There’s often a claim made that goes something like this: “Get your biggest expenses under control and most of the hard work is done.”
The theory being your biggest items are where most of your money goes. So fix that, and you’ll automatically have a decent savings rate.
But these people are often subtly implying that the small expenses and therefore small improvements don’t really matter. Well, I call bullshit on that!
Sweet, sweet savings
Look, I can see the sense in this statement. But unfortunately, in the real world, it doesn’t work like that.
Human nature gets in the way, and naturally, we just end up spending whatever we earn. So if we make a sensible housing choice, we’ll end up spending more on holidays, eating out, cars, or clothes.
That’s just what people do.
Otherwise any household with a decent income, modest house and low cost vehicle would be rich. But clearly, that’s not the case.
So where does the money go? The answer is, everywhere else!
The wealth is in the details. Small amounts can still make a gigantic difference. Let’s get this fact straightened out once and for all!
Looking where all your money goes, is critical. Not just the big stuff. Everything.
I posit that it’s even more important to appreciate the small dollars. While that might not sound very logical, hear me out.
In my mind, this goes to your overall attitude towards money and how grateful you are as a human being.
We need to realise how damn good we have it, and how little it really costs to live. Once we have that warm fuzzy feeling, we begin to appreciate seemingly small amounts of money.
Take $10 for example. That’s enough money to feed our household for an entire day. Meals, coffee, snacks, everything!
So $10 is pretty damn useful when seen in this context. It actually buys a lot of stuff when used correctly. We just have to get better at spending our money. Luckily, it’s a skill anyone can learn, and we can improve over time.
Here’s the thing: The people who don’t respect small amounts of money, will rarely ever have large amounts of money. And even if they do, they’re far more likely to just piss it away.
Because a large sum of money is simply lots and lots of small amounts bundled together.
Leaky Boat Syndrome
You’ve probably read before that a small leak can sink a big ship.
The problem is, for the average Aussie household, they have about two thousand leaks on their boat!
Yet they continue sailing along, frustrated, busily scooping the water out as it comes into the boat – thinking to themselves, “Man we sure could do with a bigger boat.”
To which I’d say, “No, you need to fix the fucking leaks!”
Without doing a song and dance about it, I though it’d be helpful to share what we did.
We wrote down every single place that our money was going and put it into categories. Then we went down the list, one by one, and looked for ways to improve on that.
Almost every time, there was a way we could save from that category. And then we made a conscious effort to carry that out.
We did this once a year. And guess what? Every single year our spending came down.
When we met, we were probably spending around $70,000 per year, and had a savings rate of maybe 35%. By the end of our journey, our spending fell to around $45,000, and our savings rate was over 70%.
There’s more fat we could trim from our current lifestyle if need be, but we’re pretty happy where it is. We’re retired now with some bonus income coming in, so a little bit of sloppiness isn’t so bad.
But on the other hand, I don’t want to lose my frugal street cred either! 😉
Even a slight amount of waste in each category, leads to a large amount of waste across your spending as a whole.
This leads to the near-zero savings rate that the average Aussie household has. And if this is true (which I maintain it is), then here’s the other side of that…
If we can wind in a bit of this excess, while still living a good life, then this creates a huge improvement overall. That leads to a strong savings rate.
And we know what eventually happens with a strong savings rate, right?
Yep. Financial Independence.
So if you’re not sure where you’re money goes (and you’re not bleeding cash with crazy things like a huge mortgage or car loans), you can be pretty damn sure it’s leaking out in small increments everywhere else!
We’ll purposely look at a few small examples to see how it’s possible to add some of those sexy increments to your savings rate, even if you’re already running a pretty efficient household.
There’s a million possibilities, but here’s some to start…
— Trimming back on unnecessary insurance. By increasing your excess, or getting the insurance within your super fund. This way you’re still covered, but your personal savings rate is higher, helping you reach FI sooner. Savings = $10 per week.
— Finding a lower cost phone/internet plan. It will be pre-paid of course! Earlier this year, we got a 2-for-1 deal with Kogan Mobile – unlimited calls, texts & 7gb data per month – $300 for the year.
This plan has currently been improved to 13GB per month, though the 2-for-1 has finished. We already had a super cheap phone deal, but this was still an improvement. Savings = $5 per week.
— Haircuts at home. Mrs Strong Money now cuts her own hair after learning how to do it watching youtube videos. And she also colours it when she feels the need. This stuff costs a small fortune to outsource as most of you probably know! Savings = $20 per week.
— Having a meal plan, and eating more vegetable focused meals. This made a huge difference to our grocery bill as highlighted in the grocery strategy post.
But I think most of us could improve in this area and shed at least a little more off our weekly shop by doing the above. We also started spending less on vitamins since our diet became a lot healthier, which is another benefit. Savings = $10 per week.
