The Long-Term Costs of Recurring Expenses – And How They Eat Up Your Life

Recently I was asked by an afterschool club to give a presentation about money to some kids from poor families. So I sat down and thought about what key points and messages I’d be able to get across in a one-hour talk.

I decided to introduce the kids to the rules of 173 and 752. Do you know them? No? Well, you should!

I first read about these rules over at MMM, then Oli from frugalisten.de wrote a classic post about them in German. Let’s see what they’re all about.

The Rule of 173 – The True Cost of Recurring Monthly Expenses

You can use the rule of 173 to work out the true cost of a monthly recurring expense over ten years assuming that instead of spending the money every month, you invest it at 7% interest p.a. The rule basically tells you how much that cost will appreciate with a 7% compounding interest rate.

If you’re familiar with the concept of Financial Independence, you know what type of investment gives you roughly 7% p.a. over the long term, right? You’ve guessed it – the stock market (diversified ETF/index portfolio). At least it did in the past…

So if you want to know what a recurring monthly expense is actually costing you over ten years, simply multiply it by 173.

Example: Let’s say you stop spending €20 a month on some stupid cable TV package. Instead, you use that money to buy some index funds. According to the rule of 173, in ten years you’d have €20 x 173 = €3460 in your investment account.

The Rule of 752 – The True Cost of Recurring Weekly Expenses

You can use the rule of 752 to work out the true cost of a recurring weekly expense over ten years (with the same assumptions).

Example: Let’s say that instead of eating out twice a week you decide to only eat out once a week and you spend an average of €30 per meal. According to the rule of 752, in ten years you’d have €22,560 in your investment account. Nice, huh?

The True Cost of Recurring Expenses Over 20 years (Inflation Adjusted)

In the examples below we’re going to use a period of 20 years instead of 10. Why? Well, if you start applying these rules at age 20, hitting early retirement by age 40 is a very realistic goal.

On a 20-year timescale I think it’s important to work with inflation-adjusted numbers. This means that we assume a 3% inflation rate and deduct that from the average growth rate of an average portfolio (7%). This means that we work with an average inflation-adjusted annual growth rate of 4%.

Let’s recalculate the above rules factoring in inflation and using a 20-year time period:

The Rule of 357

The rule of 357 gives you the inflation-adjusted cost of a recurring monthly expense over 20 years. So if you stop spending €100 per month on something you don’t really need, save that amount and instead invest it at the end of the year in something that gives you a 4% return (after inflation), in 20 years you’ll have €35,700 in your investment account. (35,700 divided by 100 gives you 357). Of course the actual amount will be higher if you factor in inflation, but in today’s purchasing power that’s roughly how much you would have.

Getting rid of a recurring monthly expense of €28 will give you €10,000 after 20 years. It’s worth memorising that number.

The Rule of 1549

The rule of 1549 gives you the inflation-adjusted cost of a recurring weekly expense over 20 years. If you get rid of a recurring weekly expense of €6.46 and invest the money instead, you’ll have €10,000 in 20 years.

All Clear So Far?

Good! Let’s move on to more fun stuff. In my presentation for the kids I used some examples of recurring expenses that they will probably have in the near future.

To make it more interesting, let’s see what impact these costs have. How many years of “paid holiday” could you “buy” by choosing to eliminate these recurring expenses?

Assumptions:

  • Annual expenses of €10,000 per person
  • Investments (in the stock market) grow by 4% (inflation-adjusted) a year over the long term.
  • The timescale is 20 years.
  • We invest the money at the end of each year instead of at the end of each month (to make the calculation more conservative).

1. Drinking Bottled Water

Let’s see how much money AND work-free years you can save by drinking tap water for 20 years. Let’s say you drink 2-3 litres of bottled water a day worth €0.92. That’s €6.46 a week. If you invested that €6.46 at week in index funds for 20 years you’d end up with €10,006. More importantly, you could live off that money for a whole year! For heaven’s sake, don’t drink bottled water if your tap water is fine! Please!

2. Wasting Food

In an official article I read that the average European wastes 173 kg of food a year. Let’s take a smaller number to be more conservative. Let’s say that you throw away an average of 152.76 kg of food a year at an average cost of €2.20/kg. Each year you throw away €336 worth of food. That’s €28 a month. To find out what you would spend in 20 years, as we’ve learned above, you have to multiply the monthly cost by 357. So over 20 years, wasting food costs you about €10,000. That’s enough money to live off for another year, folks!

