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ChooseFI | Financial Independence Podcast
586 | How to Do an Expense Audit
01:10:34
Four-step audit finds money leaks in perfect budgets
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- [00:00]
A
Hello everyone. Excited to pick back up our discussion. To resume our discussion, is it pretentious to assume that you listened to last week's episode before listening to this week's episode? Maybe, but I will assume so. With that, most people try to earn their way to financial independence. Have you ever considered auditing your way? Today we're going to talk about the expense audit, the power of the expense audit. We're going to talk about a four step framework. We're going to talk about money leaks, we're going to talk about about turning savings into phi acceleration and why it matters. Why start here. And with that, welcome to Choose Fi, your home for financial independence online.
- [00:45]
B
Before we get started, I keep this podcast entirely ad free for two reasons. First, this is a FI podcast and I don't want to promote products that I don't want you to buy in the first place. And second, I really like the clean listening experience of a show where you don't have to fast forward ads to keep it ad free. All I ask of you as a listener is the next time you open a travel rewards credit card, go to choosefi.com cards and with that onto the show.
- [01:13]
A
And to help me with this, I have my co host Brad here with me today. How you doing, buddy?
- [01:16]
B
Hey, Jonathan. I am doing quite well. Yeah, you. So my old CPA hat came on for a second there. When you said the word audit, I got some, some tingles. It was cool. I'm excited about that.
- [01:27]
A
Standing up, man. What's going to happen here?
- [01:29]
B
The goosebumps are here. Good things are here.
- [01:31]
A
If you're an accountant, that's like flight or fight syndrome. Nothing like just wakes you up more than the word audit.
- [01:40]
B
Indeed, indeed. So yeah, that was pretty cool. And yeah, I actually got some fun news this morning. I haven't even told you this. I've had a long standing thing about going back to Japan. So this has actually become almost like a running meme on the show the last couple years because I've talked about going to visit Japan and it's always, oh, I'm going to do this next year. And then it never happens. I made it a goal, as I told you a couple of weeks ago, to get back to Japan this year. It was definitely going to happen. And I actually just found out this morning that I got concert tickets. So Aaron and I put in for a lottery for Eddie Vedder, who's the lead singer of Pearl Jam. He has a four night acoustic show. And in Japan of all places this year, that's the only Place he's playing solo. Solo shows. We put in for a lottery and we got selected this morning for April 17th. So we are going two months from now.
- [02:33]
A
Maybe sometime this year is like Japan imminently.
- [02:35]
B
Exactly. So I'm going. We have concert tickets for Kyoto on April 17 and now we have to furiously plan a trip around it. So. And you and I have to record some episodes a little bit early.
- [02:47]
A
Fabulous. Okay, well, let's get started. I mean, the content is here waiting for us. I'm excited to dive into it and tell me, I guess, is there anything worth mentioning here in the scheme of travel, if someone's doing a trip to Japan, you know, just through the lens of travel rewards, is there a strategy or a tactic or something to be aware of in terms of doing these types of trips in a more optimized way?
- [03:07]
B
Yeah. So we're very much getting into it. This is mere hours after we found out we won the lottery, but we are getting started. I know there are a bunch of Hyatt hotels in both Kyoto and Tokyo that are fantastic, among other places. So we're going to start there. We're going to do a lot of travel throughout, some hikes and such through Japan. So we're not going to stay a ton in big cities. But definitely planning on using Hyatt points, so I get those from my Chase Ultimate Rewards points. So I'm going to transfer a bunch of Hyatt points, which is nice. A good friend of mine, Christine, from who you know, Christine Wheely, who's been on the show once and we met her in Bali recently, she has a bunch of like Hyatt guest of honor certificates. So we're going to borrow that from her and get a, get a nice suite so that, that won't be too shabby.
- [03:51]
A
Nice. Now our Hyatt certificates, are they transferable?
- [03:54]
B
So if you are someone who has top tier Hyatt status, you can transfer these special guest of honor certificates to other people, which is really cool. So yeah, so which that's a nice little present we're going to get from her. But as far as flights go, we're still running the numbers because flights are not that expensive actually round trip to Japan now, frankly, I don't know in April yet. We're still doing, doing the research on this, but I need to, to figure out what makes the most sense. Because if it's going to be 80,000 points round trip, but the flight only costs $1,000 or $1,200, well, that's under 1.5 cents per point, in which case that would make very little sense to do. So you could still use points and book through something like the Chase Travel Portal or Capital one travel portal, etc. So I'm contemplating that. I know Chris Hutchins, our friend who has the podcast all the Hacks. I texted him a couple of weeks ago about Japan. He mentioned that Japan Airlines has a lot of really great business class flights. So I think you can transfer capital one miles. Okay, so I'm also contemplating that. So Aaron and I each have a bunch of capital one miles. So that might have. If I can find business class, it's somewhere in the vicinity of a 14 hour flight. So that would be a whole lot better than economy obviously. So like I said very early in the research on this, but it's, it's promising.
- [05:12]
A
Okay, well, we won't spend the whole episode today on travel rewards. For those listening though, like what are you just talking about? Or maybe you have some insight, you have one card and you've done something with it, et cetera. But you're like, I wonder what people are talking about when they're just talking about free trips out the whatever as a great kind of orientation or on ramp to travel rewards. Our episode nine is older now, but in terms of the framework for thinking about this whole thing and progressing through it, there's the key concepts. It's probably one of our most downloaded and popular episodes. Go check out choose ay.com009 for a gateway to travel rewards and then all of our information on the various cards you can find@chooseay.com cards today, however, we going to be looking at the expense audit and basically what we're saying is, you know, this isn't a budget, but every dollar needs to claw its way and justify its way through your fingers for a month. Like it's not going to sneak through. You're going to identify the leaks you're going to identify. And honestly, even without judgment, this is not the same thing as a budget. We are actually not at this stage and I say we your goal when you consider doing something like this at this point is, is not actually to make a change right now. It's just to be able to say for maybe the first time in a window of time or for some people in a window of forever, how much does my life actually cost? Brad, I'll give that back to you for just a second here. But it's amazing how even if over points in time you have been intentional and aware of where your money's going, it's easy to drift on this one and usually to your detriment.
- [06:47]
B
Yeah, I totally agree. I think this is absolutely critical. I think it's something that ideally you should do once a year, even if you've been on the path to five for a long time. Maybe even, frankly, especially if you've been on the path to five for a long time. Because like Jonathan said, it is very easy to slip into old habits and even just add an extra subscription here or there or just lose track of something. I think all of us can fall prey to that and it doesn't mean we've done anything calamitously wrong. But if you're not tracking, it's really hard to know where you are and where you're going. And actually a month or two ago, I reached out via my newsletter asking if people would be interested in coming on to talk about their budgets. Jonathan and a guy named Josh wrote back. And actually this fits in perfectly here. He said, I worked through a similar exercises during our fi journey and thought we had learned from our past mistakes and quote, avoided money leaks. I like that phrase, money leaks. He said, it's like clearing out the junk drawer. It's not a one and done exercise, which means it's entropy, right? Like, things have a, have a way of just falling into disorder. That's just, that's the way life works. And again, it doesn't mean we should beat ourselves up about it. It's just, you understand, this is the way life works. Over a year or two or five, you're going to almost naturally build up some expenses. And I mean, Jonathan, how many tools have you signed up for? And you might not use a hundred percent of them right now. And even you, somebody like that could just do a quick audit of, hey, I've got a lot of these things. Am I using them all today? Maybe when I sign up for this. This is the latest and greatest. That's just a silly example, but obviously subscriptions, right? Like, think about all the streaming services. Are you really using those all today?
