Sweat the Small Stuff

Quiz!

Which are conditions that are all necessary for not thinking about small expenses?

1. Your income covers your expenses.
2. You are withdrawing less than 3% or 4% of your portfolio, every year.
3. You are relaxed about your financial position, and have no concerns with investment volatility or surprise expenses when things go wrong.
4. You feel that you are using your money in a way that maximizes your happiness.

Sweat the Small Stuff

You can skip this article if all of the following are true:

1. Your total annual spending equals less than 3% or 4% of your stock portfolio, depending on its allocation. Make sure to include infrequent items such as car upgrades, roof replacements, uncovered medical expenses, and a long stay in a nursing home. You can deduct amounts covered by guaranteed lifelong income such as social security payments, pensions or inflation-adjusted annuities.
2. You are relaxed about your financial position, and have no concerns with investment volatility or surprise expenses when things go wrong.
3. You feel that you are using your money in a way that maximizes your happiness.

Since I still have your attention, this article may help increase your happiness. You probably know that big financial decisions have a meaningful impact on your finances. Buying a large house, boat or a private jet will have substantial impact given the initial price and high maintenance costs. Having a high paying job, or two sources of income for a household can have a big positive impact.

As you work on getting the big picture right, you may follow the advice “don’t sweat the small stuff”. Indeed, you don’t need to sweat the small annoyances in life, but you may benefit from sweating the small expenses, especially the recurring ones. Here are examples.

1. Subscriptions that you don’t utilize significantly. This could be cable TV with many channels, various software & apps, credit cards with annual fees and infrequently visited clubs.
2. Infrequently used appliances that consume energy and require maintenance, including various refrigerators, lights, and computer systems.
3. More employees than necessary, including nannies for older children, cooks and various maintenance staff.
4. Eating out in expensive restaurants that you don’t appreciate in line with the cost.

The list above is a random sample of expenses. The list of expenses that can be reduced without a significant impact on your happiness is personal. You have to go through your expenses and find out what doesn’t makes you happy in line with the cost. One person may greatly appreciate a nice restaurant, while another may take great pleasure in having plenty of choices for TV programs.

Quiz Answer

Which are conditions that are all necessary for not thinking about small expenses?

1. Your income covers your expenses.
2. You are withdrawing less than 3% or 4% of your portfolio, every year. [Correct Answer, but read below]
3. You are relaxed about your financial position, and have no concerns with investment volatility or surprise expenses when things go wrong. [Correct Answer]
4. You feel that you are using your money in a way that maximizes your happiness. [Correct Answer]

Explanations:

1. Jobs can come and go, bonuses can be reduced, and businesses can have fluctuating revenues. Income from work typically provides only temporary security.
2. It is true that you need to withdraw less than 3% or 4% of your portfolio annually, but there is a much stronger condition – the 3% or 4% should be your total spending, ignoring income from work. Also, this applies to a stock portfolio. Bonds don’t grow fast enough to support lifelong withdrawals at 3% or 4%, growing with inflation.
3. Even if you are at a sustainable withdrawal rate from your portfolio, if you are stressed with volatility or surprise expenses, you should build your resources to the point of a relaxed financial life.
4. If you are sustainable financially (explanation #2) & relaxed about finances, but feel constrained, and are not happy with what money can buy you, you can be careful with your small expenses to free up money for other spending that may improve your happiness.