586 | How to Do an Expense Audit

24:18Now, naturally, Jonathan, you have pets, I don't have pets. But of course, that is a line item that, okay, you can quickly see that on a on a budget template and say, okay, I have pets, or I don't have pets, something like that, right? Or I have rent, you have a mortgage. Of course, it's gonna be a little bit different at the margins. But in general, you're going to have housing. And that includes a whole bunch of things, right? Rent or mortgage, property taxes, insurance, any kind of HOA fees or things like that, maintenance or repairs, et cetera. You could even, depending on how you want to categorize it, I probably personally would put my utility bills in there.

24:53And even down to if I had a internet or cable or streaming, I'd probably lump that all in housing personally. I don't know where, how do you think about that? Yeah. I mean, you're going to have to account for it somewhere. And so you just, whatever makes sense to your brain. I would probably keep housing pretty relatively thin. In my mind, just housing is going to be mortgage and rent or rent, and then it's going to be property taxes, and this will be home insurance, and that's going to be any sort of HOA fees. And then if I had clear delineated things that were home maintenance type things, like maybe you do a lawn service or something like that.

25:30Got the pooper scoopers coming to get stuff out of your yard from those beloved pets, whatever it might be, or ongoing, you know, repair-y type maintenance things, projects of that sort. I'm going to group it there, but that's enough as a segment of the pie for me to then move over and try to put utilities, you know, separate. And I know you're right. I'm aware that you're like, well, heating and, you know, electricity and all these types of things, I'm probably going to keep them personally just in a nice utility category. Yeah, I think that makes sense. And I think it's also important to know that your budget is your budget.

26:03So if you're trying to avoid using the word budget, we don't want to shitter people. Your audit, your audit, right? The expense audit. Yes, for accountants everywhere. Okay. Your expense audit is your expense audit. We'll go with that. So, right. I think utilities is good there. But another one, for instance, with the yours being yours is transportation, right? So it's, could you with a straight face say that flights for your trips would literally by definition be transportation. Yeah, of course. But like, I probably personally would put that in a travel category, but would I get mad at somebody if they buy the book, put that in transportation?

26:38No, of course not. You got to have to figure out what, what makes sense for you. But yeah, I mean, transportation is, is the next obvious category. So of course, car payments, any type of gas, car insurance, repairs, et cetera. I think again, And it depends on if you're taking tons of Ubers and Lyfts on travel, I'd probably lump that in travel. If you take Uber and Lyft as far as part of your regular day-to-day life, which is not unreasonable for people living in cities or frankly, Jonathan, I'm even contemplating, we're contemplating going down to one car and maybe taking a couple Ubers or Lyfts here or there in the rare instance where two of us need a car at the same time.

27:16So that I probably would lump in transportation. So we're just trying to give a flavor here of like how you think through these kind of things. I think one thing that's probably interesting or useful to think about as you try to anchor yourself in general, and I'm going to try and standardize this on my own, but I think it's useful for people to think about is your per person cost. For instance, we're all going to have different cost of housing, right? And that's going to be dramatically impacted by cost of, you know, living in various parts of the country. But on top of that, a family of seven is going to have dramatically different housing costs than a family of one, family of two, and little ones versus the big ones.

27:56So with that in mind, I'm incorporating into mine a little algorithm to account for people in the household. So when you say things like car payments slash payments, but we don't need to get into listing all the individuals, just how much you spend a car, but it might be helpful to have it some way in your spreadsheet, some way of just making a note for this year, how many people does this food bill cover? How many people are represented by this housing cost? How many people are represented by this car? And thinking about per person costs is just something that it's a data point that might be helpful for you later when you're trying to compare your food budget to maybe someone else's food budget.

28:32Certainly, I agree. If you think about the college, Robert Farrington, the college investor, he notably, I remember him when he came on the podcast saying he just doesn't even have a car. He's just doing Uber and Lyft. So Uber and Lyft is his transportation cost. And that's a very interesting model. And I'd be curious if we saw this pattern where someone that has quote unquote exorbitant Uber Lyft spending has very minimal car payment, how it actually maps out. You get your great car that you've had for five years. What is the way? Should I lease a car? Should I have a payment on a brand new car because it's going to last forever and I don't have maintenance costs?

29:07No, I'm going to buy an old car and I'm not going to have a payment, but oh man, the maintenance on this thing. Versus, you know, there's this, all of these things are working against each other and it will break an individual human's mind, but you can start to look for patterns through all of this that actually can give you some pretty good insights. And yeah, probably unsurprisingly, you're going to find out that the five-year-old Honda Civic is generally going to be a good choice, right? These patterns will emerge, but it'd be cool to kind of actually see that actually happen. And then when you get to food and groceries, Brad, yes, there's your food, there's your groceries okay but then there's also your dining out it's probably going to be added in there you might want to separate it though because you're going from two three four dollars per person a meal to suddenly over here you have you know your friday saturday night you're at you know 12 bucks meal or 20 bucks a meal and then also is there something else where it's dining out is separate from night outs or something along those lines and this is a completely different thing.

