The Financial Independence portion of my COVID career advice post was surprisingly popular. I’ve received a lot of other questions about more easy rules for getting to FI and money advice.
The ironclad law of taking care of yourself financially is you must spend less than what you earn.
Whether salaries, assets, dividends, and interest - that is your upper ceiling (Credit is not earnings. It is simply a way to move future earnings into the present by incurring cost to consume things ie. interest rate charges.).
After Emergencies, Debt, and Investing
If you already have a 6 month emergency fund stashed away, are debt-free (or have payments well under control), and are moving 20% of your gross income preemptively into savings and investments, what should you be doing with the other 80% after taxes?
You could say “whatever the hell you want”, but the real answer totally depends on your goal and how you want to live your life.
The above 3 rules take care of a lot of other financial management sins, so you can live like a sybarite if your 80% allows and you want. But assuming you want to also accelerate your path towards FI or have financial goals that you neither want to wait for your 20% to allow, nor wish to use credit, what are other good rules and guidelines to be pumping iron in the financial health sense?
Look at your big spends and reduce
For most people, the big buckets of what sucks up all your income after taxes will group into 3 areas and plus how you decide to pay for big ticket items:
Is probably everyone’s biggest. Most banks want you to be paying less than 25% gross income on rent or mortgage in order for you to be considered healthy from a credit risk perspective. Much like credit cards, renting or buying too much house is often how people lock themselves into long-term financial trouble and stress. One of the key differences between wealthy and financially independent people is that they do not spend more than 10% of their gross on housing. Hard… improbable even in some cities… but it’s a goal worth striving for.
Being able to take those extra percentage points and putting them towards big ticket items or doubling down on investments also radically shortens your FI timeline.
If you don’t track it, you’d probably be pretty shocked how much you pay annnually in terms of food annually. Effectively, our time compressed lives (before covid anyway) means people are willing to pay for convenience over other things, so substantial portions of your income (if you’re urban) may be going towards your food budget, especially restaurants and, next in line… delivery.
The simple advice here is cook more.
Don’t know how? Take a cooking course (they are awesome). Grocery shop, even if you splurge on getting groceries delivered to save time (some stores even make it slightly cheaper to order online at the moment because they are afraid of competitors stealing a march on at home delivery or, much like banks, realize it is actually cheaper for them to deliver straight form warehouse to home.). And learn to cook, quality, nutritious food. Eat less red meat which ends up being way more expensive itself, though whatever you are buying, buy good quality. Do not skimp. Buy good raw ingredients and avoid heavily processed food products.
Another big area you may not realize is hoovering up moolah is snacking and coffee breaks. Yup, add up all those coffees you walk out of the office for and try not to gasp. I am not advocating you give up coffee, but limiting the amount of takeaway coffee you consume, or better yet, doing what I do and getting a nice home setup with a grinder, an aeropress, and a good coffee bean delivery service will actually reduce that expense to about 25% of what you’ve been paying and gets you a much better cup of joe in the end than anything but the best artisanal coffee shops (for example, you get a surprisingly great cup of coffee, consistently, out of a $30 aeropress. Buy a go cup or thermos for taking that to work and multiply that by several months and it is not chump change.).
Same rules go for tea. Get nice, loose leaf in bulk paired with fillable, biodegradable, disposable tea bags you can fill per cup (most Japanese groceries will have good ones) and you will be doing much better (I am often shocked at coffee shops that ask for $5+ for a cup of mediocre coffee and $6+ for really substandard tea.).
Same goes for ready to drink juices, smoothies or similar. Get a juicer or blender and good fruit delivered and save yourselves a tenner each time.
If possible, ditch your car. They are the devil’s expensive playthings.
It is far better to trade off more expensive rent and less commuting with a closer location to work (doubly so if you value an hour of your time with any approximation of real value.). And this is before talking about fuel, parking, maintenance, and the purchasing ecosystem around buying things that owning a car convinces you you need to buy.
If your life compels you to have a car, buy used, not new.
