The Personal Finance Podcast - If you Control These 3 Expenses You Can Spend Lavishly on Everything Else

Episode Date: September 30, 2020

Episode 21: If you Control These 3 Expenses You Can Spend Lavishly on Everything Else  In this episode we cover:  The big 3 expenses you need to control  How much these big 3 expenses are costing you How much you should be spending on these expenses How to reduce these expenses  Why the small purchases don’t matter RESOURCES: M1 Finance Best Place to Invest  Personal Capital Free Wealth Management and Budget App  CIT BANK (Best Savings Account) ** Some links may be an affiliate link and we earn a small commission at no extra cost to you. We only recommend products we truly believe in.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Local news is in decline across Canada, and this is bad news for all of us. With less local news, noise, rumors, and misinformation fill the void, and it gets harder to separate truth from fiction. That's why CBC News is putting more journalists in more places across Canada, reporting on the ground from where you live, telling the stories that matter to all of us, because local news is big news. Choose news, not noise.

CBC News. Okay, when I sell my business, I want the best tax and investment advice. I want to help my kids, and I want to give back to the community. Ooh, then it's the vacation of a lifetime. I wonder if my head of office has a forever setting. An IG Private Wealth Advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you at the center.

Find your advisor at IG Private Wealth.com. On this episode of the personal finance podcast, we're going to talk about the three biggest costs that you need to control to build wealth. What's up, everybody? And welcome to the personal finance podcast. I'm your host, Andrew, founder of dollar after dollar.com. And today on the podcast, we're going to be talking about the three biggest expenses that you need to control to build wealth. And this is an extremely important show for you guys to listen to. because if you control these three expenses,

you can spend lavishly on everything else. That's how important these three expenses are. And you're the three largest expenses in everybody's budget. And the three expenses are housing, transportation, and food. And here's the thing that happens all the time. What a lot of people will tell you is, why don't you just go ahead and cut out lattes? Cut out the small things.

If you have a latte every single day, think about how much that adds up. And if someone tells you this, without discussing the big three expenses and how much more of a big impact the big three expenses have over the small things, go ahead and tell them to take a map, turn it upside down, and get lost. Tell them to get a vest with a bunch of pockets in it, a big old stick, and take a hike, because that is not how you build wealth. The small expenses matter.

Yes, the small expenses can add up and they can matter if you have a lot of small expenses. But eating avocado toast or buying daily lattes is not going to be. move the needle for you, especially if those bring you value. If it brings you joy every day to go to Starbucks and grab a latte, then go ahead and go to Starbucks and grab a latte because it's going to make you happy. It's not going to make a huge difference in terms of your financial security like these three expenses will. And I'm going to show you exactly why. Because if you control them, everything else is going to compound and everything else is going to come together. But it's got to be controlled. And what happens to most people is they overspend in these three categories. And when you overspend in

these three categories, you're going to realize that you don't have a lot of money left over at the end of the month. And a lot of times, if you don't value parts of these categories, they're going to eat away at your financial independence. They're going to eat away at your freedom fund. And that's what the personal finance podcast is here to do. I'm here to bring you value. That's why this podcast was created. I'm here to create ways for you to think differently about your money and realize that your money's not impacted by lattes. Your money is impacted by the big ticket items. So let me tell you right. Now, if you're sweating the small stuff, but not looking at the big items on your checklist here,

then you're not making a real impact on your finances. Saving $70 a month instead of saving hundreds of dollars a month is a massive difference in the long run. And yes, you can add up the small expenses. You can save more on the small expenses and it's a great start, especially if they don't bring you value. But you truly have to look at these three expenses before you do anything else. So let's get into it. So on average, Americans spend on the big three, about, 70% of their income. And I'm going to tell you right now, if you spend 70% of your income on the big three, you're spending too much money because it only leaves you 30% left to be able to create wealth for yourself in addition to buying other necessities that need to come up outside

