RPF0510-Biggest_Expenses
00:00:00.000 | Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge,
00:00:04.320 | skills, insight and encouragement you need to live a rich and meaningful life now while
00:00:08.580 | building a plan for financial freedom in ten years or less.
00:00:12.320 | Today on the show we continue our theme of an analysis of expenses.
00:00:15.880 | As we release this show in January, it's a convenient time to do an analysis of the
00:00:20.680 | 2017 financial data that I hope you've accumulated over the past year.
00:00:26.800 | And I want to focus on how expenses will relate to your plan for financial freedom.
00:00:33.360 | On yesterday's show I talked about the value of grossing up expenses, things that are monthly,
00:00:40.760 | for example, looking at them in terms of their annual cost.
00:00:44.680 | In previous episodes of Radical Personal Finance I've talked about the value of converting
00:00:48.420 | annual costs to decade costs and considering them in different frames of mind.
00:00:53.800 | I also talked about the value of cutting those costs down and looking at them on a daily
00:00:58.960 | basis so you are clear on what your daily expenses are.
00:01:02.720 | This can be very illuminating, either in a positive direction or a negative direction.
00:01:07.480 | Sometimes you look at your expenses and you're very satisfied with them that, "Hey, wow,
00:01:10.760 | I'm able to live on that small amount a day," or "I only spend this small amount per day
00:01:14.760 | on this category.
00:01:15.760 | That's great."
00:01:16.800 | Sometimes it goes the other way and it's a little bit sobering to recognize, "I spend
00:01:21.300 | how much per day?"
00:01:23.680 | Both of those can be valuable and give you insight.
00:01:27.400 | But the next method of analysis that I want to encourage you to do is to order your expenses
00:01:33.360 | from most expensive to least expensive and look at them very carefully.
00:01:38.500 | When we come to financial savings, when we come to the area of spending less money, there
00:01:45.360 | are various ways that you can approach this.
00:01:48.520 | And I think that different ways have different merit in different situations.
00:01:54.400 | I'm sure you're shocked by a statement like that.
00:01:56.760 | That's a very inclusive statement, but it really is true.
00:02:01.000 | There are times at which learning how to cut back in a specific category, perhaps let's
00:02:07.000 | talk about the well-known latte factor, cutting back on your favorite cup of coffee has a
00:02:11.680 | measurable impact on your wealth.
00:02:16.560 | That can be very valuable.
00:02:19.240 | Some people are quick to dismiss that and say, "Well, why would I put myself through
00:02:25.480 | the ringer and cut out my favorite cup of coffee?
00:02:27.960 | That just seems really bad.
00:02:28.960 | I'll just focus on the big stuff."
00:02:31.280 | Well, there's a measure of truth to that.
00:02:34.580 | But for many of us, cutting back on a daily latte, a daily four or five dollar coffee
00:02:39.220 | habit can have a tremendous impact on our net worth and on our savings.
00:02:45.140 | If you calculate what you would need in terms of your overall wealth in order to fund a
00:02:52.560 | five dollar a day coffee habit, it's a huge number.
00:02:56.840 | Let's assume that you buy a five dollar coffee and something to go with it each day, five
00:03:02.360 | days a week over the course of a year.
00:03:04.640 | If you do that over time, you would need to accumulate about $25,000 in an investment
00:03:08.960 | portfolio in order for you to support that habit in financial independence.
00:03:13.880 | So it's not insubstantial.
00:03:15.400 | It's a substantial number.
00:03:17.000 | But is that really the best place to start?
00:03:20.540 | It might be for some people.
00:03:24.120 | Sometimes focusing on one small area of expenditure and making a change can be the catalyst to
00:03:30.340 | moving in a different direction, to changing your mindset and recognizing the value of
00:03:35.160 | thrift and frugality.
00:03:38.060 | But I don't necessarily recommend that you start with that.
00:03:40.240 | I think it's best to always start with the big picture changes.
00:03:45.240 | In any area of analysis, we always want to keep firmly in mind the value of the 80/20
00:03:50.160 | principle or the Pareto principle, whichever term you prefer.
00:03:53.240 | The idea is there are a small number of things, about 20% of things, that are going to result
00:03:58.800 | in a huge number of outcomes or going to impact the most.
00:04:03.960 | 20% of your actions will account for 80% of your results.
00:04:08.640 | And so one of the methods of improving is to focus in on what are those 20% of your
00:04:14.120 | actions that will result in 80% of your results.
00:04:18.440 | And when things come to it and you have to make a decision, the more you can focus on
00:04:23.160 | the most impactful actions, the better your results will be.
00:04:29.040 | So think about your budget.
00:04:30.040 | What are those 20% of decisions that will have the most impact on your results?
00:04:38.960 | Well frankly it's not going to be your Starbucks habit.
00:04:45.220 | It's going to be the structural costs of your life.
00:04:53.840 | I want to talk about the difference in expenses and I want to use the example from the world
00:04:58.680 | of business accounting.
00:05:01.440 | In business accounting, we generally separate expenses into two categories, fixed costs
00:05:09.200 | and variable costs.
00:05:12.080 | The names are illustrative of what they actually are.
00:05:15.080 | Fixed costs are expenses that are set and that aren't going to change month from accounting
00:05:21.000 | period – sorry, aren't going to change much from accounting period to accounting
00:05:24.580 | period.