- [08:23]
A
How many free trials? Did you get an offer for the free trials? Man. Man, that's juice. We'll come back to that later. That's what you know it. Every single person heard that and just now felt like something was sitting on their shoulder and like, ooh, look. Yeah, I know. It's what's there. That's, that's how these things happen. Lifestyle creep. It's lifestyle creep for a reason. It doesn't happen overnight. It's a, it's a process and it's usually maybe like an E, you know. Brad, what's that quote? It's. Is it the, the Gregory quote? Was it Hard choices, Easy life. Easy choices, Hard life.
- [09:00]
B
Insight. Jersey. Gregoric.
- [09:03]
A
Jersey Gregoric. I just wanted to say Gregoric. All right, there it is.
- [09:06]
B
I think that's how you pronounce the last name, but that's how it's spelled now. I'm questioning. But yeah. He wrote a book called the Happy Body. He was on Tim Ferriss podcast a number of times. He's fantastic.
- [09:15]
A
My only knowledge of him is through you being very impressed. But I remember the quote. It stayed with me even now. And this is a great example of this. It happens slowly. It happens through free trials, things you are going to try out. And then because we all have the convenience of just having all of our bills on autopilot, which is a good thing, you should all be doing autopilot bills. But in the absence of an audit, and now even more so, it seems that we're at this stage of the game where you don't even have the benefit of when your card expires. You know, suddenly this expense just dies off and you don't have to make a decision because now they're asking you for now. Now somehow it magically auto updates as well. So it is more critical than ever that you review the line items periodically that are hitting your bank account, your financial transactions, and then we have to decide what does that mean, you know, over a longer period of time. I'm not particularly a fan personally. This is not a judgment on anyone else. I just find that I can't sustain the mental energy to watch every transaction over the course of a year. But I recognize the extreme value of watching everything for periods of time and then being able to create projections just to kind of balance out where I actually am. And so that's kind of the spirit of what we want to do right now. But I think, Brad, we should probably spend just a couple minutes. Why does this matter through the lens of reaching financial independence. Why are we starting here? This is almost boring. I want to talk about the glamorous stuff, you know, all the secrets, all hecks. But now we're just saying, where's your money going?
- [10:52]
B
Yeah. Oh, I love the word secrets. As if they existed here in five. That's, that's the great part. This is at its essence, it's simple, right? It's how can we expand the gap between what we earn and what we spend? Because the more you can expand that Gap in either way, frankly. But I think really the low hanging fruit is on the expense side. Then the more you can invest each month and the quicker you can reach financial independence and reclaim decades of your life. I mean, Jonathan, it's obvious, right? Like when you actually examine it like that, it's, I just need to keep expanding that gap. And frankly, like I said a minute ago, when you're letting your expenses run wild and that just happens to all of us, even if we're like Josh, even if we're like somebody like me who considers ourselves frugal by nature, it happens. It happens where you spend a little more than you anticipate. And, and I think it is really clarifying. I love that word because to me this is a granular examination of what does my life look like. And frankly, you don't see it until you actually dive into the numbers. Jonathan. And like we've said repeatedly on the show, little things matter. They just matter. So for every hundred dollars per month you can cut from your budget, it reduces your fine number by $30,000. So anybody who tells you little things don't matter simply doesn't know what they're talking about. And obviously you're also investing that money and over 20 years that a hundred dollars a month turns into $60,000. So that $100 per month is a $90,000 swing in your financial life.
- [12:29]
A
Over what time horizon are we using that number? So over a 10 year period of time, over a hundred year, 20 year period, 20 year period of time, if we can find $100 a month, that is a $90,000 swing in our direction. A $90,000 swing. This is not inconsequential. It's not something just to move on from. You need to be aware of where your income, where your earning potential, where your economic resources are going. And then once you're aware of them, we can move to a second step where we put them on some sort of value matrix. And we'll come to that in a second here. But let's stay here a little bit longer. You have this equation, we talked about it over the last couple episodes and whether maybe you're doing, maybe you just came out of a financial independence 101, maybe your local group inside of like the choose the white community is going to be doing one and, and you're trying to figure out, you know, what is the process? What does a 5101 look like? It should look a lot like what we've been going through over the last couple episodes. We need to talk about this concept of financial independence. Your why of financial independence, how to calculate a number. And what you heard was, when we say, how do you calculate your financial independence number? It comes down to how much does your life cost? Do you know? Do you know how much your life cost? Yeah, well, I think I, you know, I know what I make. All right, well, that's great if you spend right up to what you make or more. But the point here is for us to have a gap, a space between what we make during our earning years and our income. So what does our life, you know, I don't know. It's kind of. Yeah, I know, I know. We need to get it down on paper or digitally or whatever so that we can then identify that. Look at that. And then quickly spit out a financial independence number that would cover those expenses this month, while at the same time being mindful that some expenses are time bound. This month may not be a regular month. XYZ could actually drop off half of what you're paying for. You may not, you know, you understand if you have not looked, if you don't know, if you've just made easy choices and things have snuck up on you, you might be paying a price tag and locking yourself in to a path that at the end of it, you're not going to enjoy or appreciate. The phi number is not tethered to the life you actually want to live or have. So if we can, if we can say, all right, we know what financial independence is, we get why it's important, we know how to calculate our phi number. But the problem is the only real variable. We need to know how much our life cost is a giant gaping question mark. We need to get that answer. And so today we're getting into this to go through what it is that we're going to capture. And many of you, some of you that just live on spreadsheets and say, you can claw my spreadsheet from my dead, bleeding fingers. That's how close that great, you're good, right? But many of you recognize, yeah, I've been on autopilot on this. This is a weak spot. And many of you listen to this that are 10 years in might say, man, I remember when I used to do that. I used to watch it really closely, but it's been a hot minute and I've had three kids and I'm in three different houses and I'm two cars and whatever later. And it doesn't match that historical artifact that you called, you know, a spreadsheet tracker many years Ago. Man, that was, was that a soapbox for you?
- [15:39]
B
It's a soapbox, but it's an important one and frankly it resonated with me because I'm that person. Also, I used to track meticulously and I used to track everything and in the last handful of years I've really not been as great with that. I, I made a half hearted effort but frankly I just one thing I've done which I think is, is important to really talk about on this granular level, which obviously we'll spend the episode doing. But I just, in my, I know how you love my sheets that are ridiculous and impossible to read, but, but.
- [16:10]
A
I learned how to like code and program so I could like decipher them and make them palatable for the rest of humanity. You're welcome.
- [16:16]
B
But yeah, I, I track everything that comes into and out of my bank account because really my checking account is where everything happens. But realistically, most of my spending is on credit cards. So just by tracking, hey, I made a payment to Chase or Capital One this month for X number of dollars doesn't really help because if that payment, let's say, is sixteen hundred and twenty two dollars to Chase, well that is made up of a lot of component parts of what were all those actual expenditures? If I'm doing an expense audit, I really need to dive into those. So I mean, I sheepishly was like, oh man, Jonathan, I, I, I've got to do better on this. And I think it's not so easy to say, oh yeah, I track this. I, I, I have all these numbers, but if it doesn't give me real insight, I'm just wasting my time, frankly. Yeah.
- [17:04]
A
All right, so to everyone, you know, as we go through this, I'm just gonna put a little stamp or timestamp here. So Brad and I are committing to doing this expense audit. We're doing it personally. We will be doing going forward. We will be doing it on an annual basis, probably around this time of year. Although there's no, you know, guarantees about this sort of thing. But when you're hearing this episode, you're listening to this live, we are doing it. If you've been feeling like you want to do it, yeah, do it. Do it with us. There's options here. Do whatever you want. Use your own system, that's fine. I, Option two. Brad created his old spreadsheet.
