carpets, and so on. Homeownership significantly increases implicit spending.
The more possessions you have, the greater your implicit spending. And of course, you also have “explicit spending”: expenses that spring readily to mind, such as groceries and fixed monthly bills like utilities and Netflix. These expenses we know well because they are frequent.
“Within Your Means”
UPDATE: I have thoroughly revised that original workbook. I find the new version easier to use and more effective than the “Within Your Means” workbook discussed in this article. The new workbook evolved over a few years using and modifying WYM. See this post for an explanation of the changes and to download a model copy of the revised approach. /update
The Excel workbook also works in Google Sheets. Using Google apps will appeal to those who don’t want their periodic expenses to include the fee ($80 per year) Microsoft now charges for using Microsoft Office. (If you do use Google apps, I strongly recommend that you use two-step authentication.)
Each workbook spreadsheet looks at one category of saving or spending. The workbook thus guides you through building a picture of your own financial landscape. The formulas and text are protected so that you don’t accidentally overwrite them, but you can unprotect the workbook if you want to modify it. One page is the WYM license; it’s there because at one time Within Your Means was sold. Now it’s free.
After you complete the various worksheets, you may be surprised by the amount of money you’ve unknowingly committed yourself to pay (or set aside) each month. If the money’s unavailable when the day arrives, you will experience a money shortage — both irritating and depressing even if — especially if — it’s familiar. The workbook will help you see where you stand.
You don’t need to use cash
The WYM workbook suggests using cash, but that was back in the 90's. Now, with online banking, I carry very little cash. I make almost all purchases with a no-fee credit card. As soon as I’m home, I sign into my bank account and pay (from my checking account) the charges I just made. That wipes out the credit card charges, and I can clearly see how much money I have left.
In effect, I use my credit card as a debit card. I don’t use the debit card itself because we know from frequent news report that merchant companies are often hacked, and their customers’ card numbers are stolen. If your credit card is used for unauthorized charges, your liability is $50 at most. With your debit card, your liability depends on when you report the loss but, worst case, it’s all the money in your account.
Since I treat my credit card as a debit card, my credit card balance stays at $0 (or even has a slight surplus, since I prefer to pay in round amounts: $20 instead of $19.63, for example). So long as the balance is in my favor, all is well. In this way, I don’t spend money I don’t yet have. It was disheartening to get a paycheck and realize that a big chunk of it had (in effect) already been spent. Because now I pay each credit charge immediately, the card can’t siphon off future funds.
Moreover, I no longer forget about any charges and am surprised when they “suddenly” show up on the bill. Relatively small credit card charges can quickly add up to quite a sum. And — big bonus — I never have to pay interest fees.
Worse was when I got a one-two punch: seeing charges on my credit card bill that I had forgotten and at the same time learning I had to get (say) new brake linings or a transmission overhaul.
Paying the day’s credit-card charges as soon I get home keeps me in touch with reality. I can see how much money I still have available. I make sure that I don’t forget any charge by setting my credit card account to email me of any charge more than $1. That means I don’t have to remember purchases —and when the email arrives, I immediately go online and pay the charge.
One useful benefit of making virtually all purchases on my credit card is that I can download my credit card records from the bank (in CSV format) and look at spending by category. For example, I can sort on name of vendor and get a quick subtotal of how much I spent at Starbucks in the date range.
Very important: I highly recommend you use the bank’s option to notify you of any credit card transactions above a limit you set, and you set the limit to $1 (so that you are notified of every credit charge transaction). This not only serves as a reminder, it also alerts you to unauthorized activity on your card. It proved its worth for me one slow Sunday afternoon when I suddenly received alerts for five credit card charges that I didn’t make. I immediately contacted the bank, deactivated that card, and in two days had a new card — details here. (I didn’t have to pay any of the fraudulent charges.)
Not owning things saves money
The fewer material items you accumulate, the less money you must set aside to replace them — and thus the more money you have available. A lifestyle light on material goods frees more of your income for saving and for spending on experiences.
That’s part of the message of the useful book Your Money or Your Life by Joe Dominguez and Vicki Robin. I highly recommend that you read the book and try its ideas. The Simple Dollar has a brief and useful guide to personal finance.
Sometimes some object is purchased to satisfy an emotional or psychological need. It’s better to identify those needs and address them directly rather than accumulating stuff (and thus increasing your implicit spending). This is especially true because stuff seldom satisfies for long. The hit of novelty wears off, and the need resurfaces, demanding to be fed again. This brief video explains well the burden that accompanies owning stuff.
Dominguez, Robin, and others founded the New Roadmap Foundation to provide further support for their ideas. Their website is FinancialIntegrity.org.
Deacquisition: Efforts and costs
When you acquire a non-consumable item, you must ultimately dispose of it (assuming you are not immortal). When it comes time for a possession to depart, you can throw it out, give it away, or sell it (consignment stores, yard sales, Craigslist, eBay, and the like).
For example, a washing machine’s life expectancy is about 11 years. When the time comes, you must get a replacement washing machine, and you also must get rid of the old one. If you’re buying from a store, the store may dispose of the old machine for you. But if you buy a replacement from an individual, disposing of the old one will present you with a solution opportunity.
Some new possessions are destined ultimately for the trash. By definition “disposable” items are… well, disposable. Old washcloths and towels and bed linens might become cleaning rags, but ultimately they will go into the trash.
More substantial items probably won’t go into the trash. I suggest that when you require the item, you record (in a spreadsheet, say) the item name, date purchased, source, price, and how you plan to dispose of it. Putting this in writing means you won’t postpone deciding how you will get rid of it.
So when you consider a purchase — a book, a vase, a chair, a set of dishes, whatever —think about how you will dispose of it. You can’t assume that giving it away will always be easy. When the time comes, you might not know anyone who wants it. (One way to give things away is through the Freecycle program.)
Trying to decide an item’s eventual fate before you buy it may make you reconsider the acquisition. If you find it difficult to think of how you will rid of it, you may decide that you can avoid that problem by not getting it in the first place.
Not getting doesn’t mean you cannot use it. If the item’s a tool, for example, you might find renting it is the best solution. If it’s a book, there’s always the library. The idea is that if you don’t own something, you don’t have to worry about how to dispose of it (and you also don’t have to replace it when it wears out).
Collections in particular can present difficulties. Owners become attached to their collections, but often it’s a white elephant: valuable, but wanted by no one. Collect cautiously. The best collections comprise things you regularly use.
Tax-deferred retirement funds and post-tax amount
The account balance in your 401(k) or other tax-deferred retirement plan can be misleading. You can’t plan to spend the full balance shown on your statement in retirement because a portion of that balance must be used to pay taxes on the money you withdraw, which is taxed as ordinary income. The amount available for you to spend depends on your tax bracket. It will be about 25%-30% less than the total shown on the statement. One advantage of after-tax savings is that the total amount is available to you.
As you think about your retirement, I suggest you read this review of the book Early Retirement Extreme. And the book Your Money or Your Life mentioned above has useful insights as well.
It doesn’t have to happen all at once
You may find somewhat disheartening what the Within Your Means workbook reveals, but painful knowledge is better than blissful ignorance. With knowledge you can begin making course corrections by basing your decisions on the reality of your situation rather than an incomplete and distorted picture. Take it one step at a time, do what you can with what you have, and learn from experience.
Things can indeed get better. It’s much easier to work toward (and ultimately achieve) a goal when you can clearly see it.