30:01Dining out is Chick-fil-A and Chipotle. I don't know. Right. But I think this is one of the problems people have when it comes to these type of expense audits is it's easy to get lost in the complexity because like you're saying, and like we said for the last five minutes, some things can naturally be in other categories. Or I think about when I make a purchase on Amazon, it might be boxes of tissues and then jars of peanut butter or something like that. So like, where do I put that? Do I put it in the house? Do I put it in the food? And it's like, okay, let's take a breath and let's not get bogged down in complexity and let the perfect be the enemy of the good, right?

30:40And, and make you stop this. So like for me, I probably would put a lot of my Amazon purchases just in my food and in my groceries, because realistically, a lot of those things are going to be in there. I'm Jonathan, there's a line item for different home items. because we don't think about that also, right? Like a lot of what people think of as - Is toilet paper and paper towels, is that groceries or is that some thing that goes on top of groceries? Where does that go? It's a reasonable question and it's not an insignificant amount of money. So I think that's something that people often don't lump in anywhere.

31:15And I think that's a big mess. So clearly that needs to get line itemed in some way, shape or form. But again, if it's gonna take you hours to figure out, I have my Wegmans bill. I'm not gonna sit there and carve out like, this was laundry detergent and this was tissues, I'm just going to put it as groceries. So I think it's important to try to be directionally accurate, but also not get bogged down and complex it. And intellectually honest, that is not the same thing as perfect. This is the art of projection, right? Not the art of war, it's the art of projection. And in this context, I think you've already said it, don't let the perfect be the enemy of the done or the good or the tracked.

31:51We need to just get something that is representative. It doesn't need to be perfect in every single way. But the reason I highlighted that nuance is because you can lie to yourself that, oh, I don't spend anything on my grocery bill. It's super low. Well, no. Did you do a cow share and you had all of your meat twice a year and then, you know, you just didn't spend anything. Is that like, you can't forget that. And do you go out to eat twice a week in lieu of your weight? Well, that is part of your, however you want to do it. you need to be aware of these maybe things that you figured out. And it's not even to say any of those are going to stop.

32:24It's just to say, don't forget that because it didn't show up in the same pattern as everything else. You can wiggle and fudge around how many categories you need and how much additional nuance you need. And ultimately, the thing that we want to get towards is, is this a representative month? And so with that in mind, when you're doing an audit of your expenses, you need to be aware that not everything's going to show up every month based on how you do things. You do that subscribe and save. All right. So in that case, another feature that I'm adding into my expense audit, which you'll have to account for in your own spreadsheet, or you can use, you know, what I've set it up is I want to have the ability to do an annual override, right?

33:08So if I don't think I'm going to be able to target the amount of spending this month, but I need to be able to have some sort of lump sum to throw in a category to say over the year, it's probably this and then move on. I'm going to have the ability to go do more options, annual override, and then have it then derive or compute the monthly amount and then just move on with my day and have all that kind of taken care of. You need to come up with some version of that because you will lie to yourself if you just say, well, I'm going to do all the expenses this month and anything that didn't land this month to make that's not the point.

33:41The point was not for you to get the number as low as possible. The point was for you to find out how much a representative averaged out month of your life cost using the tool of the fact that a lot of expenses do land every month. So we can front load a lot of that work and a lot of that energy. Yeah. Life is lumpy, as we've said many, many times here. And there are expenses that will hit only once or twice a year to exclude those. Because really, we're trying to do an audit of your what is my life cost in an entire calendar year. And you need to get as close to that as you possibly can. And if that means it's going to take you an extra 30 minutes or an hour to figure this out, well, you're going to have a lot better data.

34:19So I think it's really important. Jonathan, the next couple of items would be health and medical. So health insurance premiums, you can put there, medication, even supplements, things like that, medical devices or glasses, et cetera. But this is a really important one to slow down on, Brad, because some of these now for the first time, they're not actually hitting your monthly cost. They're a payroll deduction item in some particular cases. So it does have a cost, but before your income comes home, you don't really see it. Should you make any sort of accounting for that? Should you only include health insurance costs that you have to pay out of pocket after the fact?

34:58There is a little bit of nuance here when you're talking about, are there things that I pay for through work? Should I be considering that as part of my expense audit. I would say yes. Maybe that's the accountant in me, but I would say yes. So you are spending that money. If it's coming out of your, it's like arguing, I'm not paying taxes because it's coming out of my payroll at every period, right? Like, no, you are, I promise. It's just that it's getting allocated before it sees you. It sees your bank account. So I think clearly in that case, if you're paying health insurance premiums through your payroll deductions, that's got to count.

