A big part of being able to retire or work truly voluntarily is having enough non-work income to cover your living expenses. That requires assets.
We all know about cash, bonds, shares, real estate, precious metals and the like – it’s easy to recognise them as assets. As with a few recent posts, I want to draw attention to the importance of reducing expenses. This time, by looking at spending money to save money AKA investing in the ‘stuff that saves me money I’d otherwise have to spend’ asset class.
Things like replacing your cafe coffees (if you don’t want to forgo coffee altogether) with a decent home machine that will reduce your spending year after year. If a $100 machine can reduce your coffee spending from $1000 a year to $200 a year, that’s an 800% return on investment. Even better, a $20 stovetop espresso machine can do a pretty decent job.
Like buying $200 boots and getting 10 years out of them for an annualised cost of $20 per year rather than getting 12 months out of a $50 pair. After 10 years, you will have $300 more in your bank account by buying quality, and you will have been much more comfortable in the intervening period (paraphrasing a quote I read but can’t relocate…)
Or spending more up-front on CFL light bulbs in order to save on electricity every month – depending on your electricity and CFL costs, you could make 100% per annum or more on the little bit of money you put into CFLs. If only there were lots more ways to spend money with that sort of return!
You can create your own ‘supermarket at home’ by finding a bulk supplier (Costco, Sam’s Club and the like, in the States) and some buckets and buying in bulk those items that you use and that will store well. You might be ‘spending’ a thousand dollars or so, but in reality you’re pre-paying grocery bills you’d otherwise pay, with the sweetener of a discount of maybe 10-30% – and the added convenience of having to go to the store less often.
Tools are an area I’m still learning about. We’ve all heard about quality being remembered long after price is forgotten, and about the hand plane that’s been handed through five generations. However, cheap versions of tools can be dramatically cheaper to buy than good brands, and the quality may not be very different. And sometimes even if the quality is different, the number of times you will need to use an item just doesn’t justify the extra spending. I’ve been caught out several times recently, thinking I have optimised tool purchases and being unpleasantly surprised when a tool failed far quicker than anticipated (e.g. a pad type brush that lasted for about ten square feet of ceiling) OR couldn’t actually do the job it’s intended to (e.g. a roller that didn’t roll properly) OR made it hard to do a good job (e.g. a circular saw that didn’t cut very straight). That’s not counting lost productivity from purchases I didn’t make, thinking that I could do without or not knowing I would need them – forcing me to wait until I could make another trip to town. Still, I’m learning and it’s likely the lessons will be applicable to other areas of my life in some ways.
This is an area of financial optimisation where the person who already has a decent amount of available cash does have an advantage. Some people are in tight enough spots that they can’t see their way clear to investing $50 in light bulbs, let alone $200 on a pair of boots. All I can suggest is to try to think long-term, and find a way to make a sacrifice that will allow you to invest in these assets – in the end, they will allow you to keep more of your cash in your pocket. Spend now to save later! Sounds scary, but you know what I mean.
Look over all of your spending and try to find areas where you could invest to save money over time. For each line item in your bank statement or budgeting software, think ‘How could I spend less on that?’ Cut it out altogether, downgrade, find a cheaper source, invest more up-front to reduce your overall cost, look for discounts and so on.