- [17:36]
B
Please don't use my spreadsheet.
- [17:37]
A
It's not too bad actually. So I will include that it's a link to a Google Drive that you can copy. And then the third option is this is the path that I'll be using and this is what I've kind of created for the community as well. Inside of the community app right now I'm opening up. It's a money challenge and you can kind of use a more beautiful, fun, easy to interact with version of the spreadsheet that also allows you to aggregate things like per person cost, et cetera, and then potentially have the ability to track them over time.
- [18:03]
B
So.
- [18:04]
A
So for those of you that are liking this, I have doing this progression, the stepping stone and doing it with choose a fire with the Choose A5 community, you can do that. That's what I will be using as well. You can just go to choose a five.com login and you'll see these, this option, this actions that you can take banner at the top of your dashboard and you can do it that way. Now if you do it that way, here's, you know, the theoretical benefit. If you do that challenge with us, we're going to have a large group of people that are going to be doing this. And so I think there's probably 20 or 30 of you already that have done this. But I had didn't announce anything. We're announcing it today. I suspect it'll be many hundreds of you. And what we'll actually be able to do is start to think about things like per person, cost of living, per person, cost of living in various areas. And we'll be able to use that aggregate data and to kind of think about and talk about how much should I be spending? What is a reasonable amount to spend? And does it matter that I'm four people but two of them are two year olds or whatever. You know, how. What's a reasonable amount to spend for this particular area? These are the sorts of insights that I think all of us would enjoy and I'm going to kind of add to that as well. Brad, you have a thought on that?
- [19:05]
B
I do actually. So I think another thing that'll be really valuable, aside from doing it as an accountability kind of group thing, is for us to be able to aggregate this data and get a sense of what do people's lives cost. I know I've had conversations with friends where they're like, hey, one thing I'd really like to see in the podcast is what are people in our community spending on X or Y, right? And cable and. Or not cable in this day and age, but Internet and phone and food, right? Like, is a family of three generally spending $700 a month or are they spending $1,400 a month? And I think that's something that the community is really yearning for and for us to be able to have hundreds or thousands of people doing this on their own and then you and I, behind the scenes being able to aggregate it. Of course, this is anonymous. Nobody's, there's no names coming out. Jonathan and I are doing this to benefit the community here. And I think that's going to be really valuable for all of us. That's another follow up episode, Jonathan, we can do is just, hey, here's the aggregate of what are people roughly spending on car insurance every month? And obviously, of course it's going to be different whether you live in Florida or you live in Idaho. But even just to have a sense, I think that's going to be really valuable.
- [20:18]
A
Yeah, especially I think over time and then year after year to be able to think about this is one thing with the static spreadsheets is you had one that was really good for one year and there are the pros that have the very good ones for 10 years in the row. But the vast majority of people change it each year, you know, some version of it. They whip up some sort of new one that are doing it. And it's very hard to look at patterns. So if you wanted to capture something like your personal inflation rate, that's something that would really be nice to have as opposed to whatever the, you know, the index comes down each year. But what was your personal history? Here's what we spent on Food in 2012. What are we spending today? You have five or six years of that data. Now you're onto something that's really beneficial for you to be able to track in a standardized way.
- [21:00]
B
Yeah. And I'm looking, since we're talking about food specifically, I'm looking at one of these emails that Kasey wrote in when I asked for volunteers to do go through their budget. And Kasey said, we've been tracking, keeping meticulous records of spending budgets since 2021. We've seen our grocery spending nearly double without any appreciable change in what we buy, family size or similar. I think many families are in the same situation unfortunately. And yeah, I think your own personal inflation rate is interesting. I think category by category would be interesting too. I suspect there are some where costs have gone down and there are some like food, where it's risen dramatically. I think that'll be fascinating both to see yourself, but then for us to see as a community as well.
- [21:40]
A
One Thing I'd like for our show to be able to do in the future is to start doing a little bit more about Inside the Numbers. Right. So let's actually take a look at the patterns that we're experiencing and how we handle that. What does it mean that our interest rates have gone up on our home and our housing costs fluid have gone. What, what does all of this mean? And is there, is there a pattern that we can determine and then we can actually get some benefit from just being aware of and seeing even if it's only anchoring our expectations, you know, accordingly. But yeah, I just want to make you aware of this however you want to do it. I think it's a great season, a great practice and we'll also just extend this out as something just to your local groups. If you are thinking about maybe doing some sort of financial independence 101 and you want some structure or support, this is potentially something, you know, the Money Awareness challenge tools that I'm talking about right here, we're piling inside of this, you know, this kind of money awareness Challenge. But also it's potentially something that we could make available for local groups that want to do, you know, multi Week Financial Independence 101s and run those and have a way to be able to work through those talking points with the group. We could potentially start to move in a future where we do that. Now, having said all of that, that's just all of you, a little, little parking, a little note here for you to take action. And now assuming that you're still with us and haven't changed the channel, we're going to now talk about the. How, how do I actually do this? So we've given a spreadsheet, some sort of digital SaaS software that can organize it for you, handwritten on a note card, whatever it is. But Brad, to your point, if you're farther on this journey, your financial life has potentially gotten a little bit more complex. And, and so doing something like being aware of the line items. First of all, there's this aspect of thinking through what are those line items that I should be thinking about for a budget? And we'll go through those and then where am I going to be able to find them? And then third, how am I going to be able to attribute or deal with some of these kind of tricky ones? So I thought maybe we could kind of go through everything in that order. Let's work through the general line items that people, the categories and the line items that people should be considering. And then we'll just work from there.
- [23:39]
B
Yeah, I think that makes sense. And now naturally everyone's budget is going to look different, but of course there are broad general categories that are going to be pretty applicable for everybody. Now naturally, Jonathan, you have pets. I don't have pets. But of course that is a line item that. Okay, you can quickly see that on a, on a budget template and say, okay, I have pets or I don't have pets, something like that. Right. Or I have rent, you have a mortgage. Of course it's going to be a little bit different at the margins, but in general you're going to have housing and that includes a whole bunch of things. Right. Rent or mortgage, property taxes, insurance, any kind of HOA fees or things like that, maintenance or repairs, etc. You could even, depending on how you want to categorize it. I probably personally would put my utility bills in there and even down to if I had Internet or cable or streaming, I'd probably lump that all in housing. Personally, I don't know where. How do you think about that?
- [24:35]
A
Yeah, I mean, you're going to have to account for it somewhere and so you just whatever makes sense to your brain. I would probably keep housing pretty relatively thin in my mind. Just housing is going to be mortgage and rent or rent and then it's going to be property taxes and this be home insurance and that's going to be any sort of HOA fees. And then if I had clear delineated things that were home maintenance type things, like maybe you do a lawn service or something like that, got the pooper scoopers coming to get the stuff out of that, your yard from those beloved pets, whatever it might be, or ongoing, you know, repair type maintenance things, projects of that sort. I'm going to group it there, but that's enough as a segment of the pie for me to then move over and try to put utilities, you know, separate. And I know you're right. I'm aware that you're like, well, heating and, you know, electricity and all these types of things. I'm probably going to keep them personally just in a nice utility cap.
- [25:29]
B
Yeah, I think that makes sense. And I think it's also important to know that your budget is your budget.
- [25:35]
A
So if I were trying to avoid using the word budget, we don't trigger people. Your, your audit, your audit, the expense audit, expense everywhere.
