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The personal finance space has no shortage of tips to managing your spending, from bag lunches in lieu of eating out at work to home-brewed coffee instead of the morning Starbucks routine. Yet the reality seems to be that in so many situations, we dig ourselves a tremendous spending hole because of our big purchases, and then worry tremendously about the small stuff trying to make up the difference. If you really want to change your financial reality for the better, though, it's the big stuff you really need to focus on - where you live, and what you drive.

The inspiration for today's blog post comes from yet another article I read this morning - which out of kindness, I will not name - that advocates a wide array of spending tips to manage your finances. Eat at home more often; skip the morning Starbucks; bring a shopping list to the grocery store so that you do less impulse buying; clip those coupons; rent movies instead of going out. The list went on and on.

Yet as I looked at the list, I couldn't help but think... really? The key to my financial future is clipping $0.50 coupons for my morning cereal and making sure that I don't impulse buy any snacks in the checkout line? Yes, I realize that spending an extra $4/day x 5 days/week x 50 weeks/year means you could be spending $1,000 at Starbucks, which is no trivial amount. But overall, most of this seems like small potatoes.

Instead of doing so much to sweat this small stuff, I wish that we could do a better job focusing on what really matters - where we live, and what we drive. Because the reality is that for most people, our dominating expenses are actually not all this little stuff; it's our cost for shelter and transportation.

Where Does The Money Go - Department Of Labor InfographicFor instance, check out this recent infographic (click for larger image) on "Where Does The Money Go" from the Department of Labor for the average household. If we add up all of the Housing categories and sub-categories, and add Transportation on top of it, we come to a whopping 63% of the household's total annual expenditures. Entertainment? Only 5.5%. Clothing and apparel? 3.5%. Food at least is almost 13%, although we can still only trim so much, since we do still have to eat a few times every day.

So simply put, why do we focus SO much of our spending tips about the barely-20% of spending that goes towards Entertainment, Clothing, and Food, and so little on the over-60% that goes towards transportation and shelter? In real terms - we buy the most expensive house and car we can afford, and then drive ourselves crazy clipping coupons to make up the difference. Perhaps the better conversation is about owning more affordable houses, and driving less expensive (or dare I say it, USED!?) cars.

I think this is especially important in light of the growing body of research that shows how so much of the happiness we derive from our financial wellbeing is about spending money on experiences, not stuff. Yet what do we do with personal finance advice so often? We tell people to give up the experiences they enjoy - eating out, going to the movies, and their morning Starbucks routine - and never acknowledge that if you buy $10,000 used cars instead of $25,000 new cars, the $15,000 in your pockets pays for all of these enjoyable experiences, and more. Choosing an apartment that's $500/month less expensive or a smaller house that has $500/month in mortgage costs, similarly, saves so much money on "the big stuff" that many wouldn't have to sweat the small stuff at all anymore. And sadly, the more affluent the individual, the more that significant housing and automobile costs consume huge portions of the annual income!

Unfortunately, these are difficult conversations to have. Many people view their nice homes and their nicer cars (1, 2, or even 3+ of them) as entitlements that we "should" get the moment a lender will approve us to finance them. But the reality, as the research shows, is that maxxing out your capacity to borrow might not lead to a default, but it certainly does crowd out our ability to spend money on the experiences that ultimately bring us more happiness.

So the next time you're thinking about a change in residence or a "new" automobile - or you're a financial planner discussing the issue with your client - take a few moments to think about the trade-off. A modestly smaller car or automobile can save so much money, you just won't have to sweat the small stuff anymore.

As long as there's a secure roof over your head, and you have an automobile that's capable of getting you to work and the kids where they need to go - even if that car isn't as fancy as you hoped, or the house isn't as big as it might have been - life will go on. And you might even enjoy it more.

  • Nathan Gehring

    Excellent post, Michael. Those things we feel entitled to (the largest house possible, nicest car, etc…) have tremendous impact on our finances and often bring little or no additional value into our lives.

    I think the critical questions we all have to answer is “How would my life be impacted without or with less of this?” I suspect in many instances, the impact would be very minor despite a very high financial price.

  • Bjorn Amundson

    Well written, and great points Michael. I’ve been advocating the same thing for some time now.

  • VG

    Great article Michael. Spend lavishly on the things you are passionate about, and be a cheap skimpy sob on the rest. One problem with downsizing a home is finding suitable housing in a desirable neighborhood. Around here, to save money, means living in a less attractive area – the newer smaller places around here actually cost as much or more than some of the older bigger houses in the same area.

  • Apel Mjausson

    Great advice, particularly for people who have decent salary but not much time. Going to Starbucks (well Peet’s actually, same difference) with friends a couple of times a week is much more fun than sitting down alone in the kitchen to clip coupons.

    Only big thing missing from this is children. They’re very expensive. If you love kids and can’t wait to have one or several of your own, by all means have as many as you can afford to feed. It will be worth it emotionally.

    But make a conscious decision. Don’t have kids because “it just happened” or mom is pressuring you for grand kids. That’s no way to make such a huge, irreversible emotional and financial decision.

  • Meagan Kenny

    Excellent post – I researched and found that buying a condo even after HOA, real estate taxes, interest, etc, etc. was still 33% less than what I was renting next door for. Needless to say, my standard of living and savings have increased dramatically. and I still drink the same amount of Starbucks.

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  • Dan Joss

    I took my son to NYC for his birthday. He loves NYC. The best day ever. Better than a new Nintendo game.

  • Jim Beall

    Excellent post. I often have the conversation with clients and friends about their desire to buy a bigger house out in the county outside the city limits. One of their lines of reasoning is they won’t pay city taxes. I ask them to do a simple experiment: when they get off of work drive to where they think their new dream home is and tell me how long it took and how many miles it was from work. I show them how much time they will lose each day and how much more mileage they will put on their cars. Show them the annual costs in time and gas. The supposed tax savings is usually wiped out in less than 6 months. The time they can never get back and who has clients that will say I have too much time on my hands I and I really want to spend it on a longer commute? Our most precious asset is time. Yet, I find very few people consciously consider the impact their big picture decisions have on this limited resource.

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Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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