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Conscious spending: How my friend spends $21,000/year on going out

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A few weeks ago, a couple of friends and I were talking about where we want to travel this year, and one of them said something that surprised me. “You probably wouldn’t approve, but I want to go to the Caribbean this year.”

Huh? Why wouldn’t I approve?

I thought about this in a pensive stare for many moments, taking the form of Rodin’s Thinking Man and wishing that I had a pipe and perhaps a tweed jacket. Then I figured it out. Apparently, I’m the personal finance guy to some people. And, I realized with a sinking feeling, to many people, “the personal-finance guy” means “the guy who tells me I can’t do stuff because it costs too much money.”

Nothing could be further from the truth. Now, I will call your ass out when you’re being stupid about money. But I’m not the finger-wagging parent who tells you not to spend money on lattes. Instead of taking a simplistic “don’t spend money on expensive things!!!” view, I believe there’s a nuanced approach to spending. Today, I’m going to tell you about 3 friends who are spending lots and lots of money on things you might consider frivolous–like shoes and going out–but I’m going to tell you exactly why I think they’re perfectly justified.

But first, let’s talk about a couple of things.

Frugality. There are plenty of blogs on frugality. This is not one of them. I think you can have lots of fun debating the minutiae about which grain of rice is cheaper, but it doesn’t really get you much further towards your goals. Also, most Americans are not brought up with the idea of frugality. I’ve been in a car with friends who were so hungry that they had to pull over and get food even though we were only 5 minutes from home.

For me, writing a blog on frugality would be like trying to convince an ankylosaurus to dance a god damn jig. As a result, I don’t believe that frugality is very sustainable for a lot of people. Yes, maybe we’ll stop buying those lattes (or whatever), but something else will take its place. In my opinion, unless there’s a fundamental mindset from a young age, it’s hard to change the I-want-it-now habits. Whether you agree with me or not, that’s why I don’t write a blog based on where to find the cheapest laundry detergent.

Finally, and this is the most important, frugality alone doesn’t get you to your goals. It’s a helpful but not sufficient condition. So I take another approach of trying to write about money holistically, while urging you to make your own decisions about what’s important enough to spend a lot on, and what’s not.

2007 is the year of conscious spending. THE PROBLEM IS HARDLY ANYONE IS DECIDING WHAT’S IMPORTANT AND WHAT’S NOT! DAMNIT! That’s why 2007 is the year of conscious spending, in which I want you to consciously decide what you’re going to spend on. No more “I guess I spent that much” when you see your credit card statements.

I guess I spent that much this month

No. Conscious spending means you decide exactly where you’re going to spend your money–for going out, for saving, for investing, for rent–and you free yourself from feeling guilty about your spending. Along with making you feel comfortable with your spending, a plan lets you continue growing towards your goals instead of just treading water.

The simple fact is that as young people, most of us are not spending consciously. We’re spending on whatever, then reactively feeling good or bad about it. Every time I meet someone who has a prescriptive budget (aka, “Here’s how much I want to spend on X this month), I’m so enchanted that my love rivals Shah Jahan’s for his wife Mumtaz Mahal (look it up).

Today I’m going to write about people who spend a lot on things that most people consider absurd. This article is not a rationalization for absurd spending habits. PLEASE. If you walk away from this article with your hands triumphantly over your head saying “I’M PERFECT!!!” then you are a moron and your parents are probably very sad. But if you look at the idea of conscious spending–of people who have paid themselves first, then used the money they have left over to do what they want with it–then your parents will be very happy and probably live longer. Man, I can’t believe I just used your parents’ longevity to convince you to read.

Ok, let’s get to it.

My three friends

The shoe lover. My first friend is a girl who spends about $5,000/year on shoes. Since expensive shoes cost about $300-$500 each, this is around 10 or 15 shoes annually. “THAT’S RIDICULOUS!!!” you might be saying. And on the surface, that number is indeed large. But I think iwillteachyoutoberich readers can look a little deeper. This girl makes a very healthy six-figure salary. She has a roommate, eats for free at work, and doesn’t spend much on fancy electronics, gym, etc. In fact, her job provides many of the amenities other people pay for.

