Saving, Spending and Counting up the Month
Hi Friendos,
A couple weeks ago I was talking to a neighbor about budgeting and FIRE. She was trying to figure out how much money their household actually spends each month but getting a bit stuck in the mud with accounting for certain medical spending. They put money into an FSA offered at her job, which covers some of their medical expenses, they have some out of pocket expenses that are partially reimbursed by their insurance company, and some things they pay for outright. So which month do those expenses belong to and should all the different transactions and reimbursements be counted? Here are some similar budgeting questions that I’ve seen come up:
- If I get cash from an ATM but don’t actually spend all the money in that same month, how do I count that in my monthly expenditures?
- How do I count something that I purchased in one month and returned in another? What if I only received a partial refund?
- I’m saving up for a big $1,200 purchase, so I’m setting aside $200/month for 6 months and then I’ll buy it. Should I count that as $200 spent during each of those 6 months, or just the one big purchase at the end?
For each of these scenarios, there are some approaches that are definitely wrong and a couple ways that are equally correct. The best approach depends on your goals for the expense tracking. Here I’ll lay out some of my own thinking on this.
Principle #1: Distinguish between saving vs spending
If you have money withheld from your paycheck that goes into an FSA, that is money you are choosing to spend on qualified medical expenses. It is use-it-or-lose-it, so one way or another, that money will be gone in about a year – you’ve chosen to allocate it to medical spending. For the sake of simplicity (see principle #3 below), I think it is easiest to count this as medical spending during the month it is withheld from your paycheck and then ignore any related transactions that take place later (ignore the specific expenses out of the FSA account when they take place).
What if your job offers an HSA? That money is yours until you spend it, so I personally would count it as savings during the month it is withheld from your paycheck. I’d count medical expenses in the month when you pay for them, even if you wait to reimburse yourself from the HSA account. If you know you will definitely be spending all the money you put into the HSA within the year and it’s easier for you to count it when it comes out of your paycheck, that is also totally fine! If you are using the HSA-as-retirement-fund-in-disguise strategy, definitely count the expenses when they take place.
Other paycheck withholding can also be classified as saving vs. spending. Taxes are spending because the money is totally gone. Retirement plan contributions are saving because the money is still yours, even if you can’t access it for a while. Insurance premiums are spending because the money is gone.
Principle #2: Each expense only gets counted once
Taking the example of saving $200/month for 6 months to make a $1,200 purchase…let’s say it’s to buy a plane ticket.
One correct approach: Count $200/month as travel expenses during each of those 6 months.
Another correct approach: Count $0/month for months 1 to 5 and $1,200 for month 6 when you buy the ticket.
Wrong approach: Count $200/month in months 1, 2, 3, 4, 5, and 6, and also count a $1,200 expense during month 6. That is wrong because that would add up to $2,400 total across the six months and the actual amount spent on the ticket is only $1,200. No double counting!
Principle #3: It is ok for simplicity to beat precision
A few months ago I joined my neighborhood food coop – the Windsor Terrace Food Coop is a delight! We offer a discount for cash payment because we save on bank fees and pass that on to shoppers, so I’ve been using a lot more cash these days. My typical pattern is to get $200 from the ATM, which covers 3-4 grocery shops. Sometimes I spend the $200 within two different calendar months.
Example: I got $200 cash in late August, spent $80 of it on groceries in August and $120 on groceries in September. Actually, my grocery transactions were slightly less than $80 and $120, and a small part of the cash went to a subway swipe ($2.90) and a bartender tip ($3).
My personal approach is to count $200 as grocery spending in August, when I got the cash from the ATM. This slightly overstates my actual grocery spend for August, and understates it for September, but I don’t care. It also overstates grocery spending by the $2.90 in transportation spending and $3 bar tip, but I don’t care about that either. I’m not going to write down how much I tip a bartender and if I get a receipt for the subway ride at all (the machines don’t always have printer paper in them) I don’t want to bother keeping track of it. It’s easier to just track how much cash I get from the ATM each month and know that almost all of it is going to groceries. I am still getting everything from the expense tracking exercise that I need.
I hope those principles help the next time you’re grappling with how to count transactions when you track your spending. If you have one that’s a real stumper, let me know and I can write about it in a future newsletter!
-Stephanie
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