Over the past few years, there were several accounts of why Millennials are flat broke. Stories of how this generation will never be able to buy a home because of Avocado Toast. Oh, and then there are the accounts of how a latte a day will keep retirement away
This is a bunch of crap. Sure, the headlines are catchy but they are missing the point. You should treat yourself (occasionally) and focus on the big three instead.
A few years ago, I went on a long bike ride with a couple of friends. Our turnaround point was about 25-miles down the road at a rural diner/breakfast joint. The place was in the middle of nowhere and surrounded by cornfields. The diner was affordable and offered great food. Heck, who doesn’t love blueberry pancakes that are the size of a pizza?
Over the course of our meal, we enjoyed a great conversation with our waitress. She was a middle-aged woman who was quaint and pleasant. I am not sure how the conversation ended up with life advice, but she said something that has stuck with me to this day.
Our waitress mentioned as a kid she was told, “don’t worry about the small stuff and it’s all small stuff.” I’ve since adopted the saying and use it occasionally. While this saying is great for stress or dealing with difficulties in life, it doesn’t necessarily hold true for personal finance.
When it comes to your finances I wholly agree that you shouldn’t sweat the small stuff (avocado toast or a latte). Where I disagree with this statement is that its all small stuff; there is big stuff too. You absolutely must focus on the big three. The occasional latte or avocado toast won’t land you in the poorhouse. Not controlling or understanding your big three will leave you broke if you are not careful.
What are the big three?
No, I am not talking about an awesome trio that will take your NBA team to the promise land. I am referring to the three biggest expenses in most every budget. Housing, transportation, and food make up 61.3%of the average American budget. Focusing on these three factors will have a greater impact on your ability to save, buy a home or retire than cutting out the latte.
Housing makes up 32.9% of the average budget. In high cost of living (HCOL) areas like New York, San Fransico, or Washington, D.C. American’s spend close to 50% of their income on housing. Housing expenses may include rent/mortgage, utilities and any other item associated with having a roof over your head.
Last year, the median rent for an unfurnished apartment was $1,492/month. This means half the country pays more for rent and half the country pays less.
There are plenty of ways to keep your housing expenses low. Don’t take on more house than you need. Don’t live the baller life in a swanky penthouse when your personal balance sheet is not in check. Live like a college student now so you can live like others only dream of later.
Ways to reduce housing costs:
Live with roommates
Live in a more affordable neighborhood
Live in a Class B apartment instead of a swanky place with all the bells and whistles
Transportation makes up 15.8% of the average budget. It seems that American’s are spending more on transportation every year as well. The average price of a new car continues to increase. Likewise, the average monthly payment is now over $500/month which is an all-time high. That’s over $6,000/year which is INSANE.
You cannot eliminate transportation expenses unless you live downtown or live within walking distance of everything. I fully acknowledge this lifestyle is not for everyone. I’ve tried it. It’s not bad but also not for me. However, there are ways to reduce your transportation expenses.
Ways to reduce transportation costs:
Live closer to work
Walk to more places
Ride a bike more (my personal favorite)
Live in a walking neighborhood
Use public transportation
Use the sharing economy transportation (bike share, scooters, etc).
Use Uber or Lyft
Drive a used car
Carpool with family, friends or coworkers
You gotta eat. Life is too short not to enjoy wonderful food. However, eating out all the time can quickly burn a hole in your pocket. Learn to cook more. Food makes up 12.6% of the average American budget.
Ways to save on food:
Eat out less
Learn to cook
Pack a lunch
Cutting expenses in the big three
Since housing, transportation, and food make up a bulk of your spending, you would be better off by reducing these expenses. Focusing on the little items won’t significantly impact your budget. Significantly reducing your housing costs, using a car less and making food at home can save you hundreds or more dollars a month.
So my friends, focus on the big three and enjoy your fucking latte. Hell, get the avocado toast as well. Life is short. You should live it up and occasionally treat yourself. If you have the big three in check, you will have more flexibility for the occasional treat. Skimping on the occasional latte isn’t going to get you to financial independence.