So, what can I do?
This is a hack in raising your networth quickly, however, it is not spoken about enough.
Focus on your lifestyle choices and bring those down instead of worrying about your investments not compounding quickly.
For example, saving $300 a month on rent puts an extra $3600 in your pocket. While 7% return on $50k investment is $3500.00. The fastest way to save over $3500 a year is to decrease your lifestyle spending, especially if you do not have a portfolio worth $50k.
You can substantially increase your networth by lowering one of the big 3 costs in your budget: Transportation, Housing, and Food.
For instance, my rent used to 7300 SEK or about $750.00. Which was over the recommended 30% of my income. This number is actually recommended by the US government A large percentage of people feel ‘cost-burdened,‘ which is another way to say ‘house-poor,’ when it is over 30%. However, this 30% is based on your gross income, and not all taxes are created equal. This is easily seen if you compare taxes between Florida and California, one has no state income tax while the other does.
Let us play with the numbers a little bit
David Bach broke this down in a handy chart. Essentially, depending upon your income this is how much you should spend on housing:
I, personally, would recommend that you use your after-tax pay rather than your gross-pay to figure out how much house you can afford. As depending on your state, your take-home income might be substantially different than your gross pay.
I will use Sweden as an example, as that is where I live now. Let us say that Lydia earns 380,000 SEK, about $38,000 USD. According to this chart, Lydia can afford a place that costs between $900.00-$1367.00 a month. Now, the tax-rate in Sweden is high but it is a progressive income tax:
- 0% from 0 kronor to 18,800 kronor
- Circa 32% (ca. 11% county and 20% municipality tax which is the Swedish average): from 18,800 kronor to 468,700 kronor
- 32% + 20%: from 468,700 kronor to 675,700 kronor
- 32% + 25%: above 675,700 kronor
Depending on where Lydia lives, she will pay around 32% of her income to taxes. Lydia is paying $12,160.00 annually to taxes, her take-home pay is now $25,840.00. So, $2,153.34 a month is what she has to spend on food, transportation, housing, etc. An additional item to consider is sales tax, every state, county and and country is different. In Sweden, it is between 12% and 25%.
Paying 30% for her housing ends up taking up a lot of her take-home pay, especially considering the taxes and the expense of living in Sweden. Lydia’s housing is now costing her between 42% and 63% of her take-home pay.
That is astronomical and I am sure that is not what a lot of people who write these articles are thinking about since many of these articles are geared towards Americans living in the U.S.
Considering the debt crisis we are in, we should be lowering the percentage paying on our housing. However, I understand that it is not possible for everyone. I am fortunate to find the housing I did, because many of my peers in Stockholm pay about half their take-home pay in rent.
I mentioned before that I used to pay 7300 SEK a month to rent. This has changed as I now pay less than 15% of my take-home income to rent. The money I intially used to pay that rent is now being saved, invested, or used to pay my student loan debt. You can read here about how I can live on $700.00 a month in Stockholm.
If you are looking to reach FIRE or be finally debt-free, then lower your housing costs to at least 30% of your take-home pay. You will begin to see the difference.