Vilfredo Pareto was an Italian economist back in the early 1900.
He discovered that 20 % of the population owned 80 % of the wealth. (I think it was in Italy). People have later on applied this 80/20 principle to other stuff. Like 20 % of the carpet will get 80 % of the walking. Or 20 % of Nike’s shoes is giving 80 % of the revenue. This is some examples.
There is an 80/20 principle on personal finance.
80 % of our private economy is based on these subjects:
If we can manage to only spend 40-50 % of our take home pay on these three things. Then we are in good shape.
How to spend less on Housing
This is the most complicated of the three of them. It might all so be the most expensive one. The big dilemma is often to rent or to buy a home.
And if you ask me I will say rent, and here is 5 reason why.
- Our money is better off in a stock index fund, than a mortgage
- A house we live in is not an investment
- It is way harder to move from there
- We need to do the maintenance ourselves
- We have no idea what the housing market will do
Some cities is harder to find a good place to rent. I live in Copenhagen, and it is super rare to find an awesome apartment, where the rent is not through the roof. But at the same time. It is not unusual to pay about 9.000 $/m2 for an apartment if we buy it. Which is insane!
I’m super fortunate to live in 50 m2 apartment I pay 500 $/month for which is super cheap here in Copenhagen. I have lived here for all most 10 years, and have no ambition off leaving anytime soon.
Let’s imagine that you are a humble person. Eager to retire early and live a more simple life. So you don’t want more space than me, about 50 m2. If you are placed in a costly city, an apartment like that would rent for 1000$/month.
A good round number.
Rent 1000 $/month
How to spend less on food
There is one obvious way to spend less on food and is to eat less out on restaurants. I think that we in general love good foods here in Denmark. And I’m no exception. I love good food, and there is good restaurants everywhere here in Copenhagen.
If I want to eat out, I often grab a pizza or a kebab. They cost about 5-10$. Being a weekly thing, it is not something that has a major influence in the budget.
The “not so obvious way” to save money on food is to fast.
Yes – you got that right. Not eating.
“But Loui?? I need to eat to survive?”
Take a look at this documentary on fasting. It is actually healthy not to eat once and a while.
I know that. The case is that people is only getting fatter. And there is a ton of health benefits in fasting. There is difference ways of doing it.
Is where you only eat 500 kcal for to non-consecutive days. And eat normal for the rest of week.
16 is referring to that you fast for 16 hours (including sleep) and eat for 8 hours. Every day. The normal way of doing this fasting protocol is to skip breakfast, and only eat lunch and dinner.
One meal a day. Is a bit tougher than the to others. But by doing this you can feast like king. Check this guy out. He is eating 4000 kcal every night. Feasting like a true king.
With eating less out on restaurants. Some occasional fasting. And eating the rest of your food at home. Spending more than 500$/person is a HUGE splurge to me.
So we will with budget with 500$/month for the food bill.
How to spend less on transport
I can’t count on my two hands how often I see people buying cars higher than their net worth. Which to me is insane. Buying a car is one of the worst investments you can ever do.
As a rule of thump never spend more than 2-4 % of your net worth on a vehicle. I know I’m not going to.
The most affordable and healthy way is to transport your self by bike. We can buy a second-hand bike for 200-300$. If you have to travel long distance go for public transportation. By biking we can also cut out the gym membership.
So let’s say we buy an awesome second-hand bike for 300 $, so the maintenance on it will be about 10 $/month. And because we don’t want to bike further than 15 km, we are going to take the train once and while which will be around 60 $/month.
Transport will then end up in monthly cost of 70 $.
We now look at total budget of:
- Housing – 1000 $/month
- Food – 500 $/month
- Transportation – 70 $/month
In total 1570 $/month or about 19000 $/year
To be financial independent we need to have about 20-30 times our annual spending. It depends on how conservative we are. Which will be about:
380.000 $ – 570.000 $ in portfolio of stocks and bonds.
From here you will have every single basic cost covered. We can then take up 1-2 month of working, just to have some money we can do fun stuff with for the rest 11-12 months.
This budget is above is not very tough. It can be done so much more frugal if we want to. And if we are young, it can make sense to leverage into that savings.