Level 1 – The Basics – Spending

You are on part 5/9 in the Level 1 – The Basics series. Next up: Debt

1. Why Retire Early?
2. The Basics – Overview
3. Income
4. Savings
5. Spending
6. Debt
7. Investing
8. Withdrawal Stage
9. Your Life In Retirement

Directly tied to the concept of savings rate is spending. How much you spend drives your savings rate. Your savings rate and income level drive how quickly you can reach financial independence. Not rocket science, but some never put all the pieces together. I view saving in three buckets:

• Big Ticket and Bills
• Discretionary
• Experiences and Entertainment

Big Ticket and Bills.

This bucket is by far the largest and includes things like housing and utilities, transportation (payments, maintenance, insurance, and fuel), food, personal insurance and healthcare. According to this data Data, these items add up to approximately 81.5% of the average American’s spend!

This bucket has to be optimized!

Let’s walk through each of the above and see exactly how they relate to each other.

Housing and Utilities. For most folks, housing is likely the single largest spend. Everyone needs a place to live, so spending money here is understandable. However, spending money on housing is a slippery slope. Some things to consider if you decide to buy vs. rent. 1) Your house is not an investment. Jim Collins does a great job of outlining why here. 2) Most people buy a house without thinking about the associated money implications. The monthly payments are one thing, but what about furniture for all those empty rooms, the repairs and maintenance which burn through both time and money and don’t forget that utilities for each extra square foot add up quickly. 3) The location of your home will likely define your lifestyle, and subsequently, the state of your long term health.

I’ll talk more about why your house really isn’t a great investment in detail later. For now, just read the Jim Collins article linked above. He is the best, and outlines pretty much everything you need to know regarding this issue.

Let’s walk through my second point above, the associated money implications of buying a house.

Furnishings. Let’s just say you buy a new house, but have almost no furnishings for it. Along with a big chunk of cash you had to hand over as a down payment and the lump sum paid for closing costs, you’ll likely shell out another $3,000-$5,000 per room to furnish. No one wants to buy a new home and not properly furnish it. Humans are stubborn and feel that if they own a home, it needs to look like a magazine ASAP. It’s a psychological effect that is very hard to fight. Over the first few years of owning a new home, you are likely to spend $20,000 furnishing the home. The value of that $20,000 over 20 years at 9% market gains? $112,000!! This doesn’t even cover the replacement costs of said goods along the way.

Now let’s look at utilities. Specifically, electricity. Buying a reasonable home in the 1,000-1,500 square foot range, you might expect an electric bill around $100 per month (data). If you had bought that home the bank said you could actually afford, you might have gone for something in the 3,500 – 4,000 square foot range, and the associated $147 a month electric bill that comes with it. A difference of roughly $47 a month. Add in gas and water, and the difference between the two houses should come out to around $140 per month, or roughly $1,700 per year extra on electricity, water, and gas for the bigger home. Or, nearly $34,000 over a 20 year period. These extra costs associated with buying a bigger house sneak up on most folks. Most people only look at the bigger monthly mortgage payment, and don’t fully consider the ancillary cost associated with a bigger home. The real cost of these larger bills over 20 years at 9% market gains? $94,800.

Between higher bills and furnishings we have missed out on more than $200,000!!

Last thing I will mention is my third point above, regarding lifestyle and health. Not only does the location of your home dictate the commute time for your job and the cost associated with it, Mr. Money Mustache outlines the true cost of commuting here, but it also controls your lifestyle and your time. This is a highly personalized decision, but if you live in a pedestrian friendly area, you are more likely be out and about, walking to see friends. If you are out in the country, you are more likely to spend time mowing a large yard or tending to the lot. Neither is better than the other, but both play a big part in helping us find happiness.

Just make sure to fully evaluate the financial cost and emotional impact the location of your home will have on the future you.

After housing, transportation is likely the next biggest spending item, at nearly 17% of your total annual spend. This item, just like housing and utilities, has to be optimized.

For starters, if you have a car that has more than $10,000 in associated debt, go ahead and trade it in or pay it off, unless it is a zero percent loan.

The mental drag of knowing you have a car payment is real.

It is easy to get to the point of saying “with all my bills, I will never be able to save money, so why even try?” Everyone feels this way at some point. The key is to do something about it.

If you are driving a fancy luxury car, unnecessarily large truck, or even high end mini-van, do yourself a favor and trade it in pronto. Take the cash proceeds, buy a high quality used sedan, and invest the rest into a total market index fund.
What do I drive? An early 2000’s sedan with nearly 200,000 miles. It drives great, and gets the job done. When it goes down for good, I’ll just find a similar car in the 2010-2012 range and buy it for cash. Won’t cost more than $5,000-$10,000 total.

Most people spend WAY too much money on transportation. Don’t be one of them.

Alternatively, if you happen to live close enough to work  that you can walk or ride a bike, even better. This is free, and you have substantial health benefits that come along with it.

Let’s run a quick Bob example showing the impact excessive transportation costs can have on your retirement goals.

