Family of Four Taking Flight to Financial Independence

What Do You Mean I Can Still Buy Starbucks?

Today we are flipping the script, and rather than focus on how much to save / invest, let’s talk about how to determine how much to spend.  This is a topic that is not discussed enough in the FI (financial independence) community.  But it’s important to take a step back from the flight to FI and remind ourselves that it’s okay to spend money. 

I’m not talking about reckless spending here.  

Striking the right balance between investing and spending is going to be the key to help you reach your financial goals.

We are going to assume you have already looked at your budget, so you know exactly how much money is left over after all of your expenses are paid each month (if you haven't done this yet, stop and do it now!).

Our example budget is $2,000 per month left over after all of the expenses have been paid.

How Do You Decide How Much To Save / Invest?

It has always been easiest for me to first set my saving / investing goals which will lead me to how much money needs to be allocated to reach these goals.  Then whatever is left over I allocate to spending (note, when we are talking about spending here, we are talking about what you spend money on that is NOT in your monthly budget.  It could be anything from getting a Starbucks to pursuing a hobby that has some expense (insert your interests here!)).  

My daughter and I (Tara) met some friends Friday evening, and we enjoyed some cupcakes at
Rise (Pumpkin Spiced Latte for me).  This expense would fall under our spending money.

For example, if you are aggressively pursuing FI and want to reach it as soon as possible then I recommend applying 50% - 70% of the $2,000 to your investments each month.  This would leave you with between $600 - $1,000 for spending per month.

Will This Level Of Spending Provide Balance In My Life?  

Once you have determined the allocation towards your savings / investments, you now need to determine if what is left is a realistic amount that can consistently cover your spending for a typical month.  The last thing you want to do is leave yourself with an amount for spending that is too low and brings added stress to your life.  Take some time to really evaluate the things you spend money on that truly add value and bring joy to your life (eliminate the ones that don’t). 

If your investing goal is to save 70% of your income, but after looking at the numbers you realize that the $600 left over is not a realistic amount for you to stay within on a monthly basis, then you need to make an adjustment.  Maybe instead of saving 70%, you drop your savings rate down to 60% (this is still great), thus increasing your spending from $600 to $800.  Find your balance while striving to stay within that 50% - 70% savings rate (if FIRE (financial independence retire early) is your focus). 

Eliminate The Guilt Of Spending

Our kids golf (an expensive sport), and their summer golf camp came from our spending budget.

What this post really boils down to is how to take the “guilt” out of spending when saving for FI.  In my experience, the best way to do it is to look at the numbers.  Once you go through the exercises above and see that you have covered all of your monthly expenses and made your investments that are on par with your saving / investing goals, then you’re good!  You can now enjoy your spending money and use it on things that bring you and your family happiness.

What is your spending amount?  What do you like to spend on? 


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