Don't spend away your dreams

By Scott Burns

Spending goes in only one direction: up.

This is a fundamental law of the universe. It is always possible to spend more money. It was true when I got my first job out of college, earning a whopping $500 a month, in 1962. It is still true 46 years later.

My wife and I could easily spend more income than we have, even though we enjoy an income far larger than we had ever expected.

Many readers can say the same. It's just the way it is. This is a world filled with beautiful objects, things to want, meals to eat, wine to drink and moments to celebrate. And America is the Land of the Infinite Upgrade.

Note that I'm not talking about going broke.

I'm talking about "drift" -- discovering that you've spent in ways you neither wanted nor expected. It's altogether too easy to let your dreams dribble away simply because you stopped paying attention. Get too "relaxed" and bad things happen, and the next Visa bill will be large enough to empty the checking account. Stay too relaxed for a period of months and you won't be able to spend money where you really want to spend it because, well, you dribbled it away on something else.

Yes, this is a great problem to have. But it's still a problem.

How do we solve it? With a spending plan.

Looking into your future

It's not a budget. It's not an act of self-punishment. A spending plan is a blueprint for the income you expect in the coming year and how you intend to spend it. It's a statement about what you want to accomplish. It is an act of intention. It is the first step toward taking charge of what happens in your life rather than discovering what has already happened.

If you do that, you'll find that much of your spending is already committed. We certainly did, even though we are near retirees with no debt, no tuition payments and no kids to feed and clothe.

That's why my wife and I now divide our expenses into two broad categories. If we are successful in one, we will be successful in the other.

The first category we call core expenses. This group includes all kinds of fairly predictable recurring expenses, such as the cost of maintaining our cars and house, as well as medical and health expenses. It also includes household expenses, such as groceries, meals out, telephone, cable, Internet, etc., and individual expenses, such as clothes and personal care.

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An economist would call some of these expenses nondiscretionary -- they simply must be paid. We all must pay the bills for car insurance, utilities and so on. But we have a lot of latitude when it comes to how much to pay for food, meals out, clothing and many other items. So core expenses are what it costs to sustain your chosen personal lifestyle.

Don't get distracted

In an advertising-driven economy, core expenses can start drifting very easily. Call it expectations inflation. Worse, just a little drift in core expenses can have a major impact on other spending because core spending is a large part of income for most people, even the affluent.

That's why we have a second category.

We call our second category gifting and feasting because most of it is directed outward, toward sharing our pleasure in the world and helping others. This category includes donations, gifts, special occasions, holiday decorating, vacations and feeding the hundreds of birds that visit our gardens. An economist would call this spending discretionary because it's a choice, not a necessity.

Your second category doesn't have to be gifting and feasting. It could, for instance, be everything you do to prepare for a year of traveling. It could be about going back to school for an advanced degree. It could be the landscaping of your home. Whatever it is, it's something that won't happen if you let core spending drift. That's why it is important to make it another category.

Let the core expenses drift and there will be less money for gifting, feasting, traveling or going back to school. Let core expenses drift badly and it may be necessary to cancel or delay spending that probably means more to your present and future life than most of the money you spend on the core.

Questions about personal finance and investments may be e-mailed to scott@scottburns.com. Questions of general interest may be answered in future columns. More columns by Scott Burns can be found here and here.

Published Oct. 1, 2008