She loves shoes. A lot. And so, after funding her 401(k) and a taxable investment account (she makes too much for a Roth), she has money left over. Now here’s where it’s interesting. “But Ramit,” you might say, “it doesn’t matter. $500 shoes are ridiculous. Nobody needs to spend that much on shoes! You’re just saying it’s ok because…well, I don’t know. But it’s too much!!!”

I see eloquence does not reign rule today. But I want to take that statement apart. First, I bet most people who are astounded at the price of her shoes haven’t even done what she’s done. To the people who would criticize someone for spending $5,000/year on shoes: Have you funded your 401(k) and started outside investment accounts? Do you keep a strict budget of how much you spend? Second, when you have extra money lying around (extra = after reasonably maxing out your investment options), what’s better: Making a strategic decision to spend on what you love? Or just spending it on random things here or there and eventually watching your money trickle out?

This girl loves shoes. And after planning for her long-term and short-term goals, she has money left over. This is why it’s so surprising that people pass judgment when they see others buying things like expensive shoes. This girl has her shit together. And I think she’s right on.

The partier. My second friend spends over $21,000/year going out. “OH MY GOD, THAT’S SO MUCH*#%(#%(#%!” a couple people said yesterday. Let’s break it down, though. Let’s say you go out 4x/week–to dinners and bars–and spend an average of $100/night. I’m being conservative with the numbers here, since a dinner can run $60/person and drinks could be $12 each. I’m not including bottle service, which might cost $800 or $1,000. (He lives in a big city.) That’s easily $400/week.

Now, this guy also makes a healthy six-figure salary, and he’s similarly invested quite a bit in his 401(k) and outside investments (including real estate). The key here is that he works such long hours that he’s only really free Friday and Saturday nights. And so he goes out. Hard.

In just a couple years, this guy has saved more than almost any of my friends. He’s also spent more on going out than anybody I know. And although $21,000 sounds outrageous on the surface, you have to take context into consideration. For example, look at his spending by percentage: Just for easy calculations, if we assume that this guy makes $210,000/year net, his going-out budget is roughly 10% of his income. For my friends who make $35,000/year, you can be damn sure that they’re spending more than $3,500/year ($67/week) on going out.

The subscription nut. The third friend is a tech guy who has a Tivo subscription, Rhapsody subscription, cable/Internet connection, gym membership, Netflix account, magazine subscriptions, and a couple of monthly online accounts. Now, when I wrote Guess How Much Your Subscriptions Cost?, the point was to highlight how we systematically discount the cumulative effect of our subscriptions. In other words, we forget to add them all up to see the total amount–which is usually a LOT. That’s why companies love, love, love subscriptions.

Anyway, I showed my friend my article, and he just shrugged. I started to get angry and use a line I’ve always wanted to use–“Do you know who I am?”–but he then explained that his subscriptions came out of his entertainment budget, which he’d carefully thought about and revised every few months. And, not surprisingly, he has a savings plan that is automatically deducted from his paycheck.

The point here is that, whether or not I agree with his subscriptions, he’d thought about it. He’d sat down, considered what he wanted to spend on, and was executing on a plan. That’s doing more than 99% of the young people I’ve talked to. Shit, if he had decided he wanted to spend $8,000/year on furry donkey costumes and Faberge eggs, that would have been great. At least he has a plan.

* * *
An analysis
I know a lot of people are going to start screaming at me for things they disagree with, so I want to try to take it step by step. Then you can send your criticisms to youarestupid!!!@iwillteachyoutoberich.com.