Base Case Scenario: 24 year old Bob who has $100,000 saved with a 50% savings rate, saving $25,000 per year, decides to buy a new car with a $25,000 loan to be paid over 60 months at 4% interest. That will cost him $5,520 per year. After 5 years, he buys another new car, and sells his old for $7,000 dollars. With this car cost, his savings rate drops to 39%. When can he expect to retire? After 12.5 years of additional income and investing, he can retire at 37! Pretty awesome. But could it have been even better?

Used Car Scenario: Let’s assume Bob starts with $100,000 already saved decides to buy a used car for cash instead of buying new. Savings drops to $93,000, and savings rate on a yearly basis stays at 50%. When can he retire in this scenario? After 10 years of additional work and investing, he can retire at 34, even assuming he has to buy another used car at age 29.

In the base case scenario, the new car payment cost him nearly 2.5 years of additional work over the used car scenario. Here is the super critical point to this example, some folks get great enjoyment out of a purchase like a car. I do not. I however do get great enjoyment out of travel and other experiences; would I work an additional 2.5 years to enjoy extra travel and other experiences along the way? Absolutely, wouldn’t think twice about it. The key is to make sure how you spend money aligns with what brings you most joy in life. If buying a new car is it, go for it, but just make sure it is worth an extra 900+ days of work at the MegaCorp.

Next up in the big ticket and bills bucket is food. I won’t go into too much detail here because I’ll go into much more detail in Level 2. However, know that I fully support spending as much money as needed to enjoy food. We eat three times a day, or more, and need to enjoy it as much as possible. Cooking is an awesome hobby, and if you are good at it, cooking meals can bring both great joy and improve your health.

However, I don’t support eating out all that much. It is highly overpriced, and typically much lower quality than what you can create at home. Anyone can make a great meal with the right tools and right ingredients. Buying in bulk can also help on cost, but we prefer to go to the store multiple times a week to buy fresh ingredients.

Food is a big spend item, and rightfully so, it gives us energy and keeps us fueled. Don’t skimp on the food budget, but don’t be lazy and eat out.

Discretionary spending.

New down jacket, pair of boots, or a stop at Starbucks on a road trip. These kinds of items are critical to splurge on from time to time, but not on a recurring basis. In the last Level 1 article, Savings, we saw the impact a daily beverage can make on your retirement goals, resulting in years of extra work. However, I think it is important to make these kinds of purchases from time to time. They do provide some joy and excitement, and don’t really make that big of an impact if done in moderation.

If you don’t spend on these types of items from time to time, you tend to feel deprived, and then make a big purchase that you regret.

Just like dieting, after a while of holding back, you have a really bad day and make some financial mistakes.

The dieting splurge is annoying because you feel like you just set yourself back a few days. Well, a major financial mistake can set you back years or more! Buy the wrong house, or upgrade to a new car? Those are decisions that will add years, at minimum, to your working career.

Be sure to splurge on small discretionary items from time to time, but make sure to have your big ticket items and bills optimized.

Experiences and Entertainment.

This is where Mrs. RME and I differ from most financial advice out there. I would advise that you take that road trip across the western US or a backpacking trip to Europe before worrying about meeting your savings goal on a given year. This of course in moderation too, but in general, we value life experiences above all else.

The whole point of early retirement and financial independence is to be free so you can do what you enjoy most. Spend time with friends and family, travel the world, or anything else for that matter. If you must put those experiences on hold for 10-15 years while you focus on saving for early retirement, something doesn’t seem right. Who knows what sort of energy you will have 15 years from now, or what condition your body might be in, or forbid, something worse. All I know is that the older I get, the more I realize how fleeting life really is. I want to live my life to the maximum and sometimes that requires me spending money.

Money is just a tool, and you should use it when prudent.

Everything in moderation. Be sure to find YOUR balance of spending and saving, and make sure not to hold back on spending on experiences.

Personally, I rather work an extra year or two to make sure I enjoy as much travel in my youthful years as possible. Also, RME Jr. will only be young for a short period of time, and I want to make sure he gets to explore the world as much now as possible. Although he won’t remember most of it, we certainly will, and the experiences of travel will help shape him, regardless of remembering each little thing along the way.


• Spending is broken up into three buckets: Big Ticket and Bills, Discretionary, and Experiences and Entertainment.
• Make sure, at all cost, to optimize the Big Ticket and Bills bucket. Nearly 80% of your spend comes from this bucket.
• Moderate discretionary spend, and make sure each purchase will bring enough joy to make up for having to work longer.
• DO spend on experiences. Life is short, you don’t want to have any regrets. You can always make more money, you can never make more time.

Your Next Steps:

• Monitor your spending. How much do you spend on each category? Does your current spending allow you to achieve your desired savings rate?
• Identify areas you want to improve upon. Start with the biggest spend first and work backwards…Housing, Transportation, Utilities, Food, etc.
• Are there areas you want to spend more? Are you spending enough to enjoy life now, not just waiting for the future?

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