Under spending / over saving?

[StellarSaver]

Hello all, brand new to the forums. I stumbled upon this site about a week ago and have really been enjoying reading some of the posts.

My question has to do with figuring out an appropriate level of spending on “fun stuff” given my income and net worth. I am single, no kids, and in my mid-40s and have a $1 million+ net worth (primarily mutual funds and IRAs/401k). No debt whatsoever and earn a low/mid six-figure salary. My monthly expenses, including entertainment, average around $2700, and I save/invest about $4500 per month through 401(k), IRA, and various taxable funds. I have cash reserves to cover about two years of living expenses. After accounting for all my monthly savings, investments, and expenses, I still tend to have a surplus of roughly $1000 each month that usually ends up just sitting in my bank account. So my question is: What would the average person in my financial position do with that extra $1000 per month?

Along those same lines, I’m also looking for general advice about my overall levels of saving vs. spending. Am I over saving, or under spending (or both)? Simply put, I don’t have a good feel for what someone with my income typically would spend on non-essentials and “fun stuff” each month. What is a good rule of thumb for frivolous or fun spending (e.g. 20% of take home pay, or 15%, or is it more complicated than a flat percentage)? I am trying to get to a more normal, healthy balance between saving and spending, so any advice on how to do that would be much appreciated!

[krantcents]

I don't think there is a number. It appears you are achieving all the key elements of saving and the basics that are important to you. Although I am married (children are adults) and in a similar position, I would not want some one to tell me what is appropriate. You have not mentioned if you rent or own your home. If you rent, buying a home may be a choice. For me, travel is an important part of my fun stuff. My wife and I travel overseas every other year. What is important to you? Anybody who has achieved your level of success will know how much to spend.

[StellarSaver]

Krantcents, I do own my home and paid off my mortgage several years ago. Like you, I also really enjoying traveling and have been trying to do more of that each year. But when I travel, I just pay for the whole trip and all related expenses with a credit card (which I pay off in full each month) -- I don't really budget or save up for it.

I think my dilemma, so to speak, is that I don't have a good gut feeling for how to spend the surplus cash I tend to accumulate from month to month. I am quite frugal by nature, so even when I want something (like a new t.v. or a new couch, etc.), I tend to delay the purchase longer than I think the "typical" consumer would. Like I said, I am trying to figure out a more rational (or normal) approach to spending vs. saving and just want to get some feedback on how others go about this... but maybe I'm overthinking it?

[JoshuaHeckathorn]

Originally Posted by StellarSaver

Krantcents, I do own my home and paid off my mortgage several years ago. Like you, I also really enjoying traveling and have been trying to do more of that each year. But when I travel, I just pay for the whole trip and all related expenses with a credit card (which I pay off in full each month) -- I don't really budget or save up for it.

I think my dilemma, so to speak, is that I don't have a good gut feeling for how to spend the surplus cash I tend to accumulate from month to month. I am quite frugal by nature, so even when I want something (like a new t.v. or a new couch, etc.), I tend to delay the purchase longer than I think the "typical" consumer would. Like I said, I am trying to figure out a more rational (or normal) approach to spending vs. saving and just want to get some feedback on how others go about this... but maybe I'm overthinking it?

I think you're over thinking it a bit, but I do the same thing too. It took me over a year to buy some patio furniture because I also tend to push off purchases longer than most people. I do really enjoy the furniture now that I finally bought it :-).

Anyway, I don't believe there's such a thing as oversaving for me. Some people get a sense of excitement out of spending money, and others get the same feeling from saving money. I just love saving money and watching it grow. If it were me, I would take the extra $1,000 and invest it each month.

[krantcents]

Originally Posted by StellarSaver

Krantcents, I do own my home and paid off my mortgage several years ago. Like you, I also really enjoying traveling and have been trying to do more of that each year. But when I travel, I just pay for the whole trip and all related expenses with a credit card (which I pay off in full each month) -- I don't really budget or save up for it.

I think my dilemma, so to speak, is that I don't have a good gut feeling for how to spend the surplus cash I tend to accumulate from month to month. I am quite frugal by nature, so even when I want something (like a new t.v. or a new couch, etc.), I tend to delay the purchase longer than I think the "typical" consumer would. Like I said, I am trying to figure out a more rational (or normal) approach to spending vs. saving and just want to get some feedback on how others go about this... but maybe I'm overthinking it?

In about six years, I will retire for the second time. I have saved my entire life for things I wanted. I am a little concerned when I retire will I be able to switch to a new mode of spending! For me, I can have tremendous fun without spending much money. If I were in your situation, I might invest part of it because I enjoy investing. To make it interesting, I would invest in income property. I did this extensively 25+ years ago. Please understand that fun for me is doing something with the money to make it grow.

Think about some of the things you have put off doing and start checking them off your list. This past Spring, my wife, friends and I visited New Orleans. I have wanted to do that for 40+ years! I have gone to Europe 4-5 times instead. It was just about time to get around to some of those things. This year we started to visit more attractions in our city (Los Angeles) such as the Frank Lloyd Wright house, and art museums. Next year, I studying Spanish using Rosetta Stone, although I have taken several Spanish classes before. In other words, look at your interests, hobbies and expand them. Since you are doing all the right things already, it is your choice.

