Welcome to my first personal finance tip!
I’m just starting out so I have to go with the #1 tip I recommend when I get on the topic of FI. It’s not a stock tip or anything about savvy investing – it’s a tip to change your mindset about money – to change the way you think about your expenses.
It’s simple – you view all your spending as a 10-year purchase. What does that mean? Well, you look at the amount you plan to spend on an item and determine what that money could be worth if you invested it for 10 years with an assumed 7% return.
With a recurring expense, you assume you incur that expense for the entire 10-year period. So if you have a monthly subscription, you’d expect to have 120 payments (10 years x 12 months).
I’ll give a quick example. I like to go out for suppers with my wife and we spend on average $100. $100 x 120 = $12,000. But wait, I forgot the 7% return. That $100 a month is actually $17,308!
That’s the power of compounding.
The power of compounding is a double-edge sword. Compounding can occur positively or negatively. It compounds positively when you have money invested and it compounds negatively against you when you are paying interest on debt, credit cards, your mortgage, and investment fees.
Short-term thinking leads to money vanishing out of your pocket. Long-term thinking helps change your spending habits.
What is short-termitis?
Popularized by Mr. Money Mustache (MMM), the Godfather of the FIRE movement, short-termitis is the lack of thinking with the “10-year purchase” mindset.
What will this cost me in 10 years?
It’s a simple question. And luckily there is a simple answer. For a monthly expense, multiply the cost by 173.
Whenever I tell people this tip they usually shrug it off. “Yes, compounding, I get it. I should spend less and save my money.” But yet the POWER of this tip gets ignored.
From my experience I get the sense that people don’t want to know what it will cost them in 10 years. The numbers don’t lie so they would rather not look at them and be blissful in their current spending.
This is what some call “strategic ignorance.” We avoid information that makes us feel bad.
And I do the same thing. I’ve ignored this rule because I don’t want to look at the numbers. Actually, I’m doing that right now. I have a list of monthly and yearly subscriptions I need to purge. I’ll get to it. One thing at a time, I’m writing here.
But I don’t want to cancel all my subscriptions!
I’m not saying you should seek out and cancel all your subscriptions. You should, however, be making an honest assessment whether the things your spending money on is bringing value to your life. How you determine its value is up to you.
The value could be from education (Audible), entertainment (Netflix), exercise (gym membership) or social connections (going out for drinks). The value is up to you.
Make a value judgement if the money is worth it. You can’t make a value judgement if you don’t know what it’s costing you.
There’s another point to the examples above and it’s that there are cheaper alternatives. Not everything is a yes or no answer.
The 10-year purchase need not apply to the WHOLE amount of an item, it applies to ANY amount saved.
You can mix-and-match eliminating expenses and trimming down on others. James Clear, the author of Atomic Habits, talks bout the “Aggregation of Marginal Gains.” It states that a “1 percent margin for improvement in everything you do” would add up to a remarkable improvement. He’s talking about building habits and it applies to spending habits too.
Adding together a bunch of small savings across many areas of your life can add up to HUGE savings.
Trying to tear the bandaid off and eliminating things from my life is too uncomfortable (plus my wife wouldn’t be pleased if I cancelled all our subscriptions!). I prefer to trim expenses on many things with eliminating only a few. In the future, if I find I’m not getting the value from that recurring expense – I toss it.
Taking the “marginal gains” approach is a good first step to increasing your savings. It helps reduce the pain and uncomfortableness of making spending changes. Drastic changes will yield fantastic results. But not everyone has the stomach for it.
Marginal gains can add up to substantial savings with little effort.
A Quick List of Marginal Gains
I’ve put together a short list of areas in your life that you could look at reducing or eliminating spending. The biggest expenses in people’s lives are housing, food, and transportation; I don’t think you’ll be eliminating the first two, and not as easily the third one.
I’ll add more as they come to mind:
- House insurance – get a new quote every 3-5 years. Shop around.
- Groceries – cutting out processed foods like snacks and processed meats (they’re not healthy anyway!)
- Online subscriptions – I have a lot! Data backup, productivity apps, Netflix/Disney+/Amazon Prime (I have my work cut-out for me here)
- Having drinks with friends at home instead of a bar/restaurant
- Buy some free weights and workout at home instead of a gym membership. This assumes you have the motivation to do it yourself. Health is more important than paying for a gym membership if you’re not going to workout at home!
- Changing your cellphone plan
- Reducing expensive coffees – reducing even 2-3x a week makes a difference
- Cut back eating out – If you eat out 8 times a month (2x week), try cutting it back to 4-5x times a month. That would easily be $200/month; $1200/year
- Buy less clothing.
The 10-Year Purchase: Future Value Calculator
I took the idea from MMM and created a mini-calculator to show the power of the 10-year purchase. Please try it out yourself.
The example below shows purchases that add up to over $100,000 in savings in 10 years!! You can change the interest rate, years, category names, payment amounts and frequencies as you like.
Be sure to click the “How Much Could I Save???” button.
| Interest Rate (%) | |
| Number of Years |
Find areas of your life that you can reduce spending big or small.
| Savings Category | Payment | Frequency | |
|---|---|---|---|
| Total Savings |