- [25:42]
B
Your expense audit is your expense audit. We'll go with that. So. Right. I think utilities is good there. But another one, for instance, with the. Yours being yours is transportation. Right. So it's could you, with a straight face say that flights for your trips would literally by definition be transportation? Yeah, of course. But like I probably personally would put that in a travel category, but would I get mad at somebody if they buy the book, put that in transportation? No, of course not. You got to figure out what, what makes sense for you. But yeah, I mean, transportation is, is the next obvious category. So of course car payments, any type of gas, car insurance, repairs, et cetera. I think again, it depends on if you're taking tons of Ubers and Lyfts on travel. I'd probably lump that in travel. If you take Uber and Lyft as far as part of your regular day to day life, which is not unreasonable for people living in cities or frankly, Jonathan, I'm even contemplating, we're contemplating going down to one car and maybe taking a couple Ubers or Lyfts here or there in the rare instance where two of us need a car at the same time. So that I probably would lump in transportation. So we're just trying to give a flavor here of like how you think through these kind of things.
- [26:55]
A
I think one thing that's probably interesting or useful to think about as you try to anchor yourself in general, and I'm going to try and standardize this on my own, but I think it's useful for people to think about is your per person cost. For instance, we're all going to have different cost of housing, right? And that's going to be dramatically impacted by cost of, you know, living in various parts of the country. But on top of that, a family of seven is going to have dramatically different housing cost than a family one, family two and little ones versus the big ones. So with that in mind, I'm incorporating into mine a little algorithm to account for people in the household. So when you say things like car payment, slash payments, but we don't need to get into listing all the individuals, just how much you spend. But it might be helpful to have it some way in your spreadsheet, some way of just making a note for, for this year, how many, how many people does this food bill cover? How many people are represented by this housing cost? How many people are represented by this car? And thinking about per person costs is just something that, it's a data point that might be helpful for you later when you're trying to compare your food budget to maybe someone else's food budget. Certainly, I agree, like, if you think about like the college, Robert Farrington, the college investor, he notably, I remember him when he came on the podcast saying he just didn't have a car. He's just doing Uber Lift. So Uber. And Lyft is his transportation, you know, cost. And that's a very interesting model. And I'd be curious if we saw this pattern where someone that has, quote unquote, exorbitant Uber Lyft spending has very minimal car payment. How it actually maps out. You get your great car that you've had for five years. What is the way, should I lease a car? Should I have a payment on a brand new car because it's going to last forever and I don't have maintenance cost. No, I'm going to buy an old car and I'm not going to have a payment. But oh man, the maintenance on this thing versus, you know, there's this. All of these things are working against each other and it will break an individual human's mind. But you can start to look for patterns through all of this that actually can give you some pretty good insights. And yeah, probably unsurprisingly, you're going to find out that the five year old Honda Civic is generally going to be a good choice.
- [29:00]
B
Right.
- [29:00]
A
It's a. These patterns will emerge, but it'd be cool to kind of actually see that actually happen. And then when you get to food and groceries, Brad, yes, there's your food, there's your groceries. Okay. But then there's also your dining out that's probably going to be added in there. You might want to separate it though, because you're going from 2, 3, 4 dollars per person a meal to suddenly over here you have, you know, your Friday, Saturday night, you're at, you know, 12 bucks meal or 20 bucks a meal. And then also, is there something else where it's dining out is separate from night outs or something along those lines. And this is a completely different thing. Dining out is Chick fil a and Chipotle. I don't know.
- [29:37]
B
Right. But I think, I think this is one of the problems people have when it comes to these type of expense audits is it's easy to get lost in the complexity because like you're saying, and like we said for the last five minutes, some things can naturally be in other categories. Or I think about when I make a purchase on Amazon, it might be boxes of tissues and then jars of peanut butter or something like that. So like, where do I put that? Do I put it in the house? Do I put it in the food? And it's like, okay, let's take a breath and let's not get bogged down in complexity and let the perfect be the enemy of the good. Right. And make you stop this. So, like, for me, I probably would put a lot of my Amazon purchases just in my food and in my groceries because realistically, a lot of those things are going to be in there. Jonathan, there's a line item for different home items because we don't think about that also. Right. Like a lot of what people think.
- [30:32]
A
Of as toilet paper and paper towels. Is that groceries or is that some thing that goes on top of groceries? Where. Where does that go?
- [30:39]
B
It's a reasonable question. And it's not an insignificant amount of money. So I think that's something that people often don't lump in anywhere. And I think that's a big myth. So clearly that needs to get line itemed in some way, shape or form. But again, if it's going to take you hours to figure out, I have my Wegmans bill, I'm not going to sit there and carve out like, this was laundry detergent and this was tissues. I'm just going to put it as groceries. So I think it's important to try to be directionally accurate, but also not.
- [31:07]
A
Get bogged down in complexity and intellectually honest. That is not the same thing as perfect. This is the art of projection, right? Not the art of war. It's the art of projection. And in this context, I think you've already said it. Don't let the perfect be the enemy of the done or the good or the tract. We need to just get something that is representative. It doesn't need to be perfect in every single way. But the reason I highlighted that nuance is because you can lie to yourself that, oh, I don't spend anything on my grocery bill. It's super low. Well, no. Did you do a cow share and you had all of your meat twice a year and then, you know, you just didn't spend anything? Like, you can't forget that. And do you go out to eat twice a week in lieu of your weight? Well, that is part of your however you want to do it. You need to be aware of these maybe things that you figured out. And it's not even to say any of those are going to stop, you know, it's just to say, don't forget that. Because it didn't show up in the same pattern as everything else. You can wiggle and fudge around how many categories you need and how much additional nuance you need. You know, and ultimately the thing that we want to get towards is is this a representative month? And so with that in mind, we when you're doing an audit of your expenses, you need to be aware that not everything's going to show up every month based on how you do things. You do that, subscribe and save. All right. So in that case, another feature that I'm adding into my expense audit, which you'll have to account for in your own spreadsheet or you can use, you know what I'm setting up is I want to have the ability to do an annual override. Right. So if I don't think I'm going to be able to target the amount of spending this month, but I need to be able to have some sort of lump sum to throw in a category to say over the year it's probably this and then move on. I'm going to have the ability to go do more options annual override and then have it then derive or compute the monthly amount and then just move on with my day and have all that kind of taken care of. You need to come up with some version of that because you will lie to yourself if you just say, well, I'm going to do all the expenses this month and anything that didn't land this month and make that's not the point. The point was not for you to get the number as low as possible. The point was for you to find out how much a representative averaged out month of your life cost using the tool of the fact that a lot of expenses do land every month so we can front load a lot of that work and a lot of that energy.
- [33:31]
B
Yeah, life is lumpy. As we've said many, many times here and there are expenses that will hit only once or twice a year. Yeah. To exclude those because really we're trying to do an audit of your what does my life cost in an entire calendar year? And you need to get as close to that as you possibly can. And if that means it's going to take you an extra 30 minutes or an hour to figure this out, well, you're going to have a lot better data. So I think it's really important. Jonathan, next couple of items would be health and medical. So health insurance premiums, you can put there medication, even supplements, things like that, medical devices or glasses, et cetera.
- [34:04]
A
But this is a really important one to slow down on, Brad, because some of these now for the first time, they're not actually hitting your monthly cost. They're a payroll deduction item in some particular cases. So it does have a cost. But before Your income comes home, you don't really see it. Should you make any sort of accounting for that? Should you only include, you know, health insurance costs that you have to pay out of pocket after the fact? You know, there's a little bit of nuance here when you're talking about, are there things that I pay for through work? Should I be considering that as part of my expense audit?
