Jul 17, 2013
This episode provides a mind blowing way of thinking about the
true cost of your monthly expenses. If you are interested in
achieving financial freedom, then it makes sense to look at each
monthly recurring expense as really costing you 300 times more. For
example, a gym membership that costs £80 per month really costs
£24,000 (in dollars, a $120 monthly gym membership really costs
$36,000). The episode explains this perspective in more detail. In
- You have financial freedom when you don't have to work to
support yourself. Therefore, if you want to be financially free,
you have to think of paying for things from the interest on your
- Although there is a lot of debate about the numbers, the most
widely used assumption is that you can live from 4% of your
portfolio (the so called 4% rule). This assumes that on average
your portfolio will make enough to cover for both inflation and you
drawing down 4% (I personally think it's better to use 3% to be on
the safe side, but let's use the most commonly used assumption to
illustrate the point).
- The 4% rule implies that you need a net worth that is 25 times
your annual expenses to be financially free. To apply that to
monthly expenses, simply multiply the 25 by 12 (for 12 months) and
you need investments that are 300 times your recurring monthly
expenses. So any monthly expense really requires 300 times
more in capital to pay for it when financially free.
- This is why for the £80 per month gym membership, you need
£24,000 in capital saved to pay that membership when financially
free. That figure (£24,000) is more than the annul expenses of most
people in the UK.
- This is why frugality and saving is so powerful as a way to get
more financial freedom. It is more powerful to save expenses than
to keep increasing your income because more income won't make you
more free unless you control expenses.
- I'm not a financial advisor and as always, you need to do your
own research. I think this perspective is useful and it has been
very helpful to me.
- That's why I won't be getting a gym membership again anytime
soon. There are plenty of free ways of getting good exercise!