How to Minimize Expenses & Increase your Chance for Financial Success

Loved this advice and wanted to re-post it.

Alberto Favaretto wrote the following advice:

A. First: drastically reduce your expenses

  1. Sell all the stuff you do not need (TV, Xbox, PlayStation, etc.).
  2. Quit shopping for the sake of shopping.
  3. Do not smoke, drink alcohol, do drugs, etc.
  4. Remove the Facebook, Instagram, Twitter, Pinterest apps from your iPhone so that you can only access them via your desktop computer (you will automatically reduce your wasted time by at least 90%).
  5. Sleep 8 hours a day, consistently.
  6. Meticulously decide whether you really need new stuff to buy.
  7. Learn how to do your own taxes. Once you understand how taxes work in your Country, you can get an accountant (and be able to check what is he/she doing with your money and tax filings). Be very careful and timely with your tax filings. Keep redundant paper and digital records of your tax payments in case of future issues.
  8. Ditch fake friends, high maintenance girlfriends/boyfriends, and all other people that actively undermine your efforts. A positive, resilient & optimistic attitude from the people you surround yourself with is essential. It is by far better to be alone than being surrounded by negative / envious people. As in many other fields of life, opt for quality rather than quantity.
  9. Never shop for food when hungry. Make to-buy lists and buy in bulk. Learn how to cook your own meals (do not eat out often). Do not buy bottled water, limit sugary drinks and other sugar-based stuff that only makes you fat. Limit red meat if possible, and prefer beans and vegetables instead.
  10. If you can, use the public transport or a bike. Accordingly, consider ditching your car. In the rare cases you will need / want to do a road trip, you can easily rent a car for a very reasonable sum without all the hassle deriving from car ownership.
  11. Do not upgrade your smartphone every year.
  12. Always pay your credit card in full at end of every month. Avoid loans and credit (i.e. paying interest to fuel expenses) like the plague. If something is out of the budget, you must mentally come to terms with the fact that you cannot afford it: move on. We do not need 90% of the things for sale out there, anyway.
  13. Get a good health insurance with above-average coverage[1](the cheapest, lowest-bracket ones are almost useless in most real life times of needs and emergencies). Having a good health insurance will shield you (and your bank account) and allow you to avoid going bankrupt in case of medical emergencies (which occur very easily, even at younger age). Exercise (weight-lifting or anything else at least moderately stressful for your body) regularly: at least twice a week. The occasional walk or even a daily run is not enough to stress your body appropriately. This is critical since — as impossible as it may seem now — you too will age and naturally lose physical (and mental) fitness.
  14. Be curious about the world out there. Try to read many books (mostly non-fiction), especially in sectors out of your normal studies. Innovation comes from the ability to correlate information between different realms of knowledge. Once you spot the correlation, do not sleep on it: act.

