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 Expense
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
Downsize into a smaller house or apartment
Live in a more affordable neighborhood
Live in a Class B apartment instead of a swanky place with all the bells and whistles
Transportation
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
Food
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
Meal prep
Pack a lunch
Eat healthily
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.
The interesting thing about the big three expenses is that, for two of those expenses, it’s possible to actually monetize them to the point where they actually pay you. House hacking not only can subsidize your housing costs, it can also pay you money!
Transportation is the same way. With strategic use of bikes and scooters (like Bird and Lime), you can actually get paid for your commute. We’ve talked about this before, but I’ve been charging up Birds and riding them to my office, dropping them off along the way. I know Young Fire Knight does the same thing.
Haven’t done all the math, but I easily average $10+ per day. If I make $10, every day, for 365 days, that’s $3,650 I get paid to commute to work. I just gave myself a raise without doing anything beyond going to work.
You did it again man! I just had a similar post to this and couldn’t agree more with what you are saying. Once the Big 3 are addressed, the savings will start to pile up. It’s so easy to get wrapped up with saving as much as possible for FI that sometimes its good to take a step back and treat yourself in order to maintain your sanity!
Completely agree with these. Don’t worry about the little things, but just focus on spending less than you earn. If you need to find a way to spend less, start with the big 3.
I agree completely. I live in Reno, Nevada where you would think the cost of living would be relatively affordable, but since the arrival of Tesla, Switch, and Panasonic rents and home prices have increased exponentially. Construction companies can’t build homes quickly enough, but when they do, whether those are single family homes or apartment complexes, the rents/mortgages are so high they make it impossible for the average people to afford them.
My brother and I pay just over $1400 a month for our two bed/two bath apartment. We could go get a smaller, crappier apartment, but it would cost the same or more because that smaller, crappier apartment is in midtown which is a hot spot.
It’s very frustrating to be in my mid30s (almost late 30s) and have to scrimp on everything.
This is very interesting post. It is crazy when you map it out the way that you did to see just how much goes to the big three. I agree with all of your suggestions for reducing the costs of the Big 3. Sometimes, it is the small things that make day to day life enjoyable. Sure, you want to save every dollar possible. But the occasional stop at a pizza joint, coffee at a shop rather than home, or even a small treat goes a long way to improving your happiness. And there is a value to that in all of this. Thanks for the great read today!
Bert
This is interesting! It’s the Pareto Principle for budgeting!
I’m not familiar with Pareto – tell me more
Isn’t a latte and avocado toast considered part of the food expense category? 😉 Certain meals out I consider to be a 50/50 split between entertainment and food budget.
I’m doing well on Housing and transportation. My home and car are simple, older, and paid for. My commute is short.
No matter how you categorize it I do overspend on food. I bag a lunch, and I try to get most of my food at the supermarket (vs fast food burgers, pizza joints, and vending machines), but I just cant get into cooking from scratch.
I live in Denver and my buddy has a pretty good setup with his Airbnb efforts. Denver has strict (but fair) short-term rental laws and many other cities are moving in the same direction. He’s lucky enough to have a girlfriend who doesn’t mind when he has to stay with her due to last-minute Airbnb bookings, mostly because she gets 20% of whatever he makes! It works out well for both of them. He shared his numbers and I talked about it with the link here, if you’re curious.