Why monthly payments are kryptonite to the aspiring FI
To the aspiring FI, recurring monthly expenses are the devil. They are to be loathed, much more so than the one-off purchase, as they represent a capital sum that must be set aside to support them.
For example, let’s assume Mr Spendthrift pays £50 a month for a top-of-the-range mobile phone (cell phone, to any readers from across the pond) plan – that’s a £600 yearly outlay. In order to generate £600 a year, one would need a capital sum of around £15,000 based on a Safe Withdrawal Rate of 4%.
Aspiring FIs need to analyse each and every monthly expenditure in this manner. £600 a year might not sound like a lot of money, but when one thinks of the capital needed to support it, it could delay your early retirement by years.
Companies love monthly payments plans, as it means they can ultimately extract more from us over the long term, whilst giving us the impression that we’re getting a good deal. Many people waste huge amounts of money in this way.
I recently came across someone who was spending more than £100 per month on digital TV, which I’m assuming means they have the entire spectrum of channels on offer. Let’s assume they’re a real couch potato and spend around four hours a day watching TV – that’s 28 hours a week or 112 hours a month.
Without even doing the maths, it is quite clear that this person would be spending almost £1 per hour to watch TV – and that’s assuming they’re always watching the pay-for channels! Given that there is a huge selection of Freeview channels these days, this person could easily be paying upwards of £2 per hour simply to watch TV!
It is unnecessarily lavish (read: wasteful or inefficient) monthly expenditures such as this that make financial independence and early retirement a pipedream for your average consumer.
My test for all my monthly expenditures is as follows:
- I multiply the monthly expenditure by 25 to arrive at the capital sum needed to support it indefinitely.
- I then work out how long it will take me to accumulate the required sum at my current savings rate.
- Finally, I ask myself whether I feel comfortable working x months or years to make myself free of this particular expenditure. If I don’t, I’ll consider downsizing or rethinking things altogether.
One thing’s for sure: I certainly wouldn’t be comfortable saving up £30,000 to pay to watch digital TV for the rest of my life!