If you're trying to retire early, achieve financial independence, or simply improve your financial situation, start by taking a close look at three expense categories: housing, transportation, and food.
Often called the “big three,” these categories are typically among the largest expenses most households face. Many early retirees say they have focused on cutting these costs instead of obsessing over small purchases like coffee or streaming subscriptions.
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One of the popular strategies among people retiring early, including the Lupo family, is the so-called house hacking. It involves renting out part of your home and using the income to cover some or all of your housing costs.
This requires the purchase of real estate, which means having savings for your own contribution and transaction costs, but for people who find it worthwhile to calculate, this can significantly reduce – or even eliminate – your monthly housing expenses.
Josh Lupo said they went from paying $1,300. (approx. PLN 4.7 thousand) per month for rent to live without housing costs in upstate New York after purchasing a duplex, living in one part and renting the other.
If buying a property doesn't make sense right now, There are other ways to reduce housing costs, such as living with roommates, moving to a smaller place, or staying where you are even if you can afford something bigger. The latter approach worked well for early retirees Kristy Shen and Bryce Leung, who found the Toronto real estate market out of their reach.
Instead of buying an apartment, they lived in a modest apartment for a decade.
“We didn't upgrade our apartment,” says Shen. — Many of our friends were buying houses or moving into two- or three-bedroom apartments. We stayed in a one-bedroom apartment above the terraced house, and our rent practically did not change during the 10 years we spent there, he adds.
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Saving on food often starts with cooking at home more often. If you're trying to break the habit of ordering food, try deleting delivery apps from your phone. You don't have to give up restaurants completely, especially if eating out is important to you. The idea is that eating at home will be the default choice more often than not.
Transportation is another big expense category where small lifestyle changes can result in significant savings. If public transport is available where you live, using it more often can reduce costs. If not, consider replacing part of your car trip with cycling or walking when possible. Using your car less – or in some cases selling your car altogether – can reduce your expenses on fuel, insurance, servicing and repairs.
One of the couples we talked to, Steven and Lauren Keys, shared a used car and prepared 90 percent. meals at home while working towards early retirement.
They said that for the past decade, their annual expenses have never exceeded $26,000. hole. (less than PLN 100,000). Thanks to this, they could save most of their income, even at the beginning of their careers, when each of them earned about PLN 40,000. hole. per year (PLN 144,000).
Leave room for what is important to you
Cutting back on the big three can create more space to spend on what really matters to you.
Personal finance expert Ramit Sethi calls this idea “money dials” (“spending dials”). These are categories of expenses—such as travel, health, food, or experiences—that you can increase or decrease depending on what you value most. Sethi encourages people to identify the areas that are most important to them and spend generously on them, while cutting back where it doesn't matter.
In other words: don't spend money on things that aren't important to you.
Shen said a common misconception about the FIRE (Financial Independence, Retire Early) movement is that it requires sacrifice: “It's about optimization, not minimization.”
Tracking expenses helped Shen and Leung with this optimization. Once they started to carefully analyze where their money was going, it became easier for them to identify what really added value to their lives and what didn't.
“Despite many promotions, our standard of living has not improved at all,” says Shen. — The only thing we actually spent money on and enjoyed doing was traveling – he adds.
This was a “non-negotiable” for them.
The above text is a translation from the American edition of Business Insider