00:05:25.580 | On a monthly basis, they're going to be about the same.
00:05:27.520 | So an example of fixed costs in a business would be something like the rent that you
00:05:32.880 | pay for your facilities or the salaries that you pay for your workers.
00:05:39.680 | These are relatively fixed costs, especially if your workers are expected to work a standard
00:05:45.360 | work week and their payment is relatively flat.
00:05:48.280 | These would be fixed costs.
00:05:49.280 | They're not going to change much, your overhead.
00:05:52.860 | Variable costs are expenses that will change based upon the value of the output of your
00:05:59.960 | business.
00:06:01.240 | So an example of variable costs would be the cost of raw materials.
00:06:05.280 | If you make widgets in a factory, your bill for the supplies that you're purchasing
00:06:12.760 | from your suppliers will go up or down based upon the number of widgets that you produce.
00:06:20.880 | In our analysis, it's important to keep in mind which aspect of the analysis we're
00:06:25.840 | looking at.
00:06:28.060 | Now if we were to apply that over to personal accounting, in your personal finances, you
00:06:33.180 | would quickly recognize that something like a Starbucks habit is a variable cost, and
00:06:39.240 | that's something that you can move up or move down.
00:06:44.440 | That's good because it makes it easy to change, but it's probably not the variable
00:06:49.280 | expenses in your life that are making the biggest difference in your total monthly budgetary
00:06:57.240 | expenses.
00:06:58.240 | It's probably those fixed costs.
00:07:00.240 | Here's my recommendation to you.
00:07:02.120 | Make a spreadsheet, either on a computer program or write it down on a piece of paper, and
00:07:09.520 | order the categories of your expenses from the last year in order of their largest to
00:07:16.400 | smallest total value.
00:07:20.240 | What was your annual total of one of your biggest categories of expenses?
00:07:27.540 | If your budget is like most people's budget, your biggest categories of expenses would
00:07:31.340 | usually be taxes of various types, housing, transportation.
00:07:40.680 | Housing of course would be a collection of different expenses that are all related to
00:07:44.160 | your house.
00:07:47.040 | Here's my advice.
00:07:48.480 | If you can get those things structurally right, the little stuff falls into place much more
00:07:56.360 | simply than if those big expenses are structurally flawed.
00:08:04.000 | If your mortgage payment is a relatively small number as a component of your budget, the
00:08:11.800 | amount of lattes that you buy when you want to go out and have a coffee treat will have
00:08:16.920 | a very small impact on your wealth.
00:08:22.600 | Focus on how you can get that number structurally right.
00:08:28.720 | Now what is right?
00:08:29.720 | Well, you'll have to decide that.
00:08:32.640 | You'll have to look at your area where you live, you'll have to look at your lifestyle,
00:08:36.120 | and you'll have to try to figure out what is an appropriate and right way for me to
00:08:40.520 | get what I need to get.
00:08:42.240 | You have to take into account your needs.
00:08:43.800 | What are the needs of your family?
00:08:45.640 | What type of house do you need to live in?
00:08:48.320 | What type of house would you like to live in?
00:08:50.480 | What's the impact on the rest of your budget?
00:08:53.400 | What needs do you have with regard to transportation?
00:08:56.840 | What wants do you have with regard to transportation?
00:08:58.840 | But if you'll just focus in on getting those first few category expenses structurally sound,
00:09:05.160 | taxes, housing, transportation, perhaps things like insurance, education costs for some people,
00:09:14.160 | if you'll get those structurally right, the rest of your budget will be relatively simple.
00:09:22.000 | If you're looking for the single category that will make the biggest difference on your
00:09:28.880 | budget, I would bet you.
00:09:33.160 | I would basically guarantee you it's your choice of living arrangements because frankly
00:09:42.720 | that drives almost everything else in your budget.
00:09:46.600 | Your choice of where to live and how to live will affect every other area of your budget.
00:09:56.720 | Doubt me?
00:09:57.720 | Let me explain.
00:10:00.320 | Taxes, your choice of where you live will dramatically affect your taxes.
00:10:10.680 | Property taxes are perhaps the most obvious example.
00:10:13.000 | If you own a home, you can own a house of the same value, let's just say a $300,000
00:10:19.280 | house, and in some cities, some states, your annual property expenses on a $300,000 house
00:10:27.040 | will be $500 per year.
00:10:30.680 | In some states, your annual property taxes on a $300,000 house will be $10,000 per year.
00:10:38.320 | Pure expense out of your pocket, driven by your house.
00:10:42.120 | Where you live, your state of domicile will dramatically affect your income taxes, especially
00:10:48.840 | with regard to your state income taxes.
00:10:51.560 | Some states that you live in will charge you no personal income taxes.
00:10:56.500 | Some states will charge you some personal income taxes and some will charge you very
00:11:00.160 | high.
00:11:01.160 | That's a level of taxation that you are paying based upon where you live.
00:11:10.640 | The house that you choose to live in will affect the taxes that you pay on personal
00:11:15.840 | property.
00:11:17.560 | Some states have taxes on personal property, some states don't.
00:11:20.960 | Some states are strict in their enforcement, some states aren't.
00:11:25.280 | But the impact of the house that you live in goes far beyond that.
00:11:28.640 | The type of neighborhood that you choose to live in will impact the type of house expenses
00:11:34.280 | that you have.