I hope that helps.

[humandraydel]

What age do you want to retire? What are your hobbies? Have you always wanted to start a business? You are obviously in a great position, but I think you need to take a long hard look at what it is you want to do. If you love your job and want to work to 65, then you've got MORE than enough money and can spend the $1k freely. If you want to retire at age 50, you probably don't have enough!

[uRabbit]

Your figures ($2,700 in expenses, $4,500 in savings, $1,000 extra each month) do not add up to your salary of 'low/mid six-figures'. It adds up to just under $100,000. Where's the math?

[kork13]

Originally Posted by uRabbit

Your figures ($2,700 in expenses, $4,500 in savings, $1,000 extra each month) do not add up to your salary of 'low/mid six-figures'. It adds up to just under $100,000. Where's the math?

I'm guessing, but I'd guesstimate that he probably pays around $1100/mo in taxes/SS/med, which if you include that, brings the income to around $112k/yr. Add in any paycheck distributions (such as for insurance/healthcare, or whatever else--some people don't consider those like expenses, since it comes out before your paycheck hits your bank account) and that would bring it higher.

[kork13]

StellarSaver,
Being securely in a strong habit of saving basically gives you flexibility. Personally, I would absolutely travel more frequently, even if only small 4-day trips to whatever national parks, cities, and places you're interested in.

I sort of have the same "problem" (except that I'm only 25 and the numbers are a little lower), and what I've started doing is making spending goals, and set aside associated savings for them. Put together a list of various "wants" and price them out. When I trip a certain "line in the sand" of how much I need saved up to buy something, I go out and buy it. So for example, say I want to buy a new road bike for myself.... It'll cost $2000, so I start saving $200/mo toward it. When I hit the $2000 I have set aside for it, I go out and buy it. Do the same for the new TV, home gym equipment, and the trip to Australia

To some it may seem kind of strange to have to "force" yourself to buy something you want, but if you're a saver at heart, it often takes some convincing to know that the expenditure is worth it. By using the "line in the sand" method, it also helps me know for certain that I can spend the money without concern, because this money has been set aside and been building up for months for this specific purpose.

[StellarSaver]

uRabbit, you're right, I used the term "salary" when I should have said "income". My salary is indeed in the $100k ballpark, but I get bonuses each year which typically amount to around 90 to 120% of my base salary. The bonus cash gets invested in mutual funds, ETFs, etc.

humandraydel, I have thought a lot about what my plans are for retirement, but I haven't come up with anything definitive. I think I would like to scale back from the "daily grind" to some degree when I reach 50 and start doing things that interest me more... but I really don't know exactly what that would entail right now. I don't think I would be happy without some daily structure and purpose in my life, so full on, classic retirement would not be for me (at least in the near future).

Any other thoughts out there on a prudent level of saving vs. spending for someone who has already saved a lot? I have been trying to convince myself that I should feel free to spend a good chunk of that surplus $1000 per month kind of frivolously, but since I'm such a saver by nature, it's not as easy as it might sound.

[kork13]

One other thought as far as the balance between saving and spending... Do you keep a budget? Set aside a particular amount as a line item of "spending." You are saving easily 50% of your income, which is fantastic, and more than probably 98% of Americans. I might consider limiting it to that 50% range, maintaining current expenses at the 30%-ish that they are, and allocating the remaining 20% as essentially "fun money". 20% of income for straight-up spending money might seem a bit extreme, but I'm of the opinion that you can't wait until retirement to enjoy life. If your retirement savings are doing well and on track, turn some emphasis to enjoying the opportunities placed before you.

[humandraydel]

Originally Posted by StellarSaver

humandraydel, I have thought a lot about what my plans are for retirement, but I haven't come up with anything definitive. I think I would like to scale back from the "daily grind" to some degree when I reach 50 and start doing things that interest me more... but I really don't know exactly what that would entail right now. I don't think I would be happy without some daily structure and purpose in my life, so full on, classic retirement would not be for me (at least in the near future).

Will you be able to work part time and make the same kind of money you are now (per hour)? Is your savings per year going to drop drastically if you work part time? Or if you are going to try to turn a hobby into a business, that has more risk and you should probably be saving that $1k per month.

Do you have long term care insurance? I think you need to sit down and come up with a DETAILED retirement plan. This will help a lot, as you'll KNOW if you have enough money or not. You can even be conservative, and once you convince yourself you have enough given all possible scenarios, you'll be able to spend that $1k easier.

The problem is without more information, it's hard to tell if you should be saving or spending that $1k. Essentially you need to determine when (age) you want to retire and the amount of income you want.

