How Eliminating Your Big 5 Expenses Can Accelerate Your Path To FI
As you pursue financial independence, you’ll realize that there are two main levers that can help you reach FI faster. You can either increase your income or work towards eliminating your expenses.
Ideally, you’ll be able to do both as you pursue FI. But cutting your expenses is a good place to start. When you are able to cut down on your major expenses, you’ll be able to increase your savings rate dramatically. Although it will require some creativity, eliminating your Big 5 expenses can pay off in the long run.
In this series, we will focus on how you can reduce your 5 biggest expenses.
What are the Big 5 expenses?
As you look at your annual budget, there are 5 major expenses that will likely stand out. These are housing, food, transportation, healthcare, and taxes. Generally, these are the biggest line items in your budget.
Based on a study conducted by the Bureau of Labor Statistics, these categories make up the majority of spending in an average American household. Here’s the breakdown based on the average household income of $78,635:
- Housing. The average American household spent $20,091 or 32.8% of their income on shelter. Unfortunately, this can vary widely. In some parts of the country, you may be spending thousands of dollars more each year to keep a roof over your head.
- Food. Food eaten at home or out of the house accounted for 12.9% of their income or $7,923. According to a Bankrate study, much of this spending comes from dining out. In fact, the study found that 38% of Americans dine out at least three times per week. That cost can add up quickly!
- Transportation. The average American household spent $9,761 or 15.9% of their income on transportation. When you consider the purchase of a vehicle, insurance, gas, and maintenance this is not very surprising.
- Healthcare. Healthcare expenses accounted for 8.1% of household spending for a total of $4,968. As the country talks of rising healthcare costs, the reality is seen in our annual budgets.
- Taxes. The average household spends $10,489 in taxes each year. Although this will vary based on your income level, most households will pay thousands of dollars to Uncle Sam each year.
In total, these five expenses account for 65% of the average annual income. This leaves only 35% of your income to save, invest, or spend on other essentials. With that, it is not surprising that 4 in 10 Americans would be unable to cover an emergency expense.
How eliminating these expenses could change the trajectory of your life
It is clear that the 5 big expenses are burning through your budget. Even if you have cut down dramatically on your discretionary spending, you stand to save thousands of dollars each year by working to reduce the impact of these expenses on your budget.
If you can reduce or eliminate any of these expenses, that gives you more cash flow in your monthly budget. You can put that newfound cash flow towards paying down debt, saving and investing. Although the monthly savings may not seem tremendous at first, they can compound over time.
In the short-term, you could break the paycheck to paycheck cycle. If you are living paycheck to paycheck, eliminating one of these expenses could ease a large amount of financial stress.
In the long-term, you could build a solid investment portfolio by eliminating these expenses. Imagine if you could save just 10% of the total cost of these expenses. If you were the average American household, then a 10% savings would represent a savings of $5,111 each year. If you invested those savings monthly for 30 years at a return rate of 8%, then you would have an investment portfolio worth $599,915.78. That is definitely worth saving for!
Plus, the higher you can get your savings rate, the quicker you can get to FI.
Many of these may seem like an unavoidable expense that you couldn’t possibly eliminate. However, that is simply not true. With a little bit of creativity, you will be able to slash those expenses and leave more room in your budget to save or spend on more exciting things.
As we continue, it is critical to keep an open mind. Although it might require going against the grain of what is commonly accepted in society, you stand to gain so much by thinking outside of the box. Over the course of this series, we will cover different ideas and tips that can help you reduce or eliminate these expenses altogether.