00:11:35.680 | If you live in a neighborhood where a backyard pool is normal and expected, that's going
00:11:41.040 | to add an additional expense to your budget.
00:11:44.920 | You're going to pay more for the house.
00:11:46.980 | You're going to pay more for the care and maintenance of the pool.
00:11:51.200 | You're going to pay more to hire the pool guy to do it for you or to go and buy the
00:11:55.120 | chemicals.
00:11:56.120 | That will impact your cost.
00:11:58.120 | It goes far beyond that though.
00:12:00.320 | The type of neighborhood that you live in will impact the type of landscaping that you
00:12:03.920 | have.
00:12:07.040 | What's acceptable, what's necessary, how much money should be spent on landscaping
00:12:12.000 | and improvement of your home.
00:12:14.040 | The type of neighborhood that you live in will affect the type of car that you drive.
00:12:18.080 | Generally, neighbors drive cars that look about like each other's cars.
00:12:24.000 | And so if you move into a fancy, posh neighborhood, you're going to feel some pressure to drive
00:12:29.800 | a fancy and posh designer car.
00:12:35.600 | Make that choice intentionally as is right for you, but you're going to feel the pressure.
00:12:39.480 | The type of neighborhood that you live in will impact your children's educational expenses.
00:12:46.080 | Some neighborhoods that you live in will have most of the children attending a private school
00:12:52.680 | and you may be putting yourself in a situation where you're stroking a check for private
00:12:57.280 | tuition.
00:12:59.880 | The type of neighborhood that you live in will impact the type of lifestyle that your
00:13:03.920 | children consider to be normal.
00:13:07.360 | The types of clothes that their friends wear will impact the types of clothes that they
00:13:11.000 | want to wear and the pressure that they bring to bear on your budget for that.
00:13:14.440 | The types of clothes that – sorry, the types of toys that your friends have, your neighbors
00:13:19.040 | have, will impact the types of toys that your children will want to have.
00:13:26.800 | What about insurance, one of the biggest impacts on people's budgets?
00:13:30.480 | Well, of course, the type of house that you live in and the type will be driven by the
00:13:34.920 | – will drive the cost of insurance.
00:13:37.200 | You can have the same four-bedroom, two or three-bath house and the insurance rates are
00:13:42.840 | very high in one place because a four-bedroom, three-bath house sells for $600,000 or $800,000
00:13:49.640 | versus the same exact house plopped on a different piece of property could only be worth $100,000
00:13:55.360 | in the local market.
00:13:56.360 | That will affect your property insurance.
00:13:58.000 | Your property insurance will be driven by simple things like how close you are to the
00:14:01.960 | ocean.
00:14:03.080 | Where I live in southern Florida, it's a matter of which side of I-95 do you live on.
00:14:07.760 | There's a line.
00:14:08.760 | If you live on the east side of I-95, there's a marked increase in property insurance rates
00:14:13.640 | because of a higher likelihood of windstorm damage because of the proximity to the ocean
00:14:20.840 | versus on the west side of I-95.
00:14:23.920 | The elevation at which you live will make a difference.
00:14:26.760 | Lower in a floodplain, now you're going to pay more.
00:14:28.760 | You're going to have a greater need for flood insurance.
00:14:30.720 | You're going to pay for that.
00:14:32.320 | Those rates will be reflected in your homeowner's insurance.
00:14:35.960 | The house where you park your car every night will dramatically affect the cost of your
00:14:39.680 | car insurance.
00:14:41.960 | In Miami-Dade County, it's my understanding that the cost of car insurance is almost double
00:14:48.000 | what it is in Palm Beach County where I live.
00:14:50.560 | Palm Beach County is more expensive than north of me, farther up, farther into the state.
00:14:59.480 | Where you choose to park your car every night will have a dramatic impact on your property
00:15:04.440 | insurance rates.
00:15:06.640 | By the way, those rates are driven partly by drivers, the number of drivers, the congestion,
00:15:12.760 | things like that, accident rates.
00:15:14.080 | But it's also driven by things like theft and crime.
00:15:17.000 | So where you choose to buy will have a big difference in the crime rates.
00:15:21.600 | I think earlier – well, every county is different.
00:15:24.720 | So you need to look at your county and understand.
00:15:27.120 | Where you choose to live will have a difference on your energy costs, the costs of heating
00:15:32.680 | or cooling.
00:15:33.680 | In an extreme climate, you'll have higher costs for cooling your house or for warming
00:15:37.800 | your house.
00:15:39.680 | And you'll pay varying rates for that energy.
00:15:43.240 | Some states have very high energy costs.
00:15:45.200 | Some states have very low energy costs.
00:15:48.560 | The place that you choose to live will have a dramatic impact on your grocery budget.
00:15:53.400 | What stores are available to you?
00:15:55.560 | How much do you pay for those stores?
00:15:57.400 | If you live in an inner city, downtown inner city, it's probably going to be a hassle
00:16:01.880 | for you to try to get out and go outside of the city.
00:16:06.120 | Probably would also be a big expense for you to purchase things in bulk at lower prices.
00:16:10.800 | So you are more likely to be working with a local merchant who's selling things in
00:16:14.760 | small quantities at relatively high unit prices.
00:16:17.440 | You'll pay a higher amount for groceries.
