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  • Writer's pictureRyan Luby

A Spending Story

(A spending story)

Inspired by Mr. Money Mustache blog & Set For Life book - Scott Trench

In one of my prior posts titled 300k a year and still broke I talked about how you can truly be broke no matter how much you make, I wanted to try and explain today how you potentially live rich no matter how little you make.

Take this super hypothetical example of Pete and Grant. Both are college students attending the same college. Both take a full course load and both hustle working part-time jobs while in school.

Grant works hard to get good grades, and make decent money for a college kid at his job. Grant uses his earnings to finance a new car, get a great laptop for school of course, buy beer weekly, eat out often, and purchase brand new books for classes. Nothing crazy here, honestly a pretty typical story. Like most college kids Grant spends 100% of what he earns and enjoys his college years.

Pete has a similar foundation in his life. Gets good grades, earns decent income for a college kid and lives a pretty typical life. He got a job close to his school so he didn’t need a car to get around. He rides his bike to work and uses public transportation or hitches rides with friends to get around, other places. Pete also bought a similar laptop to Grant because the quality justified the price, but even still he bough a slightly older model. Pete does not buy beer weekly, sticks as best he could to the school eating plan that is included in his tuition, and practices saving 30% of what he earns. Pete is not far in proximity to Grant, but miles ahead in maturity.

Grant keeps his spending habits as he ages, and because he was a good student he graduates with a solid business degree, a great GPA and gets a decent paying job at around $55,000/ year after graduation. He still spends on average 94% of what he earns and his modest 6% savings always disappears every few months to unexpected expenses. Despite doing well at his job and getting roughly a 5-8k raise every 2 years Grants spending habits continue, and after working his way to a general manager at an insurance agency by the age of 31 he earns over $90,000/ year. But by looking at his life you would think he earns $300,000/ year. Grant bought a brand new Tesla, financed the most expensive house he could possibly qualify for, and he still spends his money on beer and eating out multiple days per week.

Pete also kept his college spending habits. He didn’t bike everywhere for the rest of his life, (though he would like to) but he bought a used car that gets good mileage for under $10,000 (which he saved up during college) so he could get around as needed. Before committing to any set living circumstances Pete knew he would be looking for a job, so he rented an apartment with friends for a few months. Pete applied and got a job also at an insurance agency except he works in sales. Once he settled at his job and started getting paid his starting salary of $35,000 Pete started looking for housing options. Pete realized the advantage of having a sales job and works to maximize his efficiency at work, and increase his sales to earn a higher commission.

So despite getting accustomed to living on a modest salary of $35,000/ year Pete takes home around $53,000 his first year thanks to his commission, and he saves every dollar over his base pay of 35k. He keeps looking into potential houses his first year of work, and saving 100% of his commission. After a year Pete finds a three family home he likes close to his work, gets approved for an FHA loan that requires 3.5% down, and pulls from his savings to afford the down payment on the property. Pete keeps saving his commission and pulls from that to do repairs himself on the property and eventually lives in one unit while renting out the other two. Pete is able to live for free and even net an additional $400 a month from his multi-family. Because Pete waited, chose a house close to his work, and bought an investment property which he chose to live in, he lives for free, and is able to bike to work most days. This means the two biggest expenses in most peoples lives (roughly 50% of spending goes toward housing and transportation) are a non-factor for Pete. And he doesn’t spend his new savings on beer and eating out, he continues being smart about his spending, making his own lunch when he can, cooking his own food, finding low cost ways to hang out with friends like having cook-cook outs and happy hours at his house as opposed to the bar. Pete continues increasing his sales commission, but never touches his commission for spending. He instead invests 100% of his commission in index funds where he gets paid dividends quarterly, which he set to auto-reinvest because Pete is working to retire roughly by the age of 36 based on his math.

This is a hypothetical story of course, but a hypothetical one that occurs over and over in everyday life.

In Scott Trench’s book - Set For Life he points out some important truths about spending. Mostly, the fact that most financial advisors/ consultants will strongly focus in on your entertainment/ miscellaneous spending which in realty only accounts for roughly 20% of spending. Meanwhile, housing and transportation together take up on overage 50% of your overall spending. This isn’t to say you should spend carelessly on miscellaneous things, but… if you lived for free or even made income from your home, and had very low transportation costs by living very close to work, your miscellaneous spending would be almost irrelevant.

Not everyone can just buy a four family home and move in, or do freelance work full time.. myself included. But you can focus far more on how to improve your living and transportation costs, and I strongly encourage you to do so. Don’t waste your time not buying a coffee, or choosing a cheaper laundry detergent.. yea it might save money but it isn’t necessary. Spend your time and energy instead on how to greatly reduce your housing and transportation costs. Save what you are able to cut back, and then invest your savings.

A trend amongst financially independent people:

One of the most common phrases I hear over and over while researching individuals who retired early (Typically before the age of 35 years old)

  • I learned to live as a college kid, in college. And when I graduated I just kept most of my frugal spending habits, but I increased my income. So I had a large savings rate, and invested the difference.

Sounds so simple, but it's true.

This doesn’t mean continue to only eat ramen noodle soup, microwaved meals, and drink beer aggressively. But live as frugally as you did in college. College is a great case study that proves you don’t need to have $100,000 to have fun and live your life.

Even, better you can keep most of your college spending habits and just kick out the bad/ unhealthy ones. Obviously you don’t need to spend each day or even every week having a big party or drinking alcohol. You can eat healthier meals but be sure to grocery shop for food and learn to cook for yourself even if it’s just two meals at first.

Learn to spend your money on experiences not things. Happy hour is fun, but you can have more fun hosting a happy hour at someones house, cooking food and everyone brings their own drinks. It saves money and is more fun.

The biggest takeaway from financially independent people choosing to keep their college habits is the difference in where they spend their money. Most college students are not paying for their living expenses, and pay very little for transportation because they can walk almost everywhere or take public transportation. This does not need to change no matter how old you are.

Continue working hard to make your home truly be an income-producing asset instead of a liability, and do not spend heavily on transportation, it is extremely inefficient and expensive.

Learn more on this:

Article: Hack your housing and get paid to live for free

Podcast: Scott Trench - Set For Life

Podcast: Save 75% of your take home pay

Article: Surprisingly simple math to early retirement

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