35:34If you shuttle money into an FSA or an HSA that you're actually utilizing, not if you're doing it like an HSA for tax purposes and it's going to grow and compound for 50 years, separate issue. But if you're putting it into something akin to an FSA where you're spending that money in this given calendar year, those are medical expenses. You have to include that. Wow, man. Yeah, this is great. All right. So actually you said something there and I'm not totally surprised, but at the same point, I think people were like, wait, rewind that. What did you say? One thing I am not doing and you can do whatever you want, but one thing I am not doing is the point of this is not actually my financial independence plan.

36:10I am not looking at my income, gross income, whatever. But Brad, you have made an interesting thing and I think we should get in here. It sounded like you were saying you would include taxes that you pay on your income as part of your expense audit. Can you clarify that? Was that actually what you were saying? Well, it wasn't necessarily, but I probably would track my tax liability just because I'd like to have a sense of it. I think, frankly, as we've discussed so many times, Jonathan, I think when it comes to financial independence, when my income is zero, I think I can manage my tax liability down to almost nothing.

36:46So I don't want people to make the mistake of, hey, I'm tracking my tax liability in 2026. And I'm going to assume that that's going to be my tax liability when I reach FI and I have no income. I don't think that's the case at all. But I think frankly, it would be really nice because you know, we've talked about this so many times, how many people get confused when it comes to taxes. They have no idea what they're paying. A lot of people frankly think they're paying dramatically more than they're actually paying, but regardless, it's neither here nor there. Just having a sense of what does your life cost, I think gives you clarity.

37:20And I think that is very, very important because you're on a 10 to 15 year path to FI and you know, your gross income, that's just an obvious number. They tell you that when they hire you, right? But if you don't have any true sense of what your tax liability actually is, I'm not talking about your withholding, I'm talking about your liability. That's the expense, both payroll taxes, your federal tax liability, your state liability, et cetera. These are numbers you should know. So I think, does it provide us insight, Jonathan, today for what's my fine number? No, it doesn't. But I think it's important to know.

37:53Yeah, I think I'm going to devil's advocate on this one and go in a slightly different direction. We're talking out loud here. Brad and I did prep for this, but we didn't necessarily agree on that. We're going to agree on every talking point. So this is just the point of, you know, going to different directions and we'll see what sticks after we've both had time to digest and think about it. Maybe after the episode comes out and we hear your feedback, I would make the case that yes, absolutely. We need to account for taxes, but not here for a couple of reasons. One, we don't actually know how much we're going to spend in taxes because this is a projection.

38:24If you're just starting and our decisions that we're going to make on the back end of this are going to directly influence. So it's really more of a point of when we get to the end of the year, we want to go back and update our work here and maybe compare what we projected we would spend to what we actually spend on the back end of having a financial independence plan. We want to record an audit of what we wanted to do versus what we actually did. And at that point in time, we want to record how much we paid in taxes, but that's not a projection. that's a a note on a log you know in the spirit of gamification and tracking our progress right right right so that yeah an accountant speak you'd be truing up a number on your projection to uh true it up to what the actual is so yeah i like that because as you said things that we do like let's say putting money into a 401k or a traditional ira or an hsa lowers our taxable income in the current year and as you so aptly said we will not let's say for 2026 you won't know what your tax liability is for your 2026 income until you file your tax return in most likely by April 15th, 2027.

39:32So at that point, yeah, you would, if you were making wholesale changes, if you were dramatically adding to these pre-tax buckets, then yeah, you would expect. So for someone new to five, for instance, it would be easy for me to just say, Hey, most likely you're getting ready to file your 2025 tax return. If it's not filed already, it's going to be filed in the next 60 days. Just go to your 1040 page to find your tax liability and write that down. But if you're new to FI, there is a real high likelihood in 2026, you're going to make big changes that are going to lower your tax liability because you're probably putting dramatically more money into these tax deferred vehicles, like I just mentioned.

40:09And Jonathan, I think that's a brilliant point. I think what would be really clarifying again is April 15th, 2027 to say, oh, look at what my 2025 liability was, which I projected for 2026. And look at my actual, look at what a difference this made when I made these changes. Well, that's the magic of what's happening right now with what we're talking about, Brad, is that now as you and I have the opportunity to discuss things, we then go build it. Right. And so what we want is this should all be easy. Like we're at the, we're this 2026, This should be not as difficult as it was in 2012 when we had to look at the spreadsheet heroes that could master Excel and Google Sheets.

40:48Now, wouldn't it be cool if we could just have small building blocks? We take the small step. And right now, it's a little difficult, but it's not extremely difficult just to work through the nuance of what we're talking about. Do this part. Do the next thing and the next thing. That's all we're going to do. And if you do this thing and you're doing it with us and you're participating in the show or you're doing it through a 5101. one, but even if you're on your own, but if you do it and you have that data and it's good, it's good data. Then when we come to the next part, which you can already see it's going to happen, then we can build on that.

