The Blatt Watch by Peter Blatt: Financial Planner Asks: Why do our expenses increase while our income increases?

From the desk of Peter Blatt, J.D., LL.M. 

Sitting down with one of my clients today in Miami, he posed the question, ‘Why do I continue to spend more each year, even though my income increases?’ His real question is, ‘Why can’t I save more money?’

This problem is known as ‘keeping up with the Joneses’ and it affects people of all income amounts. For example, if you are making $150,000 a year and the average family of four in Palm Beach County can live on $75,000 after taxes, you should be able to save $50,000 a year. Most people who make $150,000 save an average of 3% (or $4,500). So what does this family spend the extra $45,500 per year on and why?

I review on average over 150 budgets per year and I have seen trends. The most common expenses include eating out, maid and lawn services, hobbies, and vacations. These historically are known as luxury items.  Now take a moment and think about your parents, and ask yourself, how often did they eat out? How often did they go on vacations?

There are two major categories of expenses. The first is needs. These include housing, food, utilities, education, and health care. The second category is wants. These historically include anything other than those listed above.  Today we tend to place expenses that are historically known as luxury items into the ‘need’ category.

For example, we ‘need’ to have someone cut our lawn, or we ‘need’ to have someone clean our home. My wife, Gina, has a theory that once we place something into the need category we try to find other wants. For example, if you normally would spend your Saturday mowing your lawn and now you do not, what are you doing on your Saturday? Are you filling it with new wants? ‘Nature abhors a vacuum.’ Many of us are looking to fill our lives with things. As we are more successful, we start to place more and more of our luxury items into needs and we look for newer wants. You basket is never full.

Recently, Nelson Mandela passed away and he left the world with a different message: You can find a new solution to an old problem. If you want to reduce your spending, understand both the ‘what’ you are spending your money on and the ‘why’ you are spending the money. Do you truly need the better sports car or are trying to fill something that is missing. One of the secrets that I understand is to have wants that you cannot buy, but you can give to yourself.

As a financial planner, I am here to help you with budgeting or planning. Give me a call.