Your spending answers the most important questions about your finances
Welcome to the fourth issue of Metrix that Matter, a weekly newsletter from WealthMetrix that helps you focus on what matters most for building and sustaining wealth. Every Saturday, we share an educational essay with actionable takeaways to guide you on your journey to financial independence.
Have you ever had to ask someone a question that you knew would make them uncomfortable? The kind of question that you need to ask, but is followed with an awkward silence before you get an answer.
Do you remember what you asked?
Was it work-related, such as asking for a raise or addressing a lingering issue with an employee?
Maybe it was about one of the “forbidden” topics – politics or religion?
Here’s one for you: Try asking someone how much money they spend each month.
Having asked this question plenty of times to current and prospective clients, it’s usually met with nervous laughter, concern, or a blank stare. Oftentimes, the question is answered with a variation of one of the following responses:
“Too much.”
“I have no idea.”
“Are we including Amazon deliveries or not?”
To be fair, asking someone how much they spend is a loaded question. Spending is personal and emotional, sometimes overwhelming. Many people feel guilt around how much they spend without even knowing the real number. They assume I’m going to immediately tell them to cut back and save more.
But that’s not the reason I ask.
I ask because your spending is the foundation for answering some of the most important questions about your financial future.
How much money do you need to retire?
How much should you keep in cash reserves?
How much life insurance do you need?
How should your accounts be invested?
All these questions require a basic understanding of your total spending. Yet, it’s the number most people know the least about.
This week, we’re exploring why your spending matters so much, and how to approach it with awareness rather than judgment.
What is your total annual spending?
To get started, it’s important to understand what makes up your total spending number. It is a combination of your annual living expenses and your annual debt payments.
Living Expenses + Debt Payments = Total Spending
There are two cash flow metrics that reflect the percentage of your income going into each bucket: Burn Rate (Living Expenses) and Debt Rate (Debt Payments).
Burn Rate (Br) is the percentage of your annual gross income being used for personal living expenses. This includes housing maintenance costs, food, utilities, subscriptions, entertainment, and all the day-to-day expenses that keep your life running. Burn Rate does not include debt payments though.
Debt Rate (Dr) is the percentage of your annual gross income being allocated towards debt payments. This includes your mortgage, auto loans, student loans, and credit card debt.
A couple weeks ago, I walked you through how to calculate both your Burn Rate and Debt Rate as part of figuring out your complete cash flow without creating a detailed budget. If you missed that issue or need a refresher on how to calculate these numbers, you can find that framework HERE.
Why your spending number drives everything else
Your spending isn't just about budgeting or keeping track of where your money goes. It's the fundamental building block that determines virtually every other aspect of your financial plan.
Almost every important financial calculation has your spending as the denominator. Let me illustrate with the four big questions I wrote earlier in this issue:
How much money do you need to retire?
The rule-of-thumb advice of "multiply your income by 10" falls apart when you realize that retirement isn't about replacing your income. It's about covering your expenses. Consider two hypothetical families who each earn $250,000 per year of income. The difference is one family spends $100,000 per year and the other spends $150,000 per year. Do you think their retirement needs will be different? Absolutely. These two families have drastically different retirement needs. Without knowing your spending baseline, retirement planning is just guesswork.
How much should you keep in cash reserves?
The standard advice of "3-6 months of expenses" only works if you know what your expenses actually are. Someone who spends $8,000 per month needs a very different cash reserve than someone who spends $4,000 per month. Your spending number tells you how much cash you need to weather unexpected job loss, medical expenses, or other financial emergencies.
How much life insurance do you need?
Just like with retirement planning, life insurance isn't about replacing your income. Instead, it’s about replacing your financial contribution to your family's spending needs. If your family spends $80,000 annually and $50,000 of that would continue even without you (mortgage, kids' expenses, etc.), that $50,000 becomes the baseline for determining how much coverage you need.
How should your accounts be invested?
Your spending patterns affect everything from risk tolerance to asset allocation, especially in retirement. Your spending number also helps determine how much growth you need from your investments to meet your goals. Someone with highly variable spending might need more liquid investments. Someone with very predictable, low spending will have more flexibility in their investment plan.
