We have talked about how to get better at spending on experiences and material items, but how do we know what is “enough” spending on experiences and material items? We can get try to get better and better at spending but how do we know what is the “right” amount to spend?
We all have to figure out what is “enough” to us because there is always going to be plenty of opportunities to spend our money. Defining what is enough impacts us in many ways but, most importantly, it impacts the time we have to spend on what means the most to us. This is because our level of spending impacts how much income we need to earn to support our lifestyles and other goals, and earning more income generally requires more of our time.
So figuring out what our “enough” is involves finding the amount of spending where the benefit from the spending outweighs the cost of the time required to earn the spending. As Henry David Thoreau (the guy who kind of lived in the woods for a bit) put it: “the price of anything is the amount of life you exchange for it.”
How can we figure out this “enough” amount practically? Let’s look at one way we can think about this.
Step #1: Estimate the amount of money we need to save to support spending on something without working
A common rule of thumb for retirement is we need to save 25 times our annual spending to support that spending in the future without working. We can also use this guidance to think about spending in a specific area.
For example, I go back and forth on whether it’s worth it to me to spend on a TV subscription (mainly to watch my sports teams lose). To get the right channels, it is about $80/month. So if I wanted to keep this spending indefinitely, I’d need to save $24,000 (estimated as $80/month spending X 12 months = $960 annual spending X 25).
Now $24,000 may sound like a lot or not very much to support TV watching in the future depending on how much value someone receives from it. Next, we can put this amount in context of how much of our life we have to spend to support this spending.
Step #2: Estimate the hourly rate we earn from working
This is not simply the hourly rate we get paid for time at work – whether that is our salary divided by hours worked or if we’re paid on a hourly basis. We also consider other time spent related to working, such as for commuting, time getting ready in the morning, or any other time that we wouldn’t have spent if not for having the job.
For example, let’s say we earn $49,000 per year working 40 hours per week with three weeks off per year for vacation/holidays. This results in us having an hourly rate of $25. But we most likely spend more time than just the actual 40 hours per week that we are paid for. So we update our hourly rate to reflect that time. Let’s say we spend an average of about 2 hours per day getting ready for work, commuting to work and going to mandatory “fun” work activities outside working hours. Our hourly rate is now about $21 since we’re actually spending about 48 hours per week on our work.
Step #3: Compare the amount we need to save to support spending with our hourly rate
So for the TV spending amount needed ($24,000) and the hourly rate of $21, we would need to work 1,143 hours over our lives. Is it worth spending more than half a year working to support this spending? This is where it becomes personal based on what each person values, it may be worth it for some people and not others. But we can apply this type of thinking to all types of spending so that we can be clear on what the spending actually costs us in terms of our time and lives.
This type of thinking is particularly helpful when getting closer to retirement and trying to decide how much longer to keep working. We can figure out how much more spending each year of working will enable for us and whether that spending is worth it to us to keep working.
For example, our current savings for retirement may be able to support $50,000 per year of spending and we estimate each additional year working will support an additional $1,000 per year of spending in retirement based on how much we can save while working.
We can then ask: is working another year worth another $1,000 spending per year in retirement based on how we could spend that money and the value we get from it? If it is not more valuable than the time we’re giving up, then we could potentially retire sooner.
Takeaways
Defining what is “enough” spending is important because it then becomes clear how much our spending is actually costing us with our time. We also face a lot of influences in society that encourages us to just keep spending without thinking about it too much. By thinking about our spending in terms of the hours we need to work to support the spending, we can confirm that the spending is valuable enough to us to offset the time we are trading for it.