41:20And then when you're doing it year over year, now you have a log. Now you have a record. Now you have the historical data to show you definitively your tax rate over time and to start to point out the patterns that are going to become more obvious as we all get better at this together. So Brad, I think what we're, this is the heart of it though, That could be confusing. And what we're saying is we're not doing yet an entire financial plan. We're doing this piece that everything will build on. And there's a couple other aspects that you mentioned there that are super important. Things like, and I think you nailed it.

41:54If it's an FSA that you use every year, use it or lose it, all right, cool expense. If it's an HSA, and this is my big one, your savings, your investments, your HSA contributions that are being done to investment should not. They are not expenses. In my mind, they should not be included on this. We are trying to find out what our life costs. If you are saving this for your future, it's by definition on the other side of the ledger. It's not a part of this equation. We want to keep this scoped on what it is our life actually costs. Yes, wholeheartedly agreed. If you're doing an expense audit, savings do not, they simply do not count as expenses.

42:35If you're someone who wants to track every penny and spend 30 hours doing this, and you want to go from your gross income to where did every dollar go? Well, that's a totally separate exercise. That's not what we're talking about here. That's not going to really appeal to everybody. But I mean, Jonathan, that'll appeal to 5 % or 10 % of our community who just loves the spreadsheets. I get that. But yeah, that's outside the scope of an expense audit because really we're just trying to prove ultimately at the end of the day, what does your life cost? And then you can look at your income and really simply just subtract the items, right?

43:09My gross income minus what does my life cost equals my savings in essence. And that should be pretty darn close. Yeah. Now, if you have things like tax prep services, that's an expense. If you have things like charitable giving, that's an expense. Now, there's a whole separate conversation on how you're going to handle that and what it's going to mean in terms of a financial independence plan, which we won't get into right now, but certainly that should absolutely be included. Charitable giving should be included on your expense audit. If you have things like local property tax, that sort of thing.

43:41If you have property tax, that's an expense. Like you need to understand this is the nuance. That is something that you are going to have to pay every single year. The little notes I was making around your federal income tax and maybe by extension, your state income tax, but your property taxes and probably to some lesser degree, depending on how your state does it, your local. There's some fudge here, right? Depending on how your taxes are accrued, that should probably be considered. The category that will also trip people up, Brad, but I think it's important is now we need to go into debt. Debt is an expense.

44:17Debt should absolutely be factored in to your expense audit. But using a standardized category for it, we all need to be intellectually honest and say that most debt, if not all debt, is a time-bound expense. And you could also make the case of mortgages as well. So maybe you would even separate out mortgage versus rent for that reason. Or maybe you just keep it together and later you clarify whether it's a mortgage or it's rent. I got to think through that one a little bit here. But time-bound expenses should be noted, especially as we move from a static fine number to more of an effective need number.

44:56We just want to make a note of that and we'll come back in a future conversation and we'll talk about what we can do with that. But we do want to know what is our payment on our debt. Yeah. And obviously you are somebody who famously paid off a whole boatload of student loan debt, $168 ,000. And I would be interested in your opinion on this because, right, like as you said, to you, it's self-evident to include that amount in your expense. And I would definitely argue that we need to account for this somehow. But there's an interesting nuance, right? In that, okay, well, let's just look at credit cards.

45:32So let's just say you opened a credit card on January 1st, 2026. This is the only credit card you've ever had. And you logged every charge as your expense. Okay. So let's say you made$2 ,000 worth of charges in the month of January, right? I would personally put that down as$2 ,000 worth of expenses in the month of January. Now, if I don't pay it all off, right? If I don't pay my bill on time and in full every month, well, then I get charged with interest expense. So in that case, I would actually just add the interest expense as my additional expense, because otherwise you'd be double counting it.

46:13So that's an interesting. This is why we're doing the nuance. All right. So everything you said is obviously like correct in its own way. It doesn't mean that we all would have done it correct, or we would have known how to handle it. But that is by miles, the trickiest thing to navigate in terms of thinking it through. I have struggled with that understanding that double counting YNAB struggles with that understanding Monarch, all of the budgeting tools struggle with the double counting issue that you're speaking about right now. And so for our purposes on an expense audit, when I said debt out loud, I wasn't even thinking about that.

46:45I was thinking about student loan debt. I was thinking about mortgage debt. I was thinking about the boat payment, the furniture that's been financed, whatever it is, the car payments, these sorts of things. But then if I'm being intellectually honest, also outstanding credit card debt. So I think now we got to hit a fork in the road where we talk about this and we're speaking now to two completely different people. First off, if you, and you should be, table stakes here, we're talking table stakes moments, highlight this, write this down. If you are capable at this stage in the game of paying off your credit cards on time and in full, every month, full stop, you should just be doing that.

47:21And then everything else I'm gonna say doesn't really matter. That's what you should be doing. And so in that context, we can keep credit cards almost irrelevant. We just look at the credit cards just for the purposes of finding out our expenses to find out how much we cost. What Brad is talking about, rightly, so is when the lines get blurred because you almost paid it off this month and then you almost paid it off next month or you had some small amount. So here's now, let's differentiate in these two categories. First, can you pay it off? Okay. All right. Pay it off. Next, can you pay it off pretty quickly?

