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RPF0509-Daily_Expenses


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00:00:30.800 | Radical Personal Finance, quick tip today.
00:00:35.520 | How much does it cost you to live today?
00:00:40.600 | One of the major challenges that we face in our wealth building goals is making sense
00:00:44.920 | of all the numbers in life.
00:00:46.360 | We know that wealth building and financial planning is fundamentally all about the numbers,
00:00:53.600 | but yet those numbers come and go and we don't often see the actual practical impact of those
00:01:00.600 | numbers on a day-to-day basis.
00:01:02.840 | This is especially magnified in our modern era where many of our transactions are digital
00:01:07.840 | and where many of our digital transactions are automatic.
00:01:12.680 | The money comes in, the money goes out, it just flies through the checking account.
00:01:17.000 | We don't have any tangible connection to the expenses.
00:01:23.440 | And that can be a real challenge because it's very easy for our expenses to increase and
00:01:28.960 | to total a lot more than we would otherwise think.
00:01:33.600 | Now you're the one who gets to decide which expenses you value.
00:01:38.240 | We all have different values systems.
00:01:40.200 | We all have different measurements by which we measure the things that are valuable to
00:01:44.160 | us and the things that I find important to spend money on may be different than the things
00:01:48.080 | that you find important to spend money on.
00:01:51.080 | But the key to being able to make that judgment is having good data and being able to understand
00:01:56.200 | the data that's involved in your life.
00:01:58.760 | And frankly, this is tough.
00:02:03.880 | Here's an example.
00:02:05.080 | How much money is your house costing you today in electricity?
00:02:11.100 | And I mean today, not this month.
00:02:13.640 | I mean today, one day, one 24-hour period, which is an amount of time that we can easily
00:02:18.760 | connect with.
00:02:19.920 | How much is it costing you today in electricity?
00:02:23.800 | Well, let me help you answer that question.
00:02:26.560 | Let's pretend that your electric bill is $150 per month.
00:02:30.720 | Take $150 this month and divide it by, usually what I do is divide it by 30.5.
00:02:39.040 | If you remember that some months have 30 days, some months have 31, and February, of course,
00:02:44.160 | has 28.
00:02:45.160 | If I use 30.5 as my easy number, that winds up with 366 days, which is close enough.
00:02:52.200 | So take $150 and divide that by 30.5, and you wind up with $4.92.
00:02:59.400 | So if your electrical bill costs you $150 per month, that means that today you're spending
00:03:06.680 | about $5 to light and heat and cool your home.
00:03:13.480 | Now I don't know if for you that would be a high number or a low number.
00:03:17.680 | I don't know if you would consider that to be a worthy expense or not a worthy expense,
00:03:22.640 | but it's a number that you should know and that you should know, if not immediately,
00:03:30.420 | you should at least be able to connect with it.
00:03:32.660 | So here would be another example of a question.
00:03:35.560 | How much does your household cost you on a daily basis?
00:03:39.500 | Now this is much simpler if you rent.
00:03:42.000 | Let me rephrase.
00:03:43.520 | Instead of household, how much does your dwelling place cost you on a daily basis?
00:03:48.360 | This is much simpler if it's a rental cost because we can just measure pure cost.
00:03:53.480 | Assume for a moment that your rent is $1,500 per month.
00:03:57.280 | Assume that your electrical bill is $150 per month.
00:04:01.160 | Assume that your water bill is $100 per month.
00:04:05.680 | Assume that your cable, TV, and/or internet and/or satellite bills total $100 per month.
00:04:13.080 | And right now we're at $1,850 per month.
00:04:17.080 | Now you may have a couple more bills, but let's just go with that.
00:04:20.440 | $1,850 per month, your normal monthly cost.
00:04:23.800 | How much is that per day?
00:04:26.120 | We'll divide by 30.5 and you have the number of $60.66 per day.
00:04:34.000 | Now the great thing about doing these numbers is you're going to have some numbers that
00:04:37.900 | are useful to you to think about alternatives.
00:04:43.000 | If that were your scenario, are you getting $60 per day of value from your dwelling place?
00:04:50.020 | Maybe so, maybe not.
00:04:51.020 | I don't know.
00:04:52.600 | What else and how else could you spend that $60 per day?
00:04:58.480 | Incidentally if you're a homeowner, you should do a similar type of analysis, but there are
00:05:02.600 | a few more steps involved.
00:05:04.800 | The way that you would do that type of analysis as a homeowner is instead of your rental payment,
00:05:12.640 | you would figure out the pure costs of your mortgage payment.
00:05:16.880 | So pull out your taxes and your insurance, which those are in many ways equivalent to
00:05:23.680 | rental costs because they're just consistent expenses.
