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Barbell Logic

May 9, 2019

Matt and Scott first talked about money and personal finance in Episode 157, which focused on the many benefits of getting out of debt. Once you are debt free, Scott says, it's time to play defense with your finances, and put you in a position to build wealth which you can then invest, and make your dollars work for you.


Defensive finance is all about managing your life expenses and building the nest egg that you can retire on and live at your current level of consumption. Obviously, the lower your life expenses, the less you have to save to maintain your consumption as a retiree... or thinking about it another way, the more you can save in excess of the bare minimum nest egg. This excess can protect you from life's unexpected eventualities -- sickness, children, job loss, major household maintenance -- which tend to be expensive affairs.


Scott lays out the simple math of retirement in thirds. Take your gross (pre-tax) income:

  • 1/3 will go to taxes; this number will likely be smaller in your younger years, higher in your later years as your income grows, but on average count on 1/3.
  • 1/3 will go to life expenses -- housing, food, insurance, clothing, transportation, and everything else.
  • 1/3 should be saved for retirement.


Therefore, your total living expenses should equal 1/3 of your gross income. For many people, however, living expenses constitute MUCH more than a third of their income. And that's a problem.


Much digital ink has been spilt over the "latte problem," the amount of money wasted on mindless daily habits such as a Starbucks latte on the way to work. And it's true, these habits can add up in a year. A simple $3 Starbucks tall latte, five times a week, adds up to nearly a $1,000 in a year after sales tax. Many people order more expensive drinks that this too. Nevertheless, Scott argues that most people make the most costly mistakes with the big items: cars and houses. It takes a LOT of lattes to make up for overspending on a house or a new car.


Defensive finance also means searching for the hidden cost of ownership. A house is an asset, but it's a pretty terrible one as far as money goes. It does not produce anything. It cannot be sold easily (or cheaply; remember there are closing costs!). It's value is highly volatile to factors outside of your control (macroeconomic issues, interest rates, changing city demographics and government). And it's expensive to maintain. Many people fail to recognize the costs of home ownership beyond the mortgage payment. Property taxes can cost many thousands of dollars each year. Insurance must be obtained. Maintenance costs between 3-5% of the house value annually, although maintenance tends to be sporadic: the A/C breaks down, a storm destroys the roof, the fences needs repair, etc.


Living within your means while considering the FULL cost of your lifestyle is the essence of defensive finance. That means containing your total living expenses to 1/3 of your income, so that you can save for retirement and, as Scott says, not have to eat dog food in your winter years.


Got a question for Matt and Scott? Email us at and we'll answer your question on an upcoming Saturday Q&A!



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