- [34:42]
B
I would say yes. Maybe that's the accountant in me, but I would say, yes, you are spending that money. If it's coming out of your. It's like arguing, I'm not paying taxes because it's coming out of my payroll every period. Right? Like, no, you are, I promise. It's just that it's getting allocated before it sees you. It sees your bank account. So I think clearly, in that case, if you're paying health insurance premiums through your payroll deductions, that's got to count. If you shuttle money into an FSA or an HSA that you're actually utilizing, not if you're doing it like an HSA for tax purposes, and it's going to grow and compound for 50 years. Separate issue. But if you're putting it into something akin to an FSA where you're spending that money in this given calendar year, those are medical expenses. You have to include that.
- [35:26]
A
Wow. Man. Yeah, this is great. All right, so actually, you said something there, and I'm not totally surprised, but at the same point, I think people were like, wait, wait, rewind that. What did you just say? One thing I am not doing. And you can do whatever you want, but one thing I'm not doing is the point of this is not actually my financial independence plan. I am not looking at my income, gross income, whatever. But, Brad, you have made an interesting thing, and I think we should get in here. It sounded like you were saying you would include taxes that you pay on your income as part of your expense audit. Can you clarify that? Was that actually what you were saying?
- [36:00]
B
Well, it wasn't necessarily, but I probably would track my tax liability just because I'd like to have a sense of it. I think, frankly, as we've discussed so many times, Jonathan, I think when it comes to financial independence, when my income is zero, I think I can manage my tax liability down to almost nothing. So I don't want people to make the mistake of, hey, I'm tracking my tax liability in 2026, and I'm going to assume that that's going to be my tax liability when I reach 5, and I have no Income. I don't think that's the case at all. But I think frankly it would be really nice because you know, we've talked about this so many times. How many people get confused when it comes to taxes? They have no idea what they're paying. A lot of people frankly think they're paying dramatically more than they're actually paying. But regardless, that's neither here nor there's. Just having a sense of what does your life cost, I think gives you clarity and I think that is very, very important because you're on a 10 to 15 year path to FI. And you know, your gross income, that's just an obvious number. They tell you that when they hire you. Right. But if you don't have any true sense of what your, what your tax liability actually is, I'm not talking about your withholding, talking about your, your liability. That's the expense, both payroll taxes, your federal tax liability, your state liability, etc. Like these are numbers you should know. So I think. Does it provide us insight Jonathan today for what's my fine number? No, it doesn't. But I think it's important to know.
- [37:26]
A
Yeah, I think I'm going to devil's advocate on this one and go in a slightly different direction. We're talking out loud here. Brad and I did prep for this, but we didn't necessarily agree on that. We're going to agree on every talking point. So this is just the point of, you know, going in different directions and we'll see what sticks. After we both had time to digest and think about it, maybe after the episode comes out and we hear your feedback, I would make the case that yes, absolutely, we need to account for taxes, but not here for a couple reasons. One, we don't actually know how much we're going to spend in taxes because this is a projection. If you're just starting and our decisions that we're going to make on the back end of this are going to directly influence. So it's really more of a point of when we get to the end of the year, we want to go back and update our work here and maybe compare what we projected we would spend to what we actually spend on the back end of having a financial independence. When we want to record an audit of what we wanted to do versus what we actually did and at that point in time we want to record how much we paid in taxes. But that's not a projection, that's a, a note on a log. You know, in the spirit of gamification and tracking, our Progress, Right, right, right.
- [38:34]
B
So that, yeah, an accountant speak, you'd be truing up a number on your projection to true it up to what the actual is. So yeah, I like that because as you said, things that we do, like let's say putting money into a 401k or a traditional IRA or an HSA lowers our taxable income in the current year. And as you so aptly said, we will not, let's say for 2026, you won't know what your tax liability is for your 2026 income until you file your tax return in most likely by April 15, 2027. So at that point, yeah, you would if you were making wholesale changes, if you were dramatically adding to these pre tax buckets, then yeah, you would expect so for someone new to five, for instance, it would be easy for me to just say, hey, most likely you're getting ready to file your 2025 tax return. If it's not filed already, it's going to be filed in the next 60 days. Just go to your 1040 page to find your tax liability and write that down. But if you're new to PHI, there is a real high likelihood in 2026 you're going to make big changes that are going to lower your tax liability because you're probably putting dramatically more money into these tax deferred vehicles like I just mentioned. And Jonathan, I think that's a brilliant point. I think what would be really clarifying again is April 15, 2027 to say, oh, look at what my 2025 liability was which I projected for 2026. And look at my actual look at what a difference this made when I made these changes.
- [40:00]
A
Well, that's the magic of what's happening right now with what we're talking about, Brad, is that now as you and I have the opportunity to discuss things, we then go build it. Right. And so what we want is this should all be easy. Like we're at that where this 2026, this should be not as difficult as it was in 202012 when we had to look at the spreadsheet heroes that could master Excel in Google sheets. Now wouldn't it be cool if we could just have small building blocks? We take the small step and right now it's a little difficult, but it's not extremely difficult just to work through the nuance of what we're talking about. Do this part, do the next thing and the next thing, that's all we're going to do. And if you do this thing and you're doing it with us and you're participating in the show or you're doing it through a 5101. But even if you're on your own, but if you do it and you have that data and it's good, it's good data, then when we come to the next part, which you can already see it's going to happen, then we can build on that. And then when you're doing it year over year, now you have a log, now you have a record, now you have the historical data to show you definitively your tax rate over time and to start to point out the patterns, you know, that are going to become more obvious as we all get better at this together. So, Brad, I think what we're, this is the heart of it, though, that, that could be confusing. And what we're saying is we're not doing yet an entire financial plan. We're doing this piece that everything will build on. And there's a couple other aspects that you mentioned there that are super important things. Like, and I think you nailed it. If it's an FSA that you use every year, use it or lose it. All right, cool. Expense. If it's an hsa, and this is my big one, your savings, your investments, your HSA contributions that are being done to investment out should not, they are not expenses in my mind. They should not be included on this. We are trying to find out what our life cost. If you are saving this for your future, it's by definition on the other side of the ledger. It's not a part of this equation. We want to keep this scoped on what it is our life actually cost.
- [42:00]
B
Yes, wholeheartedly. Agreed. If you're doing an expense audit, savings do not. They simply do not count as expenses. If you are someone who wants to track every penny and spend 30 hours doing this and you want to go from your gross income to where did every dollar go? Well, that's a totally separate exercise. That's not what we're talking about here. That's not going to really appeal to everybody. But I mean, Jonathan, that'll appeal to 5% or 10% of our community who just loves the spreadsheets. I get that. But yeah, that's outside the scope of an expense audit because really we're just trying to prove ultimately, at the end of the day, what does your life cost. And then you can look at your income and really simply just subtract the items. Right. My gross income minus what is my life cost equals my savings, in essence. And that should be pretty Darn close.
- [42:47]
A
Yeah. Now, if you have things like tax prep services, that's an expense. If you have things like charitable giving, that's an expense. Now there's a whole separate conversation on how you're going to handle that and what it's going to mean in terms of a financial independence plan, which we won't get into right now, but certainly that should absolutely be included. Charitable giving should be included on your expense audit. If you have things like local property tax, that sort of thing. If you have property tax, that's an expense. Like you need to understand this is the nuance that is something that you are going to have to pay every single year. The little notes I was making is around your federal income tax and maybe by extension your state income tax, but your property taxes and probably to some lesser degree, depending on how your state does it, your local. There's some fudge here. Right. Depending on how your taxes are accrued, that should probably be considered the category that will also trip people up. Brad. But I think it's important is now we need to go into debt. Debt is an expense. Debt should absolutely be factored in to your expense audit. So but using a standardized category for it, we all need to be intellectually honest and say that most debt, if not all debt, is a time bound expense. And you could also make the case of mortgages as well. So maybe you would even separate out mortgage versus rent for that reason. Or maybe you just keep it together and later you clarify the whether it's a mortgage or it's rent. I got to think through that one a little bit here. But time bound expenses should be noted, especially as we move from a static fine number to more of an effective need number. We just want to make a note of that and we'll come back in a future conversation and we'll talk about what we can do with that. But we do want to know what is our payment on our debt.