00:16:19.840 | You'll pay, based upon where you live, a higher or lower amount for accessibility to
00:16:25.560 | stores.
00:16:26.560 | If you live out in the country, 50 miles from the closest grocery store, there's going
00:16:31.240 | to be a significant expense for you in gasoline just to get to the grocery store.
00:16:34.720 | That's a different choice than when you live a block or two away from the grocery store
00:16:39.400 | and you can walk down there and pick up your groceries with your wagon or what I used to
00:16:43.720 | do is take my bike trailer down to the local grocery store and load up my bike trailer
00:16:47.640 | with groceries.
00:16:48.880 | All of those things matter.
00:16:51.800 | Where you choose to live will drive your entertainment expenses.
00:16:55.680 | What is normal and customary in your circles?
00:17:02.000 | Sometimes if you live in an urban, high activity lifestyle, it's very normal for you to say,
00:17:07.680 | "Well, tonight we're going to go down to the theater.
00:17:09.640 | Tonight we're going to go down to the show.
00:17:10.960 | Tonight we're going to go down to the concert.
00:17:12.280 | Tonight we're going to go down to the movies."
00:17:14.780 | And those things all have embedded costs.
00:17:16.680 | Now, of course, there can be benefits.
00:17:18.440 | I'm not painting everything as – I'm not trying to be one-sided in my analysis here.
00:17:24.160 | For example, there are many cities if you live in an urban environment, there's a lot
00:17:27.100 | of free entertainment, a lot of discounted things.
00:17:29.160 | Wherever you live, you can find ways to change circumstances.
00:17:34.900 | You might live – for example, if you live in downtown Miami, Florida and your car insurance
00:17:39.400 | rates are very, very high, it's much more in your interest to not own a car, not to
00:17:43.400 | drive and to use other forms of transportation in order to offset that cost.
00:17:49.460 | So please don't hear me being one-sided or hypercritical, but I'm trying to challenge
00:17:55.420 | your thinking.
00:17:56.420 | Back to entertainment, for example, if you live out in the country, perhaps your normal
00:18:01.100 | form of entertainment is put a bonfire in the backyard and invite your friends over.
00:18:05.820 | It's all a matter of lifestyle.
00:18:09.040 | What are you going for?
00:18:11.540 | Where you live will have a dramatic impact on the cost of your medical insurance and
00:18:16.220 | possibly on the cost of your medical care.
00:18:21.300 | Consider and calculate carefully.
00:18:22.540 | It's funny.
00:18:23.540 | I'm just sitting here and looking at my own expenses for 2017 as I do this show.
00:18:29.940 | Where you live will have a dramatic impact even on small things like your dog expenses.
00:18:37.700 | I shared on yesterday's show that a frustration for me has been how expensive one of my dogs
00:18:41.680 | has been over the last couple of years.
00:18:43.180 | It's because he has allergies to something in – at least where I live in Florida.
00:18:49.580 | The only way to control it, it leads to a dermatological condition for him.
00:18:53.140 | The only way to control his allergies is with – at the moment, with a very expensive medication
00:18:57.780 | but an effective medication that he's on.
00:19:02.300 | And yet that's probably a regional thing.
00:19:04.480 | In terms of talking with a dermatologist, it's probably throughout the southeast.
00:19:08.160 | But there may be other places in the country that would have a dramatically cheaper place.
00:19:12.820 | If I lived in a different place with my dog, it would probably have saved me about $1,500
00:19:17.180 | last year from vet bills because of his allergies.
00:19:22.260 | So that's enough of the examples.
00:19:25.100 | I hope I've made my point.
00:19:26.620 | The place that you choose to live is probably the cornerstone choice that will affect every
00:19:33.460 | other area of your life.
00:19:38.060 | Now you'll notice thus far I haven't discussed income.
00:19:42.800 | It would be negligent for me to not discuss income because there is a strong correlation
00:19:50.700 | between location and income levels.
00:19:55.580 | There has to be and this makes sense.
00:20:00.180 | If you live in a large urban environment, on average, the incomes will be higher than
00:20:06.180 | if you live out in the country.
00:20:09.820 | It's much more normal to find somebody working and living on $15,000 per year out in a small
00:20:18.580 | rural town than it is to find somebody working and living on $15,000 per year in downtown
00:20:27.360 | San Francisco or downtown New York City, downtown Chicago, downtown Dallas, Texas, downtown
00:20:32.240 | Miami, Florida.
00:20:34.840 | After all, that's one of the major reasons why people move to an urban environment is
00:20:38.320 | for economic opportunity.
00:20:41.260 | That would be one of the stronger reasons to choose to live somewhere where you're going
00:20:45.400 | to have a higher cost of living would be so that you can earn the higher rate of income.
00:20:54.720 | But count the cost carefully in that decision.
00:20:59.040 | I'm convinced that probably about 20% of the people who live in a high cost of living place
00:21:06.240 | for the purposes of earning a high income are actually earning a high income.
00:21:09.800 | But about 80% of the people probably aren't.
00:21:14.480 | What I mean is there are ways to build a high income in almost any place that you live.
00:21:21.640 | Years ago when I sold life insurance for a living, I did a lot of reading and I would
00:21:27.440 | spend a lot of time thinking about where I lived.
00:21:31.360 | One of the values of living where I lived was – is the fact that it's an urban environment.
00:21:37.720 | In an urban environment, you have more prospective customers.
