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ChooseFI | Financial Independence Podcast
595 | Value Matrix Case Study Series: Part 2 — Required Bloat
00:56:34
From required bloat to intentional giving strategies
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- [00:00]
Jonathan
Hey, everyone. Picking up where we left off. Where we left off was not last week's episode. There is a. There's a trail here. For those of you that are following this particular series, Brad and I are doing the table of contents for the financial independence community. And we've been proceeding, making our way through an expense audit and then into this idea of the value matrix. The last episode that we did was episode 592. We did this episode where we introduced the value matrix and the companion tool that goes right along with it. So you can do this interactive exercise with us. And, and then I introduced. I gotta say, it was a fabulous intro. This idea of doing four cases. Brad, this is my intro.
- [00:38]
Brad
I can't help but chuckle.
- [00:39]
Jonathan
Four cases, but we only did one of them. That's because there's so much here. But you've been, you've been introduced to the concept and I'm feeling really confident, really, really confident that this time we're going to be able to cover all three remaining cases. So in 592, we went through the leaky budget. This time we're going to be taking a look at this issue. What if the leaks aren't in your discretionary spending at all? What if your required cost are the real problem? We're going to call this value matrix required bloat. And with that. Welcome to Choose Fi.
- [01:22]
Brad
Before we get started, I keep this podcast entirely ad free for two reasons. First, first, this is a five podcast and I don't want to promote products that I don't want you to buy in the first place. And second, I really like the clean listening experience of a show where you don't have to fast forward ads to keep it ad free. All I ask of you as a listener is the next time you open a travel rewards credit card, go to choosefi.com cards and with that, onto the show.
- [01:50]
Jonathan
All right, guys, really excited to get back into these episodes. And to help me with this, I have my co host Brad here with me today. How you doing, buddy?
- [01:56]
Brad
Hey. Hey, Jonathan. I am doing quite well. I'm chuckling listening to your intro because I'm like, he's going to do it again. He's going to say we're going to do three case studies before we actually start talking and talk for an hour on one.
- [02:08]
Jonathan
You know, I think individuals listening to this should just appreciate how excited I get by this topic, that I do four times as much work as I should to be ready for our recording session. And then, yeah, every once in a while you have to scuttle it and push it on back down the road. But you know what? We're running out of time with your approaching red X month here, so we really need to stay focused and we're gonna have to try to accomplish this. I'm very committed to the idea of getting through three more episodes, but I'm not so committed that I'm not willing to ask what you've been up to lately. How's it going, man?
- [02:37]
Brad
I'm really doing well. Like you said, I have a red X month coming up. Basically, I'm taking my daughters to Myrtle beach for spring break. We've never been, so it should be like an old fashioned beach vacation, which is fantastic. And then, yeah, Aaron and I are headed to Japan for three weeks. So I've got, I've got a month off, which is really nice. Of course, when you have a big vacation plan, you're like, oh man, I gotta do so much. So I've done like six newsletters and seven podcast episodes leading up, but it'll all be worth it.
- [03:07]
Jonathan
I love the idea of being able to sprint, do various sprints and then take a little season and then come back. And you don't always have to have this balanced life where everything's exactly the same. Sometimes you can, you can front load the work. And that's kind of what we talk about. Even with financial independence, if you can front load some intentionality into your financial planning, you can reap the benefits of those decisions for decades. And so we're going to take a look at that right now because it doesn't happen by accident. In terms of what we're doing today, we're looking at it through the lens of this expense audit. This is an exercise that we talk about on the site. But when you have done an expense audit now, now the really cool stuff happens, you get to take it and we actually get to apply it into this idea of a value matrix. Now we've already had two episodes where we've talked around it and then directly about it. Now we're working through this case study and Brad and I, we've already teed up all the information that we want to start working on. So today, again, we're focusing on this idea of required bloat. This is one of those aspects that what do you do when it doesn't feel like there is anything discretionary? Everything is required. How can a value matrix help us here? Now I know for a fact that this is something that people experience at various aspects of their life. And I know that people that took this expense audit challenge have already shared with us that this is something that they are having to deal with as well. And Brad, I know we received some feedback from community members as they were going through this expense audit exercise. This is exactly what they shared with us.
- [04:38]
Brad
Yeah, totally agreed. There were definitely a couple that came in on almost identical items about this required bloat. How I think about it is seasons of life. Sometimes the practicality of seasons of life just means it's going to be a little more difficult. That doesn't mean there aren't ways to optimize there. It doesn't mean there aren't places where you can save more money, et cetera, et cetera. For a couple of these families who wrote in with almost identical things, daycare was a significant item for many families that costs very well over $1,000, up to two or $3,000. I've seen clearly by any definition that is a season of life thing. So required bloat, but understanding it's temporary. And you can also look at that maybe even more broadly with, especially if you're talking about, about families with children. Saving for college is another thing. Another thing more broadly for all of us might be car payments. Hopefully, maybe you've just found fi in the last couple years and you had already been locked into a car payment and well, that doesn't last forever. By its very definition, there is an end to that car payment. So once that's done and you are in a much more stable financial position, well, maybe car payments don't look like something you ever have again. There are definitely seasons to this, Jonathan. And I think that's really important that we keep in mind. Of course it doesn't absolve you of making changes to make your life better, but I think we need to understand that. Sure, there are pie in the sky savings rates of 30, 50, 70% that, you know, we talk about all the time. I think it's really important that everybody takes a step back and takes a deep breath and says, all right, look, that might be my aspiration, but currently, because of where I am, there are some of these things that are causing it that I can only quote, unquote, save. 5%, 10%, 20%, whatever it may be, Take a deep breath and understand you're still doing great and you're still making plans to supercharge your path defy when some of these required items go away.
