The True Cost of Regular Expenses: The Rules of 752 & 173

The concept of reaching financial independence where passive income fully supports your lifestyle is fairly simple in theory. Essentially you just increase your income, cut your expenses, and maximize your savings rate (see my article “Simple Math, Early Retirement“).

But, as we all know and as I shared in “Destination Financial Independence,” simple concepts like losing weight, exercising, and cutting our expenses are in fact extremely difficult.  Good decisions and consistent behavior are not as easy as the simple math.

Why are these extremely important areas of our life so difficult? Why don’t we stick with diets and savings plans over the long run like we should?

The causes are many, but I would argue that the pain of not sticking with our long-term plan is not as great as the short-term pleasure of doing something else.

For example our minds might console us with, “The ice cream tastes sooooooo good right now, and I can always get back on the diet tomorrow or next week.”  Or we might rationalize, “This large house is so comfortable, safe for my children, and the kitchen is beautiful. Why should I live in an older, smaller house when the interest rates are so low and it doesn’t cost me that much to live somewhere better?”

For the tough choices, sometimes we need a more compelling argument to win the battles within ourselves.

An Alternative View of Regular Expenses

One way to tip the scales financially is to understand the real cost of our daily, weekly, and monthly financial decisions.  I will help you do that by explaining the rules of 752 and 173 (which I originally found over at the blog Mr. Money Mustache).

Let’s say you eat a nice meal out at a restaurant on average twice per week. Let’s say your bill is usually $50 at each meal. What is the cost of each meal? Is it $50?? Or is it much more?

If you skipped just one of those weekly meals and ate leftovers at home, after ten years of saving and investing $50/week at a 7% compounded rate of return you would accumulate $37,600!! The real cost of a recurring weekly expense balloons by a multiple of 752 (aka The Rule of 752).

Is it possible to imagine that you could do even better and cut $100/week in recurring expenses from your budget and not even notice the difference? Think about habits like eating out lunch instead of simply packing a lunch. Or, what about drinking coffee at Starbucks instead of bringing a thermos?

If you need extra motivation to find these savings, $100/week x 752 = $75,200 in extra money in your pocket over the next 10 years. What could you use $75,200 for? Maybe to pay off your home? Invest in a rental property?

If smaller weekly spending makes such a big difference, then what about big monthly expenses like house payments?

Someone might decide to buy a $200,000 newer house in a fancier neighborhood instead of a $100,000 smaller, simpler house in a regular neighborhood. The cost of that extra $100,000 on a 4.5%, 30-year loan increases the loan payment by just $507/month. But, I know from experience that the bigger house also has much higher costs for taxes, insurance, maintenance, and fancier furniture. So the real extra monthly costs could be more like $1,000/month when compared with the smaller, simpler house.

So, what are the true extra costs of this bigger, fancier house? Is it $100,000? Or is it the extra $1000/mo x 173 = $173,000 over the next decade (this is the Rule of 173)! Or, over the next 20 years the expensive house costs the owner a whopping $520,927!

No Right or Wrong Expenses – Just Full Awareness

This is not a criticism of you if you happen to be making these choices. We all have our own unique circumstances.  But if you intend to one day reach financial independence, I do want to be sure that you know the true financial sacrifice of the decisions you are making.

If living in the bigger, fancier house is worth $520,927 to you over the next 20 years, then by all means live there. If driving new cars on $500/month payments for the next 10 years gives you $86,542 in pleasure, then do it. But you might also decide, like me, that you would rather live a little simpler (and for me happier) and in turn “buy” flexibility, free time, and autonomy instead of those extras.

The choice is yours and there is not a right or wrong answer, but I hope you now have better tools to make your choice with open eyes.

What do you think of the rules of 752 and 173? Do you have any regular expenses that could be cut? What are the easiest places to find savings? I’d love to hear from you in the comments below.

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