00:21:40.920 | Your prospective customers have higher incomes.
00:21:43.600 | Higher incomes lead to potentially larger sales.
00:21:46.280 | They have more income they need to protect.
00:21:47.880 | It's much easier to sell a $5 million life insurance policy to somebody who earns a couple
00:21:54.800 | of hundred thousand dollars a year than it is to somebody who earns $20,000 per year.
00:21:59.820 | So the idea is that if you live in an urban environment, there are lots of prospects for
00:22:05.760 | your products.
00:22:06.760 | You'll frequently see this.
00:22:08.360 | There are large life insurance producers who often live and work in very affluent areas,
00:22:14.400 | whether that's Aventura, Florida or downtown New York City or downtown Los Angeles because
00:22:19.800 | the prospect pool of wealthy and high income earning clients is very, very concentrated.
00:22:27.240 | But that's not the only way to build a business.
00:22:30.300 | When I was first starting to study the business, I quickly came across the story and history
00:22:35.120 | of a man named Ben Feldman who for a time – and I'm sure many would still consider
00:22:40.260 | him the same today – was the greatest life insurance salesman in history.
00:22:44.280 | He worked for New York Life and he just set sales record after sales record after sales
00:22:49.340 | record over the course of a 50-year career selling insurance.
00:22:53.160 | That was just huge, absolutely huge.
00:22:55.040 | He took every ceiling for decades and basically broke through every ceiling of what people
00:23:01.140 | thought was possible in the life insurance sales business.
00:23:06.940 | One of the remarkable things to me though was that he made his career and built his
00:23:10.740 | career in a little rural town called East Liverpool in Ohio near the borders of Ohio,
00:23:18.820 | Pennsylvania and West Virginia with a tiny little population.
00:23:22.620 | Most of his career was spent within about a 50-mile geographic area in East Liverpool,
00:23:27.860 | Ohio.
00:23:28.860 | He built one of the greatest, if not the greatest, life insurance sales businesses of all time.
00:23:37.980 | I would often think about that because it was a good example of challenging paradigms.
00:23:44.900 | Often you can take what you're doing in a high cost of living place and you can do
00:23:48.580 | it in a lower cost of living place.
00:23:54.340 | Don't be scared to challenge your own considerations.
00:23:58.180 | Don't be scared to challenge your own choices.
00:24:02.540 | Final part of today's show and by way of reminder, the first thing that we discussed
00:24:06.780 | was order your expenses from biggest to smallest and focus on changing the biggest ones first
00:24:15.720 | because that'll have a bigger impact on your overall lifestyle than all your little
00:24:21.540 | decisions.
00:24:23.920 | So look at the big expenses and try to focus on the big structural changes.
00:24:29.380 | If you have a $500 a month car payment, that's a total of $6,000 per year.
00:24:35.880 | If you dump the car and dump the car payment and buy something for cash that's cheap,
00:24:42.100 | at the end of next year if you save that money, that'll be $6,000 in your pocket.
00:24:47.420 | $5 a day lattes will certainly dent that $6,000.
00:24:52.860 | If you do five bucks a day, 20 bucks a week, 50 weeks a year, that's $1,200 at the end
00:24:58.180 | of the year that you're spending on $5 lattes or again, latte is a metaphor.
00:25:02.980 | So that'll dent that $6,000.
00:25:04.900 | But better for you to just sell the truck, sell the car, get something cheap and then
00:25:09.900 | pocket the $4,800 difference if you want to keep on doing the latte.
00:25:14.380 | Your best course of action of course is to do both.
00:25:17.060 | Cut out the lattes and cut out the car payment and then you got $7,200 in your pocket at
00:25:23.300 | the end of the year.
00:25:25.340 | But that was point number one.
00:25:27.100 | Point number one, biggest to littlest, focus on the big ones first.
00:25:31.700 | Point number two was if there is a key factor in your budget, most likely it's your choice
00:25:39.880 | of housing.
00:25:42.440 | That's the cornerstone expense that drives just about everything else.
00:25:46.060 | So do a careful analysis of your situation.
00:25:50.500 | Now number three, back to that fixed versus variable expenses.
00:25:55.140 | To me, one of the most valuable things that can be done in a personal budget is to move
00:26:01.780 | things off of the fixed expense category and move them over to variable expenses.
00:26:11.800 | I have a pretty deep allergy towards fixed expenses and it's only getting deeper.
00:26:20.080 | Now perhaps this is due to a little bit of my background and my history.
00:26:22.800 | As a financial advisor, I've seen so many people make changes in their lives and I've
00:26:28.260 | watched them go from prosperity to disaster very quickly.
00:26:34.160 | Just like a physician has the benefit of seeing people go from health to illness and from
00:26:39.920 | illness to health, just like a physician has that benefit, a financial advisor has the
00:26:44.380 | benefit of knowing the intimate details of people's lives and I've seen how quickly
00:26:48.540 | lives change due to no expectation – with no previous expectation of the person.
00:26:55.760 | I've seen people go from earning $300,000 a year to being unemployed for years and not
00:27:00.880 | being able to find a job.
00:27:02.720 | I've seen fortunes lost.
00:27:04.840 | I've seen businesses turned upside down by changes in legislation or changes in – somebody
00:27:09.600 | lost a lawsuit or something like that.
00:27:11.720 | It happens.