- [06:43]
Jonathan
Yeah. So when we look at our couple today, what we have, we have these two disciplined spenders. They barely eat out they skip the coffee shops, they don't impulse buy and their spending is higher. And from their perspective, it is the required cost. I'm going to go through this expense audit and I'm going to look at this through the lens of groups of categories and I'll give it back to you maybe to pull out some insights and just different observations before we even talk about things like optimization. But for housing, they're spending $4800 a month on housing. For transportation, they're at $1500 a month. For food and dining, it's a $1100 for utilities, $875. For insurance, it's $1235. For health care, $790. Personal $100, entertainment, $115. And I'm saying all these quickly as monthly expenses, travel, $100 a month, debt payments, $450 a month and then $2,700 or 2780, but $2,700 earmarked a month for children, $95 a month for pets, and then they have another kind of $150 for miscellaneous here. So obviously, as I said that out loud, Brad, there were just a couple groups of categories with really, really large number amounts. But then as you work down, some of the other categories didn't follow that trend. And they were remarkably dialed in.
- [08:05]
Brad
Yeah, remarkably dialed in. This is a family of four. They're looking at food and dining of only eleven hundred dollars a month, which is astonishing. In our last episode, we kind of earmarked a rough back of the envelope of like 3 to $500 per person per month. Just as a. Okay, if you're in that range, you're probably within range. We would expect that to be 1200 to 2000 for a family of four. And yeah, they're coming in at 1100. So I mean, like they're, they're really spot on on a lot of these things. I mean, so many of them, the personal, it's a hundred dollars a month. Entertainment's negligible, Travel is negligible. Hopefully they're using travel rewards points. They have some student loans, which is what it is. Ultimately, pets are minimal. I mean, these are all. I'm looking down at this and I'm saying, like, this is a remarkably locked in budget here, an expense on it. But realistically then they have a couple categories where you just look and you like, wow, you've locked yourself into some things that, I mean, their housing costs them $60,000 a year. And Jonathan, that's a $3,200 a month mortgage. But it doesn't stop there. Right. There's $350 a month in HOA fees, 650amonth in property tax. It's eight grand a year. So this looks like a high cost of living, area maintenance and repairs, lawn care, all this stuff. So that's significant. And then Transportation is almost $19,000 a year, with 10 grand a year in car payments. Gas about 4,000. Insurance, 3,000. Interestingly, $1400 a year in maintenance on what I assume are fairly expensive cars. So that doesn't look great. And then, like we said, childcare is another significant one that is. Is but a season. But. Yeah, I mean, they're spending $33,000 a year on children, and it's basically college savings. 500. So, okay, that's also a season. School tuition supplies, $400 a month, which is about $5,000 a year. And when I said college savings, I was $500 a month. So 6,000 a year. And then this daycare comes out to basically 22 grand a year. Those three categories. That's about 100 grand just in those three categories.
- [10:20]
Jonathan
Yeah. So what they're expressing to us is just. I don't. I feel pretty locked in. I'm not making the case to you that we're doing it. All right. I'm just saying I don't see a lot of stuff to put inside of a value matrix. Joy has nothing to do with it.
- [10:33]
Brad
Yeah.
- [10:37]
Jonathan
The reason that I kind of crafted the tool the way that I did is that recognition of the difference between Joy having directly to do with discretionary spending versus required spending. But just because it's required doesn't mean that we ignore it. And so we're going to go ahead and go into part two of this particular case, and we're going to put all of this into our process, into our value matrix. But the value matrix, for those of you that listened last time, has a way of handling, or at least giving us a framework to think about these required expenses as well. So, Brad, the way that we work this, and just for people that are maybe have started to play around with the tool since last week, the way that we do this is we first go ahead and we put out our expense audit, then we import it into the value matrix, and we decide, all right, is this a required expense or is this discretionary? And so with required expenses, with those in particular, there's actually some different characteristics that are important. And so there's a different interface to make that a little Easier. We want to break things up into three fixed. And what that means is at least in the short term. And by short term, I mean maybe six months to a year in the short term. Nothing is going to change here. It's just not going to change. Fixed, we don't need to think about anymore. But then the other two categories are review versus variable. Review means. Okay, I guess. Yeah. Theoretically I could shop around, see what else is out there. And variable has nothing to do with shopping around. It has to do with you and how much of XYZ service, product or item you use every month. And that's that kind of whole discipline part. Right. So when you're talking about groceries, talking about gas and heating, you're talking about it's just intentionality. And so you could have a lot of required expenses. And Kaylin, I'll give a shout out to Kaylan. I think Brad, she was the very first one to discover this tool before we announced it. And she went through the process and at the end when she was looking at discretionary, said, you know, I guess car insurance really isn't a discretionary item. Joy doesn't really. Yeah, that's right. That's probably going to be a required expense. It's not going to make it to the value matrix. It doesn't mean that we can't optimize it, but it's not going to go that far. We're going to make those types of decisions. Joy has nothing to do with it. We're going to make those types of decisions here as we audit these. Brad, I'll kind of let you overview that. But you know, as we went through this exercise for this case study, Brad, there were some items that were fixed. There were some items that they're open to the idea of reviewing them and there's some that are variable.
- [13:07]
Brad
Yeah. So the fixed we have is mortgage, property tax, which, yeah. Totals about 3,800 bucks a month. The car payment again we said was 850amonth. And then school tuition supplies review. I think for most people and this family, very specifically insurance, that's something that you really can dive into because just getting different quotes on these things can make a significant difference. I have an umbrella insurance policy. It almost doubled this year. And I actually had to call. We were able to change the amount of umbrella insurance that I had and that saved something like $700 a year, which was crazy. I'm still want to look at other firms, but at least that got me through the renewal and I can know have a little bit I can wait till I'm done with my red X month. But yeah, I mean, that's the perfect example of things can change instantly with insurance. So, yeah, we've got a whole bunch of items under review for them. Home insurance, car insurance, health insurance, life insurance, disability and umbrella insurance. That's real significant. College savings is another one. I mean, I think this is one of those, like, you know, you put your mask on before helping others kind of thing.
