Pareto’s law states that 20% of anything typically accounts for 80% of the effects. This applies to our expenses as well. Focusing on saving money for small ticket items such as groceries will not lead to significant reduction in your expenses.
Let look at one interesting search query that came to my site today. The person was searching on the answer to this question: how to spend only 100 a month on groceries?. My initial reaction was: “why would anyone save so hard on a small amount when you can do better with bigger ticket items such as mortgages or car loans?”
Assuming a normal 2 person family spends around 300 dollars per month on groceries . Bringing this down to $100 yields a $200 savings per month, which translates to $2400 per year. A good amount but not significant enough to change things. What’s more, spending only $100 means you are really depriving yourself of many things, including nutritious food.
Personally, my main objective in cutting expenses is to first cut rid of car loan payments. Currently, I am paying $900 for the car loan, which will end in around 1 year and 10 months. After which, the whole sum goes into savings. Compare $900 to $200 per month or compare $10,800 to $2,400 per year and you see why I rather focus on cutting down a bigger expense such as car loan than groceries.
In my case, the solution was to buy a cheap second hand car with a 7 year lifespan and clear the loan within 3 years. That leaves me with 4 years that I can save $10,800 on. This translates to $43,200, a significant sum of money that can generate $200 in dividend income if I assumed a 5% dividend yield. (See here for dividend testing for retirement).
When planning for early retirement, always focus on the big ticket expense and devise strategies to reduce it. Below is how I would reduce my expenditure
- Pay off mortgage with a vengeance: Mortgage interest is around 1%. Your savings rate is around 0.2%. If you have no idea how to invest the money in your bank account, it is better off to pay the loan as much as you can. In effect, it is identical to getting a 1% return.
- Don’t buy a car: Seriously, this is a major waste of money. I have stated in my post here on the true cost of car ownership that it is not worth giving up early retirement for. When my car dies, I am not getting of getting a replacement…unless I am already a millionaire of course : ). One way to avoid buying a car is to move closer to your working location.
- Cutting down on restaurants: Previously, I spent nearly SGD400 per month dining out. For every $50 we spend in one restaurant, we can enjoy 5 meals in a food court or hawker center! This ratio of 5:1 means I can save 5 times more if I simply change my dining venues. With Singapore offering such great food at hawker prices, I don’t see how this will be difficult. On my last count, I have already cut my restaurant expense to SGD200 and I look forward to cutting more.
These 3 items can help me to cut down $1500 worth of expenses. That is what I called significant savings.