[StellarSaver]

kork13, humandraydel, et al., thanks for your replies and some very interesting and thought-provoking advice. Since I don't have a detailed retirement plan right now, I guess it is pretty hard to know how I should be directing that $1000 monthly surplus. I am leaning towards kork13's suggestion of allocating 15-20% of my monthy take-home for "play" money, which is pretty close to that $1000 number. I'm sure I won't meet that every single month, or even most months, just due to my natural frugality. Another approach I have been trying to take recently is to not worry about paying full price for things like clothes and groceries... whereas normally I would lean heavily towards buying things that are on sale / marked down. I guess it's really a matter of getting comfortable with spending in moderation and not always looking to minimize the cost of every purchase.

[97guns]

with a net worth of what you have you should be retired like RIGHT NOW. my net worth was only $350K when i retired, you need to MAKE YOUR MONEY WORK FOR YOU and not work for your money.

[snshijuptr]

The normal %'s you hear thrown around here are 50% to needs, 30% to wants, and 20% to savings. Personally I switch to 20% Wants and 30% Savings. I suggest you aim to put at least 20% of your income toward enjoying/improving your life.

I agree with kork13 about making a Wants List. I think for you, the best action would be to evaluate what makes you happy. Make a list of activities you would like to do more of or would like to try out. Take a long vacation off work and try out some of your activities. Basically you want to figure out your ideal retirement lifestyle. Look far afield for ideas. Ask friends and family for activities they think you might enjoy.

From there you can create a retirement budget. Budget for your regular and your extraordinary expenses. Figure out how much income each year to enjoy your retirement. Multiply that times 25 to get your "number". Alternatively you can use a retirement calculator like FIRECalc: A different kind of retirement calculator.

Now you can see how much you need to save. Take the difference between your current savings and the savings you need and divide by the number of years until retirement (if the years are less than 5, I wouldn't count on growth all that much). Spend everything else! Alternatively, put more money away and retire earlier!

If you are really struggling to find something you love in life to do in retirement, there are coaches out there willing to take your money and show you how to spend more money. Alternatively, you can choose a worthy cause (be it your young relatives or a charity) and give generously. At this point you should focus less on how much money you are spending than on finding things that make you happy and passionate.

Good luck

[StellarSaver]

snshijuptr, I just checked out FIRECalc... wow! What a great retirement planning tool. I have been looking for something like that for a while, so thanks for the link. Based on some scenarios I just ran, I'm feeling pretty good about where I stand, so I'm probably going to start putting some more serious thought into what I really want to do, i.e. things that make me happy and that I am passionate about. And after all the helpful and insightful feedback in this thread, I'm feeling a lot more comfortable about how to deal with that $1000 monthly surplus.

[disneysteve]

I think you've gotten good feedback so far. Let me add my 2 cents. I've often shared here that my wife and I don't live on a budget. I have no idea, for example, how much we spent on groceries or dining out or car maintenance last year. We do, however, carefully budget our savings. Right now, 50% of my wife's salary goes into her 401k and 22% of my gross income goes to an assortment of savings vehicles. As far as we're concerned, how the rest gets spent really doesn't matter. Some months, more goes to dining out. Other months, more goes to home maintenance. Still other months, more goes to travel expenses. The past week, a fair amount went to casino gambling as we were on vacation in Atlantic City.

My point is that rather than seeking a number for the fun money, set a number for the savings goals and then work from there. If you want/need to save 30% of income to reach your goals, then do that and live off of the remaining 70%. If you want/need to save 40%, then live off of the other 60%. How you actually break down that 60 or 70% doesn't matter as long as all bills are being paid, you are not taking on debt and you are satisfied with your lifestyle.

I don't think you can over-save but you can under-spend. If you are so miserly that you are miserable (note the similar word roots there), you are under-spending. If, however, you are saving 50% of income and are loving life, don't feel you need to spend more just for the sake of spending.

[StellarSaver]

disneysteve, thanks for your feedback. I think I am pretty similar to you in that I don't live on a budget, but I do ensure that I'm saving over 50% of my gross income each year. Your comments about being "so miserly that I'm miserable" made me think... am I miserable? The answer is no, I'm fairly happy with the lifestyle I lead, and I don't feel like I am constantly depriving myself of stuff because I'm hesitant to spend. I do think, though, especially after reading some of the advice in this thread, that I should feel pretty free to spend more liberally when I want to. For example, I've been putting off replacing a 9-year-old television for well over a year now, so maybe I should just stop worring about spending that money and go do it!

[bjl584]

If you are saving over 50% of your income and you are still enjoying life and not feeling deprived, then I wouldn't change a thing. You are doing excellent. Mid 40's, no debt, a net worth over 1 million, and a high paying job. I am with some of the others that you may be overthinking things. I would Steve's advice and save a set amount each month, and then not worry too much about the details of your spending habits. You don't seem the type to blow money on things that you don't need, and you have obviously done an excellent job of saving, investing, and paying down debts thus far, so why change? Your strategy obviously has worked very well for you.

[timbuckley10]

No debt and over $1mil net worth? I would say go for the new TV :P.

I'm with 97guns. If it is the case that "fun" for you is saving and doing things with your money that will make more money, then look into somethings you could do to make your money work for you. Investing, real estate, etc.