Most of us are not consciously thinking about our spending. By that, I mean we’re not being proactive about planning where our money should go. We’re going through our 20s doing whatever, and inferring our spending patterns from the bills we get at the end of the month. We not only lack a prescriptive budget (“I want to spend 20% on my retirement account, 10% on savings, 20% on going out…”), we even lack a descriptive budget (“where the hell is my money going?”). (More about budgets and asset allocation.) And so I completely understand the sickening feeling we get when we see our bills, or the guilty feeling we have when going out to a dinner with friends.

We’re also looking at surface characteristics and making stupid judgments. ‘You spent $300 on jeans!’ ‘Why do you shop at Whole Foods?’ ‘Why did you decide to live in that expensive area?’ I know we all wonder these things about our friends because I do, too. And, in fact, most of our judgments are right: Because young people are not carefully considering their financial choices in the context of their long-term goals–e.g., we’re not paying ourselves first and we’re not developing an investment/savings plan–when you think your friend can’t afford those $300 jeans, you’re probably right. I’ve tried to be less judgmental about this. I’m not always successful, but I’m trying to work on the fact that the sticker price doesn’t matter–it’s the context around it. You want to buy a $1,000 bottle of wine? And you already saved $50,000 this year at age 25? Great! But if your friends are going out four times a week on a $25,000 salary, I bet they’re not consciously spending.

The friends I wrote about above are an exception to most people our age.

They have a plan. Instead of frivolously spending money without a holistic goal, they took a few hours, wrote down where each % of every $ should go, and then built an infrastructure to do it automatically. They spend less time worrying about money than most people! These are people who already know about ING and their credit cards and basic asset allocation. They’re not experts, but they got started a while ago.

To me, this is an enviable position to be in, and it’s exactly what iwillteachyoutoberich is about: cutting costs on what you don’t care about, and spending extravagantly on the things you do. The problem is, we all want to have it now, so we make short-term decisions. We also use simplistic goals like “Oh, fine, no more lattes!” I hate when people say that, because (1) it’s usually thought of as a panacea, and (2) for the people who have to make that pledge, it’s usually such a part of their routine that hoping for long-term behavioral change is hopeless. What if I suggested that you could be doing what one of these friends are–spending whatever you planned without thinking twice–and it would make perfect financial sense? And you wouldn’t feel guilty about it?

I know that sounds good. But the catch is, there are no stupid, simple secrets like “no Starbucks.” You need to work to change your spending habits for a year, or maybe 2 or 3. Would you be prepared to work that long to get to a place where you knew exactly what you’re spending, and you could spend extravagantly on the things you value?

You can. It takes a plan. And it’s really as simple as that.

“But Ramit…”

“These people probably spend hours every day managing their money”
Nope. I asked them how much time they spent, and not surprisingly, it’s just a few hours a month. Two of them set up an automatic infrastructure so that money is automatically moved from one accout to another as paychecks come in. Once you set your infrastructure up, you’ll spend less time managing your money than most people do. And you’ll have more of it, too. The simplest way to do this is to set up a high-interest savings account (more about ING/setting up your accounts) and automatically deduct money from each paycheck.

“I’ll never make six figures in my early 20s”
THAT’S NOT THE POINT!! PLEASE DO ME A FAVOR AND DON’T GET CAUGHT IN THE DETAILS. That’s exactly what I wrote about in The Shrug Effect. Here are some better suggestions:

  • Think about it by percentage (“what percentage of my income am I spending going out?”).
  • Think about it in terms of goals (“how much do I need to save for a down payment on a house in 5 years?”).
  • Just look at yourself and say, what am I already spending a huge amount on? And what would I really like to be spending on? A good way to do this is to say, If I had all the money in the world, what would I like to do? Then figure out how to do it. But remember, pay yourself first instead of just spending on things you want.

Still, there is some truth to what you said. If you’re making $40,000, your lifestyle is just going to be different than someone making $190,000. That’s just a fact. But whatever your income is, I guarantee you can live better on it by having a spending plan.