00:27:12.720 | When you see that again and again, it puts a deep defensive – it has put a deep defensiveness
00:27:17.800 | into me of just watching those patterns.
00:27:21.880 | I'm also allergic to it probably from my own experience.
00:27:26.600 | Having lived on a highly variable income for the last decade of my life, I've learned
00:27:32.720 | to be wary of committing myself in advance.
00:27:37.600 | I've learned to be wary of having high structural expenses because there have been months where
00:27:42.000 | my income is huge and there have been months where my income has gone along and I've
00:27:47.960 | earned nothing or I've owed money.
00:27:51.360 | Those experiences change your outlook.
00:27:53.440 | They have for me.
00:27:54.440 | So I've developed a pretty deep allergy and aversion to fixed expenses.
00:28:00.520 | I think that one of the most valuable things you can do is seek whenever possible to move
00:28:06.520 | fixed expenses and transform them into variable expenses.
00:28:12.240 | How do you do that?
00:28:13.240 | The first obvious way to do it is by paying things off.
00:28:18.220 | If you have a $400 a month or $500 a month car payment and you pay the car off, then
00:28:24.120 | you eliminate the $500 a month car payment.
00:28:26.520 | Now, do you eliminate the expense of the car?
00:28:29.320 | No, you don't.
00:28:30.820 | You still have the steady decrease in value.
00:28:34.060 | You have the steady depreciation of the vehicle and you have that expense whether you have
00:28:38.440 | a car payment or whether you don't.
00:28:41.000 | But you eliminate the fixed expense to your budget.
00:28:47.000 | Similar thing would occur if you own a home and you pay it off.
00:28:50.140 | If you have a paid off house, that brings you tremendous flexibility because now you
00:28:56.280 | don't have to make a payment every month.
00:28:59.360 | So if your income goes down or if your circumstances change, you're not stuck having to come up
00:29:04.860 | with payments.
00:29:07.740 | Method number one, pay things off.
00:29:11.340 | Method number two, whenever possible, choose a non-contracted option.
00:29:17.980 | There's a bit of a mixture here between paying things off but here would be a simple example.
00:29:24.940 | For years, many of us purchased phones, cell phones from companies with the use of a contract.
00:29:32.800 | The basic methodology of the past and it still exists today was that a large phone carrier
00:29:37.340 | would offer a phone to you and they would give you a discount on the phone, give you
00:29:41.140 | a free phone or give you a discount on it in exchange for your signing a contract with
00:29:45.420 | that company.
00:29:46.420 | I did this several times over the years and one of the challenges though was that you
00:29:52.300 | were locked into a certain provider.
00:29:54.700 | You had to fulfill the terms of the contract.
00:29:58.580 | That's annoying from a value perspective because perhaps that provider is not providing the
00:30:03.500 | value that you want and it's also annoying from the perspective of having to make that
00:30:08.540 | payment every month.
00:30:09.780 | What happens if your income is low?
00:30:11.900 | What happens if you lose your job?
00:30:13.660 | How do you keep on going with that payment?
00:30:15.740 | And having your phone number locked in with them was even worse because for a long time,
00:30:19.620 | that phone number was a really valuable thing.
00:30:22.080 | How do I make sure that I don't lose that phone number?
00:30:24.380 | Well, for a number of years, I've quit doing business with those companies and I was very
00:30:30.540 | glad to get rid of them after years of frustration with the fact that the companies always seem
00:30:36.420 | to treat the new customers better than the old customers just because they would just
00:30:40.700 | try to lock people into a contract to give them discounts.
00:30:42.980 | Finally, I said, "I'm done with you all."
00:30:45.420 | So for years, I've used various prepaid options for the phone.
00:30:49.100 | Now, I maintain service on the phone but I love the fact that I don't have to.
00:30:54.940 | I love the mental freedom from knowing, "You know what?
00:30:57.300 | If I'm not going to use my phone for a while, I could just skip it.
00:31:01.340 | I don't have to have a phone."
00:31:04.260 | And because I've moved my services around so that my cell phone number is no longer
00:31:10.060 | a number that I care about, rather I have all of my points of contact in ways that don't
00:31:15.740 | require monthly expenses, it frees me up mentally to know that at any point in time, I could
00:31:21.660 | just dump the phone cost.
00:31:25.820 | That's powerful.
00:31:26.820 | You know, that wasn't possible a decade ago.
00:31:29.460 | You always needed to have that continuity of that phone information, that phone line.
00:31:32.940 | But today, we live in a better world and today, you can do that.
00:31:35.940 | Now, I don't think it's possible to do that with all things.
00:31:38.780 | It's certainly not.
00:31:40.620 | But anywhere you have the choice to not sign a contract or you have the choice to take
00:31:45.940 | things little by little, calculate that and consider going for it.
00:31:51.660 | It brings freedom and flexibility to your budget.
00:31:54.540 | And the third point I would give on this point of how do you make fixed expenses, variable
00:31:58.660 | expenses is with personal skill in spending and personal resilience in attitude.
00:32:09.300 | I spoke yesterday about my annoyance with our grocery budget over the last year.
00:32:18.700 | The good thing about that though is even though I've been annoyed with it, the reason that
00:32:22.380 | we spent the money that we spent on groceries throughout 2017 was because we were making
00:32:29.300 | many luxury choices, luxury choices such as choosing the higher quality of food versus
00:32:37.320 | the lower quality of food that would simply deliver calories and basic nutrients instead
00:32:41.900 | of what might be a little bit cleaner, luxury choices in choosing convenience foods over
00:32:50.940 | foods that require more manual preparation, luxury choices in terms of choosing foods
00:32:55.220 | that are richer and simply tastier and more fun to eat than things that are nutritious
00:33:00.020 | and satisfying.
00:33:02.300 | But the great thing is I know that if we had to, if we had to based upon skill, I could
00:33:12.220 | feed my family on $200 a month.
00:33:17.260 | Now would that be luxury?
00:33:18.260 | No, it wouldn't.
00:33:19.660 | Should I do that?
00:33:20.660 | Well, depends on how bad I need the money.
00:33:23.740 | I think there are important considerations with something as important as food, which
00:33:26.620 | fuels your life and contributes measurably to your lifestyle, that the ultimate cheapest
00:33:32.620 | is not always the best.
00:33:35.980 | But with skill, which I do have and I know how to acquire, I could do that if necessary.
00:33:44.540 | And there are many other areas in which this is also the case.
00:33:49.720 | With skill, you can learn to repair your car.
00:33:52.300 | With skill, you can learn to groom your own dog.
00:33:55.020 | With skill, you can learn to have lots of fun entertainment for free.
00:33:59.360 | With skill, you can learn how to fix your clothes.
00:34:02.060 | With skill, you can learn how to cut your own hair.
00:34:04.340 | With skill, you can learn how to cut your own lawn.
00:34:08.340 | So skill acquisition is very important.
00:34:11.420 | And even if you don't actively practice the skills every day, at least being aware of
00:34:15.780 | them is helpful.
00:34:18.580 | That's why I try so hard to share with you ideas on skills that you can develop.
00:34:22.640 | You may not want to live on $200 a month even as I don't – of food, even as I don't
00:34:27.740 | particularly want to do that.
00:34:29.800 | But knowing how to live on $200 a month, knowing how to have your children's stomachs full
00:34:35.340 | so they're not crying and to have enough nutritional value so that you're not going to stunt their
00:34:39.740 | growth or cause problems down the road, knowing how to do that is very valuable and it makes
00:34:46.500 | you resilient.
00:34:49.740 | Personal resiliency is the other aspect of the equation.
00:34:55.200 | Are you willing and able to endure change with a good attitude?
00:35:00.380 | Are you willing and able to endure discomfort with a good attitude?
00:35:05.420 | Are you willing and able to embrace adversity and gain from it rather than complain about
00:35:12.900 | it?
00:35:14.480 | Are your relationships with your husband, wife, children, family members, are they strong
00:35:21.500 | so that those relationships will carry through times of adversity?
00:35:28.540 | Is your sense of self-confidence and self-worth, are they strong and able to carry you through
00:35:36.840 | times of challenge, times of failure?
00:35:41.260 | Everybody fails.
00:35:42.260 | Everybody faces adversity.
00:35:44.040 | All of us at some point are going to lose a job or have a business failure or fail on
00:35:48.300 | something.
00:35:49.300 | I've had my share and I'm even having my share right now.
00:35:51.580 | But your mindset is what carries you through and your personal resiliency, your personal
00:35:56.060 | strength will make a big impact in your interpretation of events.
00:36:04.360 | Your attitude and your mindset will determine the results that you get.
00:36:10.940 | Two people with two different mindsets can walk through the same circumstances.
00:36:15.220 | One of them comes out frustrated at life, deeply depressed, angry at everything.
00:36:21.980 | The other person comes out of it scarred but with new skills and deeper scar tissue.
00:36:32.700 | Personal resilience is something that can be cultivated and I recommend to you it's
00:36:37.500 | something that should be cultivated.
00:36:40.060 | It should be cultivated in yourself.
00:36:42.700 | It should be cultivated in your children.
00:36:45.580 | And resilience will have an impact on your personal expenses.
00:36:53.820 | Are you strong and resilient enough to turn off the air conditioning in your house for
00:36:58.220 | a month, to save $120 on your cooling bill so that you can meet an unexpected challenge
00:37:04.920 | in life?
00:37:06.900 | Could your children be able to handle that without complaining all the time?
00:37:09.940 | I'm amazed when I see my own flabbiness with regard to personal resiliency and things like
00:37:16.220 | air conditioning.
00:37:17.220 | I grew up in a house without air conditioning and it was hot, yeah, but that's what sweating
00:37:20.700 | is for and that's what fans are for.
00:37:22.500 | And the house was designed differently than a modern house as well.
00:37:26.180 | But I often challenge myself, "Joshua, are you committed and addicted to comfort or are
00:37:30.540 | you able to be resilient?"
00:37:34.660 | Could you handle – could your family, the bonds and the ties of your family handle a
00:37:39.100 | disaster and needing to move from your large and comfortable house into a small and uncomfortable
00:37:45.100 | apartment?
00:37:46.100 | I was impressed three or four years ago.
00:37:48.820 | I forget the name of the boat, the writer or their blog, but three or four years ago
00:37:53.740 | there was a story about a sailboat which had been sunk – which sank out in the Pacific
00:38:01.020 | Ocean.
00:38:02.020 | And the story was of a young family, husband, wife, two younger children who had saved and
00:38:08.340 | worked diligently for many years to save – to buy their sailboat.
