Vivian’s New Year’s Resolution

Vivian was helping his daughter with some math homework when he pulled out a sheet of scrap paper from his desk. It was mostly blank on one side but when he turned it over, he saw that it was a credit card statement from eight months ago.

He noticed the last transaction of $55 was for a gym membership he had started as part of his New Year’s Resolution to get fit a few years ago. He had hardly been to the gym in six months and wrongly assumed that the one-year membership package (that came with a 15% discount) had expired.

His ‘pursuit of health’ had been costing him a hidden $55 a month for over a year now and he had no clue!

Passive Income, Passive Expenses

Of course, Viv and all of us should be checking our credit card statements regularly but in the era of e-statements, those notices often pile up along with the dozens of other e-mails we never quite get around to opening.

How many other subscriptions or packages are lurking, draining our wallets, forgotten about? These kinds of expenses are what I call passive expenses.

I talk a lot about passive income, how important it is to have a portfolio of income generating assets viz. dividend paying stocks, rental properties, or maybe a secured debt investment, which reward us with a steady cash-flow even when we are vacationing in Bali or Hawaii. With some disciplined cost management and compounding, this steadily increasing cash-flow could eventually help us reach the “escape – velocity” to financial freedom. But what about passive expenses?

Passive expenses have the exact opposite effect of passive income. Left unchecked, these expenses can really add up even if individually, they are too small to be of much concern. Passive expenses are like termites eating into our money when we are not looking.

While You Were Sleeping

Let’s take it one step further. Any expense that is being paid without you physically handing over your credit card, cash, a check, or manually making an online payment is a passive expense. All those expenses that hit you even when you’re sleeping; the country club membership, the magazine subscriptions, the depreciation on your car(s) in the garage, all those things you auto-debit from your checking account are all passive expenses.

A few years back, I sat with my wife and went over all our credit card statements for a 6 month period. The number of 14.99s and 19.95s which I had completely forgotten about was horrifying, to say the least. It was literally like a bunch of ‘ unsupervised teens’ having a pajama party, wrecking havoc to my credit card…while I was sleeping. The crown jewel of them was the renewal fee of a beach club membership (an idiotic spend of $2,000 for the second time!). I had felt it was necessary because, during my first visit, I found their pool very enticing and the DJ was really good….my cumulative number of visits in 2 years? THREE! (confession: This is definitely not the stupidest thing I have done in my life)

Active Automation

Of course, we set up most of the auto-debits purely for our convenience. It will not be a great use of my time to sit and make several mandatory small payments when there is the option of setting them up as auto-debits. No one in their right frame of mind would suggest getting rid of all the mandatory expenses like utilities or cell phone etc. However setting up the non-mandatory expenses as an auto-debit is where the problem lies.

We can solve this through active automation. Only set up automatic payments for mandatory recurring bills whose amounts don’t change much…like the internet, rent and other such necessities. And be sure to check those statements from time to time. You can set up an alert on your phone or calendar to do this quarterly. However, anything that is not an absolute necessity, should definitely not be set up as an auto-debit.

Let’s take the example of that pet magazine subscription, which comes with loads of great information on dog spas. If ‘Bailey’ really can’t wait to lay his paws on every new issue, the day it is out…fair enough, by all means, go for it! All we are proposing is DO NOT use your credit card for the subscription, even if the subscription package offers 2 free issues. Pay cash and buy it every month, even if it means paying a few bucks extra. Trust me…when you are on a long vacation, neither will you end up paying for it, nor will Bailey miss it.

And be sure NOT to agree to any kind of automatic renewal program for these non-mandatory memberships or subscriptions. In a year you might no longer be interested in whatever subject a magazine covers or you may have moved away from the place you were living when you signed up for that gym membership.

Financial Freedom

A big part of achieving financial freedom is being smart about costs. Our money should be working for us not against us whether we’re asleep or on vacation. That’s why financially smart people build passive income streams, which eventually replace their day-job income, and avoid passive expenses by all means. It is unfortunate however that many people find themselves saddled with a long list of ‘lifestyle driven’ passive expenses, even though when it comes to income, they need to “show up” to earn their living. For many people, the desire to look rich comes in their way of actually getting rich.

We will cover this subject a lot in future articles and help people to take simple steps to change this.