Are My Major Expenses What I’d Assumed?

crispydoc Uncategorized 3 Comments

This past week I went hiking with an intellectually rigorous friend. He is a law professor, and part of the pleasure of our friendship is that we often come at a similar problem from different analytical angles. He’s also one of the folks I can freely geek out over finance with, knowing his eyes won’t glaze over.

I was describing to him how we were addressing our major family expenses: housing, transportation and food. I’d assumed these were the Big Three expenses based on foundational FI blogs like Early Retirement Extreme where this hierarchy is taken for granted.

My friend challenged my assumption. He conceded that housing in our area is expensive and would make the cut, but suggested that transportation is a fairly minor expense for us. He further asserted that since we eat out once or twice a month, our eat-at-home food sourced from Costco and Trader Joe’s was unlikely to constitute a big portion of our annual budget.

He made some educated guesses: he assumed we pay more for services (we pay for help with child care, cleaning house, laundry and cooking), health insurance (high deductible health plan for our family of 4) and travel (we are taking our biggest family trips ever this summer and will be abroad for a total of 5 weeks).

Turns out he was completely right.

A quick look at Personal Capital showed that our number one expense was mortgage, followed by services (as noted above) and then health care, taxes, other insurance (life, disability, auto, umbrella, homeowners), travel, then groceries. The silver lining is that our health care is paid via our corporation with pre-tax dollars, which lessens the sting.

Services are a tough one. We got lucky out of the gate with our nanny, and she is a true treasure. In eight years she’s never missed a single day of work, which is huge since I’m often coming off of a night shift as my wife leaves for a day shift. My wife is a neat freak, and swears that the services are worth it to her. I’m top 10% for a guy, but not up to my wife’s exacting standards of cleanliness, so if I kept house she’d likely judge my efforts inadequate.

Our kids are getting older and need less child care, but if we suggested part-time or a nanny-sharing arrangement we fear she might leave us altogether for a more secure paycheck with more guaranteed hours. My wife suggests we’d spend an equal sum on marital counseling if we let her go, only half in jest. As long as we own more house than we need, the cleaning and maintenance costs will remain a source of tension.

Transportation is a negligible cost for us. Our used 9 year old Kias and 15 mile round-trip commutes to the hospital once or twice a week are inexpensive. Gas and auto maintenance costs are consistent with driving beaters over short distances for work and supply runs. Our kids are fortunate to walk to and from school daily, helping to both build their health and eliminate a recurrent cost.

This year’s summer travel will take a bigger bite than usual. We are going to destinations where costs are relatively inexpensive once you arrive (Mexico, Greece) but since I have not yet begun to travel hack for airline points, the flights in and out were the costliest part of our plans. This will serve as motivation to unfreeze our credit accounts just long enough to apply strategically for credit cards so we can fly free next year.

Once there we will be staying at modest airbnb rentals, eating breakfast in our rentals, packing picnic lunches, and enjoying dinner at inexpensive restaurants (the gelato and coffee budget will be unrestrained by design).

We tend to prefer airbnbs to hotels, largely because the layouts are more family friendly, the kitchens are a huge asset in controlling our food costs for breakfast and lunch, and (to paraphrase Rick Steves) spending more money on housing builds a thicker wall separating you from the culture and people you came to see. Travel and life are about what happens when you cross paths unexpectedly, and airbnbs foster that messy beautiful experience more than hotels.

The wife and I reviewed our insurance this past year, and considered cancelling our disability and life insurance. Having reached basic FI (24X our annual expenses in savings) I suggested we could self-insure against catastrophe. She is risk averse, and prefers to see us develop a larger buffer (33X) before we cancel our policies. Happy wife, happy life, so I conceded the point.

Take home point: For physicians and other high-income professionals, the big three fixed costs of housing, transportation and food, which constitute the top expenses for most people, may not accurately reflect your three greatest annual expenses. Verify your assumption with a free tracking tool such as Mint orĀ  Personal Capital.

Comments 3

  1. This may be the most important blog post I ever read, and your friend is a genius. It’s not about the boilerplate FI blog BS. You don’t live MMM. He lives MMM and what he’s selling is soap. He makes his money living MMM. All the dopes trying to emulate MMM are missing the experience of living their own personal lives to the max.

    You write a financial blog but you didn’t even know your top expenses. You of course knew them, but what you wanted to claim was MMM’s top expenses. You were blinded by the light, cut loose like a deuce, another runner in the night (that’s my interpretation of that refrain and I’m standing pat). MMM drives a blog all about living poor. Who the hell wants to live poor? His blog is like the BR-549 truck from Hee Haw.

    I just wrote a data driven article which will air over at XRAYVSN on Thursday looking at portfolio longevity WR and risk management. What the article shows is the likelihood of dying poor as a function of withdrawal, longevity, portfolio risk adjusted for portfolio return, SORR and market. Given my analysis I don’t see how some 35 year old with $1,000,000 in the bank and a 60 year horizon survives on more than a $20K per year WR (2%) over the very long term. Even then with bad SORR he survives only 3 out of 4 times. Listen to your wife. She’s not risk averse she just intuitively understands BS when she sees it. Live your own life. You like your life, your wife likes the help, you make memories with the kids when you travel. Are we there yet? Fortunately I arrived to the FI blogoshpere 2 months AFTER I retired so according to them, I did it wrong.

    I lived a more than good life getting here. That’s the part I really like, the more than good life. As Mozart GoKart I got down but never got tight and I made it through the night.

    1. Post
      Author

      I was seduced by how well I seemed to be performing when measuring myself on someone else’s irrelevant metric. Winning! Understanding the personal angle of personal finance is the key to creating your own appropriate metrics and measuring them against your inner scorecard (Buffett’s term).

      I still view MMM with gratititude as the guy that started me and many others down the rabbit hole that slapped me upside the head and set me on a far better financial path. In another life – who knows? I might have been pretty happy living a far more frugal lifestyle, riding a bike and learning carpentry, since I’m plenty dirtbag at heart to be content with less. Still, I’m grateful for the life (and wife) I have and don’t intend to do anything to undermine the pleasant journey we’ve shared and the good place we’ve arrived at. Spending is a compromise we work out together.

      Finally, a comment that touches on both Manfred Mann AND Hee Haw in the same breath? If the greatest benefit I get from this blog is meeting invisible friends who understand both of those cultural references, I’ll die a very happy man. (As you correctly observe, there was a lot of controversy among my friends about the wording of the “cut loose like a deuce” lyric back in the day.)

      Catching up with reading after a couple of back to back nights this weekend. I’ll look forward to your guest post on XRAYVSN.

  2. Really I have nothing against MMM. It’s a free country live as you like (at least till you cut your thumb off with a skill saw or plow into a tree on the bike), God knows I live as I like, and a bonus I still have all ten fingers.

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