- [44:38]
B
Yeah. And obviously you are somebody who famously paid off a whole boatload of student loan debt, $168,000. And I would be interested in your opinion on this because. Right. Like as you said to you, it's self evident to include that amount in your expense. And, and I would definitely argue that we need to account for this somehow. But there's an interesting nuance right in that. Okay, well, let's just look at credit cards. So let's just say you opened a credit card on January 1, 2026, is the only credit card you've ever had and you logged every charge as Your expense. Okay, so let's say you made $2,000 worth of charges in the month of January, right? I would personally put that down as $2,000 worth of expenses in the month of January. Now, if I don't pay it all off, right. If I don't pay my bill on time and in full every month, well, then I get charged with interest expense. So in that case, I would actually just add the interest expense as my additional expense because otherwise you'd be double counting it. So that's an interesting is why we're doing the nuance.
- [45:47]
A
All right, so everything you said is obviously, like, correct in its own way. Doesn't mean that we all would have done it correct or we would have known how to handle it. But that is, by miles, the trickiest thing to navigate in terms of thinking it through. I have struggled with that understanding that double counting. Ynab struggles with that understanding. Monarch, all of the budgeting tools struggle with the double counting issue that you're speaking about right now. And so, for our purposes, on an expense audit, when I said debt out loud, I wasn't even thinking about that. I was thinking about student loan debt. I was thinking about mortgage debt. I was thinking about the payment, the furniture that's been financed, whatever it is, the car payments, you know, these sorts of things. But then, if I'm being intellectually honest, also outstanding credit card debt. So I think now we got to hit a fork in the road where we talk about this. And we're speaking now to two completely different people. First off, if you and you should be table stakes here, we're talking table stakes moments. Highlight this, write this down. If you are capable at this stage in the game of paying off your credit cards on time and in full, every month, full stop. You should just be doing that. And then everything else I'm going to say doesn't really matter. That's what you should be doing. And so in that context, we can keep credit cards almost irrelevant. We just look at the credit cards just for the purposes of finding out our expenses, to find out how much we cost. What Brad is talking about, rightly so, is when the lines get blurred because you almost paid it off this month and then you almost paid it off next month or you had some small amount. So here's. Now, let's. Let's differentiate in these two categories. First, can you pay it off? Okay, all right. Pay it off. Next, can you pay it off pretty quickly? You know, so we're talking about. Let's. Let's move away from These bad habits. This is going to be one of your massive action steps. We're not going to keep paying interest because we just thought it was optional and we didn't think about. No, no. We need to get to the point where it's on time and in full every single month, done as quickly as possible. But now we're over here in. I got $10,000, I got $15,000, I got 30,000 of credit card debt. Like, you know, you're coming in and maybe you're halfway through a Dave Ramsey program or something like that, or you were trying to just do better with your money and you found us at the same time and you're. How do I, I gotta, I gotta deal with debt in that context. This comes down to decision fatigue. I, in my mind, this is don't let be the enemy, be the perfect of good. I would almost just say, no, you have a debt problem, stop using that credit card. Move over to something new that you can pay off on time in full. And let's figure out a way to handle this debt in a way. Like look at the debt plan. This is a debt plan. We should not be conflating monthly expenses with a debt problem. You have a debt problem, keep it over here, find a way to stop using it and go over there. You've lost the ability to use credit cards because for six months you've not thought that this is a hair on fire moment. So that's kind of how I would do about. This is something we have to fix now.
- [48:36]
B
Yeah.
- [48:37]
A
And we're going to deal with debt here and expenses over there.
- [48:39]
B
I like that. I like separating. And yes, of course it's very important we say repeatedly, do not use a credit card unless you can pay it on time and in full every single month. Thankfully, the fi community where people who are striving to have significant assets, we're getting to the point where a couple thousand dollars credit card bill or whatever it is, X number of dollars you put on your credit card every month, it's paid off on time and in full very easily. This is not an issue. Now that said, Jonathan, as you so aptly said, there are a lot of people coming to our community who are coming in and they're coming in with debt. I agree. I look at that differently. So that is like, to me, that is like one number that is an expense that similar to a car payment. Okay. That. Let's say you have a $30,000 car payment and it is $500 a month for five years. Yeah. I would Put the debt payment of the $500 per month, that would be the expense that I would put down. You know, again, the accountant in me could say something silly which would be so ridiculous, like, oh, well, some of that is residual value. That's not how the world works. Right. Just like student loan debt itemizable.
- [49:43]
A
Have you factored that into your equation, Mr. Tough Guy? Got it all figured out.
- [49:48]
B
So yeah, clearly for car loan, I would put that all expense. For student loans, I would put it all as expense. If you're coming in with credit card debt prior to finding fi and you have this amount and you have a plan to pay it off and you're paying a certain amount every month, or even if it's variable and that amount gets paid down eventually to get you to zero, I would put that monthly payment as my expense every month. I think that's reasonable. I wouldn't split it out at that point. All that stuff you bought on there was complete junk anyway, frankly, and it's not worth anything. So every dollar you pay towards that is expense. So, yeah, let's not get bogged down in detail. For most cases, every dollar you pay down on debt, you're just putting as your expense here. Now, we could make an argument about a mortgage payment because there's some of that amount is paying down principal. I think people of good faith can argue about that. I probably would almost count my principal amount as savings. But the easiest way is to just say, hey, look, this is what my life cost. My mortgage every month is sixteen hundred dollars. The easiest way is to just say, all right, look, sixteen hundred dollars a month goes on my expense audit as my expense.
- [50:53]
A
Yeah. So Brad's giving you a way to handle this. If you're doing this just on your own to handle these mental models and these decisions that you need to make, I. With what I built, I'm going to try to just standardize it so you don't need to think about necessarily what category to put it in. With the tiny, with the large exception of, you know, the credit card debt, where it's. Some of its expenses. Solve that. But you know, to the degree that you're able, I'm not going to try to tell you exactly what perfect looks like outside of what we've already done. But what I would say is, even based on this conversation, originally I had mortgage and rent, just one line item. I'm going to separate out mortgage from rent. If you do mortgage, I'm going to carry that forward along with car payments and then along with any Sort of other debts that you may list. Because in a future chat that Brad and I have, we're going to then talk about managing debt. We're going to talk about how these payments, etc. And so you don't have to actually get it, you know, completely perfect right now, I would say with the mortgage in particular, to Brad's point, I would include your principal and interest. If you have a mortgage, don't include your property taxes and your home insurance. Like, let's say you do escrow and you just have a payment, spend a little bit longer to get that extra amount and allocated out of there. Why? Because even after your mortgage is gone, you're going to have property taxes and insurance. Your mortgage doesn't go to zero, you know, at least in terms of housing cost. No, you just eliminate the principal and the interest. So we'll separate that out. And then also for the other types of debt, what we'll do when we build on this, as we start thinking about, you know, debt management, we're going to carry all these other categories forward and then we're going to get additional information like interest rates and balances and principal and payoff timelines and. And then we'll be able to run various things like scenario. And then we'll be able to come back after the fact and say, all right, over a timeline. What does that do for my expenses?