- [14:23]
Jonathan
That's true.
- [14:23]
Brad
It's all well and good to save for college, but if it's at the expense of your financial life, then maybe that isn't the preference. And we've talked about this a lot. Like 529 plans, in most cases provide you very minimal benefit. This is not to say they're bad or that you should not use them. In most cases, it's a state tax deduction and it's capped. So if this family is putting aside, what do we say, $500 a month, so $6,000 a year for cloud savings, but they feel like they're not hitting their goals or they're not able to pay their car off on time or, you know, or pay it off early, etc. Like, okay, well, to me, that's an item that you could say, all right, look, in this season of our life, especially with this massive daycare expense of $1,800 a month, almost $22,000 a year, maybe we don't put the money into the college savings for now. Daycare will obviously end by the time that that child goes to kindergarten. So that, to me, is a real point of opportunity for sure.
- [15:33]
Jonathan
Yeah. So first of all, individuals decide what's required and what's discretionary. There are no absolute rules about this. We're going to hear say this over and over again. What's required for one person could be different. There's common patterns, I would say. Brad, to your point, insurance is almost always going to go on the review category. It's just going there. What's interesting is this person put college savings in required, but then also in review. You could make the case that college savings, much like giving, is a discretionary decision. Now we don't know what's going on in the family context. It might be required.
- [16:09]
Brad
Sounds ominous. To put it my.
- [16:12]
Jonathan
Well, I'm just saying we don't know the backstory, man. There could be a reason that that's showing up, but it was under review, so maybe that's discretionary. I also note we're going to talk about what they decided to make cuts in. Right. As we move on, they did not make any choices to make any adjustments to college savings. So, Brad, why don't you talk about as they reviewed these insurance on the required, they shopped the rates and they were able to find some savings. Let's talk that through.
- [16:35]
Brad
I'm actually seeing a bunch of them that they were able to drop their monthly insurance bills. On home insurance, they were able to save $80 a month, which is fantastic. Car insurance, another 80amonth. The interesting one is health insurance. They were able to save $270 a month, which is over $3,000 a year. So that suggests to me that maybe they went to a different type of plan, slightly, maybe higher deductible, they're lowering their premiums. I've seen for me, and this is a total aside, but it's an important aside is often, especially if you're on the aca, they have the bronze, silver and gold plans. When you go up the chain, if you will, you go from bronze to silver to gold, your premiums increase, but basically your deductible will go down. So more or less, you're almost in essence prepaying for expenses. If you're healthy people who don't use the medical insurance all that often, medical care, especially for me personally, I always go with the bronze because when it nets out in the worst case scenario, which is what insurance actually is, it's catastrophic insurance, you actually net out of pocket the same amount. It's pretty darn close in the numbers that I've run. But I would rather not prepay for expenses. It makes no sense.
- [17:57]
Jonathan
I'd rather not lock in the worst case scenario.
- [17:58]
Brad
Right, exactly. Why would I prepay?
- [18:00]
Jonathan
You're guaranteed to pay the absolute most you could possibly pay every single year, regardless. Regardless of what you do to take care of your health. Oh, sign me up.
- [18:07]
Brad
Yeah, right. Very, very, very true. So, yeah, it looks like just finally they were able to lower their life insurance a little bit. That just looks like 80 bucks a month, which is not nothing. Maybe that looks like canceling one of the plans because it actually looks like they almost cut it in half or thereabouts or just getting different policies. Again, sometimes when you just get a different quote, you are shocked by how inexpensive it is. So I think for me and just. Jay, like you've said, it always pays to just get different quotes on insurance.
- [18:38]
Jonathan
Yeah. And then on the other side, over on the variable, you see that they made a little dent in their electric and they made a dent in their phone. And so for electric, they believe they can find $80 a month in savings. I don't know what that looks like, Brad. I mean, is that just using the clothesline in the backyard? Is that where it comes from? Is anybody. Do we need to do an energy audit? I'm not.
- [18:57]
Brad
Shut the lights off when you leave the room.
- [19:00]
Jonathan
That's it. The phone, though, this is one. We're going to see it all the time because people that aren't thinking about it just pay a retail price with one of the big three companies and there are so many options out there. They were paying $220 a month and they, they believe it's, it's going to be now after shopping like 140amonth, Brad. I mean, we would probably make the case that the vast majority of individuals could get two phones, pretty decent service and most parts of the United States and data coverage. I don't know. 60 to 70 bucks a month is kind of like not super difficult.
- [19:32]
Brad
Yeah. For two phones I use Mint Mobile. It costs me 20 or 30 bucks a month and it's fantastic. We sound like broken records because that is the lowest of low hanging fruit. I mean, if you're spending more than 40 bucks a month on your phone, it's time to look into that.
- [19:47]
Jonathan
We are going to go ahead and move into the value matrix here. And when we put everything else in the value matrix, we had a bunch of high joy, low cost things. Dining out, coffee, snacks, cleaning, clothing, haircut, streaming services, hobbies, fitness, gym, vacation, spending, gifts, donations to charity. I could look at the dollar amounts, but none of them were outrageous, even when we were going through it at the top level categories. And then they had one high joy, high cost item and that was for activities, sports and lessons. And that's $80 a month. And so nothing in the low joy, low cost, and nothing in the low joy, high cost. So that's our entire picture for this couple. But we're ready. You know, we, we breeze through the value matrix part of this and we're ready to kind of take a look at the results. Because of just auditing the required expenses and because of shopping those insurance policies for this individual couple. We're over here. We're on the results. And if going back to the beginning, their annual spend was 170,640, $170,000. And now. All right, Brett, can I, can I just, can I gloss through that? And just as we go forward and just say 170 do or do you think it's worth? All right, cool. So their Current annual spend was about 170k. And then now after going through this process, Brad, walk me through what sort of savings they were find just by focusing essentially on this review category.