— Re-plan your dates. For couples, instead of going out to a cafe/restaurant to spend time together (simply out of habit), why not go for a nice sunset walk or an invigorating bike ride.
Instead of once a week, go for once a fortnight. You’ll feel better for it. And it’s better to fatten up your bank balance than, well, ourselves! Savings = $20 per week.
— Be more efficient with resources. Across the spread of power, water and gas, be a little more careful with how much you’re using. Those are important resources after all, and using a bit less of each is far better for the environment, if nothing else.
Switch to a cheaper gas/power provider. Get energy efficient lights. And switch off stuff at the wall when you’re not using it. We did these things and it actually did make a difference. More than that, it just feels better not to waste any of these resources. Savings = $5 per week.
— Forbid yourself from fast fashion. That’s right, now I’m attacking your fashion sense. Well, really, I’m just asking you nicely that you consider buying a little less shit in this department.
Fast fashion is a disgraceful trend, a big pollution problem, and a horrible waste on so many levels. Young people are the worst culprits. The truth is, most of us already have so many clothes that we only wear a fraction of them.
Rather than a steady stream of new, unnecessary upgrades, try the good old Op Shops if you really need something. Then you can feel good knowing your clothes shopping is helping this issue. Mrs Strong Money has hit the jackpot a few times and bought some unreal clothes very cheaply this way.
Or, if you’re like me and can’t be bothered clothes shopping – just get a few good items for your Birthday and Christmas, then wear them until they fall apart! Then proceed to buy nothing in between those periods. Savings = $5 per week. (savings for teenagers = $237 per week?)
— Getting in the spirit. I know this will be a touchy one. But it’s my view that adults giving each other gifts for Christmas is kind of a weird concept. I just don’t see the need. I mean, it’s for the kids. And the most important thing you can give someone, isn’t a present. It’s your presence.
Rather than exchanging crap we bought from the shops, spend time with the people you really care about, and tell them how important they are to you and why. This is far more meaningful. Not to mention all the gift wrapping, cards, plastic bags and other junk we throw away when it’s all over.
It makes me feel a bit sick actually. Thinking of all the resources that went into making that stuff, for us to use it once, then throw it into landfill. What for? So our loved ones know we care about them. TELL THEM THAT! Rather than getting a gift to do it for you.
I’m not saying don’t have Christmas. I’m no grinch. Just be mindful of what’s really important and focus on the meaning of it, without the waste. Personally, we’ve reduced the gifts we give to each other (simply because it feels unnecessary), and been more mindful of the stuff we do buy. Savings = $5 per week.
— Time off. Another idea that we used on our journey was stretching out our holidays. Instead of once or twice a year, you could go away once every 18 months. It’s not much of a delay, but it cuts the cost down dramatically.
Other than that, we started taking trips within Australia versus overseas, (mostly so we didn’t have to leave our dog!). We also took time off to holiday at home, or ‘stay-cation’ as our American friends call it. This was mostly to trial what our FI life would be like.
We’d spend a few weeks at home trying to act as if we were retired and see how it went. Many times, it was surprisingly more refreshing than a holiday! Because there wasn’t all the packing/unpacking, driving, flights and people to contend with.
Try this stuff out for yourself – you may be surprised how it feels. Savings = $20 per week.
So let’s see what kind of impact this small handful of savings really has, in terms of reaching early retirement.
Well, adding it up, these made-up (but entirely possible) optimisations come to $100 per week. That’s $5,200 per year. Now it’s starting to seem like a decent amount.
But that’s only one year. Sticking with these new habits and investing the extra cash (earning 7% per annum), after 10 years, you’d have around $70,000.
That in itself is a big boost in your FI war chest.
(In case you’re wondering, this figure blows out to $1,038,103 over 40 years. The difference between retiring a millionaire and retiring poor is all in the details)
That’s not all. Remember, your spending is now $5,200 lower each year. And you would’ve needed somewhere around $100,000 in shares to create this income each year. But now you don’t need that extra hundred grand!
So in this example, you’re $70,000 wealthier, while the amount needed for FI is $100,000 less. That’s a dramatic improvement and a huge step towards freedom.
The savings rate boost would, in most cases, bring your early retirement forward by at least a few years!
The above example is for an already reasonably efficient household.
Imagine if you’re starting from the position of a typical Aussie household – spraying money in every direction with no clear handle on where it goes!
As of January 2018, we began tracking our spending in a spreadsheet for the first time ever. All will be revealed early next year! (now published… Strong Money Household Spending 2018)
But looking over it now, I can see we have 26 categories of expenses (more than I thought). Some are high, some low. Either way, that’s a huge list to work with. You may even have more!
