How Much is Too Much to Spend?
Some Simple Rules of Thumb to Understand Affordability for All the Little Stuff in Life
When I was growing up, my mother had strict rules about how much was too much to spend on stuff. I’m 37 years old and I can still remember some of the rules:
T-shirt – $5
Box of Cereal – $4
1 lb. of apples – $1
Jeans – $15
Christmas/Birthday gifts – $20
One person’s meal at a fast food chain – $1
One person’s meal at a sit-down restaurant – $7
These prices aren’t adjusted for inflation, but you can tell that my parents weren’t exactly lavish. And I’m giving my parents some credit here because these are the maximum amounts we were allowed to spend. The goal was always to beat the targets if you could.
I spent many, many hours in dusty second-hand shops and Goodwills searching for new-to-us clothing. I would occasionally find an item of clothing I liked in a dark corner and put it in the cart. But even in Goodwill, my mother would still sometimes tell me “that’s too much to spend, put it back.”
You’re the Adult Now
As a kid, I always thought that it must be so cool to be an adult and have adult amounts of money. Think of all the tshirts my Dad could buy himself if he wanted!
But of course, being an adult is all about compromise. My wife and I generally agree about how to spend our money. But inevitably, there are categories where she wants to spend more than me or vice versa. In this post, I outline a general approach to answering the question “how much is too much to spend?” for the little stuff in life. These rules don’t work well for really big-ticket items like mortgages, cars, and retirement. They are instead a useful guide for getting at what feels right to you when purchasing smaller stuff.
There are a couple of ways that we approach the question of how much is too much to spend. Feel free to skip down to the one that makes the most intuitive sense to you:
- Savings-first approach
- The wedding contractor approach
- The coin-operated approach
Let’s start overthinking!
How Much is Too Much? The Savings-First Approach
Here, we start from assumptions about income and savings and back into what feels affordable given our real discretionary budget. The crux of the savings-first approach is to be systematic about costs. With costs fully taken into effect, we don’t deceive ourselves into thinking things cost less than they actually do. Here’s how it works:
- Start with expected yearly income.
- Deduct Federal, state, and municipal tax.
- Allocate funds to reach our post-tax savings target.
- Deduct large, predictable, recurring expenses (mortgage, daycare).
- Use the remaining budget as the denominator to determine something’s cost as a percentage of our discretionary budget.
Projecting income for the upcoming year can be hard. And despite my best efforts, I haven’t come up with any way that does better than a quick guess. So What we typically do is use last year’s tax filing and call it done.
For our example, let’s assume that last year we had a household income of $100,000. That would put us in the 64th percentile for the US. That’s not too extreme and it makes the arithmetic easy, so let’s dive in.
Taxes in the US are mind blowingly complex. Because our tax system is progressive and there are at least 3 layers of government entities, things get complicated fast. Do you want to use your effective tax rate or your marginal tax rate? If you make a bit more than expected, will that all be taxed in the next bracket? Etc, etc.
Here, we take a similarly lazy approach and use the effective tax rate from the previous year’s tax returns. This combines all of the taxes we paid for all levels of government and divides by our gross yearly income. I calculate this using tax bracket tables for the given year. Here’s the Federal tax withholdings table for 2023 for people that are married filing jointly [source]:
So for our $100k household income example, the effective federal tax rate would be $10,294 + ((100,000 – 89,451) * .22) = $2,320.78 + $10,294 = $12,615.
Since we live in Texas, we don’t have state income tax, and our municipal taxes are pretty low. (Don’t worry, they still get you with high property taxes.)
Rounding up a bit for the municipal taxes, we are left with an effective tax rate of approximately 13%.
Allocate Funds to Savings
In the last two steps, we arrived at an after-tax yearly income of $87,000 for our household. The next step is to figure out what savings rate we want to target. This is simple FIRE-101 stuff here. I like MMM’s table on the subject:
Pre-kids, we tried to target a 70-80% post-tax savings rate. We’re a bit more lax nowadays and try to target 50-60% instead. Obviously, what savings rate you target boils down to a subjective decision for you and your family.
Using 50% as our target leaves us with $43,500 for all the expenses that life throws at us.
