Track Your Spending with a “Spending Run Rate”

6 years ago · 3 minute read

This article was written by our good friend and podcast guest #2, Bryan Rahn. Bryan is a born again entrepreneur, most recently starting a flourishing ticket brokerage and also runs his own online marketing consultancy.

A friend recently pointed me to an article from the Collaborate Fund on the Psychology of Money. One quote in particular stood out to me:

When most people say they want to be a millionaire, what they really mean is “I want to spend a million dollars,” which is literally the opposite of being a millionaire. This is especially true for young people.

I’ve often had a similar thought when working with young people just starting their careers. An often-cited goal I’ll hear is “I want to make $100k per year.”

But that’s just sort of an arbitrary number they’ve anchored themselves to. I think what they’re really trying to say is “I want to spend $100k per year.”

The reality is, at least half of American adults don’t realize how they spend their money right now. Think about if for a minute. Try to figure out your one-year run rate, and even more difficult, try to figure out where that money goes.

Smart Asset suggests the average salary for a 25-34-year-old is $40k per year. Probably most readers of this site are here because they are or want to be in a higher range of that, let’s say $50k per year, after taxes bringing home $35k per year.

Let’s even say you abide by the suggested savings rate of 20% and are left with about $30k per year to spend. That $30k has to cover everything in your spending portfolio, from your needs like living, food, transportation and what’s left can be spent on your wants. But as you grow your take home pay, because your needs are already covered, the majority of that additional pay can go straight to your wants.

Sure, you’ll upgrade your living and transportation expenses, but those upgrades are wants. Your basic needs are already covered. When you look at it from that perspective, it would be a jarring life change to go from spending $30k per year to spending $100k per year.

And realistically speaking, in one year’s time, what would you be spending your money on if you were spending 3 times more than are you right now? And would you be three times happier?

I’ll leave that question to the folks at Planet Money, who recently had a great podcast on what makes us happy … Spoiler alert –Probably not.

The first step to correct the process is to get a handle on how much you spend right now. If you fit close to the averages suggested here, you’re probably about $30k per year.

Then if you’re growing your income through the strategies pointed out here at the Opt Out Life, you will likely have more money to spend next year than you did this year.

So next year, increase that from $30k to $35k in year one. Then from $35k to $40k in year two. And from $40k to $50k in year 3. And so on. (Keep in mind as your annual income grows your taxes will and your savings should increase as well.) This strategy has at least three benefits:

1. If there’s a hiccup along the way, either within or outside your control, it will be a lot easier to drop down from spending $40k per year back to $30k per year than it would be to drop down from spending $100k per year back down to $30k per year.
2. It’s unlikely for your income to jump so drastically in one year anyway. And even if it did, by slowly increasing your run rate, you’ll be able to put the additional into savings and investments to allow that money to further grow.
3. Most importantly – You’ll experience incremental benefits along the way. If you spend $30k this year, and then spend $35 next year, your next year will be improved. (At least from a benefit received from spending perspective anyway.) That’s a 15% one-year increase, which is huge. In 5 years, you might be at a 40% increase from year one. These incremental spending increases will bring life enjoyment increases each year you wouldn’t get if you made that jump all at once.

Spending money is fun. To get the enjoyment out of spending more of it, the first step is getting a handle on what you spend now, and planning on how you might grow that over time.

The end result here is to remove the focus from increasing your one-year income / spending rate to an arbitrary point, and instead, take delight in the journey there.