Reducing your household expenses is by far the easiest way to increase your wealth and personal agility.
So why do so many people refuse to do it?
Manifest plainness, embrace simplicity, reduce selfishness, have few desires.
– Lao Tzu
Why Reducing Household Expenses is More Important Than Increasing Income
The math is pretty simple. If you can save 50% of your income, you only need to work one year out of every two.
If you have the ability to put away two-thirds of your income each year, that figure drops to one out of every three.
(This doesn’t even factor in the “magic” of compound interest, which shortens the amount of savings you need and lengthens the amount of time those savings last.)
If the math is so simple, why don’t more people follow the advice to save more?
That’s because math has never convinced anyone to do anything. Or practically never, if you know anything about human psychology.
The truth is, we get attached to these heavy, rigid things that weigh us down, whether they’re physical objects like cars and houses or obligations like debt or subscriptions. They give us the illusion of security while simultaneously making us more fragile and prone to disruption.
The result? We spend 100% or more of our income. Our personal agility decreases. We become more vulnerable to minor shocks. We lose resilience.
Most Americans are one or two missed paychecks away from financial ruin. Not tough times or temporary penny-pinching. Utter financial ruin. That should terrify you.
It terrifies me.
(Whoever set up these artificial divisions is a major jerk.)
Consuming less, reducing your personal overhead, getting leaner. These are all important steps to becoming more agile.
Well, you might ask, what about earning more? Does reducing your expenses mean all that much if you can just keep making more money?
Increasing your income is fine, but not the end-all be-all that some personal finance bloggers make it out to be.
The truth is that most folks who talk about increasing their income are constrained. They say things like:
”I want to earn more income, but I don’t want to quit my job. What should I do?”
That’s tough. Your employer is anchored to the salary they’re paying you now. If you’re not willing to jump to a different employer or start your own business, you’re looking at an uphill battle.
Nobody’s going to pay you what you’re worth unless you make a major move in your career.
Reducing your household expenses is the fastest and easiest way to build wealth. Period.
If you can’t battle lifestyle inflation now, when you’re making $42,000 a year, there’s no chance in hell you will be able to when you’re making $90,000.
How to Take a European Sabbatical Without Losing Your Job: The Power of “F.U. Money”
The following story was related to another personal finance blogger, J.D. Roth, by a speaker named Jim:
Jim told a story about when he was younger (many, many years ago!), he was working at a job he liked. He wanted to take a few months off to travel to Europe, but his boss wouldn’t have it. “Fine,” Jim said. “I’m quitting.” He had saved $5,000 on a $10,000 salary, and that was FU money for him. Surprisingly, this shifted the balance of power. Suddenly his boss was more receptive to the suggested sabbatical. Jim got to take the trip and then return to a job he loved ‐ all because he’d saved enough to walk away, if needed.
Financial agility (or having “F.U. Money” as Jim would say) is the ability to adapt even when your financial circumstances change, in this case, a job loss. Jim’s power over his employer comes from his financial agility: He has the option to take his sabbatical, regardless of whether his boss will let him return to his job.
(Note how ridiculously low Jim’s salary is. His negotiating power comes from the percentage of his salary he spends, not the absolute value of the amount.)
We should all aspire to be so agile. Slashing your monthly household expenses from $2,000 a month to $1,500 a month increases your wealth by 33.3% immediately, without having to earn another dime.
Don’t believe me? Imagine you have $30,000 socked away in savings. Reducing your expenses from $2,000 to $1,500 a month instantly grants you 20 months of F.U. Money, as opposed to just 15 months.
What could you do with an extra 5 months of complete independence?
Your Debt Could Be Killing You
We know that carrying a large debt load can be damaging psychologically. It can even hurt your career. But what about the physical toll it takes on you?
A Northwestern Medicine study published in the August issue of Social Science and Medicine looked at 8400 young adults aged 24 to 32 years old. Those with higher debt (about 20%) reported higher stress and higher rates of depression. They also demonstrated a clinically significant increase in diastolic blood pressure — 1.3 percent.
A two-point increase in diastolic blood pressure, for example, is associated with a 17 percent higher risk of hypertension and a 15 percent higher risk of stroke.
Note that these are young people, not middle-aged folks who might have higher blood pressure as a function of aging. And we’re talking about life-altering amounts of debt — some with $250,000 or more (probably law school grads like me).
So there are good reasons to reduce your household expenses by avoiding debt — you could literally save your life.
Let’s throw it to you: