So you think you’ve lowered your expenses as much as you can? What if you could lower your expenses just by changing how you think? RJ Weiss from GenYWealth, in a guest post on FreeMoneyFinance, gives two “mind hacks” you can use to lower your expenses.
The first is to apply the “reverse 4% withdrawal rate” to your estimate retirement assets:
“For every $10,000 less you spend each year, is $250,000 less you need to accumulate to retire. If you can manage to get your expenses down to $40,000 a year, you only need $1,000,000 in a retirement portfolio. Could you live on $30,000 a year? Then you only need to save $750,000.
If you know your annual expenses, try doing a simple calculation. Take your annual expenses and divide them by .04. This is roughly (a lot more goes into this calculation) the number you will need to accumulate in your retirement portfolio, to maintain your current standard of living.
So, instead of trying to accumulate as much investment cash as possible now, try reducing expenses now. The less you can live on today, the less you’ll be able to live on later in life. This certainly isn’t advocating a pauper’s life but rather a more realistic and fulfilling life.
The second “mind hack” is to start thinking of expenses in terms of your life. The example given is in terms of a $400 car loan (which most of us can relate to) for someone who makes $30,000 per year. The car loan to salary ratio is 16%:
“What if instead of comparing the ratio between payment (car payment) and monthly income and calling it a day, you took that 16% and multiplied it by 240, the average amount of workdays in a year.
What does this number represent? It shows you how many days a year you’re working for your car. In the example above, you would be working 38 days a year or about all of January and February, just for your car.
Amazing the difference especially when most of us start with the typical “how much can I afford?” type questions. We should instead be asking, “how much of my life am I willing to give in order to have this…thing?”
What about you, have you been able to change your thinking in a way that has impacted your finances?