of these three expenses. And by and large, the biggest expense that everyone spends their money on is housing. And housing accounts for about 37% of people's total overall spend. Now, if you remember in the How to Buy a House podcast episode, I talked about the baseline for your home spending. And 37% is way over the minimum amount that you should be spending on your housing. The minimum amount that you should be spending on your housing is 30%. But what I tell people to do is try to get it below 20% of your total income. The reason is if you want to build wealth and you want to have financial independence, then you have to get at this low to create a higher savings rate, which will in turn,

create financial independence for you. But housing doesn't just stop there because your housing cost may be high, but in addition, there's a lot of other external factors, especially if you own a home that you have to pay for. Now, this is the case for the buy versus rent debate. And we're going to get into the buy versus rent debate in another episode in great detail. But this is a win for the rent side. Housing is extremely expensive to maintain. And a lot of people go into buying a house and I see it happen all the time where people will buy a house and not realize that stuff breaks. And when stuff breaks, you got to fix it. And all of a sudden, the repair bill is piling up. And if you don't prepare for those costs, you're going to get yourself in a whirlwind of financial trouble. And this is just a

mandatory maintenance. And the average homeowner per year spends about $168 per month on their general maintenance. But one of the common rules of thumb that I've come up with, and I've looked at this over seven years of owning a house, is that you really need to save right around 1% of the value. that you paid for that house per year for mandatory maintenance. And this is just things that are going to come up and things that are going to break. So if you buy a house for $500,000, then you need to say $5,000 a year just for the maintenance items that are just going to pop up. And you're never expected. So that is why you have to every single month put aside some money for this type of maintenance. Now, on top of that, there's property taxes. There's home insurance. There's homeowners associations

if you live in a community that has an HOA. There's utility bills. There's electric, you know, there's water bills, there's heat, there's electric. And then outside of that, you're going to make sure your house is presentable. And so home renovations are going to come into play as well. And something like home renovations, I don't think is a waste of money. A lot of times you can get your money back if you don't overdo it on home renovations, especially if you buy your house right. So if you buy your house wrong, all of these things are going to be factored in and they're going to add on top of the price. And it's going to be very difficult to get your money back. But if you buy your house right, then it's going to allow you to be able to make some home renovations,

increase the value of your home, and they'll be able to sell it for a higher price. And then lastly, there's other hidden costs, which are things like landscaping. If you live up north, things like snow removal, house cleaning, security systems, pool maintenance. There's all sorts of different items that are maintenance items that you need to do on your house, and you can either do them yourself, which costs you your time and money, or you can hire somebody else to do it, which costs you additional money. So all of these items add up, and this is why this number pushes up beyond 37%, which is the average. So a lot of people are spending way more than 37% on their home.

So if you are spending this much, make it your goal to reduce this cost. And we're going to get into how you can reduce that cost and some creative ways to get in reduced that cost, but at least try to get it below 30% at a bare minimum. Then work your way down to 25% to 20% or various other goals. But make sure you have a goal and understand why this is eating into your financial freedom and eating into your financial independence, because if you're spending 30% on your home, you're not investing.

You're not able to invest. You're not able to put your money towards your financial future. The second one is transportation. And this is a big one. This is a huge one that you can actually control because your transportation has extremely high costs. And this is one of the things that a lot of people in the fire community

or the financial independence retire early community, they talk about transportation all the time and they use creative ways to reduce their transportation significantly. And there's a massive appeal to have a fancy car nowadays. And a lot of times it's to impress other people. And if you're a car person, great. Get yourself a fancy car. But if you're not a car person, then you're eating into your financial freedom. And here's a bunch of the costs that factor into the car, especially if you buy a brand new car, you're going to hit a major depreciation factor here. So depreciation is going to take a huge hit. And that's going to be a cost on you every single year.

So every single year, you're going to be losing money on that car. So if you buy a car thinking you're buying an asset, a car is not an asset. I've got a news flash for you. A car has never been an asset unless you have an antique car sitting in a garage that you have restored and it drives nowhere, a car is not an asset. Because every single year, your car is losing money and value. Your car is losing value every single year. And in addition, if you have a payment, you're paying interest on that car payment.

