Living on $7,000 per year in pricey San Francisco

Hey folks, Mr. Frugal Hacker here, back after a short hiatus. Last year, in 2017, we tracked our expenses very closely. Every single transaction was copied into a giant Google Sheets spreadsheet. As a couple, we had almost exactly 1,000 transactions throughout the year. Some transactions like transit and health insurance premiums were only recorded once per month for simplicity.

Turns out that between the two of us we only spent $14k ($7k/person) in core expenses throughout the year while living in what people call one of the most expensive cities in the world — San Francisco. Incidentally, this also happens to be almost exactly how much Jacob Fisker from Early Retirement Extreme spends every year, and people call that extreme. In fact, I think he spends $7k/year in a cheaper cost of living city, but probably includes housing expenses as well (property taxes + maintenance on a paid off house). In contrast, we didn't feel the $7k/yr was extreme at all for us. In fact we barely looked at our expenses all year except for a single 6-month check-in. I wonder what our annual number would've been if we actually tried to keep our expenses super low?

How do we define core expenses? That's all our expenses in 2017 excluding housing, travel, one time expenses (OTEs), and taxes. Why do we exclude these important categories from our core expenses? A few reasons:

  1. Housing is a bit ridiculous in San Francisco (where we live) at the moment. The absolute dollar amount may be high, but we consider this steep housing price tag simply a "tax" to live here and make the income we make. We wouldn't live here if it weren't for our jobs. Once we cease to work (which will hopefully happen in under 3 years from today), we would move to a much cheaper cost of living city (basically anywhere else in the world). Right now we simply deduct housing from our 6-figure salaries and assume housing is "free".
  2. The same applies to our travel expenses as well. We only spend on travel because we can afford to, and we feel it's a way to educate ourselves about the world. It's certainly not "core" to our day-to-day living. We can easily make do without it. Last year we spent $2k/person on travel. So if you were to include travel, you could say our annual budget is $9k/person/year rather than $7k/person/year.
  3. Our tax bill right now is solely determined by how much we earn, rather than how much we spend. Once we're financially independent and living off our savings and investment portfolio, the tax bill will be correctly determined based on how much we spend (rather than earn) since we will only be liquidating how much we need from our investment accounts. Most likely our taxes at that point will be $0 since married couples don't have to pay any taxes on the first $101k of long term capital gains.
  4. We bought 2 brand new expensive carbon-fiber bicycles last year amounting to $6k. This was definitely a splurge, and was definitely not "necessary", since we already had great aluminum bikes. We don't consider this to be a day-to-day expense either. Furthermore, we plan on keeping these excellent bikes for at least 6 years, so the amortized cost of these 2 bikes over those 6 years is only $500/year for each of us.

The core expenses are therefore defined to be expenses that are quite hard to reduce year-over-year. It's easy to move to a different city that has a much cheaper rent — a 1-time decision. It's also easy to limit travel for a year, or not splurge on expensive carbon bicycles. What's not easy is to make a material difference to how much you spend on day-to-day stuff such as groceries, utilities, transportation, healthcare, entertainment (such as events and concerts), etc. These expenses are primarily determined by your everyday habits, and are a lot harder to change since you have to make those decisions correctly every single day of every single week of the year. One slip up, and you're immediately over-budget for the entire month.

Even if we choose to include travel and our bikes into our "core" expenditures, the annual budget jumps from $7k to $9,500/person/year. Not a huge difference in my opinion since anything below $12k/person/year (excluding housing) is considered dirt low anywhere in North America.

We didn't really do any strict budgeting at all last year. We just said we would live a fairly normal frugal life, be cognizant of minimizing wastage whenever we could, and pick the cheaper of 2 choices whenever the option presented itself. In return, we vowed to record every single transaction in a manually maintained spreadsheet, no matter how small or large the amount was. The sheer physical act of inputting 1,000 transactions every single day over a year made us mildly dread pulling out our wallets and credit cards each time. It gave us pause and made us think: Do we really need to buy this right now, right this second? This is a great negative feedback cycle (but with a positive outcome) that I would highly recommend as a clever hack to anyone who wants to become frugal.

Here's our expense breakdown for the year 2017 (click on the image to see a sharper version):

Our 2017 core expenses breakdown. This does not include housing, travel, taxes, or 1-time bicycle purchases.

Disclosures: We get free lunches at work pretty regularly. I get free lunches everyday, and my wife, Mrs. FH, gets free lunches twice a week. I also get free dinners, but I very rarely stay at work until 6pm which is when dinner is served. So we usually eat dinner together at home. These extra meals, if prepared at home, would've increased our grocery budget by another 50%, or $100 more per month. We also get free/subsidized health and life insurance from our respective companies, valued at $4k/year/person. But we also had to spend ~$2k/year as a couple just commuting back and forth from work. All said and done, our expenses would've climbed from $7k to maybe $10k/year/person if we didn't have job-based subsidies, which is still pretty low for San Francisco standards. But we probably wouldn't live in America if we didn't have free or at least heavily subsidized health insurance from our employers. We would just move back to Canada where healthcare is nearly free. We also don't include the cost of water, trash, water heating (gas), and cooking gas in the expenses since those are all covered under our condo's monthly HOA fees which fall under "Housing" which has been excluded from our core expenses. These minor expenses probably don't amount to much anyways. Maybe another extra $50/month, or $300/person/year.

Here's our expenses broken down into percentages per category:

Percentage breakdown of 2017 core expense categories. See text above for definition of what we mean by "core expenses".

so How do we keep our core expenses so low?