3. Drinking Fizzy Drinks

People drink far too many fizzy drinks and this is stupid for at least three reasons: it’s unhealthy, it produces a huge amount of waste, and it robs you of your freedom.

Let’s assume that you spend €1.85 a day (€12.95 a week) on fizzy drinks. If you stop doing that and invest the money instead, in 20 years you’ll have €20,059. That’s enough money to live off for two whole years, which means you’d have two years in which you can do something meaningful with your life. Not too bad, right? And it gets even better if you think of all the health benefits of not pouring chemical shit down your throat.

P.S.: The occasional G&T or a nice full-sugar coke once a month is allowed though, if you ask me.

Ready for the next stupid expense you could eliminate from your life?

4. Upgrading Your Phone

I do understand all those people who buy a new iPhone every year. I’m a tech freak myself. I like to think of myself as a frugal tech freak though.

Let’s say you’re a moderate tech freak and you only spend €554.40 a year on a new (or even used) smartphone. (My phone is worth about €100 and I change it every second year. I use it constantly and I’m happy with it.)

An annual budget of €554.40 means €46.20 a month. €46.20 x 357 = €16,493 in 20 years.
If you set yourself an annual budget of €50 for upgrading your phone, you’ll spend €1487 in 20 years.
Doing this will save you about €15,000.

So if you do this, after 20 years you can afford to have one and a half years more “paid holiday” than an average person.

5. Smoking

It’s really difficult for me to think of a human habit that is more annoying, expensive, unhealthy and ridiculously stupid than smoking. If you’re a smoker, you’d probably agree with that anyway. Nothing personal. Putting aside all the health-related arguments, let’s run the numbers:

Let’s say you smoke 20 packets of cigarettes a month and each packet costs €5.60. That means you spend €112 on cigarettes a month. If you stopped smoking and invested the money instead, in 20 years you’d have €112 x 357 = €39,984.

Baam! You smoked away four years of paid holiday.

6. Eating Lunch Out During the Week

When I worked in an office, most of my colleagues went out to lunch every single day. On average they spent about €6 each time. If you cook at home and take your lunch to the office, a healthy meal will hardly cost you more than €1. Making this change means a saving of €5 x 5 days = €25 a week. According to the rule of 1549 you’d have €38,725 in your investment account after 20 years if you invested the money instead. You’d be able to live off that money for almost four years.

7. Owning A Car

Many people say they need a car. I think most of them are wrong. Cars are overused and ownership can be avoided in the vast majority of cases, especially with the right life planning. This is my theory. I will put my thoughts in an article soon hopefully.

Let’s make some calculations.

First the purchase/upgrade/repair costs:
You buy a car for €6000. Every five years you spend another €4000 on it on repairs and/or upgrades.
If you chose not to buy a car and instead invested that money at 4% interest, according to my calculations,in 20 years you’d have €31,138 (see calculations here). 

Secondly, let’s assume insurance/fuel/maintenance costs of €220 per month. I’ve kept this number low because if you don’t have a car, you need to spend money on other means of transportation. Feel free to do your own calculations though.

So, in 20 years that’s €220 x 357= €78,540

All in all, by not owning a car you can gain €31,138 + €78,540 = €109,678 – enough money to live off for 11 years. This is one of the reasons we’re FI I guess…

Conclusion

It’s interesting to express recurring expenses in work-free time lost, isn’t it? If you add up all the above savings, you get over 25 years of “paid holiday”.

Is it worth it?

You have to decide for yourself. If you like owning a car that doesn’t make you a bad person. I’m sure you can find other recurring expenses you can eliminate instead – expenses that don’t align with your core values. Maybe you have recurring expenses simply because of social pressure (because other people have them and you don’t want to be “weird”). It’s worth looking for those.

Maybe my numbers are off. You can argue about that. In fact, please question the numbers and do the calculations yourself with your own spending habits and your own time frames.

Where can you live on €10,000 a year including holidays? Well, I know you can do that in Germany, pretty comfortably, especially if you live in a flat you own outright with no mortgage. In Romania you can live off €10,000 a year per person even if you have to pay rent too. (frugalisten.de has less than 10K€ expenses in a year living in Germany and paying rent).

Disclaimer: I hope it’s clear to everybody that this is a model and that it works with assumptions. So don’t come back to yell at me if your investment account underperforms the 7%. Ok? Good!

What recurring expenses did you have that you’ve cut or that you could cut? To inspire others, please use the rules above and give some of your own examples in the comments.