Trimming Expenses

In my last post I mentioned that I was confident of my approach to early retirement. In addition I wrote about a couple who have been retired for 30 years by just following the 4% rule. One of the learning from that post is that there could be a huge drop in market that may hit my investments badly. In that case my investments may not keep up with my expenses. For example if there is a prolonged market slump. And I need a plan. The plan starts with cutting down my expenses temporarily so that my investments can catch up.


Expenses

Lets start with my expenses first. You already know I planned for Rs. 50K per month on expenses that occur repeatedly a few times a year. Those could be groceries, vehicle servicing, phone bills, travel expenses etc. On top of that, there are expenses that occur less frequently like house painting, upgrading TV etc. Those fall under the annual expenses for which I budgeted Rs. 30K per month. In total my monthly expenses on average over a long period of time should approach Rs. 80K per month. Of course with inflation that will keep increasing over time.


Trimming monthly expenses

You might have noticed the color coding in my expenses. Take a look at the monthly expenses below.


The red color ones are mostly discretionary spending. So if my investments ever have trouble keeping up with my expenses they will be the first to disappear. I would sell my vehicles and cut down on petrol, service and insurance expenses. Will use public transport as necessary and reduce travel. Next I can cut down on the yellow expenses reducing the expensive mobile and internet plans. All said and done, I can bring down my monthly expenses to Rs. 35K per month.


Trimming annual expenses

Consider the following annual expenses.


Almost all expenses fall under the discretionary category. I can certainly skip buying TV, laptop etc for a long time instead of upgrading as per schedule (column 2). There will be some equipment that will break from time to time and hence I may need to spend some Rs. 5K per month on them.


Corpus required

So my expenses would come down from Rs. 80K per month (50K + 30K) to Rs. 40K (35K + 5K). Which means my corpus can be half as much as I initially planned. What this tells me is that if there is a market slump that wipes out half my portfolio, I should still be able to manage. The situation will not be ideal, but I can at least survive. Eventually when the market recovers, I can go back to my expenses. That is my simple plan for now.



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3 thoughts on “Trimming Expenses”

  1. I understand the need to trim expenses in adversity and it may be the need of the hour. What happens when one cannot afford necessities? Is compromise on necessities a price we pay for freedom or time. Are we going too far in exchanging time for money or money for time? Are extreme measures necessary? If not, where is the balance? My happiness portfolio includes Self, family, community and work. Alienating from any of the sections would make me vulnerable. Work need not essentially translate to money. But it should translate to value. I dont wish to work 20 hours a day or none at all. What are your thoughts?

  2. This is where every individual is different. For some the exchange of time for money is completely satisfactory. Some others may prefer money over time. And no one is right or wrong. We should act according to our constraints and beliefs. The balance is up to you to figure out :). I know it sounds like useless advice, but that is how it is. Every persons risk, happiness, materialism is different. Don’t blindly follow someone.

    If you like community and work, by all means you should do it. And yes work need not translate to money. Which is exactly what I am doing. I am working, but not for money. You almost never see me be lazy or watch TV. You can do the same. If you have enough accumulated for a good living + some buffer then retire. And work at things that interest you (NGO, helping family, community, farmers or whatever you feel like). When you are in a crunch, cut down your expenses temporarily and you also have the buffer. Continue serving who you want to. If things go bad, find work that pays. If things get better your expenses can go back to normal.

  3. Until you become financially independent (FI), you may have to work 20+ hours a day. When you are FI, you are free to work as much as you like. Alternatively, find a work that is not too demanding but does not pay as much. You can continue working for a long time and never have to retire early. Just retire when you feel like or if you have to.

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