DailyWorth challenged three women to cut their discretionary spending in half.
The first, a 43-year-old self-employed organizer, cut weekly expenses from US$568 to US$400 by eating out less.
The second, a 20-year-old who works at an ad agency, cut her expenses from US$572 to US$178 by buying fewer new clothes.
The last, 36-years-old and self- employed, cut back on dining and socializing, from US$795 to US$627 a week.
These three women learned a lot from the exercise. If you’re so inclined, give it a try. Keeping track of expenses, even if for only a week or two, can be enlightening. I encourage the effort.
However, I’d argue that cutting back out-of-pocket spending is just tinkering around the edges. You’d be behaving like the government. When the sequester hit in 2013, for example, the U.S. government nearly shut down the economy. Rather than go after the mega expenses—Social Security, Medicare, Veteran’s Affairs, and other transfer payments—they cut back on air-traffic controllers, for example. Controller cuts risked shutting down airports, in effect shutting down the U.S. economy.
Luckily, the government was able to adjust. Air-traffic controllers went back to work, and airports stayed open. But that’s government think: cut minor costs rather than the politically protected mega expenses.
In our personal lives, we can avoid government think. Rather than cutting tiny outlays, we can cut big things that can have a much greater impact.
For most of us, those high-impact areas are housing, cars, and taxes: the big three. The average family spends 85% of total expenditures on the big three.
I’ve found that many working Americans doubt the 85% rule. Perhaps you should prove it to yourself. Start with your tax return from last year. See how much money you made. Then look at what you spent on taxes, again starting with income taxes on your tax return. Add in Social Security and other payroll taxes. You should probably gross up here, to include the employer portion of your payroll taxes, but we’ll let that slide for now. Throw in estimated sales taxes, and other direct taxes—on your utility, cable, phone, and insurance bills, for example. We’ll include property taxes in housing costs, below, and vehicle registration in car costs.
To figure your car expenses start with monthly payments on the car loan, insurance, parking, garage, maintenance, and whatever else.
Estimate what you spend on gas. Then include taxes and registration, and what you pay for add-on parking, car washes, traffic tickets, towing charges, whatever.
As an alternative to digging out car bills you can estimate based on the IRS numbers. The IRS every year studies fixed and variable costs of running a car. For 2015, they came up with 57.5 cents per mile. So if you and your partner owned two cars and drove 40,000 miles per year, you’d spend about US$23,000 (40,000 x .575) on private transportation. We’re talking estimates here, but on average that’s US$1,916 per month. Even cut in half (assuming you and your significant other are sharing a single vehicle), that’s US$958 per month.
Finally, look at housing costs; include your mortgage, property taxes, maintenance, and utilities. Most people underestimate maintenance. They figure they replaced the roof this year, it was a one off, next year they’ll spend nothing. Then next year comes and the furnace breaks down, they paint, they remodel, they buy new air conditioning. Maintenance costs never stop. On average, you pay 1% to 2% on home maintenance each year, according to a report by the University of Illinois Extension.
Take a look at the final number. Most working families surprise themselves with how much they spend on the big three. I’d even suggest that if you come up with less than 85%, and you’re still paying on the mortgage, you’ve likely failed to include some costs or other.
So What Should You Do?
Avoid thinking like the government and cutting crucial, day-to-day costs; those three women, above, eliminated eating out, clothing costs, and going- out costs—they sacrificed day to day. I submit that eating out, buying pretty clothes, and socializing can bring joy to our lives. Cutting these critical costs, minor as they are, impairs quality of life.
Sunset at a weekend getaway, a Monday-night football game with a friend in a sports bar, and flying across country to attend a grandchild’s three-year birthday party seem so much more fun than driving a big car.
Instead of cutting day to day, cut the high-impact items… the big three.
Start with taxes, the easiest place to cut. To cut taxes you simply retire. If you can possibly swing it, retirement is the way to go. Vicki and I retired years ago, while still in our thirties. At the time I estimated that opting out of the work force saved us a compounded million dollars in future Social Security taxes alone. We saved maybe half a million in Medicare, and millions more in state and Federal income taxes. Sure, we have a lower net worth today than the guy who continued working for 30, perhaps even 40 years. We collect less Social Security, too. Then again we do get both Social Security and Medicare. And, unlike the guy who continued working, as we turn 65 this year, we celebrate 30 years of retirement.
Next look at your housing costs. I’ve written previously about how reducing your living space will lower your monthly living costs and mean a happier, more social lifestyle for your retirement. Save a bundle by living in smaller spaces. Save even more by living in smaller spaces overseas.
Finally, car costs. Consider getting along without a car altogether. Just like living overseas makes it easier to live in small spaces, with less stuff, moving overseas also makes it easier to live without a car.
If you live in the USA everyone you know has a car. Los Angeles was designed and built for cars. But if you live in Buenos Aires or Chiang Mai you’ll meet large numbers of expats without cars. They get around on buses and in taxis, tuk-tuks, and motos, instead—both so much cheaper (as a rule) overseas.
Editor’s Note: Paul shares his hard-earned retirement planning advice with Overseas Retirement Letter readers every month. If you’re not already a subscriber—and would like to read more of Paul’s insights, as well as “warts and all” monthly reports on a different retirement destination every month—you can test-drive the newsletter now for just 99 cents.