- [21:03]
Brad
Yeah, so like we talked about with a lot of those insurance savings and the phone savings, looks like they saved about $800 a month. So that's about 10 grand per year annual savings a little, it's a little less than that $9,700. That means when you multiply that amount by 25, they reduce their fine number by almost a quarter of a million dollars which is really not nothing. Of course that's a fantastic thing for just these few items that were in those review and probably at its essence six to eight phone calls and they saved a quarter of a million dollars on their fine number. And Jonathan, that was just low hanging fruit. They still have all of those fixed expenses which as you know are not quite so fixed.
- [21:48]
Jonathan
Yeah, exactly. So you know, as this couple finishes this exercise and is excited by just the quick wins, but also they recognize that it wasn't discretionary. They might even end up spending more in discretionary, you know, at some point in the near future here. But the issue wasn't, what it is is they have kind of locked themselves in. But lock themselves in isn't exactly the full picture. And this is why as we proceed through this we staying very focused on one aspect on a time but we're building. And so what do I mean by that? Well, they have debt. Debt was a big part of the expenses that we cover when we talk about required bloat. Daycare has an end, debt can have an end. And so this exercise as you go through it, they are excited to get back and do this again next year and see what was fixed. Is it still fixed now as we do this audit again, they're not just going to leave it forever. How do we like knowing that all of our economic output is just going to debt service payments payments. Do we want to stay in debt the rest of our lives or do we want to put that money back to work? So as we kind of build on this exercise and we now start talking about debt payoff strategies, Brad, as we go to a new tactic, we're going to start to have a timeline where you're going to see potentially a million dollars come off that expected phi number just as you start to have time bound expenses that are coming to an end and debt service payments that are also coming to an end. And now with this value matrix in mind, they finally get to put that Money to work.
- [23:14]
Brad
Yeah. And that'll be really interesting for all of these case studies and all of us who are running through this expense audit and value metric is. Is to see, okay, what is my fine number look like now? But you can also project forward because very many of these expenses are just simply not going to be there for this. This family. The $850 a month for car payments, like you were saying, that's the debt you were talking about. The $1,800 a month for the daycare, the $500 a month for college savings right there. That's $3,150 per month, almost 38 grand times 25. That's basically a million dollars off their fine number just from those three things. So their FI number is cut by a quarter just from those three things. And then, I mean, frankly, Jonathan, you look at their housing expenses, what was it? 50 to $60,000 a year? That's not nothing, right?
- [24:10]
Jonathan
I mean, full of choices, man, but you do get one life. So the YOLO aspect is on the one end, but the other aspect is you're locking yourself into an outcome at the same time that the world has never been more untethered. You are no longer required to work right next to or live right next to wherever you work if your value matrix is all aligned. But talk about, you know, yeah, you. You're not going to fix that tomorrow. You're not going to solve that tomorrow. But are you never going to inspect it again? I don't know. I think someone that's taking the time to do a value matrix might very likely keep looking at that in lieu of other options. And anytime someone says something is fixed, like, oh, there's nothing I can do about this, isn't it cool that there's a community of people that have interacted with that same decision tree and found other options and can share them with you? So you have the benefit of knowing everything that you don't know that you don't know.
- [25:05]
Brad
Love it.
- [25:06]
Jonathan
I'm kind of excited, man. We're going to do another case today.
- [25:08]
Brad
We might even get through all three. We will.
- [25:11]
Jonathan
We will die on this hill. Okay, what happens when you've already cut and your required costs are reasonable? What if you're already doing it right? All right, that's case number three. So, Brad, we're going to go ahead and take a look at this case, and we're going to do a different breakdown. Why don't you go ahead and introduce the categories and the groups and the spendings for These individuals, sure.
- [25:30]
Brad
This looks like a couple who's almost there. Their annual expenses in total are about $50,000. So this looks much more like the old school prototypical FI number. Their housing costs monthly are $1,600. So that looks like $1,200 a month in mortgage, some property tax, some home insurance, some maintenance, repairs. That adds to $400 a month. Transportation of only $235 a month. So no car payments, just gas and car insurance and a little bit of maintenance. Food and dining is remarkably locked in. 600 bucks a month for two of them. That's very much on the lower end, Jonathan, of what we thought was that reasonable back of the envelope number. So they're right in there. Utilities of $300 a month, including their phones, which are only $50 a month total. So our normal go to is not there. Insurance. They've got. It doesn't look like they have life insurance. So that's an interesting point that we could, we could talk about. When you're at fi, maybe life insurance isn't quite so necessary anymore because really at at its essence, what term life insurance is is someone who relies on your income in the untimely case of your death. Then they would get this money to essentially make up for that. But yeah, if you're at fi, it doesn't look like these people need life insurance. So they have a small umbrella insurance policy, which makes sense for many five people. Health insurance of about $400 a month looks like they contribute to either an HSA or an FSA. So that's 300 bucks a month. So very small prescriptions. Personal items are pretty locked in on 200 bucks a month. Same with entertainment. It looks like some streaming services, some audiobooks, some movies, you know, just a normal, normal life. Their travel and vacation is small. Also we have to assume they are using travel rewards, points, no debt, which is wonderful. Doesn't look like they have kids or pets. So $0 there and then looks like they donate about $2,400 approximately a year and give gifts. So about, yeah, $3,000 a year in donations and charity.
