I try and think of every expense in my budget as a trade-off: if I buy this now, however small the cost, I will be delaying my financial independence in order to get it. Additionally, if I allow an expense to become a recurring budget item, my financial independence nest egg will require more savings and passive income to support that ongoing expense throughout my life. Despite how often I like to think of expenses in this way, I rarely do the math to break it down into real-life terms of dollars and time working.
The Real Math
Using a really cool new “recurring charges” tool on Networthify.com, it is now easy to calculate the true cost of real recurring expenses in my life:
- 1 extra meal “out” for lunch each week ($7/week)
“To generate weekly income of $7 with a withdrawal rate of 3% you need an investment of $12,133” (almost 5 months of savings at my current rate)
- Drive my car to town and back 5 days a week instead of 3 ($13/week)
“To generate weekly income of $13 with a withdrawal rate of 3% you need an investment of $22,533” (more than 9 months of savings at my current rate)
- Gym membership ($35/month)
“To generate monthly income of $35 with a withdrawal rate of 3% you need an investment of $14,000” (nearly 6 months of savings at my current rate)
- Monthly haircut at barber ($16/month)
“To generate monthly income of $16 with a withdrawal rate of 3% you need an investment of $6,400” (2.5 months of savings at my current rate)
This kind of specific math helps me realize what the luxuries in my budget actually cost me in terms of the time it will take to reach financial independence. Using just the examples above, I could reduce my time to finacial independence by 22 months (or more, when factoring in the power of compound interest), by eliminating a few luxury expenses and putting a little creative effort behind boosting my savings rate.
I’ve been pretty happy with my lifestyle and budget adjustments over the past year, but I know it is important to keep the momentum going and continuously evaluate how I feel about the value and power of my money and income, and remind myself of my goals. It is very easy to fall back on the societal notion that working a full time job your entire life is normal, and that spending money because you have it is expected.
In a sort of mental balancing act, I am also remembering that expense reductions aren’t everything, and my life will not be enjoyable if I don’t spend some time and money doing enjoyble and comforting things. I know that being too focused on not spending can be dangerous; I have a tendency to be slightly extreme, and I could be teetering on the edge of hermit-tude if I am not careful. I therefore try and remember how important friendships, relationships, family, and normal societal interactions are to me. When I start plotting the destruction of as many recurring expenses as possible, I strive to also weigh everything fairly, not just monetarily, factoring in my social as well as economic goals and remembering my core values.
[featured image author: lucidtech]