“Yesterday, you wrote that you just moved to San Francisco and you’re paying 2x the rent. Why would you do that? Shouldn’t you live beneath your means?”
Good question. I still am. In my 2007 resolutions post, I wrote that in 2007, I’ll make more, save more, and spend more than ever before this year. I created an asset allocation to save and invest more money (both in the stock market and in my own businesses), and then I looked at what I had left over. And I consciously decided that the higher rent, parking, eating costs, etc, was worth it.

One additional point is that money isn’t just here to be saved and scrimped and pinched. It’s here for us to enjoy. And I love living in SF. When you consciously spend, you can say “it’s worth it” after having actually considered the alternatives using numbers, not foofy emotions.

“I have identified a fatal flaw in your reasoning. Yes, your friends may have maxed out their 401(k)s, but they could still invest more. And since every dollar we save now is worth a lot later, your dumb friends are actually losing tons of money!! HAHA!!”
Touche. Yes, technically you could always save more. But when your money becomes oppressive to you, that’s when you stop respecting it. If I were saving 95% of everything I was earning and not enjoying any of it, would I really have an incentive to respect my own self-set goals? As someone commented earlier today, personal finance has a lot more to do with “personal” than with “finance.”

And so, as a personal example of my finances and decision-making for moving to SF, I definitely could have taken the extra money and put it towards more investments. But after making my asset allocation, I’m happy with how much money I’m putting away. I don’t want to blindly just save more and more with no good reason. Conscious spending is about putting your money in the best places that make the most sense for you.

* * *
I think the comments on this post are going to be very interesting. I want my major takeaway points to be very clear:

1. Conscious spending is about making a plan on how you want to spend your money.
2. Most of us are not spending consciously–we’re just spending whatever and then getting the bills at the end of the month.
3. Why should we spend consciously? If your plan is forward-thinking, you’ll be able to pay yourself first by automatically saving/investing part of each dollar that comes in. You also won’t feel guilty when you go out, or buy shoes, or whatever, because it will be an explicit part of your goals. And if you structure your system to pay yourself first, in a few months, you’ll start to see it add up. Imagine where you’ll be one year from now.

Thanks for reading. And please tell your friends.

 

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130 Comments

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  1. Nice.

    I have one question: why refer to ING and ING only?

    Nowadays, ING is trailing the high-yield savings accounts. The truth is there are over 30 savings accounts that offer 4.5%+. There’s really not that much of a difference between them.

  2. I don’t have a strong opinion about which high-interest savings account people use. I’ve heard good things about HSBC and Emigrant Direct. I just happen to have an ING account, so if people want a referral click here.

    When I signed up, the 0.3% difference was not really that big a deal to me (they change all the time). I’d rather go with what I know / am comfortable with. So, bottom line, I’ve heard good things about all the big high-interest savings places, and if you like another one, you should go for it.

  3. Indeed, a wonderfully insightful post. What is frivolous spending for one person is quite different for another. It all boils down to perspective and desire.

    For those who are strong advocates of socking away almost every penny they have, or depriving themselves of small, enjoyable luxuries – this on the surface may seem like an admirable goal. But given the choice of being filthy stinking rich in my old age, or taking a more subtle approach by making wiser financial decisions while still nurturing my passions … well, I know what I would choose.

    We are, after all, only young once.

    The key is to discover that delicate balance and uncover a definition of what is meaningful and enriching spending for your own personal values and lifestyle.

    I personally am a huge travel junkie. I hope one day to grace the mystifying beauty of the Taj Mahal. Because. from my perspective, an experience like that would simply be priceless.

    =^..^=

  4. Great post! It took my wife (then girlfriend) about a year to move me away from my repentent monk style of budgeting — after buying something big stop spending money until you feel you’ve sufficiently atoned for your sins — and toward something akin to the concious savings you describe above.

    One wrinkle: I write, sometimes for professionally, and I also do the occasional consulting gig. The result is unexpected checks come in every once and a while during the year. The question is, what should you do with unexpected income? Save it all? Blow it all? The technique we settled on was to apply the 25%-split rule. This says, regardless of the check size, 12.5% goes to retirement, 12.5% goes into general savings. The rest is up to us.

