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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 summary:

  • 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 passive investments.
  • 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!
Further Reading:

116 Why Your Gym Membership Is 300 Times More Expensive Than You Think