Our core, non-housing, non-travel expenses in 2017 were low primarily because we had no kids or car. But as outlined in our Things We Don't Do post, we also keep food expenses low by minimizing eating outside at restaurants — we cook most of our meals at home. We buy most of our groceries from bulk/discount stores such as Costco and Foods Co. See our mid-year grocery spend breakdown for a detailed breakdown. Groceries are generally between 5-10x cheaper than eating out.

Additionally, we consciously and deliberately stay away from all the expensive luxuries of life such as fine dining, gym memberships, spas, sports clubs, yoga studios, golf resorts, high-end tech equipment (drones, cameras, watches, gaming consoles, etc.), jewelry, pets, alcohol, coffee, drugs, cigarettes, meat, and seafood (we've both been 100% vegetarian since birth). We barely turn on our space heaters, and we also don't own an A/C. We set our fridge to the warmest temperature possible without risking food spoilage. We avoid binge shopping by simmering products in our cart for at least a few days before checking out. We don't hang out at bars or party with friends at clubs (we can't handle the loud noises and music anyway). Finally, we don't buy gifts for people, or donate large amounts of money — we don't feel we're there yet financially.

We managed to keep our clothing budget under control as well last year. We get a bunch of free t-shirts, hoodies, sweaters, and socks from work in the form of marketing swag. I bought a pair of jeans from Costco for $30 that's hopefully going to go a long way. Mrs. FH had a 1-year challenge where she didn't buy any new clothing the entire year in 2017, which she succeeded in doing.

The big difference last year was the amount of cooking we did at home. We have a beautiful home with a luxurious full-sized chef's kitchen that we started to take advantage of. We also invested in quality appliances such as the Instant Pot pressure cooker, the Vitamix blender, the Breville food processor, KitchenAid toaster and hand mixer, and top-of-the-line cookware from IKEA. Through sheer practice, experience, and online learning, my wife Mrs. FH has refined herself into a meal machine that can consistently transform ultra-cheap vegetarian groceries into delicious edible feasts day-after-day.

Why does this number matter?

As with anything personal finance related, it is critical we ask ourselves "Why does this matter"? It matters because your annual expenditure is the biggest factor that determines how much money you need to no longer be reliant on your job, and be solely reliant on the output of the US economy in the forms of gains, dividends, and interest. In other words, it determines when you can formally "retire" from your job, and go pursue other interesting things in your life that may matter to you more.

The 4% rule for retirement states that you need to have 25x of your annual expenses saved up include housing, taxes, and health insurance in order to comfortably quit your job and retire. So if my annual core expenses are only $7000 per year, and my housing in some reasonably priced 2nd tier suburban city for a spacious 1-or 2-bedroom apartment/condo is just $1300/mo that I split with my partner or significant other, then my total expenses come to just under $15k per year ($7000 + $1300*12/2). If you make all of this money through your portfolio's generated long-term capital gains and qualified dividends, then you pay $0 in taxes, since the first $38,600 (as of 2018) in qualified dividends and long-term capital gains is tax free at the federal level. State taxes might apply for your particular state, but that should be minimal as well. Assuming you can get health and dental insurance under the ACA for $2k/year, and your investment adviser charges you fees of no more than 0.3%, you then need just $460,000 ($17000 / (4%-0.3%)) to comfortably retire for at least 30 years (assuming no kids, pets, or air-based travel). 

If you annual expenses were $10k instead of the $7k used above, you would need a slightly higher portfolio of $535,000. At $15k of annual core expenses,  you're looking at $670,000 in savings, quite a steep increase from the basic $460k. Notice how the number you need saved up over your working life increases quickly as your annual expenses go up.

Frugality as a Virtue

Where do we get our frugal genes from? Mostly from our parents leading by example. Frugality either has to be learned painstakingly by oneself (hard), or needs to be inherited via parents and/or family (easy). We were fortunate enough to learn this terrific skill from our respective parents by simple osmosis. And once you develop the right frugal mindset and skills, they never go away, much like learning to ride a bicycle or drive a car. Mrs. FH's grandma for instance can make delicious chutney (a type of thick Indian sauce) from any combination of vegetable peels. We, on the other hand, throw them away into our compost bin. So much for people calling us "extreme".

Frugality may come quite easily to you when you're forced into it, which might have been the case for our grandparents. But it's a lot harder when you earn a big income where wastefulness can easily become the norm. At a household income of $300k+ per year probably putting us at the top 3% of America (and perhaps top 1% of the world), frugality needs to be a very deliberate and conscious choice. It's a muscle that needs to be exercised every day in order to reap the benefits at the end of the year. As such, frugality is worth practicing solely for frugality's sake, even though the actual real-world long-term benefits are numerous.

Frugal in San Francisco

The common misconception is that San Francisco is a really expensive city to live in. While that may be true for housing and state/county/property taxes, it's certainly not true for everything else. The basic necessities such as groceries and household products are still quite cheap here. Public transit is still rather affordable: $2.50 for 1.5 hours of riding. The city is compact enough that UberPool to anywhere is quite reasonable as well (since most of the charge comes from the distance covered to reimburse the driver's gas), making car ownership 100% optional. Electricity rates during weeknights and weekends are very reasonable as well (we paid $33/mo last year). There are plenty of working-class and lower middle class families living in this city, so life's basic necessities need to remain affordable.

You just have to learn to mimic their lifestyles as much as possible by ditching the flashy bars and hipster cafés. Turns out doing this is pretty easy when you are practicing frugality by choice. The only tricky part to living frugally in San Francisco is keeping housing costs low, but this too can be accomplished by living in slightly less-than-desirable neighborhoods and sharing space with roommates and/or your significant other.

What did your core expenses add up to last year? If they're more than $15k/person/year (i.e. more than double ours), can you think of some clever ways of reducing them?