The Bureau of Labor Statistics just released the results of its 2016 American expenditure survey, and the results are fascinating.
Here are a few of my observations.
Housing Is Your Biggest Opportunity
Housing remains the single largest expense, easily double any other category, and often more than 10x other categories. If you’re able to settle into a ‘below average’ house, you can easily spend ‘more than average’ in many categories, and still have an extra several thousand to put away in savings. This is the strategy I used to live large in NYC. I was saving easily $12k-$18k in rent over peers in similar circumstance because I was willing to deal with a few less luxuries. I then spent luxuriously on eating out, which is one of biggest vices, and yet I still put away thousands more compared to my peers because I made the sacrifice on a bigger line item, then ensured my happiness by spending on luxuries that were overall less costly.
A little bit of expert design and styling advice can go a long way towards making a cheap space look more luxurious and a smaller space more usable. Flip through a few blogs focused on apartments in Hong Kong or New York City for inspiration. Downsizing on your home expenses may not be the sacrifice you think it will be.
Inefficiencies In the Eating/Food Budget
The average family spends almost as much eating out as they do eating at home. Curious how much they could save each year if they were to cut back here.
Transportation Costs Are Insane
I suppose living in a big city has put blinders on me when it comes to typical transportation costs. Between public transportation and walking, my and the Hubs’ annual transportation costs up until this year have been something like $3,000. I didn’t include the extra detail in the chart, but the sub-lines from the data table made it clear this $9.049 was about day to day transportation costs, not flights for vacations.
Living close to work is not an option for everyone, but it should be a strong consideration if the opportunity arises. Prioritizing living along a train/bus/or bike-friendly commute may be worth thousands in savings. I’ve also recently gotten into some in-depth discussions with friends about remote work. I have a friend who is now making a NYC level salary but working remotely from a small town in Ohio. He gets not only the arbitrage in cost of living that he can pocket away, but he also cuts his transportation costs drastically. They can drop at least one vehicle and its associated expenses – that’s thousands of dollars a year.
Big Vacations Are Truly a L-U-X-U-R-Y
Less people are taking mega vacations than you think. It looks to me like vacation expenses are either getting captured in ‘entertainment’ or in ‘all other expenditures’. Neither of these lines is the kind of number that supports weeks of luxurious travel in Italy, elephant riding in Thailand with massages every day, etc. Maybe with some real travel hacking. But this was a wake up call to me. If you feel like every one of your friends is blowing big money on travel each year and you should, too, you should know that this is not common. If travel is important to you, by all means put your dollars where they will make you happy. But you should take the time to appreciate what a true luxury this is compared to the average American family.
Savings rates are incredibly low. You probably knew this already, but it is reinforced with the data. At an average income of $74,664 and average expenditures of $57,311, there is a $17,353 gap. A married couple will pay almost $10,000 in federal taxes, plus as much as $2500-$4000 in state and local taxes depending on where they live. That leaves a measly $3,000-$5,000 to put towards their future. This foots with the statistic from the Bureau of Economic Analysis that the average American savings rate is 5%. Yuck.
Budget Conservatively For Healthcare Costs
Note that healthcare costs increased 6.2% over last year. That’s more than double inflation. Note that this is for the average family, which means it is unlikely due to increasing age or anything else as the average family’s age has stayed mostly the same. We live in uncertain times when it comes to subsidies for healthcare. You may want to revisit your budget for financial independence and make sure to add some cushion to your healthcare numbers.
Where Does That Leave Us?
I find benchmarks like these illuminating. If you do average things, you will get only an average outcome. If you want to buy your freedom early, you are asking for an above average outcome, and asking for an above average outcome requires an above average effort. Anything you can do to pull yourself farther away from the averages of this table and into a higher savings rate will benefit you many times over due to the power of compound interest. That money once put away will keep doing work for you every day while you sleep.
Where are you doing well? What categories continue to elude you?
Not sure how you compare? Figure out how to start tracking your own expenses and net worth. I walk you through what I use and what I track in Two Metrics You Must Track To Do Well Financially.