You have to have insurance. You have to have gas. You have to do general maintenance all the time. And then you have registration fees and licensing fees. and all those various things. So all this adds up. And if you think about it, let's say you have a $500 car payment.

Well, your insurance is going to be at least $100. Your gas is going to be at least $150. And your maintenance is going to be at least $100 a month if you add up all the oil changes and things that are going to come into play over time. And the average monthly cost of owning a car is $916. Ladies and gentlemen, that is way too much. And if you're spending that much on your car, and maybe you don't think you are because you have a car payment of, say,

two, three, $400. But if you add it up over time after you're replacing tires or when you have to replace brake pads or anything like that, over the long haul, you're spending a significant portion of your income on your car. And I'm going to show you how to look at cars differently. And it doesn't mean you have to drive a hoopty or ride your bike all over town or ride the city bus. What I'm going to show you is just how to buy cars the smart way.

If having a fancy new car is worth $750,000 to you in the long run, which is just about $30,000. drawn down each year in retirement, then you do you. There's no convincing you of that. But if it's not, then I'm going to show you how to save some money when it comes to transportation. The third item is food. And the U.S. Bureau of Labor Statistics says that people spend between 13 to 20% of their

income on food. So those numbers work out to $6 to $900 every single month on food. And what I find when I talk to a lot of people about their money is they're spending a massive portion on groceries and eating out. both those two items and their grocery bill they don't even know how high it is a lot of people think their grocery bill is much lower than it is and then they do the numbers and they're like oh shoot i spend seven hundred dollars on groceries when i thought i spent four hundred dollars on groceries and that's one of the most surprising factors to people when they start a budget or when they start adding their

money up then you factor in eating out and if someone goes out to lunch every single day with their co-workers you've got a massive amount of money building up so if you can control this item and control how much you're spending on food it's going to make a mass massive difference because if you're spending 20% of your income on food, 20% of your income on groceries, and 37% of your income on housing, think about how much money you can save by cutting out these big expenses. It's the big things that matter. So I'm going to show you how to reduce your spending on the big three expenses. Let's get into it. So lately, I've been noticing how fast things are changing at home. The kids are growing like crazy, clothes don't fit anymore, and routines are changing.

And it just hits you. Life is expanding. And when your life grows, your responsibility grows with it. That's something I've been thinking about more this spring, making sure the safety net we have in place actually matches the life that we're building. And that's where PolicyGenius comes in. PolicyGenius is an insurance company. They're an online marketplace that helps you compare life insurance quotes from some of the top insurers in America, all in one place for free.

And their licensed team works for you, not the insurance companies. So they help you find the right coverage for your situation without all the guesswork. And they walk you through everything. Answer your questions, handle the paperwork, and help you get the coverage that actually fits your life today and where it's going. So protect your family with a policy that grows with your life. With PolicyGenius, you can see if you can find 20-year life insurance policies, starting at just $276 a year for $1 million of coverage.

Head to PolicyGenius.com to compare life insurance quotes from top companies and see how much you can save. That's policygenius.com. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible. And if you've ever been there, you know how stressful this can be. That's where Indeed comes in. When it comes to hiring, Indeed is all you need. Instead of struggling to get your job post noticed, Indeed's sponsor jobs help you stand out and hire faster. Your post jumps up to the top of the page, making sure it reaches the right candidates. And it makes a huge difference. Sponsor jobs on Indeed get 45% more applications than non-sponsored.

sponsored once. And there's no need to wait any longer. Speed up your hiring right now with Indeed. And listeners of this show will get a $75 sponsored job credit to get your jobs more visibility at Indeed.com slash personal finance. Just go to Indeed.com slash personal finance right now and support our show by saying you heard about Indeed on this podcast. Indeed.com slash personal finance. Terms and conditions apply. Hiring, Indeed is all you need. We've all been there. He finally makes it out of the group chat and uh-oh, you volunteered to host. Suddenly you need snacks, drinks, dips, cups, and all the other party essentials.

