(FI) My Single Greatest Cost-Saving Tactic
The first in a series of financial independence podcasts. Today's discussion touches on the importance of controlling costs along your financial independence journey
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Welcome to episode 36 of the show and the first of our financial independence podcast series. We will continue to list the episodes in the series in the order they come out but will use slightly different podcast art with the FI episodes so they’re easier to distinguish.
As you probably know by now, there are two of us that work on this show. We are at different stages in our financial independence and investment paths and we’ll both add to the episodes using lessons learned and personal experiences that result from each of those unique journeys and perspectives.
Before we get too much further into the series let’s define financial independence. According to Wikipedia it’s: “The status of enough income or wealth sufficient to pay one’s living expenses for the rest of ones life without having to be employed or dependent on others.”
One key thing to remember is that financial independence, or “FI,” is measured on a sliding scale. No single amount of passive income is the right amount for all of us and even a single person can expect their financial needs to change significantly over time. This first point should be encouraging as it means you can enjoy some of the benefits of FI very early on in your journey without having to wait for some magical day in the future when you save up the “correct” amount of money and stop working for the rest of your life. If that’s even something you want to do.,
This is because any percentage of independence can provide you with peace of mind during tough times knowing that even if you can’t stop working forever you can better sustain a prolonged job loss or health event without the “financial wheels” coming off of your life.
We can and will cover the benefits of FI more in the future, but for now I’d like to discuss the most important tool I found and exploited on my own path to FI. You might think that an investment technique or shortcut to a better job or a raise would have carried the most weight on my journey, but in fact, no. It was a savings vehicle that had the most effect. To be specific, it was my bicycle.
Before I explain why the bike was so powerful let me back up and list the three greatest expenses that most people face. Those three expenses are food, housing, and transportation. To the extent you can cost cut on those three items, you’re going to make a huge impact on your rate of savings.
For most of us transportation takes the form of a car, or in the case of many families, two or more cars. In my case, I’m married with four children, and the majority of my friends with the same size family have at least two vehicles. That fact that car ownership, and use, is so ubiquitous leads many of us to assume that we can’t get along without a vehicle and that the cost of owing and operating a vehicle isn’t significant enough to warrant further thought. Before we follow common wisdom, however, let’s investigate together the actual cost of car ownership.
According to AAA, the average cost of car ownership in the US was $713 per month in 2016. This number was actually down compared to the previous year due to lower than average fuel costs and is likely much higher today for the same reason. But the $713 per month number provides a convenient middle of the road figure for our purposes. The AAA number includes all sorts of costs from insurance and registration, to depreciation and maintenance, and represents the total cost of car ownership over the vehicles life, and not the average payment on an auto loan.
To better illustrate the point I’m driving toward, I’ll share a little bit of my own story with you now. My wife and I were married in 2001 and over the last 21 years have owned a single vehicle for all but three of those years. Basically, the family used the car and, except for rare occasions, I biked myself to work and back for 18 years. This means that at $713 per-month we saved $8,556 a year just from biking to work and that over the full 18 years we saved $154k. I invested our bicycle savings all along the way and between the bikes direct savings and the investment returns I was able to purchase my second home mortgage free in an all cash transaction.
It really is incredible that controlling one single expense could have such an out-sized impact on one’s financial future. Who would imagine that cycling to work could eventually purchase a home but again, in this case, it did and the cost of car ownership is only going higher not lower making transportation savings ever more valuable as the years tick past.
Controlling costs truly is the panacea of business operations and personal finance. Many of the companies highlighted on this podcast are stand-out performers, in part, due to their ability to control costs or as a result of a unique business model that advantages their cost structure. It may sound too obvious, but before you can invest your capital you must first have the capital to invest, and for many of us cutting out a major expense can be the springboard to those future investment returns.
As it turns out walking, jogging and riding to work provide a cascade of benefits beyond just cost savings. There are the obvious health benefits, along with the related stress release that comes from fresh air, and there are even some other less obvious benefits. One interesting cycling side benefit I discovered over the years was that a self-enforced limitation in your life often drives you toward better planning and solutions in other areas.
Meal planning is a good example of this. When I drove to work, I didn’t plan my meals very well. Why plan them out the night before when I could simply zip off to Chipotle on a whim and buy myself lunch? On the bike, however, I knew that time and energy limitations made zipping off to Chipotle a no-go lunch solution, so instead of buying lunch from a restaurant, I’d pack up leftovers from the night before and eat them at work. The benefits from this simple change were numerous and included time saved, gas saved, more effective and productive work, and often times healthier food to power me through the next peddle session. I’m now digressing pretty far from the mainline topics of this podcast so I’ll get back to finances before I wrap things up.
What I hope to convey in this first FI episode is just how much low-hanging-fruit is available to you on your own road to passive income and independence. Savings on transportation is just one of those pieces of fruit, but even that one technique can, and in my case did, have a massive impact on my net-worth.
I understand full well that not every technique will work for each individual. Distance, physical limitations and personal safety may mean that ditching your car for a bicycle isn’t practical for you, but even within those limitations you can explore ways to reduce transportation costs. Moving closer to work, mass transit, ride sharing or even teleworking are tactics that have had a similar out-sized payoffs for others and that might work for you.
In the end, if one small decision applied over months and years can be the difference between a paid-off house or a mortgage payment, isn’t it at least worth some consideration? I think that it is, and in my case, I’m grateful for the time spent peddling around town listening to audio books knowing that each mile brought me a little closer to my goal of owning my own time.
Well, with that I hope you liked this first installment of our FI specific podcasts. We’re looking to, initially, do a short run of episodes and see how much value our listeners get from the slightly different but related topic. Hopefully the topic was both engaging and enlightening, and I look forward to bringing you more FI and special situation investing topics in the weeks to come. Thanks again for listening and we’ll see you again soon.