    I’m curious, however, about how others budget unexpected income?

    • Unexpected money? I personally save it until something that I really like appears. But as a general rule, I would transfer 30-40% in a savings account and the rest in another account for personal usage (meaning things I like to do). It really depends. I do buget my expenses monthly, but it really depends on how much you earn. I live in Romania and have no debt from university education since here state universities have many free places, but in the future I will probably have to take out a loan if I want a house in Bucharest. I will never be able to buy a house with cash if I don’t seriously bump up my earnings. Another thing is that here the system works like this: part of the contributions for my state pension are redirected to a private pension as well automatically ( this is by state law). So I will have 2 pensions: a state and a private one. I am 26 now, but I worry about the future. I need more information about investments because I don’t know about that. My savings account gives me an interest though.

  5. How many people in the country, really, make over six figures? Your examples border on the ridiculous.

    That’s not the point of the post. The same thing holds true for people who make $20,000 or $40,000, just at different levels and for different things.

    -Ramit

  6. I totally agree. It is all about being conscious about what you spend.

    Why be miserable and frugal if you have do what you love and still be wise with your spending habits?

  7. Although many people might have trouble articulating it, I suspect that the judgment doesn’t come because your friends are spending recklessly — if they’re saving appropriately and sticking to a budget, *obviously* they’re not being financially reckless. The judgment comes from the fact that they’re spending so mcu and so *selfishly*. $21,000 a year on parties?? $5,000 a year on shoes?! Gimme a fucking break. Why not give a little to the local homeless shelter instead? And to fight malaria in Africa, and feed starving children in India? And if you’re already giving to those causes, give some more, or find something else worthwhile to do with your money. As it is you’re just frittering it away on shallow hedonism. “To whom much is given, much is expected” and all that.

    I’m not worried that these people aren’t saving enough for their retirement, and, like I said, I seriously doubt many other people are concerned about that either. People with healthy six-figure salaries don’t usually garner that sort of concern. What they are doing is contributing to our rampant consumerism, debasing both themselves and our society in the process. Look, we’re human, and not everyone is going to live like a monk or nun, so most people will treat themselves to needless frivolties on occassion. Or the $3 morning latte, or whatever. But this can easily reach a point where the spending becomes obscene, and your friends have long since crossed that threshold. People are bothered by this for the same reason they were bothered by Kozlowski’s $6,000 shower curtain. I’m not concerned for their bank accounts; I’m concerned for their souls.

    On one hand, I agree. For people who are spending entirely on themselves without a care for anyone else, while it might not be our right to criticize you, it’s still sad. But on the other hand, who says that just because people are spending a lot on going out, they’re not contributing to other causes? In my friends’ allocations, 2 of the 3 have charity components. This post is about more than 3 people, but I take your point and respect it.

    -Ramit

  8. Right on. I couldn’t agree more.

    I am way too impulsive with my spending and the guilt bites me in the butt in the end.

    If I spend on something I’ve planned for, the guilt part never comes around.

    It’s the sitting down and making myself plan and stick to the plan that’s the hard part.

  9. This is great.

    But I was going to say the same thing about ING. I have an ISA account through Northwestern Mutual that automatically deducts money from my checking account each month. It averages 4.7%. And hsbc direct is offering a whopping 5.05%!

  10. Your theory is great, “Spend whatever is left over on whatever you want.” But in practice, it doesn’t convert to those of us with smaller incomes. You suggest that we just think of it as percentages, but the percentages for discretionary spending aren’t the same for people who make 6 figures (10%) and those who are struggling to pay the mortgage (Your theory is great, “Spend whatever is left over on whatever you want.” But in practice, it doesn’t convert to those of us with smaller incomes. You suggest that we just think of it as percentages, but the percentages for discretionary spending aren’t the same for people who make 6 figures (10%) and those who are struggling to pay the mortgage (<1%).

    Could you make your comment box any smaller? If you make it one word small, then I can just read horizontally. 🙂

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