With Instacart, you can get all those groceries delivered in as fast as 60 minutes. No extra errands for you. One quick order for everyone. That way, everything shows up right on time, making hosting easy and, like you had it planned all along. Download the Instacart app today and get no markups at select retailers. Fees and exclusions apply. Amazon Presents Jeff versus Taco

truck salsa, whether it's Verde, Roja, or the orange one. For Jeff, trying any salsa is like playing Russian roulette with a flamethrower. Luckily, Jeff saved with Amazon and stocked up on antacids, ginger tea, and milk. Habiniero? More like habanier, yes. Save the everyday with Amazon. So the first expense I want to talk about and how we can reduce this expense is housing. Now listen, I know we are in a housing boom. I know houses are extremely expensive. Rent is extremely high. And right now, all the prices seem like it's hopeless to be able to reduce your housing expense. But there's a couple tips I can give you that you can use over time, and this is evergreen, is don't buy more house than you need. And that sounds extremely simple. But if you think

through this, what a lot of people do is they buy a house with multiple additional rooms that they never use. And so they're overspending for those rooms because you buy a house with price per square foot. So you're paying 40, 50, 60, 70, sometimes $100,000 more for a couple of rooms that you don't use. And the same thing goes for rent. You pay for your rent price per square foot, along with the features that come with the house or the apartment. And if your rent is way over 30%, you have to get that down and you have to live in either a smaller apartment or a cheaper area to be able to reduce that expense. If you want to pursue financial independence, if you want to work forever, then you don't have to do anything. But if you want to pursue financial independence, if you want to build real

wealth, then you have to reduce it below 30% of your income with the goal of trying to get it below 20% of your income. And here's a funny stat about housing, because in 1973, the average house size was 1,600 square feet. In 2015, the average house size was 2,600 square feet. So the average home is 62% bigger than it was in 1973. And there's another massive difference because three people on average occupied each house in 1971 and only two and a half people occupy each house now. So houses are nearly two-thirds larger and 16% fewer people live in the houses. So that's why I'm saying the simplest option is to downsize your home.

Now I understand if you've been in your house a long time, this is extremely hard to do. You have an emotional tie to your house. I understand that. but sometimes you have to make sacrifices that allow you to pursue what you truly want. And so if you're really spending way over budget on your housing, then you're going to have to make a sacrifice if you want to pursue financial independence. It's the only way to do it. Or you're going to have to make sacrifices in other areas.

Another way to cut back on your housing costs is you can have free housing. And we talked about this in the house hacking episode. Now, if you don't know what house hacking is or you didn't listen to that episode, house hacking means that you buy say a duplex or a triplex or a quadplex or a house and you buy a duplex and you live in one unit and then you rent out the other side if you don't know what a duplex is it's just a side by side apartment so essentially what you're doing is you're renting out one side and living in the other the side that you're renting out is paying for your mortgage so you're essentially living free or for barely nothing the same goes if you buy a house now people who are

married with kids can't really do this maybe you could you could figure out a way to do this but you could buy a house and rent out a room or two to your friends, they pay you rent, and essentially, you're mortgage-free. And this is a great creative option for people, especially when they're starting out. And if you want to get into real estate investing, this is a great way to dip your toes into the water so you can understand exactly what you have to do when you start to scale your portfolio. But if you're looking to buy a house and house hacking isn't an option, then one of the biggest suggestions I tell you is look for houses that have major cosmetic issues because they're always

cheaper. And what happens is if a house has a major cosmetic issue, say it has shaggy carpet, purple walls, pink tile in the bathroom, then what you can do is buy that house, fix up the cosmetic issues, which is going to increase the value of that house and help you build well over time. So it's going to appreciate over time. And then when you go to sell that house, you're going to sell it for much more than you bought it for as long as you didn't buy it wrong in the wrong market. And that's one of my favorite ways to buy houses, is to buy a house, fix it up, hold it for a few years, or longer, and then sell it. Now, you can do this pretty frequently as well. You can do this every other year, every two years, and people call that a