Account for Large Recurring Expenses
Next, we take out all the large recurring expenses. Let’s assume our mortgage PITI is $1,200/mo and part-time daycare for two kids is another $1,200. That eats up most of our budget, leaving us with only $14,700 for everything else.
Now we know approximately how much we have to spend on all the small things in life. We then use that to develop an intuitive feel for how much is too much to spend on smaller things. Here’s what I mean:
|Thing||Approx Cost||Percent of Our Budget|
|Tank of gas||$50||.3%|
|One week of groceries||$250||1.7%|
|A cheap laptop computer||$750||5.1%|
|Expensive car repair||$1,500||10.2%|
Having a sense of these numbers gives us a numerical way to think about our expenses. We can have a quantitative discussion about whether it’s worth 5% of this year’s budget to get our oldest kid a new laptop.
It also gives us a more realistic sense of the size of any purchase. It’s easy to think “well, we make $100k a year, I can afford to turn up the thermostat a bit.” But that utility bill isn’t .1% of your budget ($100 / $100,000), it’s .6% of your discretionary budget ($100 / $14,700). The absolute numbers are still small, but one is 7x bigger than the other. This enables us to be more accurate when we talk about how much is too much.
How Much is Too Much? The Wedding Contractor Approach
The savings-first model works well for cheap expenses that we deal with regularly. But what about the big-ticket stuff that only comes up every now and again?
When we moved from California to Texas in 2020, we had to find movers. This was no small task. We had to find other humans that we trusted to haul all our worldly possessions 3,000 miles without incident. It was going to be costly no matter which mover we went with. The savings-first approach would only help us agree that it was ridiculously expensive. So in cases like this, we use a technique that was introduced to us while we were planning our wedding.
The premise is that how much a good or service costs is narrowly bounded by the costs to provide it. You can’t run an interstate moving company without big trucks, for instance. And big trucks tend to be expensive. So rather than focusing on the percent of our budget, we instead try to get a sense of market prices.
But if you wanted to get a full survey of all the available prices for movers, you’d go insane. There are too many, and anyways, they’re all likely to be similar to one another.
Sage Advice From a Wedding Caterer
Here’s where the wedding contractor approach comes in. Rewind back to our wedding planning in 2012. One of the caterers we worked with gave us a tip that saved our sanity in a big way. Her approach started by recognizing that most goods and services are pretty similar to competitors. Her guidance was simple: “get three quotes, choose the one you like best and move on.”
We are going to be moving again in about a month and I used exactly this approach. I called 3 moving companies, got detailed quotes, and did about 15 minutes of analysis. At the end, I had a simple recommendation to my wife. We booked the movers for the middle of May. It only took me about an hour. Wedding contractor approach FTW!
If we used the Savings-First approach, the % of our budget would have been unpleasantly high. But that wouldn’t have been relevant. The market doesn’t care about our budget and we want to move.
How Much is Too Much? The Coin-Operated Approach
The two approaches above cover most of the spending that we do. There is, however, one additional category that needs a separate approach.
Sometimes you buy stuff that isn’t cheap like a fast food meal or a once-in-a decade expense. For this category of spending, we like to amortize the expense of the thing over its useful lifetime. Dig into your memory a bit here. Do you remember arcade games that required you to put coins into the machine to keep playing? What we’re basically doing here is imagining how we would feel if other things in our life were coin operated. Would it feel like a good deal or not? If not, that’s a strong signal that it’s too costly.
Is a Cushy Chair Too Much?
Right after I graduated from college, I started my first company with my two best friends. The first year we were in business, I made $0. I was living on a very small savings account I’d built up working in the library as a student assistant. Despite this impoverished lifestyle, that was the year I spent $750 on a chair for my desk.
You might think “wow, this guy’s insane for spending nearly $1,000 on a chair while making no money!” But I didn’t think of it that way. More than 15 years later, as I write this post, I’m sitting in that chair. It was an expensive up-front purchase, but it has been insanely cheap over the long run.
