Money, Retirement, Life – 3. How much do you need

August 9, 2017 by ramblingsofanextrememan 8 Comments

“Plain dishes offer the same pleasure as a luxurious table, when the pain that comes from want is taken away.” Epicurus 

So how many of these paper life force tokens do you actually need? What sets the upper limit on your spending?

Think about when you were younger and you had less money, I assume you spent less. Then over time you slowly started to earn more, got pay rises, promotions, changed jobs etc. Chances are that your spending increased as your income increased. Did this stop at some point? Should it stop at some point? 

Are you happier now, spending more money than you were when you were younger and spent less? Say you earn a hefty income every month, are you proportionally more happier than the people you know that earn less? You may have more things, go to more fancy restaurants, but has the extra money that you’ve spent added any more happiness or convenience to your life after hedonic adaption is taken into account?

For many people the only thing that puts an upper limit upon how much they spend, is how much they earn. If this is you; you are placing something very important, the cost to maintain your lifestyle in its current state into the hands of something that you cannot control, the amount of and regularity of your income. This is a risky way to live.

I propose that as you spend more you reach a point where your happiness or convenience you receive from the purchase doesn’t increase. The law of diminishing returns kicks in and you hand over more of your paper life tokens and get less or nothing back in return. 

You should optimise your spend so that you are not pissing your finite paper life tokens up against the inevitable wall of diminishing returns.

The first step to doing this is to start to track your expenses. **

In order to know if all of your expenditure is actually making you proportionally happier, you should track how much you spend per relevant categories, and then reflect upon that spend each month. 

You should actually stop and consciously think once per month, am I happy about spending that much on said category?

To optimise anything you need a feedback loop, measuring and reflecting is a feedback loop that will allow you to optimise your spending so that you are not spending more on things that do not make you happy.

For example, here is how my spending on Recreational activities has changed over time since I started measuring and reflecting on all my expenses. This includes capital and operational expenditure on Hiking, Mountain Biking, Fishing, Camping and Surfing:
And here is how my spending on Food has changed over time, since I started measuring and reflecting on my expenses:

I know you’re probably thinking, gee Extreme Man, that seems like a lot of effort, I’m not sure if I’ve got the time. But you see, the thing is you traded a part of your life that you are never going to get back for that money, and then you decided to spend that money on things. Surely you owe it to yourself to keep a record of how much of your life you traded for those things, and time to consider if trading your life for those things was worth it? And if it’s takes too much time to record the expense, perhaps you should save even more time and not make the purchase in the first place?
Once you do this, you’ll find that over a few months your spending will go down. You’ll slowly work out the actual cost per month to maintain your life in a fashion that you can consciously justify to yourself. 
This is a very powerful moment. If money is a paper life force token that you have traded your life for, you’ve now worked out how much of those paper life force tokens you are trading back each month to sustain your life. 

If your salary gives you a certain amount of dollars per month, you’ve now inverted that relationship and worked out the number of months per dollar.
Once you know the number of months per dollar the way you think about the cost of things changes, you now know the conversion rate between the price of things, and the amount of your life.
People generally compare buying something to not buying something because they don’t know what else to do with their money; the decision is to buy and have it or not buy it and don’t have it, often this comparison inevitability results in buy it and have it as there’s no down side. Once you work out the number of months per dollar this comparison is a lot more valid. You’re comparing buying something and having it versus not buying it and keeping X months of freedom saved up.
Once you know the number of months per dollar you can immediately look at your savings and say, my savings will support me for X weeks/months/years. You now know how much of your freedom you can buy with the amount of savings that you have. You can also work out using (the cost of travel) how much freedom in certain places you can buy with your savings.
Knowing this empowers you to make informed decisions to change things about your life.
But what if looking at your savings and knowing you have X weeks/months/years of freedom saved up isn’t enough? What if you don’t want temporary freedom, you want permanent freedom? What is the cost of perpetual do anything you want, whenever you want freedom? That’s up Next.
**In the final topic in this series I’ll provide a spreadsheet that makes tracking all of your expenses easy.