PART OF THE 2022 FINANCIAL FUNDAMENTALS SERIES
Editor’s Note: We are in the midst of a The dozen year bull market in the US has officially ended, creating an environment in which fundamentals are less more in focus. This series of posts explores the less complex tactics of the personal finance playbook.
American Frugality
Benjamin Franklin, who was a prolific writer among other things, was fond of making lists. On more than one of Ben’s lists the notion of “frugality” can be found. I share the love of writing, making lists, and have a deep respect for frugality myself.
Franklin died in 1790 and, reflecting on our modern world, it seems he took frugality with him. Franklin was as profound a thinker as history has to offer us. For this reason, I consider his interest in frugality something worth consideration.
Fast approaching 250 years after Franklin’s death, and the average person is not set-up for success when it comes to being frugal. Most do not have access to reliable data regarding their spending.
In Ben’s day, it was easy to see cash going in and out of ones possession as the economy was built on transactions made through money literally exchanging hands — cash flowing from one individual to another. Today, while we can use a single app to hail a cab, access all the news and editorial content we can handle, or consume endless 60 second videos, there is not a one stop shop for personal finance. As the smartest engineering minds work on building out a blockchain ledger to track JPEGs, we cannot easily build a personal ledger, such as a spreadsheet, with a full accounting of our financial status.
There is a simple explanation for this shortcoming. Most people’s personal finances are indeed a complex web of relationships — student loans are in one place, there’s one credit card for groceries, daily spending is routed through a checking account, you have another credit card for travel, and so on. In that sense, Ben had it easy.
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American Consumerism
Consumer spending account for nearly 70% of the US GDP and has been for the last couple of decades.
That’s the macro. At the individual level in 2022; (a) your dollar is able to buy less today than in recent years (see Real Disposable Personal Income graph), and (b) even during a dozen year bull market most people did not save enough (see Personal Savings Rate).
In summary, Americans are good at spending. And not so good at saving.1 Unfortunately, it’s hard to know you are bad at savings because that information is hidden in the complex web of financial relationships of modern life.
Personal Burn Rate
I am defining annual burn rate as the following — total annual spending divided by total annual after tax income (i.e., take home income, such as W2 income less taxes). That calculation gives you a percentage.
This percentage is approximately the inverse of what you are saving/investing. As opposed to calculating a savings/investment percentage, the burn rate is going to provide a more defined path to increase saving and investing.
For calendar year 2021, I have the clearest picture yet of my personal spending. This is because at the start of the year I was on a mission to simplify. In doing so my spending was almost entirely run through one account.2 The fact that I had to actively try to get to this level of detail is why most people don’t do it.
Here is the output…
2021 Total Spending (% of Spending)
The graphic above reflects any and all spending. But spending only. That is everything that isn’t taxes3, savings, or investments.4 The total dollar value of the underlining spending data ends up as the numerator of our burn rate.
I found this to be a helpful methodology because switching to show Housing, Bills & Utilities of percent of income gets skewed if you make “enough” money. In cases like that, the dollar amount spent may be a small percentage of your income simply because you’ve got a lot of money coming in rather than frugal-oriented decisions.
Isolating spending data, as opposed to savings data, is a useful exercise as this can illuminate where changes can be made to the discretionary portion of spending. As an example; Housing, Bills & Utilities is almost entirely not discretionary. Could I find a place to live with cheaper rent? Sure. I can also control utility expenses at the margin by turning the thermostat down in the winter. But these are the essentials of modern life, otherwise.
If I were to summarize my data above compared to the average American, I would guess Groceries are a higher percentage of my burn. On the flip side, Food & Drink and general Shopping are likely a smaller percentage.
A general framework for personal burn rate might look something like this:
| Burn Rate | Context | |
| High Burn | 81% to 100%+ | At 81%+ you are saving or investing less than 20% of your post-tax income … at 100%+ you are spending more than you make after taxes, which is unsustainable |
| Medium Burn | 50% to 80% | I suspect the majority of “middle class” Americans fall in this range, and those who don’t, strive to, i.e., a burn rate of 80% would mean you are saving or investing 20% of post-tax income |
| Low Burn | 1% to 49% | Unfortunately, it’s a minority of American’s that can reach this low level … but if you are in this group you likely have a lot of disposable income which can increase one’s ”room for error” leading to some poor spending habits |
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Focus On What You Can Control
In recent years there have been a flurry of tweets and memes that hit this topic of frugality. They say something like this:
In this meme, like any good meme, different people see different things. A universal truth is that skipping that coffee purchases, even every day, is not going to make you filthy rich. We should all be able to agree on that.
But any habit change that decrease spending can then be pulled into the savings or investment bucket. And is thus a step in the direction of financial freedom. Not the same financial freedom of an Elon Musk, but freedom none-the-less.
Going back to my Groceries spending in the pie; during the COVID pandemic I started using Instacart. At first this was out of necessity as paying for the premium subscription provided better access to delivery time slots when they were limited due to the new found demand. More than 24 months (or 104 weeks to align with the table below) after the pandemic started and through some combination of inertia and convenience, I continued to use Instacart.
After seeing the details in my spending data, I did research on alternative services and ultimately shifted from Instacart delivery to direct purchases from a local grocer via pick-up.
| Instacart | Direct Grocery | Difference a.k.a. Savings | |
| Fee | ~$10/week | $0/week | $520/year |
| Tip | ~$20/week | $0/week | $1,040/year |
| Total | ~$30/week | $0/week | $1,560/year |
Some will choose to make fun of this discussion around grocery or coffee purchase habits. As this particular example shows; fifteen hundred dollars is meaningful to just about anyone. This ties back to the “lifestyle creep” piece — Instacart, for me, is a great recent example of lifestyle creep type spending that took effort to unwind.
Spending, and thus saving, is not entirely but very much in our control. Embrace that. As for taxes, well, Franklin’s right — not much we can do about them.
THIS ARTICLE IS PART OF THE 2022 FINANCIAL FUNDAMENTALS SERIES
EDITOR'S NOTE: Ken Burns and PBS recently released a new Benjamin Franklin documentary. The author recommends it highly.