How much money do you waste?
I’m still reading Dave Ramsey’s The Complete Guide to Money. In fact I love to read these kind of books on personal finance as I find them to be very thought provoking. Even if you have been saving money for years and consider yourself a financial expert I’m sure these kinds of books can trigger new ideas and give you new ways of looking at things.
The Four Walls
In the book I came across the concept of the Four Walls. The Four Walls are your basic living costs that need to be covered each month. These consist of shelter (rent or mortgage payments, plus utility bills), food, clothing and transport. The book talks about these in terms of writing a pro-rata debt repayment plan. The plan basically involves paying back what you can using your disposable income, this being what’s left after deducting the four walls.
This got me imagining. What if I was in debt to the mafia and I needed to repay them as quickly as possible. I can’t simply skip town, they have my mum held hostage. In other words, what is the current minimum expenses of my four walls, and hence, my disposable income.
So I ran the figures on the back of an envelope (literally I did). I should point out that I currently live and work in Bangkok, Thailand so I am guessing my expenses are probably a lot lower than yours but as a practical task anyone can do it.
Rent and Utilities: Last month these came to 16,807 baht ($495) which is by far my biggest expense.
Food: This one took some working out. As a daily menu milk and cereal for breakfast (15 baht), Noodles for lunch (7 baht) and pork omelet and rice for dinner (14 baht) gives a basic daily food budget of 36 baht ($1.06). Add in a few weekly extras; 1kg of rambutans 35 baht, ¼ watermelon 9 baht, 2 large bananas 16 baht, a packet of fake Oreos 10 baht,2 large carrots 12 baht, 3 boiled eggs 25 baht and 2 packets of peanuts 15 baht comes to an additional 122 baht a week ($3.60). A week’s worth of drinking water (10.5l) is another 10.5 baht ($0.30). Add another 250 baht a month for toiletries and detergent and cleaning items gives a monthly basic budget of 1,916 baht ($56)
Transport: The air-con bus to work costs 11 baht ($0.32). Two trips a day (there and back) comes to 954 baht a month ($28)
Clothing: Work related clothing can be covered with about 5,870 baht a year. Weekend clothing can be cheap if you just hang out by the pool at 1,100 baht a year. Socks and underwear probably set me back another 2,220 baht a year. This works out at 766 baht a month ($23)
Wastage?
So there are the bare bones of the four walls. Total potential cost of $602 a month. My current budget for the four walls is $1,089 a month. If we exclude rent and utilities which are semi-fixed costs (I could move to a cheaper condo, for example) then the remaining three walls cost me $594 a month. The minimum cost for these could be $107 a month. I basically spend more than 5 times what I need to on these three walls. That’s a lot of gravy.
5:2 Diet for your Wallet
The difference between the two figures is $487 a month, or $16 a day. By living frugally for one day a week I could potentially save an extra $850 a year. Two days a week would give an extra $1,700. In the UK the 5:2 diet is very popular. The diet is basically fasting (consuming 500 calories a day) for two days a week. These two days are not consecutive, so you might fast on Mondays and Thursdays. The idea being that even those days are hard you know that the next day you can go back to normal. For many people this method proved much easier to commit to than dieting and counting calories 7 days a week. I think in terms of budgeting this could also be true. A few low days could potentially supercharge your savings rate without too much pain. Provided of course you don’t go on a spending spree the day after the frugal low days.
Realistically What’s it Worth?
An extra $850 a year saved for 30 years at a reasonable 7% a year growth rate would see your retirement savings increase by over $80,000 which at a 4% draw-down rate gives an extra $3,200 a year in income. Obviously if you did it two days a week you would get double this figure. As I said I live in Thailand where my living costs are relatively low to begin with. If you are starting from a higher level then the potential savings could be much greater. Savings of $4,000 a year equate to $15,000 a year extra income in retirement. In addition to this the discipline of being super frugal a few days a week will probably instil better spending habits into your daily life meaning your retirement savings might not need be as high as your originally anticipated. The increased savings together with a lower income requirement at retirement means your potential retirement date or financial independence date could be bought forward a number of years.