Your spending is the baseline that everything else gets measured against. This is why getting clear on this number isn't about judgment or restriction. It's about having the information you need to make informed decisions about your future.
What is a healthy Burn Rate?
Now that you understand why your spending matters, let's talk about what healthy spending looks like. For today, we’re just going to focus on Burn Rate, your regular living expenses. Next week, I will dive deeper into Debt Rate.
When I'm reviewing someone's financial situation, I'm generally looking for a Burn Rate below 50%, meaning less than half of their gross income is going toward living expenses. But your income level matters significantly when it comes to what's realistic.
The chart below shows average Burn Rate percentages based on income ranges:
The wealth-building pattern shown in the numbers
Notice the pattern? As income increases, the average range for Burn Rate decreases. It reflects a fundamental principle of building wealth: as your income grows, the key is to not let your lifestyle costs grow with it.
Most basic living expenses don’t need to scale proportionally with income. Someone making $500,000 doesn't need to spend five times more on groceries than someone making $100,000. When you can keep your Burn Rate in check as your income rises, you create margin in your cash flow, giving yourself the ability to direct money towards savings, investments, and debt reduction.
This is why lifestyle inflation kills wealth. Every time your income goes up, you have a choice: let spending rise to match it or maintain your current lifestyle and redirect that extra income toward your financial goals.
There’s another truth illustrated in the chart above too. If you're earning under $100,000, especially in a high-cost area, getting your Burn Rate below 50% may be difficult through spending cuts alone. There's only so much you can trim before you hit the essentials.
Instead, your attention may be better served by focusing on increasing your income. While there’s a floor to how little you can spend, there’s no ceiling to how much you can earn.
Sometimes the best use of your energy isn’t finding ways to cut another $1,000 from your budget, but instead finding ways to increase your income by $10,000.
Awareness, not judgment
Whether you’re working on the income side or the expense side of the equation, the good news is you don’t need perfect control over your spending. But what you do need is awareness.
There's a big difference between the two. Control implies rigid discipline and constant restriction. Awareness simply means knowing where you stand so you can make informed decisions when life requires them.
Your spending will fluctuate, and that's completely normal. You'll have expensive years and lean years. Your needs will change as you move through different life stages. Young families spend differently than empty nesters. People in their peak earning years have different priorities than those approaching retirement.
The goal isn't to keep your spending perfectly consistent year after year. Instead, the goal is to understand patterns. This allows you to recognize when spending is trending upward, make informed trade-offs, adjust when life circumstances change, and plan confidently for major financial goals.
The families who struggle financially aren't necessarily the ones who spend the most. They're often the ones who spend without awareness, making decisions in isolation rather than understanding how each choice fits into their bigger financial picture.
Focus on building awareness first, judgment-free. Once you know where you stand, you can make intentional decisions about where you want to go.
Next week, we’ll explore the other half of total spending, which is Debt Rate. As always, I will provide healthy ranges for debt and strategies for climbing out of debt. I will also discuss which types of debt should be prioritized compared to others.
WHAT TO FOCUS ON THIS WEEK
Calculate your Total Spending. Remember, this includes all annual living expenses and debt payments. Then calculate your Burn Rate by figuring out what percentage of your income is going towards living expenses (excluding debt).
Is your Burn Rate within the average ranges in the table above, based on your income?
Would you be better served by looking for ways to increase income or reduce spending?
Which of the four big questions above is most important to you right now?
ELEMENTS INVITATION
Thank you for reading. At the end of each newsletter, there is an invite to use Elements to see your financial metrics. If you are ready to gain more clarity into your financial situation, we invite you to click the link below to get started with Elements. You will be asked basic financial questions about income, spending, debt, and account values. The process takes about 10 minutes. Once complete, we will review your scorecard and send you an email to schedule a 30-minute phone call to discuss your situation, answer any questions you have, and see if there’s a potential fit to work together. This whole process is complimentary.
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