Reverse engineer your expenses

12 Dec

Russian Dolls

 How much would you pay today to never have to pay your monthly Netflix bill anymore for life?   $100, $200, $500, $2500……….   The Netflix monthly subscription is $7.99 per month.

How about your family’s monthly food bill that averages $500.  Would you pay $9,500 today to never have to buy food anymore for life?  Or would you pay $24,000?  Maybe $56,000?

In order to reach financial independence/early retirement you must know precisely that number for each of your expenses and deploy an asset that will cover these expenses for life.  By doing this, you eliminate the need to work for any further income to pay for this piece of your life.  You can extrapolate the formula shown below to all your expenses (home, car, food, medical insurance, utilities, yoga class, your daily snickers bar addiction, etc…) and are empowered with specific data to assist with becoming financially independent.

 

Expense Item Monthly Expense Annual Expense Value of My Asset To Pay For This Expense
Netflix
$7.99 $95.88 $1,597.92
Food $500 $6,000 $100,000
Cable TV $90 $1,080 $18,000

 

 

The math

Annual  expense / (Your asset’s annual yield  – Inflation) =  Value of my asset to pay for this expense

Netflix $95.88 /  (      .10                  -        .04   )  =             $1,597.92

Food     $6000  /  (       .10                  -        .04   )  =             $100,000

Cable   $1080  /  (    .10          -        .04   )  =         $18,000

 

 

In the above example let’s assume your rental property yields  a 10% annual return and inflation for the future will be 4% annual.  If we wanted to be done paying our Netflix account for life, we could save and invest $1,597.92 (AKA deploy an asset) that provides us with a perpetual income stream of $95.88 annual or $7.99 a month that we could use to pay our Netflix subscription.

 

Basically:

In order to never have to pay for your Netflix again in your life; save and invest $1,597.92 at 10%  = $7.99 a month/EVERY MONTH

In order to never have to pay for groceries again in your life; save and invest $100,000 at 10%  = $500 a month/EVERY MONTH

In order to never have to pay for your cable TV again in your life; save and invest $18,000 at 10%  = $90 a month/EVERY MONTH

 

I hope this excites and motivates you to analyze each of your expenses and how you can have your investments outsource your job.  Try to develop the mindset of knowing if you can save X amount of dollars and invest it, you will not have to pay for X expense ever again.  Running these calculations on your expenses may lead you to rid your life of a particular expense.  Maybe you value your time (not having to earn more money at work) more than working.  You would have to work and earn an additional $16,402 in income just to watch cable TV instead of Netflix.  This equates to an additional 820.1 hours of work (AKA 102 days of your working life or about 5 months if you earn $20 an hour.

 

Reverse engineer your expenses; maybe you will drop cable TV, subscribe to Netflix and retire 5 months earlier than you can (I did).

 

Remember; pay off that debt, save and invest the rest, and join us on the other side and retire before you are dead.

 

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12 Responses to “Reverse engineer your expenses”

  1. Chris Ochoa December 12, 2013 at 2:08 pm #

    Oh how I long to see my money grow and retire early

    • Will December 13, 2013 at 9:04 am #

      Chris, hopefully we can learn something from this blog and keep pushing forward!

  2. The Fake Cheap January 14, 2014 at 5:07 pm #

    This is a great concept. I read through some other posts as well. Keep up the good work! I’ll be back.

    • Will January 14, 2014 at 7:11 pm #

      Thanks for visiting!

  3. mistersquirrel February 20, 2014 at 3:43 pm #

    10% or 15% yield on your rental properties is very high. I’m guessing you bought the places low after the 2008 crash to be able to generate those returns.

    I’m not criticising but in future, as the prices rise, those yields will not be available to newer investors – don’t get me wrong, you did good by snapping up the bargains when they were there :)

    When I wrote the 1st paragraph I was going to say that those numbers were unrealistic, but then I realised that what you’ve done is the classic “buy low” / “greedy…fearful” stuff and now I’m impressed.

    Late entrants trying to follow your particular strategy wont, of course, do so well – but that’s what capitalism, free markets, and economics is all about :)

    • Will February 20, 2014 at 4:23 pm #

      Hi mistersquirrel.

      You are have assumed correctly about my purchases. I snatched up a few homes at rock bottom prices during 2010 and 2011. No doubt I was lucky and investors after me would have difficulty reproducing my returns today. As you state “buy low”. I will be spinning off my real estate with the next 24 months as I speculate we will be near another housing top. I am also banking on the stock market is due for correction in 24 months. I will use the profits from housing to ride the market down short and then buy for the ride up. Find out what’s out of favor and invest heavily. When it’s popular spin out of it. When it looks like a turd grab a wheelbarrel.

      • mistersquirrel February 20, 2014 at 4:35 pm #

        cool! also why it’s necessary to have a bit of boring cash around. it doesn’t give any yield and it’s deflating but it’s very useful indeed when things are at “wheelbarrow prices” eg in 2008/9, I did stocks.

        Caveat though – housing/property is a funny one, it’s much more emotionally connected and it’s very illiquid at times ( http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/) and as someone who lives in the UK where it’s almost a religion it’s REALLY hard to play. (I made an error)

        • Will February 20, 2014 at 6:05 pm #

          Yep, personal housing is often not the greatest investment and emotions are costly.

          Although if you purchased the most efficient amount of space for your needs (say 1000 sq-ft for a family of 3) and buy a foreclosure or tax sale home for cash, one could realize a nice return on their personal housing investment.

          For investment properties it’s all about the numbers. The emotions are taken out of the equation. I like this asset class as you are in more control of the investment than say stocks. I don’t know when the “board of directors” is going to vote a pay raise for senior management. With investment properties I am writing the checks.

  4. Laura February 27, 2014 at 5:20 pm #

    Can you tell me what your back up plan is for the times when the market goes so far down or the properties aren’t rented that you can’t pay all of your bills? I’m wanting to be FI but I’m not sure what to do about the bad years. I know there will be bad years. Thanks for your help!

    • Will February 27, 2014 at 6:10 pm #

      Hi Laura. Great question!

      My families current expenses run less than 50% of my passive income. So this by itself I feel comfortable enough that we can ride out a few bad years with the extra income we are socking away.

      We have experimented with living on 1/4 of our passive income and could return to this level of spending in a pinch.

      I believe the biggest step one could take to reach FI would be to pay off your house or have an asset that pays for your rental home.

      I actually look forward to down markets as one can scoop up depressed assets and spin them off when that particular asset class returns to sanity.

Trackbacks and Pingbacks

  1. Carnival of Financial Independence, 43rd edition - December 28, 2013

    […] Will Murphey @ Retire Before You Are Dead explains how to Reverse engineer your expenses […]

  2. Retire Before You Are Dead - February 24, 2014

    […] Earn more than you spend.  Be unique. Find like-minded frugal friends. Own your home ASAP.  Reverse engineer other expenses and rid them for life. Remember; pay off that debt, save and invest the rest.  […]

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