00:05:26.800 | You're not building any equity there.
00:05:29.040 | And then do your best to, out of your principal and interest payment, do your best to figure
00:05:32.560 | out what you think your house is actually costing you over the course of a year.
00:05:38.480 | And it will be more challenging because you'll have to bring in improvements, maintenance,
00:05:45.320 | other types of expenses, things like that.
00:05:47.240 | It may be simpler.
00:05:48.840 | Just use your mortgage payment.
00:05:49.840 | It's probably a fair enough assessment of what your costs would be because for most
00:05:54.400 | people my guess would be that any potential increases of the value of the property would
00:05:59.120 | be offset by expenses and improvements that you would make in the property.
00:06:02.880 | Most people don't come out too much ahead on their house.
00:06:04.920 | If you think you're going to come out ahead, go ahead and adjust that a little bit.
00:06:08.760 | But figure out what is your daily expense.
00:06:12.180 | The cool thing about doing this math is it gives you a basis for comparison that may
00:06:17.120 | be very useful to you.
00:06:19.520 | Pretend for a moment that you wanted to live in multiple places and during the year 2018,
00:06:25.360 | instead of staying in one rental apartment in one city, you wanted to move around.
00:06:30.640 | Well, what could you get in terms of a daily rental rate or a weekly rental rate?
00:06:36.160 | You can jump onto Airbnb and if your current cost is $60 per day for your dwelling, you
00:06:42.000 | could jump onto Airbnb and look around and see what you can rent for $60 per day and
00:06:46.400 | you know that you would have an equivalent cost to what you're spending right now.
00:06:51.960 | Or maybe you would like to do some traveling and you look at hotel costs.
00:06:56.240 | Or maybe you intend to buy a boat and live on a boat and so you try to figure out how
00:07:00.440 | much your boat payment would cost you and how much your marina fees would cost, etc.
00:07:06.360 | But that's a very useful number for you to know, that daily number, because then it opens
00:07:12.000 | up points of comparison.
00:07:15.960 | Frequently people don't make accurate comparisons because they don't have an accurate understanding
00:07:20.880 | of what the numbers mean.
00:07:22.720 | You're used to writing that $1,500 a check every month for your rent.
00:07:25.840 | You're used to writing that $2,500 a month check for your mortgage payment and you don't
00:07:30.000 | think about alternatives.
00:07:31.000 | But sometimes if you'll just convert that into a daily expense, it'll open your eyes
00:07:36.520 | to something new.
00:07:38.440 | I've just done this analysis for myself and you can do this incidentally with just any
00:07:43.800 | of your payments.
00:07:44.800 | If you have a monthly payment, you don't need a full year's worth of data or you can do
00:07:48.760 | it with a full year's worth of data.
00:07:51.400 | It's January 2018 as I record and release this episode of Radical Personal Finance.
00:07:55.440 | That means that you should have a year of data accumulated from 2017 and you can look
00:07:59.280 | back.
00:08:00.280 | I've been doing this analysis because one of our plans during 2018 is to do some extended
00:08:05.120 | RV travel.
00:08:06.440 | I'll share more about that on a future episode as far as our specific plans, but we intend
00:08:12.200 | to take a multi-month trip around the United States with the goal of meeting you.
00:08:19.320 | But in order for me to understand those expenses, I need to compare what would be my expenses
00:08:23.360 | on the road versus the current expenses.
00:08:25.920 | I can do that very effectively with a daily budget.
00:08:30.040 | You can also do this just to get an idea of your normal expenses that you're always going
00:08:34.400 | to incur and try to figure out what they actually would mean to you on a daily basis.
00:08:39.240 | Let me give you an example from my own budget.
00:08:42.900 | During the year 2017, Mrs. Radical Personal Finance and I spent a total of $7,934.41 on
00:08:52.520 | groceries.
00:08:54.060 | Now that grocery category in my tracking system is inclusive of paper products and things
00:09:00.060 | like bottled water, but any kind of food-related thing.
00:09:04.240 | Going forward, one of the things that I'm changing in my own accounting system is to
00:09:07.640 | be more discriminating in my subcategories.
00:09:11.320 | My general philosophy regarding budgeting is keep it as absolutely simple as possible,
00:09:17.880 | meaning in many cases as few categories as possible, but it must be detailed enough to
00:09:23.440 | be helpful for you.
00:09:25.520 | So that number of $7,934 comes out to a total monthly of $661.20 per month as far as a monthly
00:09:33.160 | average.
00:09:34.160 | Now, the reason that that number feels high to me and it's frustrating to me, I feel
00:09:38.800 | like it should be at least under $500 a month.
