Stop!
Controversial post to follow.
Let me begin by saying there are a lot of people who will not agree with the context behind this post. I respect your viewpoint if you don’t agree. Everyone has their own opinions that I respect. So here are some of mine.
It is important for people to STOP worrying about the wrong types of expenses. Let me explain. Have you ever heard of the 80/20 principle? This principle is also known as the Pareto Principle.
The 80/20 rule states that, for many things, 80% of the effects come from 20% of the causes. I am a visual person so I have to see or hear with with concrete examples to better understand. So here is an example. A sports example.
Think of your good ol’ American football game. There are 53 players on a professional sports team. If we assume half of those players play for the offense, we would have roughly 27. Of these 27 players on offense there is a high likelihood of 80% of the points coming from 20% of the players. This would mean 80% of the teams points scored on offense comes from 5 players. Make sense?
Maybe you haven’t fully come around to the 80/20 principle yet so let’s apply the 80/20 principle to your expenses. Think about your monthly expenses and how they break down. Most in the Financial Independence community understand their expenses each month.
For the sake of this example, let’s assume you spend $3,000 per month ($36,000 per year). Of the $3,000 per month, your line level expenses from largest to smallest look like this:
- Housing Mortgage: $1,400 + $250 utilities
- Car Payment: $300 + $100 gas + $90 insurance
- Food: $400
- Entertainment: $250
- Subscriptions: $100
- Phone: $60
- Gym Membership: $50
Again, the 80/20 principle states 80% of the effects come from 20% of the causes. This principle means 20% of your expense types account for 80% of your total expenses.
Now let’s see in this persons scenario if this is true. The chart below breaks out the total cost of each of these categories.
The top 2 expenses (home and car payment) account for 71% of this individuals monthly expenses! That is insane!
The Good News!!
The good news is if you can optimize your top 2-3 expense categories, you will be well on your way to crushing the game! This is a big reason why I house hack and will continue to house hack for the foreseeable future. Doing this one trick allows me to cut my largest expense to $0 a month. In fact, house hacking has allowed me to make $200-300 per month in income while living completely free!
Key Takeaways:
- Understand the Pareto’s 80/20 Principle as you can apply it to almost anything in life
- For expenses, focus on reducing your larger expenses
- House hacking is an incredible way to reduce or completely eliminate your housing expense