live-in flip. And you can make a full-time income doing that if you do it the right way. And we'll get into live-in flips in a future episode, but it's an extremely cool way and extremely creative way to make money on your living situation. Next, let's get into reducing your transportation expenses. So like we talked about earlier, cars can be killers because of all the external expense factors. So one of the most expensive things that you can do is buy a new car. The reason being is once you acquire that new car, you're taking a massive depreciation hit. So here's my strategy on buying cars. I buy really nice cars that are really well taken care of that are one to two years used. The reason I do this is these cars take the initial depreciation hit. And that initial

depreciation hit is the biggest loss that these cars are going to take. And so now somebody else took on that loss and I'm taking over the vehicle. But that's not the end of this story. Because then what I do is I drive those vehicles for the long haul. So I plan on buying a vehicle and I'm going to hold that vehicle for at least 10 years unless something actually happens to that car with the real goal in the back of my head of trying to hold it at least 15 years. Because if you do this, over time you're going to own less cars, which is going to significantly reduce the price you pay on transportation. And if you allocate that money towards investments instead, it's a massive difference. And you've already seen the effects of compound interest, but when it's hundreds of thousands of dollars getting put back

into your investments and that money's compounding, it accelerates your wealth tremendously. Because what you don't want to do is buy a depreciating asset or an asset that goes down in value after you own it and take the major hit of depreciation. Take the major hit where you lose the most money. So this takes that out of the equation. Now, if you want to pursue financial independence, in a very short period of time, then you may want to consider other alternative options. And one of the best option is to pay cash for cars. That's the very best way to buy a car. And what a lot of people do who are pursuing financial independence who actually buy cars

is they buy, you know, five, six, seven, eight, nine, ten-year-old cars with cash. And sometimes, you know, they cost between $5,000 to $10,000. They run really well. And they usually buy reliable cars. Reliability is a major factor in this as well because reliability will allow you to drive that car longer, which allows you to save much more. more money, which allows you to deploy that money towards your investments. And this is where all this ties together. Because you're not doing this to save more money. You're doing this to build wealth so that you

can become financially free so you can do whatever you want in life. This isn't to cut back. This isn't to restrict you. It's to allow you to change your life and to change your family's life for the long haul. And then lastly, let's talk about reducing your food expenses and the expense that you can most easily control. Because if you're spending a massive amount of money on food, then you have to look at both factors obviously. You have to look at your grocery bill and then you have to look at your eating out bill. If you're eating out more than you're cooking at home, then this is the first way that you can save money. So you can cut back on your eating out and cook more food at home because cooking at home is cheaper. Now, if you make a significant income and it's not making an impact on your

savings rate and you're saving exactly as much as you need to, then eat out all you want. But if you're not, if you're not hitting your goals, then this is one place that you can look to cut back a little bit. Now, I'm not saying don't ever eat out, but find that balance between the two where you can cook your own food, which is a lot of times healthier as well. So there's multiple benefits to cooking your own food. But in addition, you're going to save money. There's just no way around it because eating out is much more expensive than eating at home. Now, if you are spending a significant portion on groceries, there's a couple way to cut back your grocery bill. The first thing is, is when you go in the grocery store, you've got to have a plan, you got to have a list. And you're not going to

buy anything outside of that list. But one of the biggest factors is to change where you're grocery shopping. Because if you're shopping at whole paycheck, sorry, I mean whole foods, but you're having a hard time making rent every month, then you have a problem because the prices are significantly higher than if you went to your local Aldi. So if you shift your mindset as to where you're going to be shopping for food, you can significantly reduce your grocery bill because this is a spot that a lot of people don't focus on. And this is not like cutting back lattes where you're going to save $60 a month. If you cut back on your groceries, especially if you're a big spender on groceries, you're going to be saving hundreds and hundreds of dollars a month. And as we know, just $400 a month can save you