I work at least 40 hours per week and I’ve spent half of my career working out of my home. That means that my seemingly expensive chair has actually cost me $8/mo or around $0.05/hr. And it’s better still: my chair is one of the most comfortable office chairs I’ve ever sat in. It also helps support good posture and ergonomics. So for the measly sum of $0.05/hr, I’m avoiding expensive problems like developing carpal tunnel, straining my neck, or getting hemorrhoids. If my chair were coin operated, I’d gladly shovel money into it!
How to Calculate Something’s Useful Life
I bought my chair from a very reputable manufacturer (Hermann Miller). I knew they made great chairs and would stand by their product. So I felt it was pretty likely that I’d be able to get 10 years out of the chair. Here I am 15 years later and I think it could last closer to 20 or 30 years.
But of course every brand wants you to believe that their thing or service will last a long time. It’s up to you to cut through the BS and get a reasonable estimate.
Here’s the approach we use when doing these analyses:
- Spend 15-30 minutes learning how long various things last. Consumerreports is a great resource here, as are in-depth product reviews like the NYT’s WireCutter.
- Be conservative. I had never owned a really nice office chair when I bought mine. As a result, I wasn’t sure how much to discount the marketing material. The sales rep we spoke with told us the chairs would last at least 15 year. I took a random guess at it. “Okay, let’s assume it lasts 30% less just to be on the safe side, so 10 years.”
- Take into account upkeep and maintenance. Chairs are generally pretty low maintenance, but other stuff (washers, dryers, dishwashers, etc) require maintenance to continue working. Factor that into your calculations.
- Finally, estimate your usage. One key to doing this accurately is to never assume that your behavior will change when you buy something new. For instance, I was already sitting in a crappy chair for 40-50 hrs a week when I bought my chair. There was no required leap of faith to suggest I’d keep doing that.
Here’s another example that illustrates how we recently did this analysis when evaluating whether to buy a PS5 gaming console:
- How long do gaming consoles last? About 5 years.
- Be conservative. 5 years is a long time, let’s assume it dies or I lose interest after only 4 years (20% less).
- Upkeep and maintenance. Gaming consoles don’t really need regular servicing, but you do need to buy games and accessories. Let’s assume we spend an additional $500 on games over the life of the console.
- Estimate usage. My wife and I love gaming. Right now, we each play video games for ~2 hours a week.
So putting it all together, we assume that the total cost of the console is about $1,050. We think it will last for 4 years. During that time we will each probably spend 2 hrs per week gaming on it. So that means we’ll collectively spend 4 hrs x 52 weeks x 4 years = 832 hours. $1,050 / 832 = $1.26/hr.
If I owned a PS5 and it was coin-operated and I had to insert $1.26/hr to play, would that feel like a good deal or a bad deal? Again, take my money! $1.26 for an hour of enjoyable gaming? There are very few other ways to have fun for that cheap.
This approach enables you to get a gut feel for how much is too much to spend on something by thinking of the per-unit costs. Spending $550 outright on the PS5 felt super expensive to me. But once I’d done the analysis, I realize it was actually an incredible deal.
Coming to Grips with Difficult Comparisons
I’ve outlined 3 methods that we use to answer the question “how much is too much to spend” on something. We’ve found that these approaches work well to create an intuitive baseline within categories. But it’s really hard to compare across them.
My wife recently bought the kids some stickers from the dollar store. They cost about $3 in total. Using the savings-first approach, this was a no-brainer. The stickers are a tiny fraction of our budget for the year and the kids loved them. But rather paradoxically, the $550 we spent buying a PS5 was significantly cheaper per hour. (The kids tore through the stickers in less than 10 minutes).
In light of the PS5 comparison, was the $3 too much to spend on the stickers? I don’t think so. Our solution has been to avoid comparing purchases across categories.
We don’t compare the $3 stickers to the cost of movers. We compare them to other recurring expenses like apples or plastic utensils.
We don’t compare the cost of movers to my computer chair. We only compare it to the other quotes we received.
We didn’t compare the cost of the PS5 to either of those with the stickers or movers.
Hopefully this framework helps you better analyze and make decisions about your spending. At the very least, I hope that you’ll develop a consistent rationale. That way when your kids grow up and write blog posts about how stingy you were, you’ll have a defense.
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