47:53So we're talking about, let's move away from these bad habits. This is going to be one of your massive action steps. We're not going to keep paying interest because we just thought it was optional and we didn't think about it. No, no. We need to get to the point where it's on time and in full every single month done as quickly as possible. But now we're over here and I got$10 ,000. I got$15 ,000. I got 30 ,000 of credit card debt. Like, you know, you're coming in and maybe you're halfway through a Dave Ramsey program or something like that. Or you were trying to just do better with your money and you found us at the same time.

48:23And you're, how do I, I got to deal with that. In that context, this comes down to decision fatigue. I, in my mind, this is don't let the enemy be the perfect of good. I would almost just say, no, you have a debt problem. Stop using that credit card. Move over to something new that you can pay off on time and then full. And let's figure out a way to handle this debt in a way. Again, look at the debt plan. This is a debt plan. We should not be conflating monthly expenses with a debt problem. You have a debt problem. Keep it over here. Find a way to stop using it and go over there. You've lost the ability to use credit cards because for six months, you've not thought that this is a hair on fire moment.

49:01So that's kind of how I would do about it. This is something we have to fix now. Yeah. And we're going to deal with debt here and expenses over there. I like that. I like separating. And yes, of course, it's very important. We say repeatedly, do not use a credit card unless you can pay it on time and in full every single month. Thankfully, the FI community, we're people who are striving to have significant assets. We're getting to the point where a couple thousand dollar credit card bill or whatever it is, X number of dollars you put on your credit card every month, it's paid off on time and in full very easily.

49:30This is not an issue. Now that said, Jonathan, as you so aptly said, there are a lot of people coming to our community who are coming in and they're coming in with debt. I agree. I look at that differently. So that is like, to me, that is like one number. That is an expense that similar to a car payment. Okay. That let's say you have a$30 ,000 car payment and it is$500 a month for five years. Yeah. I would put the debt payment of the$500 per month, that would be the expense that I would put down. Again, the accountant in me could say something silly, which would be so ridiculous, like, oh, well, some of that is residual value.

50:08That's not how the world works, right? Just like student loan debt. Well, it's itemizable. Have you factored that into your creation, Mr. Tough Guy? Got it all figured out? So yeah, clearly for car loan, I would put that all expense. For student loans, I would put it all as expense. If you're coming in with credit card debt prior to finding FI and you have this amount and you have a plan to pay it off and you're paying a certain amount every month, or even if it's variable and that amount gets paid down eventually to get you to zero, I would put that monthly payment as my expense every month. I think that's reasonable.

50:39I wouldn't split it out. At that point, all that stuff you bought on there was complete junk anyway, frankly, and it's not worth anything. So every dollar you pay towards that as expense. So yeah, let's not get bogged down in detail. For most cases, every dollar you pay down on debt, you're just putting as your expense here. Now, we could make an argument about a mortgage payment because there's some of that amount is paying down principal. I think people of good faith can argue about that. I probably would almost count my principal amount as savings. But the easiest way is to just say, hey, look, this is what my life costs.

51:12My mortgage every month is$1 ,600. The easiest way is to just say, all right, look,$1 ,600 a month goes on my expense audit as my expense. Yeah. So Brad's giving you a way to handle this. If you're doing this just on your own to handle these mental models and these decisions that you need to make, I, with what I built, I'm going to try to just standardize it. So you don't need to think about necessarily what category to put it in with the tiny, with the large exception of, you know, the credit card debt, where it's some of its expenses, solve that. But, you know, to the degree that you're able, I'm not going to try to tell you exactly what perfect looks like outside of what we've already done.

51:48But what I would say is even based on this conversation, originally I had mortgage and rent, just one light item. I'm going to separate out mortgage from rent. If you do mortgage, I'm going to carry that forward along with car payments and then along with any sort of other debts that you may list. Because in a future chat that Brad and I have, we're going to then talk about managing debt. We're going to talk about how these payments, et cetera, influence. So you don't have to actually get it completely perfect right now. I would say with the mortgage in particular, to Brad's point, I would include your principal and interest.

52:22If you have a mortgage, don't include your property taxes and your home insurance. Let's say you do escrow and you just have a payment. Spend a little bit longer to get that extra amount allocated out of there. Why? Because even after your mortgage is gone, you're going to have property taxes and insurance. Your mortgage doesn't go to zero, at least in terms of housing costs. No, you just eliminate the principal and the interest. So we'll separate that out. And then also for the other types of debt, what we'll do when we build on this, as we start thinking about debt management, we're going to carry all these other categories forward.

52:55And then we're going to get additional information like interest rates and balances and principal and payoff timelines. And then we'll be able to run various things like scenario. And then we'll be able to come back after the fact and say, all right, over a timeline, what does that do for my expenses? Right. I love that. And that's all the fun stuff. But really at its essence, what we're doing here today. I know you and I are having fun getting a little bit bogged down because that's the interesting part about this is there is some nuance to it. I'm trying to anticipate the questions that would come in via email that someone said, but you didn't mention XYZ.