- [27:43]
Jonathan
Okay, so a total monthly expenses about $4,200 a month. Total annual spend of about $51,000. And then you know, a two person household. So a per person annual of about $25,500. We're going to take all of that and we're going to go and go into the value matrix. All right, Brad, so I'm taking a look at what they did when they got to the interface in terms of making decisions around required expenses. As you would expect, insurance made it into the review category. Mortgage and property tax were fixed, and then they had your variable stuff. But they, they made no changes here. They just, they, they documented it. It's there. But they once categorized as required and put in the right category, they move directly into the value matrix. And at this point, we're taking a look at, you know, where they put things. And they put high joy, lowcost dining out, 120 bucks a month, coffee and snacks, 25 bucks a month. Clothing, 40 haircuts, 25 hobbies, 80amonth, fitness and gym, 30 movies and concerts, 60 books and audiobooks, $20 a month. You went through all the prices but flights, vacation spending, gifts, donations to charity, everything was in high joy, low cost. And by the way, again, high joy versus low cost, and high joy versus high cost is, again, a subjective decision about whether it's high or it's low to you. I mean, I look at it and, you know, we might have different numbers in mind, but they put everything in high joy, low cost. They put three items in low joy, low cost, and that was personal care, subscriptions, and streaming services. And Brad, they chose to make just a couple very modest cuts.
- [29:19]
Brad
Yeah, but certainly not nothing. Right. Personal care looks like they dropped it from $45 a month to $15 a month. So saving $360 a year subscriptions, that probably looks like. And we mentioned this on the last episode, 5, 92, about, hey, you don't have to have all of these streaming services or subscriptions all at the same time. In this day and age, you can just cancel some and binge or stream an entire series and then just pick up the next one. It looks like they did that with a bunch of subscriptions and streaming to the tune of it looks like $60 a month they cut leaves them with $30 a month in spending, and they cut 60. So these are, of course, not huge numbers. Jonathan, as we went through their budget and their value matrix and et cetera, there's not that much room. These people are pretty optimized.
- [30:10]
Jonathan
Right. And the key here, I think, is, you know, they found a thousand dollars a year of savings. But I doubt they got here by accident. I doubt this was the first time that they've inspected what they're spending their money on. This is more of an upkeep type thing. And they just noticed, hey, these expenses are hanging out. But I don't really. Yeah, we should just cut that. Right. And they're doing this Almost as a form of practice. So they're not finding much. But here's the big thing. From three cases that we've done up to this point, have you noticed that actually all we needed to interact with to be able to do this exercise was focus on just expenses? This gives us no insight into income or net worth whatsoever. But what we do know is that when your expenses are optimized like they are in this scenario, then income earned and increases in income can go oh, so much farther. So we've walked through three case studies and we're about to go into another one. What we know is this individual is very, this couple is very locked in on what it is they're choosing to spend money on, which means that their economic earnings can go towards the life they want to have. They're reclaiming their most precious non renewable resource, their time. What you spend, Brad, to give this back to you, what you spend does not reflect your net worth. For the vast majority of individuals out there.
- [31:29]
Brad
Yeah, certainly here in the FI community, they are absolutely locked in. You talk about you can live a really optimized, wonderful life. In this case, they're spending about, after they made these small cuts, $50,000 a year. That means their fine number is a little more than $1.25 million. That is a really attainable number for a lot of people who have been following the path to 5 for 10 to 20 years, of course, depending on your savings rate, etc. Etc. But for living a 5 life, that's pretty accessible. Jonathan, that's what's cool. And like you said, if they are still in their working years, these people are almost there. So we have to assume, based on what they've told us, that they haven't pulled the trigger yet. Any raise just gets dumped into savings and investments and it just, it keeps on rocking and rolling and compounding. I mean, we've seen incredible growth in the market over the last number of years. It wouldn't shock me if these people look at this value matrix and say, oh wow, it's so nice to see this on paper, on the screen. It's just maybe we're already there. That wouldn't surprise me at all if we get the, the FI scream after this.
- [32:39]
Jonathan
Yeah. And it's kind of like, okay, you've spent enough time here, you can move on. Right. Check the locks and go. We'll do the audit every year or so and just, we'll make sure we're, we're following our values on this stuff. Good job, you're done. You don't need to overthink it. That's incredible. And it's not to say that anybody else needs to strive to hit that, this number. But what I can tell you as I look at it, you know, myself, and as we kind of look at it as, wow, that's dialed in. They don't need help from a group to figure out how to optimize their expenses. They are dialed in.
- [33:10]
Brad
Yeah, I just wanted to take a quick aside. Since we mentioned umbrella insurance a couple of times. I just googled this just to get the exact quote from Geico, let's say of what? Personal umbrella insurance policy is a type of liability insurance that provides additional coverage beyond the limits of homeowners, auto or other personal insurance policies. It helps, this is the critical part. It helps protect a policyholder's assets and future earnings from major claims or lawsuits. That's why that type of policy is especially applicable for people in the FI community who have significant assets. I know in years past, of course, I mentioned at the outset that my umbrella policy just went up significantly. But for many years, and I suspect for many people, an umbrella policy costs a couple hundred dollars a year for $1 million of coverage or $2 million of coverage. That's probably worth you calling up your insurance company and just getting a quote on because that's a really nice peace of mind thing, especially for us in the fight community who have built assets. Again, if you could sleep well at night for 10 bucks a month or 20 bucks a month, that seems, that seems like probably something you want to look into.
- [34:19]
Jonathan
Oh man, I have trouble getting up in the morning. All right. But here's the thought that I had actually, you know, we're talking about insurance, insurance products. But you, you kind of mentioned this in passing, this idea of actually being self insured. I'm talking about life insurance, not with umbrella insurance. But here's a pretty cool potential milestone or checkpoint the individuals hit. It's this idea, right? Like you don't necessarily need insurance for your whole life. So you know how we used to talk about various checkpoints that people could hit and how to let us know when they hit them as this could be a fun one. Hey, I realized that I am self insured and I made the decision to drop my term life insurance policy. That would be a pretty cool milestone, you know, for individuals that actually recognize that. And if we saw that as a pattern.
- [35:05]
Brad
I like that, I like that a lot.
- [35:07]
Jonathan
Right?
- [35:07]
Brad
That is a milestone, certainly on the path to five when you realize, hey look, this served Me. And that doesn't mean it was wasted. All those premiums you paid, It's a
- [35:15]
Jonathan
bet you want to lose, right?
