So, if you’ve been reading here you’ll know I’m a big fan of Scott Trench’s book Set for Life. I think it’s a great resource for people starting out, or as a refresher for those already on the path to Financial Independence. Go buy it (or click the link above and buy it!)
I do have a quibble with some of the language, however. It’s not really Scott’s fault, it’s just that the language the industry uses around financial planning and budgeting is misleading. And, actually, Scott’s book helped me clarify why I’ve always objected to the language.
The problem I have is in the word choice: Fixed and Variable. In financial writing these are standard, but they’re wrong! Fixed expenses are considered your rent, car payment, monthly bills, etc. Variable expenses are things like entertainment spending, gas, etc. Scott goes through a nice full explanation of these things, so I won’t duplicate that here. However, the language we use for these categories assumes too much, and I think we should do away with them.
Instead, we should use Structural expenses and Discretionary expenses. I think these are more precise. After all, Structural expenses, like rent, car payment, bills, etc. ARE NOT fixed. Yes, they are more difficult to change, but they ARE changeable. If you move or sell your car or cut the cord, you are changing those expenses – which makes them structural, but never fixed. In essence, I’m saying these are all variable expenses – if you’re committed enough!
In his book, Scott talks about minimizing these structural expenses as the more powerful lever in wealth creation (versus most of the personal finance world, which hates coffee, because they’re monsters). If you focus your efforts on housing, transportation, and food, you are impacting a whipping 63% of the average person’s spending. Save 50% in these categories, and your saving rate is suddenly 31.5%. Yes, it’s hard, but it’s possible.
So please, please, please, please, pretty please let’s stop using the wrong terms for what we’re talking about! Using the wrong term – particularly thinking about housing, transportation, and food as fixed – tricks our brains into thinking these things are immutable. They’re far from it! If we think of expenses as structural, we start to ask ourselves “How can I change this structure to meet my FIRE goals?” which is a much better question.