00:09:42.200 | In my mind, that would be a reasonable budget for a family of five, but one of the – of
00:09:49.200 | course the youngest is only just starting solid food and the other two really don't
00:09:53.240 | eat that much.
00:09:54.280 | But I feel like that's a sloppy number and I need to tighten that number up.
00:09:58.800 | So when I look at it on a daily basis and I calculate it, it comes out to $21.74 per
00:10:03.800 | day for groceries and paper products.
00:10:10.280 | When I think about that, it's actually not quite so unreasonable to me in that case.
00:10:16.480 | To feed four people every day for $21.74 at three meals per day, that comes out to $7.25
00:10:25.680 | per meal.
00:10:27.120 | Is that awful?
00:10:28.680 | Well, I feel like it's unnecessarily high, but I don't think it's necessarily awful.
00:10:34.800 | Now another interesting thing that I calculated was fuel use.
00:10:39.660 | During the year of 2017, we spent $1,936.50 on fuel.
00:10:47.800 | Total is $161.38 per month and that's $5.31 per day.
00:10:53.760 | It's interesting because fuel is one of those things that I don't think we actually
00:10:57.880 | use very much.
00:10:59.360 | We live in a county and have a geographic lifestyle.
00:11:02.920 | The county that we live in is huge and our lifestyle is very spread out.
00:11:07.600 | But I don't drive for work and my wife doesn't drive for work.
00:11:10.360 | So all of those miles are personal roundabout miles.
00:11:15.000 | But $5.31, that feels high to me.
00:11:18.480 | I didn't really realize that we're spending $5.31 per day on fuel.
00:11:26.640 | There are other interesting categories as well.
00:11:28.680 | For example, one of the ones that has been rough the last year, a couple years for our
00:11:34.400 | budget has been the expenses for our dogs.
00:11:38.760 | My total spending on dog expenses for 2017 was $2,063.21 which comes out to $5.65 per
00:11:48.400 | day.
00:11:49.400 | Now that's a very high number, $171.93 per month.
00:11:53.720 | It's a very high number because my dog has had some extensive health issues and he has
00:11:59.240 | a specialized dermatologist veterinarian and we've gone through all kinds of things.
00:12:04.840 | He's on an expensive medication right now which has solved some of the problems.
00:12:08.840 | We've tried all kinds of different treatments, tried changing foods, tried changing supplements,
00:12:13.480 | all kinds of different things and we're still trying to get that budget category under control.
00:12:18.720 | But it's a little sobering to look and say $5.65 a day?
00:12:23.280 | I love my puppies so I've spent the money but well, it's illuminating to have that daily
00:12:30.720 | number.
00:12:31.720 | I don't need to go on with my examples.
00:12:35.480 | What are yours?
00:12:36.480 | What are your monthly expenses?
00:12:39.760 | If I paid you $10 a day to cut your grocery bill in half, would it be worth it to you?
00:12:46.720 | For me it would.
00:12:47.720 | When I look at that number, that $20 a day number for feeding my family on groceries,
00:12:53.200 | I look at that and I think, $21, sorry, $22 number, I look at that and I think, "Well,
00:12:58.600 | you know, it's not awful but it's probably worth $12 a day to me if I could cut that
00:13:06.000 | number in half."
00:13:07.440 | So let me focus more intensely.
00:13:09.720 | Let me stop being sloppy with that category because if you told me and put it into context
00:13:17.520 | and say, "Joshua, if you can cut your bill from $22 a day to $12 a day and you're going
00:13:23.000 | to get an extra $10 bill stuffed into your wallet every single day of 2018, are you willing
00:13:30.080 | to do that?"
00:13:32.800 | I'm willing to do that, especially when that's after-tax money.
00:13:38.520 | If depending on your tax rate, that $10 a day extra money in your pocket could be worth
00:13:43.360 | an extra $13, $12, $13, $14 a day that you'd have to earn an hour of labor per day every
00:13:50.760 | day.
00:13:51.760 | I challenge you to do your own analysis.
00:13:55.120 | And again, here's how you do it.
00:13:56.720 | If you have data for the year 2017, take that data and if you are competent with a spreadsheet,
00:14:05.140 | put into the spreadsheet your annual expenditures.
00:14:09.220 | If you use a personal finance software platform such as YNAB, the You Need a Budget software
00:14:16.260 | that I use that I recommend to you, radicalpersonalfinance.com/ynab, make me a little cash for doing the show.
00:14:23.620 | I appreciate that.
00:14:24.620 | Radicalpersonalfinance.com/ynab.
00:14:25.620 | So if you use a software like YNAB, that's great.
