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Recurring Expenses: Why “A Dollar a Day” is Really $9,000

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:

  1. They are often fully automated expenses, so they will never end, unless you take action.
  2. 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).
  3. 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?

  • memberships
  • maintenance
  • subscriptions
  • insurance
  • telephone
  • services
  • rentals
  • fees
  • utilities

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Comments

  1. Excellent article. Thanks for breaking down the numbers.

  2. Darrow Kirkpatrick says:

    Thanks Fletch. It is amazing how it adds up!

  3. Steve in Los Angeles says:

    I do have one substantial monthly insurance fee, currently about $93 per month, for long-term care insurance with a five-percent annual inflation rider. Although I still do not need long-term care as I still am quite healthy and relatively young (as I am in my mid-fifties), when I get much older, there is a good chance that I will need it. My parents needed long-term care during the last several years of each of their lives. Unfortunately, they did not have the insurance. They had to pay for their care personally. Fortunately, my parents were financially quite comfortable, but the annual cost for their care each year for each of them was about $24,000 and this was about ten to eighteen years ago. Today, the annual costs are much higher due to inflation. Also, Medicare does NOT pay for long-term care. My parents lived in assisted-living facilities. They did NOT live in a nursing home, which is much more expensive than an assisted-living facility.

  4. Some people have a "habit" that they don't consider an recurring expense, but it really is. I know many people who have to stop and get their take out coffee on the way to work, or on Sunday mornings. For $20 I can buy enough beans to grind my own coffee and have it fresh every day of the month. If I were to go buy a cup of coffee (just plain coffee mind you) it will cost me at least $2/day. This ends up being $60 a month. Most people however buy their coffee at a coffee shop because they want a "fancy" coffee, which can cost $5-$6 depending on what size you get.
    If someone is really serious about cutting down recurring expenses, they need to consider their "habits"…

  5. Additions to your list?: groceries and sundries. Thank you so much for the financially intellectual stimulation. It's really gotten my juices rolling and is highly educative, practical and motivating. I live in South America and currently pay about $33 a month for rent and utilities. By US standards, my expenses are extremely low. Still, there is much I can do to really get myself and my life empowered and flowing. Your 300x principle is amazing. It's making me much more accountable, aware and alert with what previously seemed to be the smallest of things. Like, for instance, my cell phone use. Moderate use would bring me to a $3430 need for retirement. The same goes for sundries, like sun lotion and shampoo. I am also, thanks to reading your information, actively looking at ways to lower rent (OK, obliterate it with something they have here called "anticredit") and transportation costs (I use public transportation here, which is fabulous and inexpensive) by getting a bike. In addition, future travel expenses can be curtailed by investing in camping gear. On the sundry end, I now have very strong motives for learning to develop and implement homemade products. And with groceries, the dream is to have a very small farm with a cow and chickens (eggs), specific fruit trees, and a vegetable and herb garden. Any extra milk and eggs can be sold to obliterate any other grocery expenses. The way my figures are showing, with taking into consideration the cost of antcredit, present debt, and a few other items, it will take me $22,000 to retire. Of course there will be other expenses like with visiting the U.S., but that will require additional income from other sources as needed. Again, thanks. Thanks a million! And congratulations for a job well done and a life well lived!

  6. Darrow Kirkpatrick says:

    Thanks Justine. You're right: an expensive habit is just another kind of recurring expense!

  7. Darrow Kirkpatrick says:

    Thanks for the detailed comment Julie. True, your expenses sound low, but it's all relative. I do think it's very powerful to think in terms of the amount of savings required to fund each of your living expenses. Biking and camping are some of the cheapest fun to be had, in my opinion. Self-sufficiency, in one form or another, is the key to financial independence. Stay in touch.