In my previous post, I looked at some of the thoughts surrounding debt, specifically that debt is having liabilities that are greater than assets. To crush your debt, you need to deal with your consumer debt.
We’re taught to believe that expenses are bad and to cut them as much as possible, but that’s a simplistic and misguided perspective. In reality, there are four types of expenses, and only one of them needs to be cut: lifestyle, protective, productive and destructive. Here I’ll look at the first two.
1. Lifestyle (Consumptive) Expenses
These are things like dining out, vacations, concert tickets, and flat-screen TVs. These are expenses that are fun and build memories, but that don’t build assets or income. You can spend money on things you value guilt-free if you make sure not to spend more than you earn or that you don’t go into debt in buying them.
For the 5 Day Weekend lifestyle, it’s important not to cut all these expenses out. People are taught to wait until retirement to spend any of their hard-earned money, and that only in retirement can you really enjoy life.That’s why there are so many miserable millionaires! If you never spend any money, you won’t be fulfilled, you won’t have these enjoyable experiences. These are good expenses, as long as they are managed wisely.
Analyze them on the basis of price, opportunity cost, and value to determine if a purchase is worth it.
- Price: What you pay to purchase something.
- Opportunity Cost: The benefit you could have received, butforfeited, to take another course of action.
- Value: The total value, real and perceived, derived from a purchase.
Consider purchases within the context of your 5 Day Weekend lifestyle to decide if you’d rather sacrifice or enjoy something now. To pay for these expenses, never borrow and always use cash. Ideally, you should use the recurring revenues from your investment portfolio to pay for these.
In short, lifestyle expenses should be managed wisely.
“Successful people have libraries. The rest have big screen televisions.”
– Jim Rohn (1930-2009), American entrepreneur and author
2. Protective Expenses For The 5 Day Weekend Lifestyle
These are things that protect your property and human life value. This is thefinancial area that most often gets overlooked—especially by the middle class. Affluent people almost always take care of this and don’t compromise with their protection. They understand that there are unexpected financial surprises and issues that put their assets at risk.
Protective expenses include your liquid savings, which should be enough to cover a minimum of nine months’ expenses. These savings won’t be overly productive in terms of earning interest, but they will be there to protect you and prevent you from worrying about money every second. Other protective expenses include estate planning, corporate structure planning, life insurance, disability insurance, medical insurance, auto insurance, and emergency preparedness.
In my next post, I’ll talk about productive and destructive expenses.
First, think about your expenses: have you organized your expenses to include enough in savings to cover contingencies? Thank you for sharing.
Secure your copy of the “5 Day Weekend” book. 5 Day Weekend: Freedom to Make Your Life and Work Rich with Purpose [Nik Halik & Garrett Gunderson]