We have the most fun when we write this section. Why? Because we think it could significantly improve the amount most people can save.
The reality for most of us is our income is relatively fixed. If you earn a monthly salary, well that’s it. Unless you are promoted, get a salary increase, or find a better paying job, your income is relatively fixed. You don’t automatically earn more by working more – but this could be a criteria in performance bonuses or salary increases. Anyway, the point is for most of us our income level is fairly set for the next year. And for those with variable income, the risk is earning less than what you need, not more.
So if income is known, then the only thing we can manage is our expenses. Our spending choices determine the cost structure of our lives: for example, renting in Port of Spain is more expensive than in East Trinidad, but your choice may have been a shorter commute, which leads to a higher personal cost base, “personal cost base” referring to your total expenses.
A dollar saved
We like to focus on what is obvious:
It’s a little different than a new dollar earned because it is not one-for-one. If you only factor in income taxes, every dollar earned is 75 cents saved. Add in other deductions and it’s usually less than 75 cents.
Have you ever heard this expression:
The first time we heard this statement it preoccupied us. What silliness was that? Of course the more you earn the better. But after a while we realized that the idea was most of us increase our expenses when we earn more. But the real problem is our cost base increases in a way that it is difficult to adjust downwards e.g. by buying a more expensive car – short of selling it or driving less, you are stuck for a while. As a result, a more frugal person earning half your income could potentially be saving more than you.
From that point on, we vowed to keep more. As our income grew, we tried hard to keep our cost base the same. This does not mean we did not occasionally splurge. We just tried to keep it one-off i.e. not add an expense that permanently increased our cost base. The point was, in the event we needed to scale back, it was relatively easy. For some types of personal expenditure, the amount we budget for has stayed the same for the last 10 years – no increase, even when we earned more.
There are dozens of ways you can reduce your expenses, which we will start to collect in an Everyday Tips section (to come). But most everyday tips involve some sort of sacrifice e.g. don’t buy gourmet coffee, drink instant, etc. Instead, we wanted to address this topic in a macro fashion. Meaning, are there any “lifestyle” choices we could make, or habits we could change, that would automatically lead to a lower cost base?
Let us quickly make a side comment. There are choices we make that have a huge financial impact e.g. having children, but we cover these in the section Life Events and Decisions. Instead, here we want to focus instead on, having made the “big” decisions, what can you do to minimize the cost associated with them. Hope you follow.
Using an example, the decision whether or not to buy a home or rent is one of the most significant decisions we make. We cover the pros/cons of home ownership in the section Life Events and Decisions. But if you made the decision to buy a home, in this section we’d like to cover ways you can reduce the cost associated with owning a home through lifestyle choices.
Debt and taxes
One final comment. In our view, two major areas for reducing outflows are debt and income taxes. We cover debt in Manage Your Debt and will consider doing a section on taxes in the future. So please note the content of those sections will not be repeated here.
New posts will be added soon…stay tuned! In the meantime, we’d love to hear your thoughts in the comments below