- [52:43]
B
Right. I love that. And that's all the fun stuff.
- [52:45]
A
Yeah.
- [52:46]
B
But really at its essence, what we're doing here today, I know you and I are having fun, getting a little bit bogged down, because that's the interesting part about this, is there is some nuance to it.
- [52:55]
A
I'm trying to anticipate the questions that would come in via email that someone said, but you didn't mention xyz. Yes, I did. Yes, I did. Did you Listen to addendum4.7B, hashtag A? It was clearly said there. Maybe you're talking 40 words a minute. We had me on 3X.
- [53:11]
B
Oh, man, I would be frightened to listen to you in 3X. But yeah, the nice thing is don't get bogged down. Just make this happen. And that's the important part.
- [53:20]
A
So you'll get better at it. Right. Like, even if you do this, like, badly, next year you're going to be way more in tune with your finances and you'll know whether or not that was a real projection. You can do it again or you can update it as you get more information.
- [53:32]
B
Definitely. I love it. So, okay, we talked through debt, you Know, obviously there are different insurance policies that you have. I think we would probably put medical and car in their own separate categories but maybe you could lump it all on insurance if you wanted. But you have life insurance, disability, long term care, umbrella insurance is something I have. And then we get down to children. So childcare, education, different sports, et cetera. Pets are another thing we mentioned earlier. There's plenty of line items for your pets if you have them.
- [54:01]
A
What about gifts? What about birthday? Hey, my son has tons of friends. Great. How are those birthday parties working out for you?
- [54:07]
B
Yeah, I mean that's, that's got to counter. I mean that stuff adds up. Or I think we give little presents to each of the kids, teachers, holiday time or whatever and, or teacher appreciation day. Like that stuff does add up and yeah, it's important, it's important just to have a sense of really like what does my life cost? Because also we're trying to project eventually for five. Right. So like the X number of dollars that we spend on teacher presents or kids birthday presents, that's not going to be there in 10 years. That's a season of life thing.
- [54:36]
A
All right. So Brad, that kind of goes through the line items. Now you have a spreadsheet that you've been, you know, you worked on and you shared with people before and then we have the various tool that we talked about here and individuals might have said we've missed stuff, you know, absolutely. There's, there's things that we didn't cover but, but what we were trying to do is just paint a picture for you of where to look for creep because it's actually going to happen. So real quick expectations for this episode. Brad, someone wants to take action on this, they're going to do it with us or maybe years from now they're doing it after the fact. What should they do?
- [55:07]
B
Yeah, well for me it's click on one of those links that we put in the show notes and get started. So I think what I personally would do so for my own expense audit, which obviously Jonathan, we said we're going to do this. Everything in my life runs through my checking account and everything in my life runs through my credit cards. So the vast majority, just about everything will be captured if I just look at a few months of those two items essentially credit cards and checking account.
- [55:35]
A
Well, you brought up a great point. You're not just limiting your scope to the statement from this single month and anything that hits from February 1st to. Because someone might say hey I wanted to do this month long challenge but it's already the 15th.
- [55:48]
B
No, I mean let's not get bogged down and oh man, I missed it by a couple days. That's, that's not what we're talking about. You need to take action for you. Not because Jonathan and I decided to come up with a challenge. We'd love for you to be part of it, but you need to take action to make your life better. Let's be entirely clear. So don't get bogged down in that. But yeah, do I think one month is representative enough for me? I don't. And especially in this day and age where you can download Account Activity so easily. So I go into my Chase or Capital One credit cards, you can really easily download Account Activity. You go to all transactions and then you can get a CSV file or an Excel file. It's not like you need to sit there and meticulously type down every single expense. You just download the thing and then you just sort it. And like I said, I'm going to do that in my bank account as well. I'm going to download Account Activity and just kind of sort everything and then just my, the time that I'm going to be spending is just then moving those things into different categories. I think, honestly, Jonathan, I think this can be a pretty fun and easy exercise. But every person needs to know like, where did they run their life through? I think for most people it's going to be checking account and credit cards. But who knows, maybe some people, it would be silly to say, oh, I'm not going to consider how much cash I spend. If you're someone who spends actual dollar bills, like I frankly don't spend a dollar bill in a six month period. So that's irrelevant for me. But if you use a checks or a debit card, I mean all of that should wash out in your checking account. But just be reasonable for where do you actually spend money and track it? And I think for me, at the minimum I'm looking at two months, but I'm probably going to really eyeball three to four months, I think.
- [57:28]
A
Okay, yeah, and that sounds reasonable to me. I think one thing is just make a list of the things that are variable versus the things that are fixed. Right. And those are just two different things. If you pay a set amount for something, then great, use that. But if it's a variable one, you're going to want to do some sort of averages when you're using doing something for projection. Take a look at every subscription, every recurring service. Be mindful of Those things that you have that are subscribe and save, and they hit once every six months or once every eight months. Do you really need any more air filters? You don't change them to begin with. Go change them. Do you really need to restock? All right, speaking of myself there and then various, however you're going to do the tools, that's completely fine. But now that we have that and we'll come back to this, we'll pick this up, but I'm going to spend a few minutes here. We want to actually take a look. We want to categorize. Yes. By category, but then there's two different ways that we want to categorize things. One is required versus one to haves. And keep in mind that that's not an entire category in terms of the entire category is required or the entire category is one to have. It actually can apply to each individual line item, as in, I have to have this amount of money every month for food or it's just not going to work. Versus life's a little bit better when we have this amount. Right, right. Like that's the sort of thing. Just want to pay attention to that, you know, as a detail. And you can decide which one you actually use. There's. But you want to. You're not necessarily just trying to say this is the minimum we can spend on food, but this is maybe, you know, what we want to have. And this is a different way of looking at things. And you can apply the model that fits, especially as you get out of the core categories. You know, what you're spending on your housing, what you spend on your cars, what you're spending on your food, you know, housing, food, transportation. Now you're getting down to these, you know, lower tier things. Some of these crept in. This is where we really want to, you know, Brad used that phrase, the valueless, frugal, cheap, value valueist. Well, when you're looking at these lower tier items that take up all the remaining space on your expenses, we want to start thinking about things like how much value do I get out of this? If nobody was watching my life whatsoever, would they even know that I was paying for this or getting any value from it? Would my life change one iota if it went away? And here's the cool thing, especially with a lot of these, you can just test it. It's very easy to cancel. Well, maybe it's not as easy to cancel as there's a sign up, but it's very easy just to drop them and see what you missed. Right. I mean, this is the same. We want to do these tiny little tests of. All right. I was on eight streaming services because free trials. And now I'm down to one. I still don't watch it. Right. Do you remember when you had 600 TV channels on and nothing on? Still nothing on, Brad. I mean, you got to go. You got to use this value matrix to take a look at where your economic output is going.