53:28Yes, I did. Yes, I did. Did you listen to addendum 47B hashtag A? It was clearly said there. Yeah, but you're talking 40 words a minute. Well, you had me on 3X. Oh man, I would be frightened to listen to you in 3X. But yeah, the nice thing is don't get bogged down. Just make this happen. And that's the important part. Because you'll get better at it, right? Like even if you do this like badly next year, you're going to be way more in tune with your finances and you'll know whether or not that was a real projection. You can do it again or you can update it as you get more information. Definitely.

54:00I love it. So, okay. We talked through debt. You know, obviously there are different insurance policies that you have. I think we would probably put medical and car in their own separate categories, but maybe you could lump it all in insurance if you wanted, but you have life insurance, disability, long-term care, umbrella insurance is something I have. And then we get down to children. So childcare, education, different sports, et cetera. Pets are another thing we mentioned earlier. There's plenty of line items for your pets if you have them. What about gifts? What about birthday? Hey, my son has tons of friends.

54:32Great. How are those birthday parties working out for you? Yeah. I mean, that's, that's kind of count too. I mean, that stuff adds up, or I think we give little presents to each of the kids, teachers at holiday time or whatever, and, or teacher appreciation day, like that stuff does add up. And yeah, it's important. It's important just to have a sense of really like, what does my life cost? Because also we're trying to project eventually for five, right? So like the X number of dollars that we spend on teacher presents or kids birthday presents, that's not going to be there in 10 years. That's a season of life thing.

55:04All right. So Brad, that kind of goes through the line items. Now you have a spreadsheet that you've been, you know, you worked on and you shared with people before, and then we have the various tool that we talked about here and individuals might've said we've missed stuff. You know, absolutely. There's, there's things that we didn't cover, but, but what we were trying to do is just paint a picture for you of where to look for creep because it's actually going to happen. So real quick expectations for this episode, Brad, someone wants to take action on this. They're going to do it with us or maybe years from now they're doing it after the fact, what should they do?

55:35Yeah. Well, for me, it's a click on one of those links that we put in the show notes and get started. So I think what I personally would do. So for my own expense audit, which obviously Jonathan, we said, we're going to do this. Everything in my life runs through my checking account and everything in my life runs through my credit cards. So the vast majority, just about everything will be captured. If I just look at a few months of those two items, essentially credit cards and checking account. But you brought up a great point. You're not just limiting your scope to the statement from this single month and anything that hits from February one to, because someone might say, hey, I wanted to do this month long challenge, but it's already the 15th.

56:15No, I mean, let's not get bogged down in, oh man, I missed it by a couple of days. That's not what we're talking about. You need to take action for you, not because Jonathan and I decided to come up with a challenge. We'd love for you to be part of it, but you need to take action to make your life better. Let's be entirely clear. So don't get bogged down in that. But yeah, do I think one month is representative enough for me? I don't. And especially in this day and age where you can download account activity so easily. So I go into my Chase or Capital One credit cards. You can really easily download account activity.

56:47You go to all transactions and then you can get a CSV file or an Excel file. It's not like you need to sit there and meticulously type down every single expense. You just download the thing and then you just sort it. And like I said, I'm going to do that in my bank account as well. I'm going to download an account activity and just kind of sort everything. And then just my, the time that I'm going to be spending is just then moving those things into different categories. I think honestly, Jonathan, I think this can be a pretty fun and easy exercise, but every person needs to know like, where did they run their life through?

57:21I think for most people, it's going to be checking account and credit cards, but who knows? Maybe some people, it would be silly to say, oh, I'm not going to consider how much cash I spend. If you're someone who spends actual dollar bills, like I frankly don't spend a dollar bill in a six month period. So that's irrelevant for me. But if you use a checks or a debit card, I mean, all of that should wash out in your checking account, but just be reasonable for where do you actually spend money and track it. And I think for me at the minimum, I'm looking of two months, but I'm probably going to really eyeball three to four months, I think.

57:56Okay. Yeah. And that sounds reasonable to me. I think one thing is just make a list of the things that are variable versus the things that are fixed, right? And those are just two different things. If you pay a set amount for something, then great, use that. But if it's a variable one, you're going to want to do some sort of averages when you're doing something for projection. Take a look at every subscription, every recurring service. Be mindful of those things that you have that are subscribe and save. And they hit once every six months or once every eight months. Do you really need any more air filters?

58:29You don't change them to begin with. Go change them. Do you really need to restock? All right, speaking of myself there. And then, you know, various, however you're going to do the tools, that's completely fine. But now that we have that, and we'll come back to this, we'll pick this up, but I'm going to spend a few minutes here. We want to actually take a look. We want to categorize, yes, by category, but then there's two different ways that we want to categorize things. One is required versus one to haves. And keep in mind that that's not an entire category in terms of the entire category is required or the entire category is one to have.