- [35:16]
Brad
That is a bet you very much, yes. You're only winning it from the grave. Let's hope that doesn't come to pass. That is definitely a bad. And that wasn't wasted. Those premiums were not wasted at all. You were locking into a contract that would have paid this death benefit. And, yeah, this is great. Not only did I not die, which is, of course, the biggest part, but I'm at the point where nobody relies on my income anymore because I have enough assets to cover. We're. We're at fi. That sounds pretty good to me.
- [35:45]
Jonathan
All right, well, if anybody has that one and wants to share it as a win, we could feature that voicemail in an episode in the future. I think it's pretty cool. So if you agree, let us know. We'll cover that win for you.
- [35:53]
Brad
You can now leave comments on these episodes. Choose about a comm slash 5, 9, 5. That'll take you to the page where you can leave comments. You can comment on these scenarios and these particular people. Any other things that we missed. That wouldn't be a bad place to talk about canceling your term life insurance either.
- [36:10]
Jonathan
Yeah, very cool. All right. Hey, I know you didn't think I was going to get to the third case, did you? You were. You were ready. But here I am, and we've got time. So let me set up. This was the hook that I had at the very beginning. Does anybody get that term? It's all right. This is this little pivot on the idea that's so interesting that you're going to want to stick around for it. Brad, for this third case, let's go ahead and go through the category groupings. I'll just quickly mention the highlight reel and then have you pop in with some insights. So for housing, $2,100 a month. For transportation, $690 a month. Food and dining, $770 a month. Utilities, 448. Insurance, 620. Healthcare, 360. Personal spending, $95 a month. Entertainment, $130 a month. Travel, $150 a month. No debt. Children, $980 a month. Pets, $85 a month. And then miscellaneous, $1,400 a month. And then for this couple, it's 2.5 effective people in the home. So there's probably a child involved.
- [37:17]
Brad
Okay. When you add that down, that's about $94,000 a year in spend. It's interesting when I'm going through this, I'm looking at these categories and thinking they're much more like the prior example with the case of almost there, because a lot of this stuff looks pretty locked in. I mean, $2,100 a month is not unreasonable for housing at all. Transportation, it looks like they do have one car payment at $350 a month, which, you know, of course is not ideal, but that's a necessary thing for, for some people and I suspect that's something they could easily pay off. Their food is locked in. They're under $800 a month for either two or three people. Utilities of 400 and change a month. I mean, nothing looks terribly out of, out of the ordinary here. Health insurance, you know that again, for a lot of us, $550 a month for two or three. Not unreasonable in the United States. Yeah, I mean, we're going down this. They don't have. They don't have a ton here. You get down to, to really two categories. Children. We've got $900 a month in childcare or daycare. So that's, yeah, almost $11,000 a year, which is not insignificant, but as we said, that is a season. Most families who have childcare, daycare, that's going to be a five year at most type expense because once the child goes to kindergarten, that should be reduced significantly. And then, yeah, really the, the big thing is, interestingly, donations or charity of $15,000 a year. So I mean, that's almost. Not quite, but that's probably what, 17% or thereabouts. I'm doing the math in my head. 17% of their annual budget comes from donations and charity and gifts. Those two categories alone, that's what, $28,000 and change on a $94,000 annual expense. That's 30% right there.
- [39:15]
Jonathan
I'm really excited about this case study. I think that giving is something that happens a lot in the financial independence community. And there's a lot of ways of talking around it and about it. Um, and I think this is gonna be a wonderful case study for us just to explore it a little bit because there is some nuance and some complexity and there are some various approaches to it. There is not necessarily a right way, but I do think there is a lot of power in being intentional about it and thinking about it through the lens of discretionary spending. But the value matrix. The value matrix. The one other thing I wanted to point out is when we're talking about car payments I know it's easy to kind of feel like maybe that there's a judgment attached to you if you had to do a car payment or not. But I also know that a lot of us probably like at various times maybe have had the money to buy a car and made the choice to finance a car. And I think the interplay of the intersection is not, you know, maybe you went to CarMax to get the car and you realize that actually for you to bring the cash there, to do the cash there, or to write a check or whatever, you didn't have it all strategically set up, but you realize you could finance it that day. And now it's been a couple months later and you're like, well, let's just go and pay it off. I think the main point here is in the United States we're so good at marketing that a lot of people end up in cars where they can only afford the payment, they can't afford the car itself. That's the fundamental trap that you want to get out of. If you made a decision, you could have gotten the price on the car, but you made the choice to lock in the 1% interest rate for four years at XYZ and maybe you're going to pay the car off at some point in the near future and you have the means to do that. That's kind of a, that's just a personal decision, right? That's a choice on your part and, and you might have made a smart, quote unquote economic choice. You're not failing at 5 because you have a payment. But in general as a pattern or a practice, if you have a lot of line items that represent consumer debt and you don't have a short term strategy to get that cleaned up, well, that's going to take more of your energy, your economic energy than, you know, mapping out your path to financial and events. Because we have to solve that first one way or another before we can start getting the flywheel working for us. And so there's a nuance there. And we're going to be doing a full on debt episode. But I just wanted to, you know, add that additional context for individuals as well. Brad?
- [41:32]
Brad
Yeah, I like that. And I think it's also important that when we look at a point in time, we look at our annual expenses and we multiply by 25 and we come up with our fine number. It can misrepresent in some small ways. Like this is a perfect example, they have a $350 per month car payment. So you multiply that by 12 and then you multiply that by 25. That looks like their fine number needs to be increased by $105,000. But realistically, if this is a five year loan, a $350 a month car payment is probably 20 to $23,000 on the actual loan.
- [42:10]
Jonathan
You in the MOJ I got, I got episodes planned for this now.
