“So often people are working hard at the wrong thing. Working on the right thing is probably more important than working hard.” – Caterina Fake (founder of Flickr and Hunch)
In case I have not been abundantly clear in my posts so far, getting rich is as much about expense control as it is about making money. In fact, wherever you are in your financial journey, you are probably not paying enough attention to what you are spending.
That is a pretty broad statement though, so I would like to focus on the easiest and often the most impactful type of expense you can incur. And that is…. The recurring expense.
The concept of the recurring expense was first made popular by a personal finance author named David Bach. He pointed out that people could generate tens of thousands of dollars by forgoing their daily $5 latte and instead saving and investing that amount over some extended period.
But most people don’t think about it this way. The reason being is that our brains don’t view any single or isolated expense as that meaningful. So people give very little thought to shelling out a few dollars here or there.
But those expenditures that occur over and over for some period, sometimes indefinitely, many times are the most meaningful. And again can be the sneakiest, since we tend to view the cost as a standalone payment instead of the cumulative effect of the expenditure over time.
As Bach pointed out, spending a few dollars on a cup of coffee does not seem like a big deal at the time. But if you buy a cup of coffee every day, week after week, month after month, it begins to add up. One $5 latte purchased every day equals $1825 per year. Over 10 years that is $18k. If you instead made your own coffee at home for pennies and invested the savings at the market average rate of 8%, you would accumulate close to $30k. Now that is real money.
Another great example of this is the purchase of car or SUV. When most people shop, they look to finance the vehicle and focus almost exclusively on the monthly payment, instead of the actual price of the car and the finance charges they will incur over the life of the loan. Again a $400 monthly payment does not seem like a big deal. But when you are obligated to make that payment for 72 months, it adds up to $28,800 over the life of the loan. The total dollars paid is what is most important.
In my own life, I track my recurring expenses separately from the rest of my financial metrics to give it extra visibility. To do so, I keep a list of all those obligations that I have committed myself to and force myself to look at it and review it on a periodic basis. The point of which is to really force myself to decide if the value I am getting for these expenses is worth the constant drain they are inflicting on my net worth. My list includes items such as:
Identifying these expenses and writing them down is a powerful exercise. It highlights all the money that is leaking out of my bank account every month/quarter/year. Some of which are incurred whether I use these things or not (Netflix or my cell phone plan are examples). As I review the list, I picture each recurring expense as a leach attached to my net worth, slowly sucking the financial life out of me, every moment of every day. It means that every day that I work, the first x% of my day is simply spent covering these recurring costs. Sobering right?
The worst of these expenses are the ones that are hard to see or you don’t think about. Expenses like the extra gas for your oversized SUV, the “pool guy” you have to call every year to open and close your pool, a gym membership while you could be otherwise exercising at home, the subscription to a music streaming app, storage costs for your boat that you only use 4 months of the year, property insurance for the second house that you hardly have time to use.
These expenses are dangerous. Not because any one of them is overly impactful. But for this same reason, they sneak up on you because no singular one moves the needle. But collectively they cause substantial damage to your wealth accumulation. So signing up for, or agreeing to incur any recurring expenses, should only be done with careful consideration.
In fact, red flags go up in my head whenever I am propositioned for a new recurring expense. Just the other day a friend from our neighborhood invited us to his club with a pool. My family and I love a day at the pool, especially our two daughters, though dad can be found frolicking on a hot summer day like a big kid himself. My girls are still young enough that they like to hang out with their dad, so that pool time is very fun for all of us. As a result, the idea of having access to a pool was pretty appealing. My friend explained that it was only $150 a month for the membership, which did not seem that expensive at first given how much our whole family had just had.
But because I am very sensitive to any recurring expense, I really started to analyze it. Given how much other stuff we like to do, how much would we really use it? Maybe 2 or 3 times a month. And there are some months during the summer when we travel and hang out with extended family. We would probably use it much less or not at all then. But that $150 monthly payment would come regardless (the membership is for a full year minimum). So we decided it was not worth it. If we want to use the pool, we can pay the per visit price, or go to the local beach that is a farther drive, but is free for residents in our city.
One of my best friends is a great example of someone who has lost control of their recurring expenses. My buddy is married and he and wife make well over $100k between the two of them. But they struggle each month to save any money. In fact, they will carry a credit card balance from time to time (blasphemy in my book)!
I found this shocking when he mentioned it to me. Given how much they make, how is possible that they would be struggling? My buddy said he was baffled as well since from his perspective, they hardly ever go shopping and very irregularly buy things. But as we started to go through where their money goes each month, we discovered it was littered with recurring expense that he wasn’t focused on. My buddy was committed to the following:
And these were just the ones we came up with off the top of his head. We estimated that he had about $2,500 of recurring expenses each month. No wonder he cannot get ahead. If he and his wife take home about $7k per month before considering his mortgage, these recurring expenses take a huge bite out of his paycheck.
And that doesn’t take into account the adhoc expenses that seem to creep up each month that you don’t expect. That is why I am so sensitive to committing myself to any recurring cost. So I am constantly looking at my expenses, and searching for ones that I can eliminate.
Just this month I was shopping for my wife’s birthday. Every year I take my 2 daughters out to find gifts we think she would like. One of the things that my wife really appreciates is a card. In many cases, giving her a thoughtful card is as valuable to her as the gift itself.
I was shocked though at how much a single greeting card costs. In some situations, they are as much as $5. So if each of my two daughters and I buys a card, that’s $15. And it’s not just birthdays. We have Christmas and mother’s day too. That really starts to add up.
So the 3 of us decided to start making cards. My girls actually loved the idea of getting to design their own card. Writing what they want and putting pictures and stickers on the cards is a lot of fun. And probably the best part of the whole thing is that my wife likes the homemade card 100 times more than anything we could buy in a store.
Boom. Another invisible recurring expense eliminated. And our family is better off.
Obviously the savings is not big dollars here. But if you constantly look for these opportunities, you can stack one on top of another. And the aggregate savings becomes material. So my advice is start tracking your own recurring expenses. And ask yourself if they are really worth it. The more you can eliminate, the more the savings will really add up.
Good luck!