Last Thought on Expenses…

I can’t emphasize the importance of the expense side of the equation enough. From the day you start saving on your journey toward FIRE all the way into your withdrawal strategy in early retirement. Optimizing expenses is key.

Expenses: A Different Perspective

Let’s think about expenses in a different light. With the 4% rule, for every $25 invested you’re effectively able to withdraw $1 safely in retirement. This is a 25:1 ratio. On the contrary, for every dollar in expenses you reduce, it’s exactly a dollar in reduced expenses, a 1:1 ratio.

For example, the dreaded coffee a day. Think about it this way, to fund a single $8 fancy latte or bubble tea in retirement you’d have to stash away $200 during your working years at a 4% annual withdraw rate. If you’d like a fancy latte every weekday (260 days) in the year in retirement you’d need to stash away a whopping $52,000 during your working years to afford it. If you’re making $100k a year and save/invest 20% ($20,000) per year it would take you an entire 2.6 years of savings just to allow you the luxury of having an $8 fancy latte 260 days of the year into retirement. I suggest aiming to retire 2.6 years earlier and making coffee at home instead 😀

Expenses: Avoid Mindless Spending

Put thought into where your money goes whether in the stages of saving for FIRE or in FIRE…

One way to think of expenses and just wants and purchases in general is to correlate how much of your time is needed at work to obtain them. A new iPhone 16 Pro 256GB model at time of writing costs $1299 (let’s see how this ages!). For someone that earns $25/hr, it’ll take them approximately 52 hours saving every cent to afford one. Is it worth it?

The second way we can frame purchases is with the cost per use formula. Taking the cost of purchase and dividing it by the number of times you think you’ll use it. You’ll get a rough idea of how useful that item will be in your life. Is it worth it?

Thirdly, we can also look at expenses, wants, and purchases in relation to current net worth or as what Vivian Tu refers to as the “Delulu equation”. Take the cost of the good or service and divide it by your total network, then multiply by 100. You’ll want to aim for a target of 0.01% or less!

Expenses: Inflation

If you are currently living in a developed nation or plan to into retirement, inflation will be a way of life. Governments around the world will pull several levers to attain a low but positive year over year inflation rate. Typically this target is around 2% a year as inflation is a key ingredient for economic growth and prosperity. Monetary stimulus and interest rates are two of such levers governments can use to either stimulate or pull back spending.

in·fla·tion

a general increase in prices and fall in the purchasing value of money.

Therefore, it is almost a guarantee that cost of goods will increase year over year and continue to do so into the indefinite future. Outside of proper financial planning the best way to combat inflation is to reduce the overall number of expense line items in your budget. Since inflation directly affects each one of them. For example if you have 2 insured vehicles, each policy is subject to inflationary pressure. Go down to 1 car and you’ll reduce your exposure to price increases by one half. It’s simple, but not necessarily easy but reduce your aggregate number of expenses and you’ll blunt the impact of inflation.

Expenses: The Last Word

As noted earlier, expenses really are key. There is a greater force multiplying effect through reduction of expenses as opposed to working longer to save/invest more. Strive to reduce your expenditures both on your way to FIRE and in RE.

Before you go…

A word from our sponsor, errr.. We still don’t have any sponsors but here’s an affiliate link to a book I found helpful.

Rich AF: The Winning Money Mindset That Will Change Your Life by Vivian Tu: https://amzn.to/41rUPib

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