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Monday 19 August 2019

The Expense Triangle Of Doom

Aiming for FIRE? 
Sho, that headline scored a solid 10 on the ominous scale!

I did however choose it for good reason - because your finances will be looking pretty ominous if you over-extend yourself on the three expenses which stop so many people from catapulting themselves to a better financial situation (whether that be getting out of debt, saving, or the ultimate golden ticket - financial freedom.)

Sure we all mess up sometimes - yes that cappuccino you buy every other day could set to set you back R400 a month, and getting an over-specced fruity phone may increase your monthly cellphone bill by R300. But these can probably be forgiven, and are pretty tame compared to the 4 and possibly even 5 digit rand amounts that get sucked away each month by what I term "the Big 3”.

Now, when I mention big expenses, I'm pretty sure the first two items that pop into your head are housing and cars?

And you'd be right - these two eat a large helping of most South African's budget pie.

But it doesn't end there, because housing and cars then also go on to directly influence a third biggie which forms what I like to call the expense triangle of doom – the deadliest shape in all of personal finance. Dum dum dum!

It looks something like this:

Just when you thought you were done with Pythagoras


Cars are one of those expenses we really have a lot of control over. You can choose to get from A to B with a bum which has been thawed to a precise temperature by a state of the art seat warmer, while using Kit inspired rolling indicators to signal your intention to turn, just as the imaginary knot in your lower back has been expertly untied by the perfectly tuned vibrations of the massage function in your back rest.

Or, you can realise that a car is merely something that can meet a need of getting you where you need to be. Anything that can do that reliably is going to be just fine (with plenty money left over for thermal underwear, the full Knight Rider box set, and a proper Swedish massage?)

You can also choose how you decide to finance a car. You can get something you can easily afford and take a few extra months before you buy it to make sure you are able to put down a decent deposit, or you can opt for something which you quite frankly cannot afford and commit financial suicide to a balloon finance deal – a great way to confess your undying love for your bank.

Something else that is important to realise, is that the cost of an expensive car doesn’t end with an increased sticker price, additional interest payments, and an oversized depreciation knock.

Expensive cars are not only more expensive to buy, but they are:
  • More expensive to insure
  • More expensive to service
  • More expensive to maintain
So as you ratchet up the price you pay for a car, there is a whole symphony of related expenses which starts playing louder and louder. The perfect way to get your cash to leave the room.

And then of course your choice of car directly drives (see what I did there) another one of the Big 3 expenses – your cost of commuting. An expensive car costs a lot more per kilometre when you factor in all the related expenses, and this results in a higher priced commute.

So by choosing a cost effective car means you get to decrease not only your car expense, but also your commuting expense.


Housing is probably the biggest line item on most people’s budget. A quick glance at the Stealthy Budget shows over 29% of our income getting sucked up by expenses related to the roof over our head. And I suspect we are on the lower end of the percentage which most home owners spend.

With such a big portion of income going towards housing, getting smart and thinking long term when it comes to how much you spend on a house, can have a massive impact on how much income you leave available for other goals and priorities.

For example, buying a house for 10% less than what you can afford could make you a home owner 5 years earlier than the usual 20 years. Buy for 20% less than you can afford, and you could own your house outright in just 12 years.

So the amount you spend on your house is important, I think that is clear. But something else that should also be seriously considered is where you choose to buy that house.

The location of your house directly influences your commute cost (and arguably just as important, your commute time). This is where it can get a little tricky - for example, it may actually be worth paying more for a house which is closer to your work, because the cost and time saving of the shorter commute could more than compensate you for the increased house price. And of course it’s always worth remembering that a shorter commute makes you happier!

The Backwards Approach To Big Expenses

There is something that really intrigues me about the way many people approach their expenses. With the small expenses, we are usually on top of things:
  • Bank fees - try reduce
  • Insurance - try reduce
  • Eating out - try reduce
We are generally pretty good at reducing these types of expenses when we apply our mind and dedicate some time to it. For the smaller expenses, the approach is usually to identify the need, and then try find the most cost effective way to meet that need. That’s a pretty solid approach!

But then…
  • Cars and houses - maximise, and add finance!
Suddenly, we seem to forget that cars and houses are also simply ways of meeting a need. When it comes to the really big stuff, we decide to flip the whole process on it’s head. The approach many take is to identify the most money their budget will allow them to spend, and then find the maximum amount of car or house that meets that money.

For some reason, people seem to try maximise their car and housing expense?

And this is most unfortunate, because while reducing the small expenses certainly does help, it is by saving on the really big expenses where massive strides can be made, and financial freedom can be bought.

If we are able to approach the big expenses with even just half an eye on cost effectiveness, we can really propel our finances to the next level.

Sounds like something worth thinking about?

Turning The Triangle Of Doom Into A Triangle Of Dreams

Okay so let’s wrap this all up.

If you overspend on a car, and overspend on a house, which is far away from your work, then you are depriving yourself of the opportunity to pursue some of the many other joys life has to offer (such as financial freedom or travel).

So, what’s the alternative? Is it possible to flip this all around?

Controlling the big 3 expenses means you can turn your finances into rainbows and unicorns

And this is where I consider myself extremely fortunate. We have managed to turn the expense triangle of doom into an expense triangle of dreams. Through some carefully considered decisions I have managed to:
  • Buy a house for less than what we can afford
  • In an area which is extremely close to my work
  • While driving an extremely cheap car scooter

Triply terrific!

Was it a schlep to haul our life from Jo'burg to Centurion? Yes, it took some effort.
Did driving a scooter to get to work take some getting used to? Absolutely!

Was it worth it?
Hell yeah! 

In fact, quite simply, the fact that we have chosen to minimise the Big 3 is the only reason we are able to follow our early retirement and financial freedom dream!

I guess the key takeaway from all this can be nicely summed up by this tweet:

Till next time, Stay Stealthy!
 - ~ - ~

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