B. Second: drastically increase your income

  1. Study Game Theory[2] before looking for a job. After the Wikipedia page on Game Theory, I recommend you to start from The Joy of Game Theory (I have no affiliation with the author and I do not profit from linking this book in any way): you will understand how in a market of naturally conflicting interests, game theory and strategic moves will allow you to think rationally and achieve oftentimes optimal results with much reduced effort (compared to your peers). This will be a critical advantage for you down the road.
  2. Have skills: study and understand the business niches where — based on your skills — you can get a better paying job that does not send you to mental hospital. Once you get a job, look yourself around and focus on acquiring new, useful skills that are not common at your workplace: e.g. coding, learning how to speak a new language proficiently, ability to effectively sell or market products, etc. You do not need a degree for many highly important and well paid skills relevant in today’s job market. Relocate abroad if necessary or if your Country prevents competition or innovation at home. Do not be scared. Be available to do risky jobs that your peers are not willing (or are too comfortable) to do.
  3. Learn how to solve problems at work. Find neglected niches at your workplace and fill the productivity gaps. While everybody at work just does barely “enough” (and limit themselves to complain when things do not work), you will quickly become essential as one of the very few who solves problems in your niche. This works even if you are fat, ugly, inexperienced, too old, too young, whatever. Do not wait for your boss to ask you: proactive problem-solvers are golden nuggets in any business environment and rewarded accordingly. The more critical is your niche of expertise, the better.
  4. Get what you are worth. Once you become one of the few “essential” employees, you will employ Game Theory to force your employer to give you a better salary, better bonus, better exposure with clients, etc. Do it nicely but effectively. With a smile, you will be able to submit your employer into a so called “dominated game[3] where the only possible outcome is for you to get a better salary, etc. (please keep in mind that if you are a smart problem solver, you are effectively doing your boss a favor by not changing ship). If you are effective in solving problems and still do not climb the ladder, it means that the opportunities at your current workplace are hopelessly limited. This can happen: do not lose motivation or settle like most people around you will do, just find a better job as quickly as possible. “Persist” is the keyword.
  5. Set up an emergency fund. Once your salary starts flowing in, immediately set up an emergency fund in cash of approximately 6 months of salary (3 months if you are particularly good at avoiding emergencies). This is cash that must be readily available for emergencies: not to buy you a BMW. Do not stupidly inflate your lifestyle and continue to be cautious with the way you manage and spend your money.
  6. Save & invest, every month. Open a Stock Account with your bank and every month save 20%/30%/40%/50% of your net income and invest it in a low commission S&P500 ETF by Vanguard[4] (like “VOO” or “VIG”: google them). Never touch this investment for at least the next decade. Save mercilessly and invest every month “no matter what”. Google: “dollar cost average” + “compound interest” in order to understand the benefits of this double-pronged strategy (in short: you will beat 90% of all the stock traders & professional fund managers out there). Set up (both mentally and practically) a bare minimum that you must invest every month and deposit it into your stock account at the beginning of each month so you will not be able to spend it to buy useless stuff. This will do marvel to your sleep and to your income as long as you will be consistent, patient and NOT touch your investments for a decade or so. As soon as your career will progress and you will earn more, be careful to also proportionally increase the amount of your monthly savings: this strategy will prevent you to fall into the “increased lifestyle” trap (where you spend more money on useless items just to show your status to your peers or because you become lazy). Also: if you get the occasional bonus at work, win the lottery, inherit any sum from a distant relative, invest it straight away as specified above, in order to prevent spending it for useless “euphoria-triggered” stuff (euphoria will pass after a week or so anyway while this approach will greatly accelerate the achievement of the final goal).
  7. Start a side business. Once you have 200k/300k USD invested in a Vanguard ETF like VOO or VIG and they are pumping approximately 30k USD a year as compound interest (on the ETF shares’ physiological market appreciation year-over-year) and dividends (which you are NOT touching at any cost, but simply re-investing in the same ETFs, thus further magnifying the compound effect), you are able to focus your attention in order to start a side business to corroborate your income. In the current, extremely volatile, economic environment, if you do not start a side business you are obtaining your whole revenue stream from a single umbilical cord thus effectively allowing your employer to automatically dominate your whole game (you should work very hard for the opposite to occur).
  8. Keep your current job while you start working on your side-project. Keep the two (mentally and practically) separated: maintain your above-average performance level and do not try to get your coworkers as customers. Work at night, on weekends and holiday to kickstart your side business.
  9. Focus on getting the first 3 customers for your new side business (friends and family do not count). Once you get 3 customers (which is an amazing achievement!), focus on how to make 30. If in 3 months you are not able to reach the 1.000 USD / month threshold, you must focus on finding better cash-flow generating business ideas: do not fight on price, the margin is essential. Learn from your mistakes (you will do many). Take low hanging opportunities that others do not see. Study quirky, even awkward & ridiculed (by your “friends”) market niches, that oftentimes are a goldmine for those able to satisfy them (you).
  10. Once your side business starts making 10k USD / month you can start evaluating if your current salaried job is worth the effort / time / hassle. If not, make the jump to the self-employed world and focus on increasing the income from your side business to 30k USD / month.
  11. Sooner rather than later you will be a millionaire. The first million is by far the absolute hardest.