The rule of a car losing 15-20% of its value each year, and the second you drive it off the lot is largely true. Figure out what you can afford and stick to that as a hard ceiling on your budget. Negotiate as if you were going to finance, and then (if you can) pay cash and get a further discount.
Ride hailing is vastly less expensive than owning a car if you are urban. Doing the numbers, I regularly abuse ride hailing compared to other alternatives and figure it costs roughly 1/5 of the cost of car ownership (note, however, that more than a few studies point to the fact that ride hailing is worse for the environment than car ownership unless you are taking hybrid or electric vehicles - I do wish this were an option on ride hailing apps, ie. “gimme a green car only.")
Public transport is your best bet besides human-powered modes but if you can, walking, biking, scootering, or blading are options which I have to say, I wish I had more time to do. Besides the health benefits, they keep your costs down. I’m also told scooters are awesome and shockingly liberating though have yet to try them (they’re banned where I am currently living.).
Big Ticket Items
Whatever they are, always try to save up for them and pay in full. Cash payment usually gets you discounts on full price and if you like to haggle a bit.
Financing options for big ticket items are designed to keep payments low and interest payments rolling which mean you pay more over the lifetime of your financing. In some cases, a whopping amount more. If you do need to finance, get a fixed interest rate, and make sure you can balloon payments when you do have extra cash to keep things cheaper (and that there are no penalties for paying early - you’d be surprised how common that is in the fine print of things like mobile phone contracts and the like.).
Where to Splash Out
In terms of deciding what you should splurge on and spend extra on, I usually follow a rule of thumb about how much time I spend with something interacting and what additional quality to that time gains. What does this mean? Some examples:
- I aspire to 7 hours sleep a night (it’s work in progress :-/ ). That’s 1/3 of my life. And sleep has large quality of life effects for me. So, I spent a bit more to get the comfiest, nicest bed I thought I could afford without going overboard.
- I spend an even longer time on my computer every day. So, figuring out amortizing, I shell out for a very nice computer that gets the job done and will last me 3 years even if it looks expensive up front (my last machine latest 5 years before I replaced it and is still completely usable. Gave it to a friend with lower computing needs than me.). I generally aim for a maxed out mid-range machine since a lot of my computing takes place in the cloud these days.
- Also, now I am working from home in these COVID times, I shelled out for a very nice office chair run by a company that makes chairs for gamers (also, my back was hurting from the old one if in it for prolonged periods.). As a counterexample in the same vein, my desk is a simple plank from Ikea with legs screwed into and has served me well for over 7 years without incident or worry (though it will hardly win any beauty contests).
Things you interact with less than an hour a day, commoditize as much as possible unless consuming them is somehow affected by the quality to the point you savour them (for example, if you are highly into your coffee, splurge on a fancy, high even coffee maker.)
Basically, invest in nicer items where their build quality and long-lastedness will make quality of life differences. Go budget everywhere else. It’ll make you happier and keep you financially healthy.
Invest in experiences. Splurge. Don’t think of it as spending.
Just about all happiness research now points to the fact that experiences, particularly shared ones, outshine any object you can buy and long after you’ve hedonically adapted to some thing you purchased, the memories and gains from experiences will still keep you satisfied from a quality of life perspective.
I’d put travel, education, events, even dining and friends and family time in this category but it should be broad enough to provide you guidance. Even though you might have nothing to “show” for these expenditures, overall they’ll provide more for your happiness buck than almost anything else.
And that’s it. I could throw some things in there about clothing though I find it totally depends on your lifestyle, work, and fashionista leanings.
Overall advice: don’t treat shopping and expenditure as a hobby and live within your means. So, I’m hoping this advice will help you level up a bit in accelerating FI or other goals you may have like getting out of debt, getting that 6 month fund built, or getting more bang for your buck.
Let me know what you think about the post @awws or firstname.lastname@example.org. I’d love to hear feedback about what else or similar thinking about what works for you. Even better, (reasoned) opinions on why I might be wrong and what might make this better.