Do you want to achieve financial independence and retire early? The first step is to save a large portion of your income. Personally, I recommend trying to save 50% of your income. That way, you can FIRE in a reasonable time. Saving 50% is pretty difficult, though. You need to minimize the big 3 expenses to have a chance. Also, we all start small. Once your active and passive income increase, it’ll be much easier to save 50%.
For most households, the big 3 expenses are housing, transportation, and food. These three categories can take up a huge percentage of your income. Housing in particular is getting more expensive every day. It’s the biggest problem for many of us. Transportation expense is better, but it really depends on how you handle it. Some people enjoy expensive rides and they don’t mind spending money on their personal vehicles. However, you just need a safe and reliable vehicle. You can get that without spending a huge amount. Food is actually very affordable in the United States. However, it can be a big problem for lower-income households. Healthy food can take a large percentage of your income if you don’t make much.
The RB40 household is doing quite well with all 3 categories. Let’s take a quick look.
*From the U.S. Bureau of Labor Statistic – Consumer Expenditures 2019
Wow, that’s better than I thought. There is one thing to note. Our household income is about twice as much as the average income. It’s easier to keep the percentage low if the denominator is higher. However, many high-income households still spend a huge percentage on the big 3. When you make more, you tend to spend more. It isn’t easy to stay frugal when you make more income.
Let’s go through each of the big 3 to see how we manage to stay way below average.
We spend about $1,400/month on housing. This includes mortgage, property tax, insurance, utilities, repair, and maintenance. That’s not bad for a high cost of living location like Portland, OR. The way we managed to keep our housing expenses down is shared housing. We live in a small duplex and rent out one unit. This duplex is a 2-story home that was divided into two units sometime in the 80s. One unit is a bit small for a family, but it’ll work for now. Our son is still young so we can manage. His “room” is actually an office/den. It’s okay for now, but I’m sure he’ll want more privacy when he’s older. We plan to take over both units when he’s in high school*. Our housing cost will double at that point. You can read more about our duplex here.
*I didn’t get my own room until I was a junior in high school so I don’t feel bad for our son at all.
The easiest way to reduce your housing expense when you live in a high cost of living location is to share housing. You can buy a house and rent some rooms out or the other way around. I believe the kids call it “house hacking”, these days.
Housing expense is difficult to reduce because it largely depends on where you live. If you live in San Francisco, you’ll spend a lot on housing no matter what. On the other hand, the transportation expense is a lot more controllable. Many households choose to spend on nicer/newer vehicles because it’s important to them. For us, a car doesn’t mean that much. It’s just a way to get from point A to point B. As long as it’s safe and doesn’t stand out, we’re happy with it. Also, we don’t have a garage so we park in the street. A luxury car will get dinged up quickly and I’ll just get mad. For us, it’s better to have a modest vehicle. Here are 10 reasons why I prefer a cheap car.
Our current vehicle is a little minivan, a Mazda5. We purchased this vehicle in 2010 for about $17,500. We paid cash for it and plan to drive it into the ground. It’s been a good vehicle for us and I hope it lasts until RB40Jr goes off to college. We don’t drive much (5,000 miles/year) so the main expense is insurance. Even if I factor in the cost of vehicle purchase, we’d still be way below average in this category.
Wow, we spend more on food than transportation. That must be pretty unusual. We spend about $500/month on groceries and $100-$200/month on restaurants. The way we keep food expenses moderate is to cook at home. I cook dinner on the weekdays and Mrs. RB40 cooks on the weekend. This year we get takeout about once per week to support the local restaurants. I think this category is the easiest to control out of the big 3. Healthy ingredients are affordable and anyone can learn how to cook. Most of my recipes are very easy. You can check out my SAHD recipes page for some interesting Asian cooking.
Your Big 3
The average US household spends 48% of their income on the big 3 expenses. This makes it impossible to save 50% of their income. There are still other categories to spend money on – taxes, clothing, entertainment, healthcare, education, and insurance. Saving 50% of your income is hard. You have to put a lot of effort into it. I think you need to keep the big 3 under 30% to have a chance. Of course, FIRE is not a race. You can still get there if you don’t save 50%. It’ll just take a little longer.
In conclusion, track your expense to see what you spend money on. This will help you reduce your spending and hasten FIRE. Of course, you should also grow your income at the same time. Do both and you’ll achieve financial independence before you know it.
Do you know how much money you spend on the big 3? Share your percentage in the comment!
More about the big three.
- The Cost of The Big Three Expenses By State by Accidental FIRE
*Sign up for a free account at Personal Capital to help manage your cash flow and net worth. I log in almost every day to check on our accounts. It’s a great site for DIY investors.
Image Credit: Aaron Burden
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.