over a million dollars over the course of your investing career over 30 years. So this is why cutting back on the big expenses is going to make the significant impact. The $70 a month is not going to make a significant impact. Cutting back on these expenses will. Now, if you decide to cut back on these expenses, if you start going through and saying, hey, I'm going to drive my car for a longer period of time. Then here's what I would do. Make sure you automate and have systems in place to automate your savings rate because you don't want your money to get commingled in your checking account and you go spend it on something else if you want to save more money, if you want to increase the amount that you're investing. So make sure you have bank automatic

transfers transferring over to your investment account or your savings account that are going to allow you to build that emergency fund or build that savings rate or put more money into your brokerage account. This is going to allow you to execute your plan and achieve your goals much, much faster. And what you're going to find is once you get to the point where you have controlled all these expenses, you're going to have a lot more money laying around that you can do things with. And not just things like saving or investing. All that's good and well, but you want to have a balance as well.

And you want to enjoy life. And you can do more things like travel. You can invest more in hobbies and things that bring you value and things that bring you joy. Because it's not always about pushing, pushing, pushing and pushing. Sometimes you just have to buy things that bring you value, bring you happiness. so that you can relax a little bit. And this is one of the best ways to do that, because cutting back just a little bit in each of these categories

is going to increase the amount of money that you have significantly. And if you don't believe me, just try it and watch. Because these have the greatest impact over your financial well-being. And as you're doing these automatic transfers, as you're putting this together and making sure you're saving the money instead of just spending it on things that don't bring you value, what I would do is I would save the money in specific accounts and then allow that money to grow.

So for example, let's say you paid for a car and you finally paid it off. So you're going to drive the car for the long haul. So you had a five-year loan on it. After your five comes up, now you have no car payment. Give yourself a high-five, fist-bump your friend. And now here's what I would do, because you're going to have to buy another car at some point. So start saving for that next car now. So you can buy the next car in cash.

Because if you buy a car in cash, you don't have to pay interest and you're not going to have debt. And it's going to allow you to have power over your money. In five years, you paid for an entire car. Who's to say if you drive that car another 12 years, In another five years, you can't save up enough money to pay cash for the same car 12 years later. And this is where this strategy starts to become powerful. The same thing goes for housing. Let's say you want to pay off your house faster.

And all of a sudden, you've cut back expenses in other areas here and you have an extra chunk of money. You're hitting your savings and investing goals. Well, you can start putting extra payments towards your housing. And now you're not paying so much money and interest. And you're working toward not having a mortgage payment. Think about how much faster you could retire if you didn't have that mortgage payment, that $1,000 to $2,000 in mortgage payment or rent or anything like that.

This is where this comes to play because now you can start to deploy money towards the things that bring you value that puts you in a fantastic financial situation that makes you bulletproof in any situation. It's not about restriction. It's not about cutting back. It's about building wealth for you and your family so you can have financial security for the rest of your life. Thank you guys so much for listening. And if this is your first time listening, consider subscribing so you never miss an episode. And hey, if you get value out of this show, consider sharing it with a friend because we believe that every single person in this world can build true wealth and build financial freedom. We want to share that message with everyone else because it starts right here.

It starts with financial education. And it's not taught in high schools. It's not taught in colleges. So we want everyone to understand exactly how they can build wealth and how they can go about building an amazing financial future. Again, thank you so much for listening. I hope you have it right now. Rosen lasagna, medium power, 15 minutes.

Sounds like Ojo time. Let's play. Feel the fun with Play-O-Jo. The online casino with all the latest slot and live casino games. What you win is yours to keep with no wagering requirements, instant payouts, and no minimum withdraws.

Hey, I just won. Woo-hoo. Feel the fun. Play-O-Joe. Honey, forget about the lasagna. Let's celebrate. 19 plus Ontario only. Please play responsibly. Concern about your gambling or that of someone close to you. Call one-66-531-2600 or visit connexonterio.ca.