Thank you for reading my answer this far.

Let me know in the comments if you need any clarification.

Good luck.

*** 1st Update ***

I am humbled by the extraordinary response I have received to my answer and I must thank you all for the fantastic comments and suggestions. I am trying to respond to all of them and I have slightly revised a few of the points above to better clarify my thinking. I also added a book recommendation on Game Theory as many asked in the comments for that (no affiliation).

*** 2nd Update ***

Re: Real estate investments[5]. Many asked about real estate investment. A few suggested to stick to it as “the only asset that always has value”. I am aware that this may be a controversial point and I purposely did not include the real estate investment among the points above. Obviously there may be exceptions, but I would recommend against doing any real estate investment before you have already reached any solid financial independence goal. I am well aware that I may hold a contrarian view on this (we all know that everybody buys a house these days) but I recommend you to check the following factors before purchasing any real estate:

a) purchase price (including fees & commissions);

b) mortgage cost for the whole life of the repayment plan (10–30 years);

c) insurance cost;

d) maintenance cost;

e) taxes (when you buy it, while you own it, when you sell it);

f) impact on your financial flexibility (including on your ability to diversify your investment in the future) for the whole repayment plan and relevant opportunity cost;

g) estimated profitability (ie. asset appreciation);

h) monthly mortgage instalment cost vs. rent.

I did these calculations myself and, at least in big city centers (in USA, Europe and Asia), never I could find a real estate investment that could match the profitability of the S&P500 with the same degree of flexibility of investment/disinvestment, coupled with the (priceless) mental freedom coming from the fact that if I want to liquidate my whole investment tomorrow, I can do it in a whim (basically suppressing any opportunity cost). Since most of us have normal jobs and are not real estate professionals with asymmetrical knowledge of our local real estate market (i.e. which entails ability to buy real estate at heavily discounted prices), in the long run a real estate investment is normally a huge bloodbath compared to the stock market. I would thus recommend to stick to the investment plan as outlined in the point 6 above and search patiently for a place for rent that is both very cheap and not too far from your workplace.

*** 3rd Update ***

Re: Marriage. I am aware that a marriage may impact on this plan and, potentially, even disrupt it completely (naturally, this applies (even more so) if you wish to make a baby whom you will be bringing into adulthood under your and your partner’s responsibility). For these reasons, I would advise the following:

  1. Choose your partner wisely: if your partner is unable to share your goals and is only happy living a lavish lifestyle there will never be a salary good enough for the two of you. This is probably the quickest road to financial and emotional misery. Be careful.
  2. Do not marry too early: it is better to be safe than sorry. Be wise, and only marry once you are sure that it is the right thing to do. Postpone if you are not sure. Break-up if your partner is not the right one: being single is an order of magnitude better than being together with the wrong partner for the rest of your days.
  3. When you do get married, do not feel trapped by the idea that you must impress anyone with a wedding ceremony: be aware that 3 days after your wedding, people will plainly forget about it and move on with their lives. I have read that in New York the average wedding cost is above 70k USD[6]: you will agree that this kind of expense for a signing ceremony, some flowers and a fancy dinner is totally nonsense. Invest this money wisely instead so to accelerate the snowball effect to your advantage.
  4. Skip the whole “diamond ring” scam[7].

If you follow the above, you will be fine.


[1] Is It Important to Actually Have Health Insurance?

[2] Game theory – Wikipedia

[3] Dominated Strategy

[4] How Warren Buffett Won His Multi-Million Dollar Long Bet

[5] Is It Better to Rent or Buy?

[6] New York City weddings cost $77,000

[7] Alberto Favaretto’s answer to What are some interesting facts about diamonds?

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