- [42:14]
Brad
I'm doing it off the top of my head, man. Come on, give me a break. All right, we'll do that in the future. But nevertheless, I mean, it's a really interesting thing. There are seasons and I think that's what we've talked about in this episode. So. Yeah, to be continued. So Jonathan's giving me the evil eye here.
- [42:27]
Jonathan
You're talking about effective need and time bound expenses like. Yes, yes, absolutely. We will get there. And that's why you're staying tuned for the ultimate crowdsource personal finance show because we will. But in today's episode, we're staying focused on this last case. And it is, you know, if you're going to delay your financial independence number for any reason, how cool is it when it's giving? That's pretty, that's a pretty good reason, especially if the giving also, you can say truthfully, it brings you joy. So that's what we're going to do. We're going to go into the value matrix first. We're going to take a look at how this mapped out for them. So we took the expense audit and we went ahead and applied it to the, you know, the required interface and we're not going to spend much time here. But basically all the stuff that you can imagine, insurance all went into the review category. They didn't make any choices about that. Maintenance and groceries and all that type of stuff all made it into variable. The only things they identified as fixed, you know, to your point was the time bound car payment, which is fixed right now but not forever. The property tax and the mortgage. Nothing's going to happen with that. And in their case, probably next year, nothing's going to happen either unless they, you know, there's, they're not, they don't need to optimize it. And the car payment is its own conversation. So really, in the absence of everything that they categorized as required, we're going to go ahead and see what made it into the discretionary value matrix. And Brad, for again, it's pretty cool when everything that they're spending money on is showing up as high. Joy.
- [43:58]
Brad
Yeah, this is pretty fascinating. There are 12 of these items and when they categorize them, they put all 12 of them in high joy. That's really an astonishing thing. And when you go through an exercise like this, you never know, frankly, like that. When you sit down either by yourself or as a couple and you go through this, wouldn't it be cool if every single item showed up as high joy? I mean, wouldn't that just really show that you're living in a line life regardless of cost?
- [44:28]
Jonathan
Right. Just think about that in terms of. I wasn't even. I hadn't even mentally gotten there. If you remember two episodes back before we had the benefit of looking at this through practical case studies, we were talking about, okay, well, yeah, it's pretty cool when it's high jewelry, low cost. And it's also pretty cool when it's. It's pretty obvious when it's low joy, high cost. But now the ones in the middle are the high joy, high cost and the low joy low. Because we were basically talking about how you have to make decisions because, yeah, it's high joy, but it's also high cost. But I think to your point, you're highlighting right now, how amazing is it when there's nothing in the bottom quadrants.
- [45:01]
Brad
It's great. And I think we're all just trying to live better lives here on the path to fi. If you're locked in, that doesn't mean, of course, fudge this and just dump everything in hijoy. We're not saying that at all. It's just, hey, you look at this and you can honestly say everything fits in hijoy. That's pretty Good. So, yeah, nine of their 12 they put in the high joy, low cost. And it doesn't look like they're decreasing any of these amounts. So dining out, coffee, snacks, clothing, haircuts, grooming, streaming, hobbies, et cetera, fitness, books and activities. They're pretty content with that. And then, yeah, you get to this other one, which is high joy, high cost. And they've got vacation spending, which they have $150 a month. So $1800 a year. That doesn't sound like too high cost to me personally. I probably would have, if it was me, I probably would have put that in high joy, low cost. And then, yeah, it really does come back to these items that we were saying, which is gifts and donations and charity. And that adds up to fourteen hundred dollars a month or about seventeen thousand dollars a year. They have that in hi joy, which is really nice.
- [46:04]
Jonathan
This is one of these really, really interesting opportunities. They were saying our life we're focusing on high joy items and we've made very intentional choices. And as we look at it, there's nothing that we need to make a decision on at this point to change. We don't feel compelled that we need to find any additional savings. There is definitely things that they could, but they would then be going into things that they have said after inspecting them are bringing us a lot of joy. Now, this is the really interesting thing. Let's just say, for instance, that they just chose to cut their giving. Forget the birthday gifts. We're just talking about their giving. We're going to cut it and we could save $15,000 a year. Well, that means just that one choice that's going to take their current fine number from 2.35 million down to 1,000,979, 400. That's $375,000 less that you need save. You know what? They value this. This is an important part of their life. And they are excited about the idea of delaying financial independence, reading some number to not only think about this, think about this, and not only be able to continue giving now, but when they reach financial independence, to be able to continue to give on the other side at the same level as they are today. This is what makes it so interesting for the financial independence community. When we're thinking about how to give, there are so many wonderful frameworks that are out there. There are individuals that want to leave something, you know, after they're done using it to something of their choice. There are individuals that have various tactics on when to give it and when to help children and different causes and charities and different activities that they want to invest it into. And these are personal decisions. But I will tell you that if giving is not at all part of your framework, you're going to run into another problem, which is hoarding. And you should see Uncle Frank from Risk parody radio talk about hoarding. He tends to use all caps. And this is the problem. When you're so good at being frugal and so good at being optimized, and your hands get gnarled into knots at your ability to keep every penny locked in your hands, you. You can never let it go. You can never walk away from your job because you can never see a number go down because that's a negative KPI number, right? When you have opened up your hands earlier to share, you know, in any way that you choose to do it, you are going to deftly avoid this, this feeling of hoarding as it comes to the point in time where you're going to go from accumulation to drawdown, you are going to bridge the gap and you're going to feel a lot better about your choices all along the way. And so I have a lot of sympathy is not the right word, but I can commiserate or I can appreciate the choice that this individual did. Even recognizing, yeah, they could reach financial independence faster. Sure. And they could have a better looking savings rate number. But you know what? They have built in flexibility right now, built in flexibility in their financial independence number to the degree that they value this and are able to do it. They want to prioritize it now and in the life they want to build for the future.