00:38:14.180 | They purchased a sailboat and they had lived on the sailboat and they'd saved their money
00:38:18.220 | in order to go on a multiyear round-the-world cruise.
00:38:21.940 | They were living in Mexico and Southern California docking there and they set out from there
00:38:27.220 | to cross the Pacific.
00:38:29.180 | While they were out there, unfortunately they ran into problems with the boat.
00:38:34.220 | The husband was an experienced captain and I don't believe that there was any major
00:38:39.220 | negligence on their part.
00:38:40.340 | They just ran into problems with the boat and they wound up needing to be rescued very
00:38:44.220 | dramatically, thousands of miles from shore, rescued and the boat was sunk.
00:38:49.540 | And after years of working toward their dream, they were now without their boat, which was
00:38:56.060 | of course a huge financial catastrophe where they had a lot of money tied up in that boat.
00:39:03.060 | And so some of the interviews after the fact were focused on, "Well, what now?
00:39:07.020 | What's going to be the next area of impact?
00:39:09.860 | What are you going to do?"
00:39:10.860 | Well, the family wasn't giving up.
00:39:14.060 | They were focused again on pursuing their dream.
00:39:17.180 | They had moved into a small apartment and they said, "We're going to embrace for
00:39:20.700 | now this small apartment lifestyle and we're going to save and work towards that."
00:39:24.980 | I don't know if they've gotten their boat again today, but I bet they will if they
00:39:28.260 | haven't yet because they had a plan.
00:39:30.980 | And what I admired about them was their attitude.
00:39:33.140 | And I've seen this again and again with sailors.
00:39:35.860 | I admire sailors because sailors have to develop skills and resilience in their personal experience.
00:39:42.500 | When you're out on the ocean and it's just you and the boat, you've got to develop
00:39:45.340 | the skills to fix the thing.
00:39:47.740 | And that requires a knowledge of the wind and the weather, a knowledge of mechanics
00:39:51.340 | to get the engine going again, a knowledge of electrical systems to figure out why the
00:39:54.780 | inverter is not working and why the batteries aren't taking the charge, requires generalized
00:39:59.820 | knowledge and skills that most sailors learn little by little.
00:40:03.940 | But it also requires a sense of resilience.
00:40:06.540 | Sailboats are hot and yet frequently a sailor looks at that and says, "Yeah, but I get
00:40:12.660 | to live on a boat.
00:40:15.080 | So during the hot heat of the day, I'm going to go in the water or go on shore where I
00:40:19.500 | can be cool or figure out a way to just deal with it."
00:40:21.940 | And that attitude, that sense of resilience carries over in other parts of life.
00:40:25.500 | So this particular couple, I remember them, they moved into a tiny studio or a one-bedroom
00:40:29.700 | apartment, and they had to persuade the landlord vigorously that it was okay.
00:40:33.820 | They were used to living on a tiny sailboat.
00:40:35.820 | So even though they were a family of four, they could still move into this tiny little
00:40:38.980 | studio.
00:40:39.980 | And then they had constructed some clever small beds in a way that would give the children
00:40:44.900 | a place to sleep but really wasn't that much room.
00:40:47.020 | And they had gone into it and figured out how can we frugally decorate it and make it
00:40:50.180 | a homey and happy and cheery place even though it's small and inexpensive.
00:40:56.100 | To me, it was a beautiful example of resiliency.
00:41:01.820 | Cultivate a sense of resilience in yourself and in your children.
00:41:06.620 | Fortunately, it's actually relatively easy to cultivate a sense of resiliency.
00:41:12.060 | Unfortunately, it's not so fun.
00:41:15.220 | How do you do it?
00:41:17.260 | Set challenges for yourself.
00:41:21.020 | Either embrace them when they come along by circumstances or set them for yourself.
00:41:28.220 | Make your life uncomfortable and learn how to have a good attitude through it.
00:41:31.200 | Make your children's lives uncomfortable and teach them how to have a good attitude through
00:41:35.020 | it.
00:41:36.020 | It'll make all the difference in the world.
00:41:38.880 | As I close today's show, I want to challenge you.
00:41:48.980 | Do you have a clearly defined goal for your money?
00:41:54.980 | Do you have a vision of what you're working towards?
00:41:59.180 | The family with the sailboat did.
00:42:01.480 | They had worked for years and saved for their boat.
00:42:04.160 | Then they were starting the process all over again, working and saving for the boat.
00:42:09.000 | I need to go check to see if they've gotten their new one yet.
00:42:14.120 | There's no doubt that they will because they have a clear goal.
00:42:18.640 | The clarity of your goals dramatically impacts the ease with which you will roll up your
00:42:24.280 | sleeves and get into the actual plans.
00:42:27.640 | The family who wants to live on a sailboat will embrace moving into a cheap studio apartment
00:42:34.260 | because it's preparation for the sailboat.
00:42:36.800 | Do you have a clear goal and are you aligning the things in your life with those goals?
00:42:43.840 | If not, just work on it.
00:42:47.120 | Don't expect perfection.
00:42:48.120 | Don't expect to figure it all out right away.
00:42:50.240 | Just work on it systematically over time.
00:42:55.680 | This show is part of the Radical Life Media network of podcasts and resources.
00:43:01.320 | Find out more at RadicalLifeMedia.com.
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