Jul 29, 2015

Principle 2: Why High Monthly Overhead is Crushing Your Investing Goals

My Wife and I have a few high-value items that we can not live without.  She likes her I-Phone and I like my gym membership.  We both like having cable TV, and we do not plan on selling one of our cars any time soon.  But we both know there are areas in our budget we could cut back or eliminate and apply the saved monthly payments to mortgage reduction or retirement savings.

How about you?  Can you think of any monthly overhead expenses, particularly recurring monthly expenses like subscriptions, fitness clubs you don't use, or any expense that gives you minimal value in relation to its cost?

A few that stick out in my mind that you may want to look at are the following:

1. X BOX Live Membership-These can be up to $10/month.
2. Expensive Yoga Studios-I know classes can cost $25 or more EACH.
3. Magazine and Online Content Subscriptions-Do you read them anymore?
4. High Cost Cell Phone Plans-My wife likes her I-Phone, but are you getting the best deal?  (Hint: Check out Straight Talk Wireless-$30 to $45/month)
5. Unnecessary Insurance Premiums-Boat, Motorcycle, or any other kind of "nice to have" item that requires monthly insurance
6. Netflix/Hulu Subscriptions-These seem like a good value, but do you need both?  Can you get away with cancelling these?
7. Home Security Systems

A few non-recurring expenses you may also want to look at are:

8. Dining Out-This is likely the biggest budget buster out there.  Track this for 3 months and you may be surprised.
9. Clothes-Trips to the shopping mall can add up to BIG annual totals spent on clothes.  How about Ross?

What I'm trying to get at by sharing some examples with you is discretionary expenses need to be audited closely.  These can escalate quickly, and attention should be placed particularly on recurring expenses (auto-debited from checking/credit card, monthly bills by mail).

What about premium cable?  Do you really need Direct TV or 25 premium channels?  Does your cell phone plan call for Unlimited Talk/Text/Data at a low cost of $200!!!  Eliminate or scale these back now to get more value for your money.

Need some motivation?  Google "time value of money" and find out exactly what those monthly bills end up costing you over a, say, 10 year period.  Here's an example:

$100/month Jiu-Jitsu Academy Membership

10 Year Cost assuming opportunity cost of 6% growth: $37,387.

In other words, if you chose to instead invest that $100 membership fee in a low cost index fund at Vanguard earning 6%/year, you would have a total of $37,387.  Pretty expensive membership, huh?

Again, I'm not saying you turn into the guy on the internet eating peanut butter and jelly sandwhiches all day to retire at 30 with annual expenses of $25,000.  I am saying, however, that these monthly expenses can really cost you in the long run and it would benefit you greatly to honestly assess the value they bring you and your family.

Until next time,

TB
Take Me to Principle 3:

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