59:06It actually can apply to each individual line item as in, I have to have this amount of money every month for food or it's just not going to work versus life's a little bit better when we have this amount, right? Right. Like that's the sort of thing. Just want to pay attention to that, you know, as a detail and you can decide which one you actually use there, but you want to, you're not necessarily just trying to say, this is the minimum we can spend on food, but this is maybe, you know, what we want to have. And this is a different way of looking at things and you can apply the model that fits, especially as you get out of the core categories, you know, what you're spending on your housing, what you're spending on your cars, what you're spending on your food, you know, housing, food, transportation.

59:44Now you're getting down to these, you know, lower tier things, some of these crept in, this is where we really want to, you know, Brad, use that phrase, the valuest, frugal, cheap valuest. Well, when you're looking at these lower tier items that take up all the remaining space on your expenses, we want to start thinking about things like how much value do I get out of this? If nobody was watching my life whatsoever, would they even know that I was paying for this or getting any value from it? Would my life change one iota if it went away? And here's the cool thing, especially with a lot of these, you can just test it.

1:00:19It's very easy to cancel. Well, maybe it's not as easy to cancel as it is to sign up, but it's very easy just to drop them and see what you missed, right? I mean, this is the thing. We want to do these tiny little test of, all right, I was on eight streaming services because free trials and now I'm down to one. I still don't watch it, right? Do you remember when you had 600 TV channels on and nothing on? still nothing on. Brad, I mean, you got to use this value matrix to take a look at where your economic output is going. Yeah, I think it's important. And yeah, like you said, there's almost no decision that you make in terms of canceling for a time that is irrevocable, that you just simply can't go back.

1:00:59So why not err on the side of, okay, I'm going to cut until I can get to a point where I'm starting from ground zero and then I build back into my life the things that add value. And I think streaming services, it almost sounds like a cliche at this point, Jonathan, but it's a perfect example because I think many of us have legitimately three to five of these things at any given time. And realistically, you're not watching three to five streaming services in a given month. Most of us binge something and that's usually on one particular service. So is it unreasonable to cancel the other four for that month, just use that one and then move to, okay, I'm done with Netflix for this month.

1:01:43I'm going to open up Hulu and watch whatever. I think that's a very intentional decision. Obviously, that's a little bit outside the scope of this expense audit per se. But I think, Jonathan, what's so beautiful about this is there's an interplay with all of this. This is fi, right? There's an interplay with how much I'm saving. It would be silly to not include, okay, if you cut expenses, it's going to change how much you can save. It's going to change how much your fine number is. And there's an interplay with everything. We're talking about a very simple exercise here with the suspense on it.

1:02:14But I think at the end of the day, what's going to happen is it's going to change your behavior. And I think that to me is the clarifying beauty of this is, all right, what do I value? I'm going to spend significantly on that. And then I'm going to cut everything else really significantly. I, that's how I like to live my life. Yeah. For us and our family streaming services. I mean, we have Netflix. We have Disney and ESPN and Hulu because I guess for two months out of the year during Wimbledon and the Australia Open. Well, that's it. I mean, that's it, right? You just, for us, I don't need streaming, you know, year round and you don't need eight other services.

1:02:53So if you only need to have streaming for one or two months, cause there's a couple of events you want, you just sign up for it and let it go. It's fine. A lot of times, not with Disney. I can tell something, immediately the thing is, hey, we'll give you the next three months for$2.99. If you do that, remember you're back on another hidden trial, sneaker snicle. So just be aware of those. But the value matrix, Brad, if you think of four quadrants, I think this is useful, right? So first we go through, we create that monster list. Then we identify and just pull off the top so we don't need to think about it really anymore.

1:03:25These are just required things. We don't need to spend any more brain power on here. Let's take the rest and let's throw them on a value matrix. And here are the various quadrants to look at. Top left, have to think about left, right. Is that stage left? Top left, high joy. Top right, low joy. Bottom left, yep. Essential, bottom right, eliminate. Now imagine you could just take all of those and everything had to fit into one of those four quadrants. If you're doing a spreadsheet or a paper, paper you're at a disadvantage, just cut it up. Make a copy, cut it up. And it's gonna go in one of those, right?

1:03:58This is going to be something that brings a lot of joy to your life. Do not lose that. If you do something for your kids and it's an ongoing expense and it's a high joy thing, conversely, if you're taking them kicking and screaming to something because you're trying to make the grandparents happy about something else every single time, decide whether it's high joy or low joy. Decide if there's a return on the hassle that's involved with it. Should you be paying money for something that at the same time is wearing you down and adding stress to your life, you need a way to categorize these because not everything's going to come with us to this next chapter in our life.

