Years ago I was mystified at how I consistently failed to have spare money. Then I discovered what I’ll call implicit spending: if you rely on some possession that has a lifetime, your daily use involves implicit spending. Say you own an item that has for you a useful life of 4 years and that you expect to pay $2000 to replace it when it goes. Then as you use it, you’re implicitly spending $500/year, or $41.67/month, by having it, since when it must be replaced you’re going to need $2000. The price at replacement time might vary from $2000, but you expect that you’ll have to come up with that for the replacement.
An apartment dweller might count as sources of implicit spending things like a car, tires, car battery, vacuum cleaner, mattress, TV, computer, and the like. A homeowner must also account (and accumulate) for a roof, water heater, furnace, dishwasher, refrigerator, washer, dryer, exterior paint, carpets, and so on.
In our possession-laden lives, the burden of implicit spending can be significant—and it’s in addition to explicit spending: insurance policies, automobile registration, birthday gifts, and the like: periodic expenditures that we more obviously and explicitly must make.
I created an Excel workbook (download at link) to track all this, starting with the money you get from your take-home pay. Each page examines one category of saving/spending (mostly spending, I must admit) and allows you to enter the amounts appropriate to you. Each page is protected so that you don’t accidentally overwrite formulas, but if you want to tinker with it, the password is “123” (without the quotation marks).
I think if you work through this you’ll be surprised at the amount of money you’ve obligated yourself to pay, on average, each month. And if you don’t have that money, bad things will happen to you, sure as my name is Leisureguy. Take a look, and see how it works for you.
UPDATE: The obvious corollary: the fewer material items you accumulate, the less money you must put aside in your replacement savings. By adopting a lifestyle that’s light on material goods, you free up more of your income for saving and investing. That’s part of the message of the interesting and useful book Your Money or Your Life, by Joe Dominguez and Vicki Robin. I highly recommend the book and the application of its ideas. Quite often, it seems, a material object is acquired and valued not for what it is, but in an attempt to satisfy some psychological need. It’s much wiser to identify these needs and deal with them directly than to try to satisfy them by accumulating stuff (and increasing the implicit spending you do). And an Update to this: watch this little movie for a new appreciation of the burden of stuff. — Dominguez, Robin, and others also started the New Roadmap Foundation to provide further support for their ideas. The Web site for that is FinancialIntegrity.org.
UPDATE 2: When you do acquire things, many of those things must ultimately be disposed of: given away, sold on eBay, thrown away, or whatever. Some may be simply used up: a washing machine, for example. But still it must then be discarded.
It helps when you go to buy something—a book, a vase, a chair, a set of dishes, whatever—if you take a moment to decide how it will be disposed of. You can’t assume, BTW, that giving it away will automatically work: it might well be that the intended recipient will not want it when the time comes. One way to give things away is through the Freecycle program.
It will then perhaps occur to you that you can finesse the problem altogether by not getting the thing in the first place.
UPDATE 3: A suggestion on the money you’re setting aside for future use: save this money via automatic transfer to ING Direct. (Last I checked, passbook savings accounts in regular banks paid 1/10th of 1% interest per year.) As the money accumulates, put it into one of Vanguard‘s low-fee balanced funds. (For most of their funds, “low-fee” becomes “no-fee” once you have $10,000 in the fund.)
UPDATE 4: The Simple Dollar has a good post that sums up the fundamentals of personal finance. Take a look.
UPDATE 5: I just added a bit to the workbook. This latest version has my email address on the “Summary” page as “firstname.lastname@example.org“. If you have some other email address there, you might want to download the latest version. The main difference is small. I include this text in the “Savings” page:
A comment on the 401(k) and other tax-deferred plans: the account balance is misleading. You don’t really have that much money available to spend in retirement because you must pay taxes on the money that you draw out—and it’s taxed as ordinary income. So the total available for you to spend is (depending on your tax bracket) is 25%-30% less than the total shown. That’s one reason after-tax savings are so important: that balance is actually available to you.
BUT: Be sure to max all all your tax-deferred options (401(k), IRA, and the like) BEFORE you start your after-tax savings. Also: check out the ROTH IRA: that money perhaps can be withdrawn tax-free.
UPDATE 6: Be sure to check out the resources available at FinancialIntegrity.org.
UPDATE 7: Take a look at this review of the book Early Retirement Extreme.
UPDATE 8: 18 Jan 2012: Updated link to Excel workbook.