An average household starting today with 25-30 spending categories, could easily find a way to save $10 a week from each category, on average.
That opens up close to $15,000 of savings per year. Investing that cash and earning a 7% return per annum…
After ten years, they’re $200,000 wealthier. And because of the lower spending, they now need around $400,000 less in investments to retire.
Basically, they’re a shitload better off than they were before!
High income earners can get away with just a moderate level of frugality, for lower income earners, those small increments are even more important. Either way, savings rate as a percentage of income, is everything.
Here’s a quick table for you to see how long it’ll take to retire, based on different savings rates. Or you can use an interactive online calculator like this one!
This table assumes you earn a 5% investment return after inflation, and you live on 4% per year during retirement.
||Years to Retirement
As you can see, every incremental jump in your savings rate, brings your financial independence date forward. By years!
Now you can see exactly why small improvements excite me so much!
Study this table, because this is where the magic happens. If you want to retire sooner, simply learn to live on less of your pay.
Here’s my project for you. Give yourself a Money Audit.
Look over a minimum of 3 months worth of bank transactions. Find out, really, where does your cash escape to?
Round it up and put all the expenses into categories. For the costs you can’t find, do your best at estimating those on a yearly basis, and average it out.
As an example, your car service might be once a year and cost $500, with some minor repairs every couple years. Note this down as $10 per week, or $40 per month – whatever is the easiest for you.
I’ve found that measuring your expenses by the same time-frame (weekly, monthly etc.), it gives us a much better picture of our household spending.
Once you’ve got your categories sorted, sit back and take a look at it. And think to yourself…
Is there anything that looks a bit high to you? Are these things really adding to your life? Is there any way to get the same benefits at a lower cost? Are these costs worth sacrificing your freedom for?
Can you improve on them? Or cut some of them out completely?
Really think about your life and what’s important to you. For us, some things we just couldn’t justify. And the rest we simply improved upon.
Next, go down your categories one by one. Find a way to optimise your spending in each area, and then get to work making it happen. If you’re doing it right, there’ll be a big list! And then work on them one by one.
This stuff is like getting in shape. Our expenses are how much fat we’re carrying. And our investment portfolio is how much muscle we have.
We’re simply trimming the fat. And using that fuel (our savings) to build the muscle (our investments). And as this muscle grows, our financial position becomes stronger.
There’s so many possible ways to find incremental savings. So this process can be repeated every year.
Start tracking your spending in a spreadsheet, if you don’t already. The results may surprise you. And this way, you’ll know for sure where your money goes – no guesswork needed.
As you make positive changes and see the results, it’ll motivate you to find more ways to be efficient.
Remember, $10 a week is really $520 a year. And that requires over $10,000 of investments to cover that cost with dividend income.
So, rather than think about the $10, think about the $10,000.
As you can see, this stuff can literally make the difference between permanently broke and wealthy. A couple of tweaks here and there each year, will see you many thousands of dollars closer to your goal.
Our nature is such that we want the rewards without the effort. But it rarely works like that in real life. To retire ridiculously early, requires a change in philosophy and a systematic approach to improving our spending habits.
Don’t get me wrong, large expenses are super important and should be your first focus. But appreciating small improvements is glorious too. Instead of one or the other, aim for both!
The bottom line is, every dollar you can drop from your yearly spending, is 25 dollars less you need of income generating investments. And it doesn’t matter which expense category that comes from!
So the next time somebody says “It’s only $10/$30/$100”, you now know that’s a destructive thought process to have. To our wealth and our freedom.
Ultimately, we’re not sacrificing our spending in order to save. We’re sacrificing our lives in order to spend.
Some things are worth it, but many are not. By realising the future impact of our spending choices, we learn to prioritise and make better decisions.
Let’s start taking small amounts of money seriously. Because the better you get at playing this money game, the sooner you can retire.
Thanks for reading!
Here are some resources you may find useful on your wealth building journey:
Sharesight: A great portfolio tracking tool for share investors, and free for up to 10 holdings. It tracks all dividends, franking credits and capital gains, which is incredibly helpful at tax time. Saves me a lot of time and headache!
Mortgage broker: My personal broker of 10 years is More Than Mortgages. Highly rated and award winning, Deanna and her team been super helpful over the years and can assist with anything home loan related, including refinancing and debt recycling.
My book: After 5 years and hundreds of articles and podcasts, I decided to distill everything down into an easy to follow book. Designed as a complete roadmap to achieving financial independence and retiring early in Australia. Available in paperback, ebook, and audio.
Just so you know, if you choose to use these resources, this blog may receive a financial benefit at no extra cost to you. Thanks in advance if you do. And to be clear, I only ever recommend things I use myself and genuinely believe in 🙂