1:04:34But we do not want to cut things that are bringing a lot of joy. We're not just doing a budget to do a budget stake. We're designing a life that we're excited about living. We're just cutting ruthlessly in Brad's words, the things that we don't drive enough value from to keep going. Yeah. Yeah. And I think that's important, right? So the path to FI is not about deprivation. It's not about being a miser. There's nothing negative to me about financial independence. I know in the past, we've seen caricatures of people in the FI community. We've had these terrible stories in the Washington Post about brown bananas and other nonsense, but that's not how we really live.

1:05:10As Jonathan, you're saying, we're searching for joy. We're searching for value. We're searching for wonderful lives and we're trying to build them from a place of financial stability. And in that financial stability, you have to understand there are finite resources. If you were making$2 million a year, you wouldn't be listening to this podcast, right?

1:05:33If you, if you, you've got, you've got a real problem. Let's be honest. But most people have to make, have to make decisions based on scarcity and based on, okay, there are finite resources. This is the essence of every decision in life. There are finite resources. You have to make decisions. Okay. And very simply, you can't spend every dollar you make because you are going to be poor for the rest of your life. So you have to make a change. If you're coming in here, saving 0 % of your income, you need to make changes. All right. I'm not going to sugarcoat this for you. You need to make changes.

1:06:06And I think finite resources helps clarify, what do I value? Jonathan, do I value my freedom? Do I value Phi? Do I value that more than buying new throw pillows or things to put up on the wall? You bet your ass I do. It's not even a question. So for me, the clarifying question is, what am I looking to get out of this? What's my North Star? Is it freedom? Is it time to spend with people I love doing things that I want to do? That's worth more than any material good to me. So I'm gonna make those decisions and that's why I save money, frankly. I think it's important. Man, we could do multiple episodes on this, obviously.

1:06:43I'm tempted. I'm looking at the clock right now. I know we're running out of time on multiple levels and so let's just see with how we wanna go about this. I think everyone is kind of on board. They get the fact that the conversation is now more so than ever really continuous, right? When we pick back up, we're picking up where we left off. We're incrementally going through the playbook, the table of contents of the financial independence community. We're inspecting it in our own personal lives. And we're doing our best to convey it in a way where you can apply it to your own life, wherever you are at starting out or maybe well on your journey and derive value from it.

1:07:14Enjoy the process. And so this feels like a natural segue for us. When we come back next week, Brad has an awesome conversation teed up with Andy Hill for Marriage, Kids and Money. And then we will be picking up the following week, this conversation, and we're going to be going through, okay, maybe you have some numbers. And actually, let me just point out, that's given a bunch of you a chance to make moves on this. And if you have taken that week and done a significant amount of action, if you have joined the challenge, if you have gleaned some insights, we would love to carry whatever insights you've gleaned from your chance to start working on this into that episode.

1:07:52This is intended to be fully interactive. So go to chooseify.com slash log in, participate how you want to participate, do the money challenge, do the money audit, and then let us know what you're finding along the way. We're going to incorporate that. But I would say one of the, you know, in terms of things that we have to do as we progress through this roadmap, we're going to keep looking for those leaks that are going to come up as people talk about what they find, you know, so we can optimize this, standardize this. We're going to be talking about how to reallocate, right? So what's the point?

1:08:21What do we want to do with this? What didn't make the cut? What was low joy that didn't make the cut? And were there any hidden expense traps that we should be aware of that all of us can actually think about? We can also think about, all right, well, we had things that were, you know, essential and we had things that we need to eliminate. We had things that were high joy and we had things that were low joy, but then we had this gray space where kind of required, kind of needed, but we know it's not optimized or we suspect it's not optimized. So let's spend some time there thinking about how to optimize those.

1:08:49And that's a great place for crowdsourcing, right? Whether you're talking about cell phone bills, internet plans, fees, insurance over coverage, convenience creep, car costs, whatever it might be. Transportation and housing are huge levers, but they're also harder to change immediately. But lattes, while they're easy to dismiss, Brad talked about at the beginning, find$100 a month, that's a$90 ,000 swing. I wonder how many of those we can aggregate together. The aggregation of marginal gains is huge here. And then as we build on that episode, we're going to springboard our way into actually looking at, okay, we got all this.

1:09:28What do we got to do? what do we got to do about the debt? And then for those of us that aren't as worried about that, what do we got to do next? So we're going to really keep moving with this. And for those of you that have been with us for a few weeks, you're going to be able to identify out loud. All right, discovery. Okay. Awareness. Okay. I'm working on control right now. Right. Last week we talked about, this is a framework for saying I'm in control. Well, this is the move. You understand this is the first massive move. All of the decisions that you will make that will definitively say you're in control are going to be predicated on this audit that you're doing right now.

1:10:03You're making moves. I hope this episode was enjoyable for you guys. We're thrilled that you're here. Take action this week, whatever it looks like for you. If you want to join us in the community, if you want to discuss this episode, again, you can go to chooseify.com slash log in. The fire is spreading, my friends. We'll see you next time as we continue to go down the road less traveled.

1:10:28Thank you.