Whether your goal is retiring early, building wealth, or just making your dollars go farther — an effort that pays huge dividends is cutting recurring expenses. Here I’m talking about regular, usually monthly, charges such as phone bills, gym memberships, or property insurance. These are important, and insidious, for several reasons:
- They are often fully automated expenses, so they will never end, unless you take action.
- Companies are adept at making them easy to add on impulse (requiring a simple consent or web form), but hard to cancel (requiring a phone call or sometimes written communication).
- They often appear small, but in fact can be very substantial, especially from a retirement perspective…
Why are recurring expenses of particular concern when thinking about retirement? Because of what I will call the Rule of 300. It goes like this: The amount of money you must save to meet a monthly expense in retirement is approximately 300 times that expense. That’s right! So if you commit to a seemingly insignificant $30/month membership that you plan to keep indefinitely, you need to save $30 x 300 = $9,000 to pay for that membership, once you stop working!
Where does that 300 factor come from? I’ll explain these concepts in more detail in Your Retirement Fuel Gauge, but the essence is simple. It’s based on the research that has been done into the Safe Withdrawal Rate. This is the percent of a lump sum of money (your savings) that you can withdraw each year over the course of a normal retirement, without a high risk of running out. Conventional values for the safe withdrawal rate range around 4%. (There is ongoing debate about the exact number, with authoritative voices striking a more pessimistic note recently. But the typical range for that rate remains 3%-5%.)
The inverse of 4% (1 divided by 0.04) gives a multiplier of 25x — and you’ll often hear the rule of thumb that you must “save 25 times your expenses” to retire. That’s a handy number to keep in mind, but most of us probably don’t know our annual expenses off the top of our head. However, we probably have an intuitive grasp of our monthly expenses, since we see those bills regularly. Of course to convert a monthly expense to an annual one, you must multiply by 12 months, and that’s our second multiplier. So, combine the multipliers, 25 x 12 and you get the 300x Rule of 300 multiplier for the amount you must save to provide for a certain monthly expense in retirement.
So recurring expenses — even small ones — deserve serious consideration and analysis, before signing on the bottom line. Now, I’m a big fan of occasional splurges — treats that help keep life fun on the long road to financial independence. But I set a very high bar for committing to any recurring expenses, and recommend you do the same. Before you decide any kind of ongoing commitment is “cheap” — multiply it by 300 and then picture how long it will take you to save that sum! Yes, “a dollar a day” actually represents about $9,000 in required savings!
Now that you know how important it is to review and optimize your recurring expenses, here is a list you can use to jog your memory. Can you cut in any of these areas?