I really like to frame every purchase I make a certain way. Outside of normal, recurring monthly bills like rent, groceries, my cell phone bill and the like I really try to make sure I’m completely aware of the costs of any item I buy. What I like to do, especially with an expense that will recur on an ongoing basis (like a car payment, gym membership), is to not look at the actual costs of the item or service, but rather I look at how much money I’d have to have saved up to offset that expenditure.
So, let’s say you get tired of working out in your living room and you determine a local gym has all the equipment you need and only charges you $45 per month. Not bad. $45 per month isn’t a lot of money, right? Well, let’s think about that.
As someone who is seeking financial independence, I am actively building my investments to the point that I can one day meet all expenses with the income these investments provide. What I do is look at every expense and look at how much capital I need invested to meet that obligation. I use a 3% yield as a conservative measure for this exercise. Why? Well, because the Trinity Study that showed that a 4% safe withdrawal rate is appropriate to have a good chance of not running out of money during retirement was used for more conventional 30-year retirements. If I actually meet my goal of retiring at 40, I’ll hopefully be retired a lot longer than 30 years! So, I scale that down to 3% to be conservative and give myself an accurate picture of my income. I’ll be living off my dividends in retirement, so my actual yield may be slightly higher than this.
Let’s get back to that gym membership.
A monthly expense of $45 is $540 over the course of one year. To meet that yearly expense, one needs to have $18,000 saved up, using a 3% yield as indicated above. Is the gym membership worth $18,000? It may very well be, but I think that anyone who is seeking financial independence needs to look at expenses this way because the income your investments provide is how you’re going to be meeting your obligations. $18,000 for me means working for an additional 6-9 months, depending on how much I can save each month. Is a gym membership worth 9 months of your life? Only you can answer that. I’m not necessarily saying the gym membership is a bad idea in this example, but I’m simply imploring you to frame your thoughts correctly so that you can make an educated decision.
Let’s use a different example. Let’s try a car. This will be fun!
So, according to Investopedia the average yearly expense to own and operate a car here in the U.S. is $8,003 per year. You can already see where this is going, right? So, using a 3% yield from your investments you’ll need to have $266,766 invested to meet that expense for the rest of your life. So, is a car worth it? If you ask me if I’d like to work a full 7 1/2 years (saving a full $3,000 a month!) so I can have a car to put around town I’d have to resoundingly say no. Is that car worth $266,766 to you? Again, only you can answer that question.
Maybe you need a car to get to/from work right now and plan on ditching it once you no longer have the obligation of full-time work. But, how much is that car costing you now? How many more months will you have to work to pay for a car that’s getting you to a job you no longer want to go to? Good questions, right? It might be time to answer these questions and perhaps find a way to bike, walk, scooter or use public transportation to get to work. If work is too far away, maybe you need to move.
So, there you have it. That’s one of my secrets to staying so frugal. I don’t just look at expenses in terms of their monthly cost or even their full purchase price. I instead calculate how much capital I need to have invested in conservative dividend growth stocks to meet an obligation and how long I’ll have to work to save said capital. When I start seeing months or years added on to my career I can easily start figuring out which things are really important to me.
Ultimately, it comes down to time and how much of it you want in life. Do you want 8 years of your life or a car? You choose.
Thanks for reading.
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