- [60:20]
B
Yeah, I think it's important. And, yeah, like you said, there's almost no decision that you make in terms of canceling for a time that is irrevocable, that you just simply can't go back. So why not err on the side of, okay, I'm going to cut until I can get to a point where I'm starting from ground zero, and then I build back into my life the things that add value. And I think streaming services. It almost sounds like a cliche at this point, Jonathan, but. But it's a perfect example because I think many of us have legitimately three to five of these things at any given time. And realistically, you're not watching three to five streaming services in a given month. Most of us binge something, and that's usually on one particular service. So is it unreasonable to cancel the other four for that month? Just use that one and then move to, okay, I'm done with Netflix for this month. I'm going to open up Hulu and watch whatever. Like, I think that's a very intentional decision. Obviously, that's a little bit outside the scope of this expense audit, per se. But I think, Jonathan, what's so beautiful about this is there's an interplay with all of this. This is fi. Right. Like, there's an interplay with how much I'm saving. It would be silly to not include, okay, if you cut expenses, it's going to change how much you can save. It's going to change how much your fine number is. There's an interplay with everything. We're talking about a very simple exercise here with this expense on it. But I think at the end of the day, what's going to happen is it's going to change your behavior. And I think that, to me, is the clarifying beauty of this is, all right, what do I value? I'm going to spend significantly on that, and then I'm going to cut everything else really significantly. I. That's how I like to live my life.
- [62:03]
A
Yeah. Except for us and our family streaming services. I mean, we have. We have Netflix, we have Disney and ESPN and Hulu because I guess for two months out of the year during Wimbledon and the Australia Open. Well, that's it. I mean, that's it. That's it. Right? You just. For us, I don't need streaming, you know, year round and you don't need eight other services. So if you only need to have streaming for one or two months because there's a couple of events you want, you just sign up for it and let it go. It's fine. A lot of times, not with Disney. I can tell you this right now. Yeah, not with Disney. A lot of times when you go to cancel something immediately, the thing is, hey, we'll give you the next three months for 299. If you do that. Remember, you're back on another hidden trial sneaker. Snyko. So just, just, just be aware of those. But the value matrix, Brad, if you think of four quadrants, I think this is useful, right? So first we go through, we create that monster list. Then we identify and just pull off the top. So we don't need to think about it really anymore. You know, these are just required things. We don't need to spend any more brain power on here. Let's take the rest and let's throw them on a value matrix. And here are the various quadrants to look at. Top left, have to think about. Left, right. Is that stage left? Top left. High joy. Top right. Low joy, Bottom left. Yep. Essential. Bottom right, eliminate. Now imagine you could just take all of those and everything had to fit into one of those four quadrants. If you're doing a spreadsheet or a paper, paper, you're to disadvantage. Just cut it up, make a copy, cut it up and it's going to go in one of those, right? This is going to be something that brings a lot of joy to your life. Do not lose that. If you do something for your kids and it's an ongoing expense and it's a high joy thing. Conversely, if you're taking them kicking and screaming to something because you're trying to make the grandparents happy about something else every single time, decide whether it's high joy or low joy. Decide if there's a return on the hassle that's involved with it. Should you be paying money for something that at the same time is wearing you down and, you know, adding stress to your life? You need a way to categorize these because not everything's going to come with us to this next chapter in our life. But we do not want to cut things that are bringing a Lot of joy. We're not just doing a budget to do a budget stake. We're designing a life that we're excited about living. We're just cutting ruthlessly, in Brad's words, the things that don't. We don't drive enough value from to keep going.
- [64:20]
B
Yeah, yeah. And I think that's important. Right? So the path to FI is not about deprivation. It's not about being a miser. There's nothing negative to me about financial independence. I know in the past we've seen caricatures of. Of people in the FI community. We've had these terrible stories in the Washington Post about brown bananas and other nonsense, but that's not how we really live. As Jonathan, you're saying we're searching for joy, we're searching for value. We're searching for wonderful lives, and we're trying to build them from a place of financial stability. And in that financial stability, you have to understand there are finite resources. If you were making $2 million a year, you wouldn't be listening to this podcast, Right? If you. If you. You've got. You've got a real problem, let's be honest. But most people have to make. Have to make decisions based on scarcity and based on. Okay, there are finite resources. This is the essence of every decision in life. There are finite resources. You have to make decisions, okay? And very simply, you can't spend every dollar you make because you are going to be poor for the rest of your life. So you have to make a change. If you're coming in here saving 0% of your income, you need to make changes. All right? I'm not going to sugarcoat this for you. You need to make changes. And I think finite resources helps clarify. What do I value, Jonathan? Do I value my freedom? Do I value Phi? Do I value that more than buying new throw pillows or things to put up on the wall? You bet your ass I do. It's not even a question. So for me, the clarifying question is, what am I looking to get out of this? What's my North Star? Is it freedom? Is it time to spend with people? I love doing things that I want to do that's worth more than any material good to me. So I'm going to make those decisions, and that's why I save money. Frankly, I think it's important.
- [66:13]
A
Man, we could do multiple episodes on this. Obviously, I'm tempted. I'm looking at the clock right now. I know we're running out of time on multiple levels, and so let's just See, with how we want to go about this, I think everyone is kind of on board. They get the fact that the conversation is now more so than ever, really continuous. Right. When we pick back up, we're picking up where we left off. We're incrementally going through the playbook, the table of contents of the financial independence community. We're inspecting it in our own personal lives, and we're doing our best to convey it in a way where you can apply it to your own life, wherever you are at starting out or maybe well on your journey, and derive value from it. Enjoy the process. And so this feels like a natural segue for us. You know, when we come back next week, Brad has an awesome conversation teed up with Andy Hill for marriage, kids and money. And then we will be picking up the following week, this conversation. And we're going to be going through. Okay, maybe you have some numbers and actually, let me just point out that's given a bunch of you a chance to make moves on this. And if you have taken that week and done a significant amount of action, if you have joined the challenge, if you have gleaned some insights, we would love to carry whatever insights you've gleaned from your chance to start working on this into that episode. This is intended to be fully interactive, so go to, choose a vi.com/login. Participate how you want to participate, do the money challenge, do the money audit, and then let us know what you're finding along the way. We're going to incorporate that. But I would say one of the, you know, in terms of things that we have to do as we progress through this roadmap, we're going to keep looking for those leaks that are going to come up as people talk about what they find. We know, so we can optimize this, standardize this. We're going to be talking about how to reallocate, right? So what's the point? What do we want to do with this? What didn't make the cut? What was low joy that didn't make the cut? And were there any hidden expense traps that we should be aware of that all of us can actually think about? We can also think about. All right, well, we had things that were, you know, essential, and we had things that we need to eliminate. We had things that were high joy, and we had things that were low joy. But then we had this gray space where kind of required, kind of needed. But we know it's not optimized, or we suspect it's not optimized. So let's spend some time there thinking about how to optimize those. And that's a great place for crowdsourcing, right? Whether you're talking about cell phone bills, Internet plans, fees, insurance, over coverage, convenience, creep, car cost, whatever it might be. Transportation and housing are huge, you know, are huge levers, but they're also harder to, like, change immediately. But lattes, while they're easy to dismiss, you know, Brad talked about at the beginning, find $100 a month. That's a $90,000 swing. I wonder how many of those we can aggregate together. The aggregation of marginal gains is huge here. And then as we build on that episode, we're going to springboard our way into actually looking at, okay, we got all this. What do we got to do? What do we got to do about the debt? And then for those of us that aren't as worried about that, what do we got to do next? So we're going to really keep moving with this. And for those of you that have been with us for a few weeks, you're going to be able to identify out loud. All right. Discovery. Okay. Awareness. Okay. I'm working on control right now. Right. Last week we talked about, this is a framework for saying I'm in control. Well, this is the move, you understand? This is the first massive move. All of the decisions that you will make that will definitively say you're in control are going to be predicated on this audit that you're doing right now. You're making moves. I hope this episode was enjoyable for you guys. We're thrilled that you're here. Take action this week, whatever it looks like for you. Want to join us in the community. If you want to discuss this episode again, you can go to choose ay.com login the fire is spreading, my friends. We'll see you next time. As we continue to go down the road less traveled.