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When we reduce our fixed costs, we can create space in our budget, not only for savings, but for everyday luxury. Would you like to go by that luxury hand-bag? Not feeling guilty for taking a taxi? Follow this step by step guide to reduce your monthly expenses and you will have enough money left over to indulge in everyday luxuries.
What are Our Fixed Costs?
Everyone’s finances look different but the largest expenses for most people are housing, transport and food. For an average family these three make up between 40% of expenses (UK) to 50% (EU) and all the way up to 75% in parts of the US.
How Much do We Save?
Before we look more closely on how to get more money for everyday luxury, let’s take a look at our savings.
How much we save varies a lot. Almost 50% of people in Brittan are not saving anything at all. The average savings rate in the UK is 8% and 7% in the US. People in the EU are doing better saving on average 25% of their income.
To put this into perspective: If you save 5% you will have to work 66 years to be able to retire. If you save 10% that falls to 51 years and all the way down to 32 years with a 25% saving rate!
Now, the savings rate mentioned is not only for retirement but also for all the other things we want to do in life like weddings, holidays and university fees.
We are often told to save more but even though we know it’s right, we don’t take action. We don’t want to deprive ourselves today for a brighter future! And if we focus on this later gratification, we actually end up feeling more deprived than if we don’t focus on it.
Why Making Everyday Luxury a Habit Will Make Your Fincances Better
The Marshmallow Experiment
The Stanford marshmallow experiment famously let kids choose between having one sweet now, or two if they waited 15 minutes. Many people referencing this study focus on how many kids were able to wait and what made those kids different from those who ate their marshmallow right away.
It’s equally important however, to look at how the kids that were the best at delaying their rewards did it:
By being distracted.
The kids that could wait the longest for a reward didn’t look at it and distracted themselves with songs and other fun. What the study concluded was that the delayed gratification of two marshmallows wasn’t in itself enough to resist the temptation of one marshmallow now. Instead, the key is to identify it as your overall goal and then distract yourself!
Enjoy Everyday Luxury as You Reduce Your Fixed Costs
Brining this back to personal finances, it is clear that if we try to save money by removing all the fun in life, in order to have a better future, we will fail. Most of the time.
And even if we do succeed it will be a struggle.
To be able to save what we need for the future we need to create enough space in our budget so that we can still fit in the fun, the indulgency, and the everyday luxury. And how to we do that?
We limit our fixed cost!
Housing, transport, and food are the main big expenses for most people so by reducing them (or not increase them as our pay increases!) we can create space for both savings and everyday luxury!
Reduce Fixed Costs: Housing
Many of us are brought up to believe that the house you live in is a direct reflection of our worth. We are also told that a house is a great investment and we should stretch ourselves to buy the biggest house we can afford.
Let’s start by debunking those myths:
Living in the biggest home you can afford (or not afford) will not make you happier. Find something where you will be comfortable and that has what you need but don’t choose your living space to impress someone else.
People often spend money on things they don’t need to impress people they don’t likeFlapper Fanny cartoon, 1929
Your home is not a great investment. Houses increases roughly with inflation so you would be better off putting your money in a low-cost index fund that in a house. A big house also costs a fortune to maintain! Get what you need no more, no less.
If you really want to reduce your housing costs and free up a lot of money you can go a step further and try a house hack:
Get a housemate
Rent out a spare room on air B&B
Rent out your parking space
Rent out your garden shed
Get a house with a granny annex to rent out
Live as a house-sitter (!)
By making your house generating income you can significantly reduce your living expenses!
Reduce Fixed Costs: Transport
In the UK transport is the absolute highest expense for the average household, higher than even housing costs! Considering that the average commute in the UK is almost 1h it’s not surprising that it also costs an arm and a leg. So what can we do about it?
Commuting one hour a day is a massive waist of time, money and energy, all resources we want to allocate to better pursuits than the dreaded commute. Freeing up time and space in this area may require some changes in your life but consider the following:
Live Closer to Work
You work 30 minutes in one direction and your partner 30 minutes in another direction, so you live in the middle. Sounds familiar?
Or your job is in the outskirts of town and you want to live in the city centre? Or the other way around?
Either way, living far from your job will always come at a great cost and it’s important to really consider if it’s worth it. Could you change your job? Could you move? Is there anywhere both you and your partner could get a job?
Not accepting the commute as a necessary evil is the first step to change.
Don’t Want to Move Right Now?
Consider the following:
Carshare with a colleague
Work from home full or part time
Cycle to work
Walk to work
Take the buss instead of owning a car
If you can either reduce your commuting time, find a way of commuting that’s not as expensive, or best of all, find a way to reduce the number of cars you own, you will see a significant reduction in transport costs!
Reduce Fixed Costs: Food
Have you ever calculated what you spend on food? Shopping, restaurants, take-away…? It’s probably more than you think!
Being mindful with our food can go a long way. I’m in no way advocating for you to eat beans and rice or ramen noodles every day but there are a few things you can easily do reduce your food bill:
Cook at Home
It is always cheaper and better quality than a takeaway and if you do some batch cooking, you will always have something ready in the freezer! I love a good takeaway, but it should be a mindful choice, not a default because I’m tired from the day.
Consider the Price per Person per Meal
If you are not used to thinking of your food costs, try making a few meals that are only 2USD per meals. The choose FI team has put together a great resource on their website.
Limit Eating out and Take-away to When it’s a Planned or Mindful Choice
Eating out is great! But it’s best when it is because you fancy a night out, not when you just can’t be bothered cooking.
The Habitista’s Fixed Costs
I spend less than 25% on the big 3: Housing, Transport and Food. I also save a lot more than most people but as you can see in the pie chart, I could increase my spending very significantly and still save a lot more than most people! And some months I do. I indulge in everyday luxury and spend on what is worth it to me:
High quality clothes, shoes, and things for the home.
What I don’t do is live in the biggest house I can afford. I work from home. I don’t own a car as it’s cheaper for me to take a taxi than to maintain a car. We cook most of our food at home and are mindful of our food bill.
Reduce Your Fixed Cost and Start Indulging in Everyday Luxury
By doing those big changes you don’t need to deprive yourself to be able to save up for your pension, holiday, or wedding.
You can buy that scarf, go out with your friends or whatever is luxury for you. And you won’t be doing it on your credit card. You will know you are saving what you need.
Take a good look at your big fixed expenses and consider if it’s really worth it. Create that space in your finances where it’s not spending or saving. It’s both!
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