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Intentional Spending

Your spending is an important factor in your financial independence journey. It effects the rate at which you can save and invest while in the accumulation phase and is also a critical factor in calculating your Target FI Number.

When accumulating wealth, the amount you can save and invest is a simple calculation: what you make minus what you spend.  Like many of the levers we talk about, your spending has a non-liner effect on your FI journey.  Spending slightly less also means saving slightly more and both of those quantities are found in the formula for Stash Rate, leading to a multiplied effect.

$$ Stash Rate = {Annual\ Savings \over Annual\ Expenses} $$

As we saw in the Stash Rate article, decreasing expenses leads to an exponentially increasing rate of wealth building.


On the other side of financial independence, the level of spending in your drawdown phase directly determines your Target FI Number.

$$ Target\ FI\ Number = {Annual\ Expenses \over Target\ Annual\ Withdrawal\ Rate} $$
Reducing your spending both accelerates your progress forward and brings the finish line closer.

It’s one thing to know this in principle, but another to be able to apply it in your life.  The first barrier to practical application is simply knowledge; most people have no idea how much they really spend.

Try this simple exercise: think about how much money you made last year Salary or total income.  Then subtract out the income taxes you paid Line 24 on your Federal 1040 plus the equivalent Total Tax line from your state tax return.  Finally, subtract out what you think your expenses were last year.  If you are like most people, you probably just came up with a positive number If the number was negative, it would indicate your spending exceeds your income and you may be going into debt..  However, if you did, the left-over amount should be equal to the amount you saved and invested last year.  Is it?

If you are still like most people, this number is larger than what you saved last year.  Most likely this is because you underestimated your expenses, or didn’t realize how much taxes you paid, or both.  Instead of guessing, a practice unavoidably filled with bias, we can instead track our expenses to know the total amount we spend.

The second reason to track expenses is to reveal what we spend our money on.  Even if you were close on the total expenses estimate, the details of where your money goes can reveal surprising information on how your spending aligns with your values.  By organizing your expenses into categoriesPractically, the categories you use may take some adjusting.  You want them specific enough to create useful information, but broad enough that tracking isn’t too tedious. when tracking, you can make sure your money is going towards the things that matter to you. When you see large amounts in buckets that aren’t important or don’t make you happy, you have found your first candidates for saving some money.

This principle is called Intentional Spending and is critical to the journey towards Financial Independence.  Sometimes sacrifices can be made for future benefit, but going through the journey while cutting spending so deep that you feel deprived will be counterproductive.  Rather than deprivation, we want to focus on intentionally spending on the things that matter most to us, but then dispassionately cut back on those that don’t.

Another benefit of tracking by categories has to do with the Pareto Principle.  Also known as the 80/20 rule80% of the outcome comes from 20% of the inputs, the Pareto Principle generally asserts that many of the outputs can be attributed to a small amount of the inputs.  In this case, out of the many categories that most people will divide their spending into, they will find that only a few categories will tend to dominate all of their expenses.  Focusing on these major categories first will lead to the greatest impact.

How to track your Spending

There are multiple ways to track your spending.  The way you should pick is the one that you will actually do!

The first and most manual option is writing down your purchases.  Every time you make a purchase, jotting a quick line with the expense and the category is all you really need to get started.  Maybe the date and a brief description.  If you like a touch screen better than a pen, make an electronic record in a list or note app on your phone instead.  At some point, you will have to add up your expenses in each category.

A less manual option is to download the data from your credit or debit card transactions.  After logging into your account online, you should be able to see your transaction history, complete with details like date and spending category.  From the transactions page, you should be able to find a link to download or export the data.  Some will offer different file format options for Quicken products or Excel, but all should also offer the CSVCSV stands for Comma Separated Values and is simply a text file where the data is deliminated by commas. format which can be imported into Excel or other spreadsheet applications like Google Sheets.

Once imported, you will likely find that you need to adjust some of the automatically assigned categories to better reflect the purchase or even to split the purchase into multiple categories.  Using this method, you will still have to manually track any cash spending and add it to your spreadsheet. One benefit to using your credit and debit card data is that you should be able to pull some past data, giving you a head start as you begin your tracking.  You will have to know how to manipulate spreadsheets enough to total the data across the different categories for the dates you are interested in and make some charts to help visualize your spending.

Finally, the most automated solution is to use a spending tracking application.  I prefer Mint, a web application from Intuit.  Using an application like Mint, you can connect your different bank and credit card accounts together in one place.  The software will import and aggregate the data to present your spending in different categories and typically provide you with ways to visualize the data.  You will still have to manually add entries for any cash purchases and should periodically reviewI like to do this about every couple of weeks so I can still remember what the expenses were. the automatically assigned spending categories.

An example of Spening by Category on Mint. Mousing over the categories shows the amounts while clicking on a category brings up more details.


This view shows the more detailed sub categories of a broader bucket.  Mousing over the categories shows the amounts while clicking on a sub-category shows the underlying transactions.

You will have to continue this tracking for a while to establish what your baseline spending really looks like.  Don’t forget that expenses can be seasonal as well, with certain bills popping up only once a year or more presents being purchased near the holidays for example.  While a full year’s worth of expenses would be ideal, you can certainly estimate seasonal expensese.g. property taxes are due the same time every year and the dates of the holidays don’t change ahead of time, so don’t let this stop you from taking action.

Tracking is just the first step.  Now you have the information to decide if your money is going towards the things that are important to you.  Do the sizes of each category feel right to you?  Where can you cut back without feeling deprived?  Use the FI Calculator to see the impact these savings can make.

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