- [49:24]
Brad
Yeah. And of course you're not going to say this about yourself because it sounds like it's posting, but I know giving to charity and giving to your church is a significant part of your financial life. This is something that's very personal for you. I think this is a significant aspect of a lot of people's path to phi. I know we had an amazing episode a couple years back, episode 483 and it was called effective giving for the FI community with Rebecca and Jack Jonathan. That was one of our most well received episodes. I got countless emails over the years, I mean literally years, about that episode. Actually, Rebecca has a wonderful site called yield and spread.org she has something she just came out with called the Phi Lanthropy Pledge. So this is to be continued, but you can certainly check it out. We'll put a link in the show notes. And like we've talked about over the years, there are always ways to optimize things. That's the nice part is clearly giving to charity is very important for many people in the FI community and we're not going to spend a ton of time talking about these strategies necessarily. But donor advised funds are an interesting way, especially if you want to. Again, you are someone who is on the path to fi. You have significant assets. You can optimize a little bit. So it might look like giving two years of your charitable giving in one calendar year to maybe get over the standard deduction for your tax return and actually get some tax benefit from giving. Now, of course you're not giving to get a tax benefit. That would be preposterous. But if you are giving, why not get a tax benefit? Because frankly, the beautiful part about our tax system now is our standard deduction is so significant that over 90% of tax filers don't get itemized deductions. We just use the standard. But what if it looked like, Jonathan, for you, what if it looked like you giving to your church for both 2026 and 2027 in December of 2026, okay, that, that might not be so bad, right? And you, you would get over that standard deduction. Another interesting thing is you can donate appreciated stock to charity. This is a really nice one. So let's say you have $10,000 worth of stock that you bought for a thousand dollars, okay? You have a $9,000 unrealized long term capital gain in there. You can actually, for most significant nationwide and worldwide charities, you can donate appreciated stock very, very easily. What that looks like for you is since this stock is worth $10,000 today, you donate the stock and you make a $10,000 donation. Okay? That charity is receiving that $10,000 now. You had a $9,000 unrealized long term capital gain in there, and you never pay tax on that. That unrealized long term cap gain is gone. It's wiped out. And now, of course, we're not doing this to stick the charity with, with the tax. That's the beautiful part, is that is gone forever. They get the $10,000 stock. The way that I believe this works is they would just then sell that immediately and they have no tax implication for that. So they sell it for the fair market value and that's what that charity receives. So everybody wins there. There are always ways at the margins, Jonathan. That's what's so cool about, about what we're doing here and what we in the FI community do. But at its essence, you're making charitable donations and giving for the right reasons. But that doesn't mean you want to be stupid at the margins when you can optimize.
- [52:53]
Jonathan
Absolutely.
- [52:53]
Brad
Yeah.
- [52:54]
Jonathan
And I am looking at exactly the stuff that you have described in terms of, you know, lumping together. And I will say that United States has made it a little trickier to nab the benefit on that, at least through front loading and combining multiple years in that way with the crazy standard deduction that is available now, which is great.
- [53:10]
Brad
Of course. It's amazing.
- [53:11]
Jonathan
I know, I know. Anyways, you know, other note about Rebecca, she asked me probably about a month ago now to create a forum inside the choose if I community app to talk specifically about giving. I have put it on my feature request to do list thing and I've gotten busy the last couple weeks. But remembering this conversation right now, I'm going to make sure that it is live by the time that this episode goes there. So for individuals that want to Have a place to talk about effective giving and effective giving strategies and just the practice in general, what it looks like for your life. Then we're going to have that forum set up to go along with this particular episode. But I think the big thing I want to just kind of end here with is just a couple of pieces of feedback from individuals that went through the exercise that had feedback for us along the way. This first piece was for Santa Lynn, and Santa Lynn says already, fine, but spending has slowly crept up. I want to see what spending materially improves my life and what spending is not value added. So he's talking about the value matrix. Right. And so this is a visualization. And I think the goal, one of the goals should be not just, you know, what gets cut versus not, but how much of your spending is showing up in a category that you define as low joy, regardless of the cost. And then from there, you know, if you take a look at what made it in low joy and you realize, well, I'm really just ambivalent about it. It's just not going anywhere. It has to be. Well, then that's not a, that's not a value matrix decision. That's a required expense. And you should put it back over there. But for the things that are discretionary, it's pretty cool when everything is above the line. And then from there you can make decisions around what you want to optimize or not. And then the other thing, and this is from JAG now. And JAG now says I have the data. Right. So YNAB expenses, spreadsheets, but I want to use the data to change behavior. That's the value matrix. Okay. We need to add a subjective layer of visualization to which expenses are sucking up our cash flow. This will allow you to do that. You need to translate this from an idea. Good thought. Into actual action. And Brad, that's. I know it's what you advocate for in every single episode.
- [55:14]
Brad
Yeah, I certainly try. And I just want to thank you again for taking action and creating this for all of us. That's what's so beautiful about it. This lives on the Choose A5 website. Jonathan, why don't you tell people how they can access it?
- [55:26]
Jonathan
Definitely. Just go to choose.com local and when you get there, you know, the site's an in progress thing and it's always kind of evolving and changing, but we're trying to make it really, really easy to get you onboarded. And as you get there, you can go to tools and resources and you're going to have the ability to start an expense audit that's not, like, optional. You're not going to get any value out of a value matrix. Sorry for the redundancy, but you're not going to get any value out of a value matrix without first going through an exercise of putting your expenses together. But once you have that, whether you did it separately or whether or not you're. You did it, you know, from the scratch inside this tool, you're going to bring those in and now you're going to have the opportunity to interact with it. I think based on the feedback that I've already seen from Kaylin, and she got to it before I even announced it, full credit to you. It's going to bring you a lot of joy just going through the exercise. And how often can individuals say that when looking at a Google spreadsheet? I know there's a few of you, but then there's the rest of us. All right, my friends, the fire is spreading. We'll see you next time. As we continue to go down the road less traveled.