“Spending has the greatest direct effect on your financial condition.”

My friend Gordo posted about family spending recently.  Read his thoughts, and let me try to add to them.  I would gently suggest to his advisor friend that discussing spending in a frank, honest, non-judgmental way would be one of her most valuable services to her clients.

In my practice, I serve families with net worths between $500,000 and $40 million. With every one of them we discuss spending on a regular basis.  The discussion eventually settles down to two key points:

1.  Is this level of spending sustainable for at least as long as we need it to be?

2.  Is the spending accomplishing what we want it to accomplish?

Financial professionals burn through electrons kicking around the idea of sustainable withdrawal rates.  (No one with multiple initials after their name would say something as simple as “spending.”  Those initials cost money!!) Most of the thinking is premised on the idea that people will be unwilling or unable to change their habits in light of changing reality.  My experience has been the exact opposite: when things got hairy for everyone in 2008-2010 virtually all of my clients volunteered to take a pay cut on their lifestyles, whether they really needed to or not. Darwin was correct (again) that the trait most helpful in surviving is the ability to adapt to change.

The much more difficult question to answer is whether the spending is actually productive. Is this expense solving the problem it was intending to solve?  Is it fulfilling a need or a desire, and if so are they the right needs and the right desires? Would we be better off spending time and effort to meet this need?  In this sense, money, time and effort are all different forms of energy.

Sometimes this energy is readily interchangeable: if I can get to work in 20 minutes by car but 90 minutes by bus, perhaps the 70 minutes I get are worth the extra cost of driving. Sometimes they are not: the time you spend having family adventures or just hanging out will be remembered long after the stuff you bought for them has been forgotten.

Gordo gets a key point exactly right: spending has the greatest direct effect on your financial condition.  Like all factors, it compounds over time.  No matter how small the hole is in the bucket, the bucket will eventually go dry.