August 3, 2020

Build expenses from the ground up

Imagine for a second what things would be like living on $0 a year. Not a single bill to pay. Believe it or not, our ancestors thousands of years ago actually inhabited a world where money was not even a thing. They had to work together to build shelters, hunt for food, and keep each other safe. While the quality of life and typical life expectancy has skyrocketed in the past few centuries, with it has come the obligation to pay. We owe someone something for nearly everything that comes into our life. Because humans are innately social creatures we talk to other people about the things someone has, we secretly compare our things to theirs, and we judge other people based on their stuff. But what if we got rid of everything and wanted to live a reasonable life as financially efficient as possible? You’d build from the ground up.

Start by looking at the things you need. The leather sofa you saw at the mall the other day or new xbox you saw on TV is not going to make the list. Let’s think rationally. Everyone physically needs shelter, food, clothes, and companionship. Anything else is generally above and beyond and probably not something worth paying for. If we break those four categories down, I think people would be happily surprised by how cheap we can actually live. For example:

Shelter: Single family home $125,000 over a 30 year mortgage = $600/month
Tiny Home $50,000 over 30 years = $250/month
Build a house $50,000 in materials 30 year loan = $250/month
Food: $100/per person/per month
Clothes: Passdowns – Free
Goodwill – $120/year = $10/month
Mall – $1200/year = $100/month
Companionship: FREE!

These numbers are obviously not set in stone. They vary widely based on location, preferences, and a million other variables. But if we took the four cheapest options we’d be looking at living on $350/month, or $4200 per year. To live indefinitely on $4200 a year, you’d need a stash of $105,000. Many people’s homes are worth 3x that. While I understand this is not feasible for the vast majority of people, maybe not even myself, it’s important to realize that many costs that we take on monthly or annually are completely unnecessary. They are a drain on our wealth and do not provide us with any additional happiness in return. If cutting out all expenses at once and starting over is too extreme, try taking a look at your three largest areas of monthly spending and try to reduce them as much as possible. If I were to take an educated guess, I’d say that for 95% of Americans it would be: Housing, transportation, and food, in that order.

For housing, the most important consideration is only paying for what you need. This comes back to the fact that you might want a 3000 square foot place, but in actuality you need maybe half of that. This will not only give your expenses a major haircut, but it will be less work for you to maintain and worry about. Or, if you simply can’t get over having a small place, buy more square footage than you need but rent out a room or two. This could offset the cost of the mortgage or if you’re lucky, they could be paying you to live in your house every month. Also, always do the math of renting vs owning before committing somewhere. If you aren’t sure which would be more costly, do a few google searches of “rent vs buy calculator” and you should have the answer shortly. Don’t always assume renting is “throwing away money”, in some cases that’s simply not true and renting may in fact save you much more money in the long run.

Transportation is going to be heavily tied to the decision you make about where to live. What baffles me every single day is how many people put up with insane amounts of commuting. All I have to say here is live within biking or walking distance of your job. If you’re married, do your best to meet in the middle or live directly next to one of the workplaces. This not only cuts down on time spent getting to/from work but commuting to work by mass transit/bike/walking will save you thousands of dollars every year and make you healthier in the process.

Lastly, food is relatively straight forward. Look for food that will give you the most value for your money. Scope out the deals, get a Costco membership, get the off-brand items, and limit the junk food. Again, you will save a ton and probably look and feel better too.

Given all that I’ve said, it’s important to mention I’m not saying you shouldn’t spend any money on yourself. Go to the bar or enjoy a nice dinner on the weekend, but just understand that these things add up. If you can chop major areas of spending or live on a very small amount of money, your freedom is even closer than you think.

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