00:14:28.340 | If you use Mint for categorizing your transactions, if you use Quicken, if you use Tiller, you
00:14:35.100 | have a Tiller spreadsheet.
00:14:36.780 | I forget my – maybe it's radicalpersonalfinance.com/tiller.
00:14:40.540 | Go to the website and there's a link through for Tiller or tell them, "Joshua, Radical
00:14:45.180 | Personal Finance sent you."
00:14:46.660 | If you use Quicken, et cetera, just export the data from 2017, your totals, drop it into
00:14:51.340 | a spreadsheet and run a couple of formulas.
00:14:53.300 | Take your annual total, divide it by 365 and get your daily totals and then divide that
00:14:59.600 | annual by 365 and get your monthly totals.
00:15:02.700 | So that's a simple way to do it if you have good data for the past calendar year or for
00:15:06.780 | the past rolling 12-month period that you're listening to this show.
00:15:11.060 | Another way to do it is just simply take your expense, take the monthly bill that you have
00:15:16.420 | and figure it out for yourself.
00:15:18.460 | With a monthly bill, I recommend you go smaller down to daily and then bigger up to annual
00:15:26.700 | because this will impress upon you the value of certain changes.
00:15:32.100 | Assume for a moment that your internet and TV bill is $100 per month.
00:15:38.900 | Well, question.
00:15:40.980 | Do you really need that?
00:15:42.860 | For example, on TV, did you know that you can get free TV that just comes through the
00:15:47.740 | air if you need TV?
00:15:50.100 | Or did you know that you can get free DVDs from the library?
00:15:52.540 | Did you know that you can read a book?
00:15:55.320 | With your internet usage, do you really need to have a separate high-speed internet line
00:15:59.100 | into your home?
00:16:00.220 | For some people, that's an absolute necessity, but for others, that's a total option.
00:16:04.240 | Maybe you can get by with just using your phone here and there for internet if you have
00:16:08.300 | a data plan on your phone, or you can just use the internet and do whatever necessary
00:16:12.180 | internet work you have while you're at the office or at another location.
00:16:16.060 | $100 a month dropped down to a daily expense comes out to $3.30 per day.
00:16:23.500 | Is it worth it to you to pay $3.30 per day?
00:16:29.980 | Or multiply it by 12, and let me ask you this question.
00:16:33.700 | At the end of 2018, if you could cut your internet bill and your TV bill by $100, would
00:16:40.560 | you rather have an extra $1,200 in your savings account?
00:16:47.460 | Would you rather have an extra $1,200 of your debt paid off?
00:16:50.860 | Would you rather have an extra $1,200 available for your investments?
00:16:57.060 | The choice is yours, and it all comes down to your expenses.
00:17:03.500 | So take, if you don't have records for the last year, take your monthly bills and run
00:17:08.820 | them through this analysis.
00:17:11.300 | I encourage you, don't discriminate.
00:17:14.820 | Run all of your bills through this analysis.
00:17:18.580 | You can just do it by hand.
00:17:19.580 | Write them down.
00:17:20.580 | Write down your categories on a sheet of paper and calculate it out, and then look at each
00:17:23.860 | one and say, "Am I satisfied with this?"
00:17:28.780 | If the answer is yes, good.
00:17:31.540 | The goal of life is not to spend the least amount of money possible.
00:17:41.540 | The goal with your expenditures is to spend the least amount of money possible to buy
00:17:49.980 | the lifestyle that you believe is important for you at this stage of your life.
00:17:56.540 | There's a balance, and less is not always better.
00:18:01.700 | One recommendation in frugality is this.
00:18:04.740 | Cut your expenses down to where you're uncomfortable and then increase them slightly.
00:18:12.300 | If you live at the ragged edge of discomfort all the time, you will probably find that
00:18:19.980 | very wearing.
00:18:20.980 | If you have an aggressive financial goal to get out of debt by a certain time or to save
00:18:26.060 | a certain amount of money for a down payment on a house or to become financially independent
00:18:30.180 | by your 35th birthday, etc., then living on that ragged edge of discomfort may be what
00:18:36.220 | you can do.
00:18:37.220 | As long as that goal is in your sights, you can push yourself through to that.
00:18:43.460 | Don't keep yourself on that ragged edge of discomfort for the long term if you don't
00:18:48.420 | have some impressive goal that you're working towards.
00:18:53.260 | Take yourself down to that point of being uncomfortable in your expenses and then increase
00:19:00.660 | just a little bit.
00:19:01.660 | I think that's where you get the best bang for your buck.
00:19:05.740 | Have a great 2018.
00:19:08.780 | This show is part of the Radical Life Media network of podcasts and resources.
00:19:14.420 | Find out more at RadicalLifeMedia.com.
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