Baseline Spending

Is this the most important number in personal finance?

I was talking to a friend the other day about my plans for the rest of the year, and mentioned that my wife and I have a pretty low baseline spending number.

He was surprised, but then I explained that our actual spending is much higher, more in line with his expectations.

Which made me realise that he didn’t think about spending in the same way.

Three types of spending

I look at spending and divide it in to three types. I find this helpful when thinking about what we spend money on and how our spending may change in the future, or how we might deal with financial setbacks etc.

It’s a useful lens to focus on money.

The three types are:

• baseline spending
• regular discretionary spending
• irregular discretionary spending

Together, they should add up to your total spending.

The value of having these three categories is to allow you to think about your spending in a more granular fashion. This model could give you a better understanding of your spending, and thus more control.

Baseline spending

Baseline spending is your essential spending, the stuff that you cannot cut. Rent, food, utilities, insurance, etc.

Baseline spending tends to be regular, in that you are paying it every month or every year.

You can optimise your baseline spending, by moving to a cheaper home, by changing your mobile provider, by shopping in bulk and cooking at home, but you can’t eliminate it.

If you found yourself in economic difficulties and wanted to cut your spending as much as possible you would end up with your baseline spending number.

For my wife and I, I think this could be as low as 200,000 yen or less. That number would still allow us to live a pretty comfortable life, with a nice home, a car, healthy food, and some entertainment.

Regular discretionary spending

My impression is that this is where many people get into trouble. Discretionary spending is something you don’t absolutely need but have decided to spend money on, and the regular part means that you do it every week/month/year.

Many people are not really aware of the difference between their baseline spending and their regular discretionary spending. In their mind it is all necessary.

For my wife and me, our regular discretionary spending is things like paying for our grandchildren’s extracurricular activities (swimming, horse riding, jiu-jitsu, tennis, etc.), eating out, buying flowers, subscribing to various things (Netflix, Disney+, Amazon Prime, my jiu-jitsu club), going to the public gym or swimming pool, giving money to charity, and having a car.

If necessary, we could cut or eliminate any or all of this spending.

Irregular discretionary spending

This is spending money on one-offs, like a new car or a trip, or buying furniture or a new TV, or going shopping for clothes, or giving gifts.

It feels optional, and is the easiest spending to cut back on.

For my wife and me our big irregular discretionary spending categories are foreign and domestic travel and gifts to family members.

It has been up to half our spending in some recent years, but again could be completely eliminated if we needed or wanted to cut back.

The importance of spending

Your spending is important because it determines how much money you need to live, how much you can save, and how long you can survive on your savings.

In some ways, it is as important or more important than your income.

After all, if you can’t control your spending no amount of income will be enough (just look at Johnny Depp or Mike Tyson).

So figuring out what is important to you and what isn’t (and focusing your spending on the former and not the latter) is the key to having a financially stable life.

How is your spending looking? Are you aware of your baseline? Check out this poll in the Forum -I’m pretty impressed by the RetireJapan community!