Where does your money go?

To become financially independent, saving a significant portion of your income is at least as important as getting a good return on your assets. This is especially true for those who do not have a 40-year investment horizon, i.e. anyone who does not want to wait until the normal retirement age. In this case, you should focus on the biggest expense items such as taxes and social security, housing, transportation and food. Once you have these points under control, you have done the main thing.

Compulsory expenses (taxes and social security), housing (with charges), transport (private and public) and food (outside and at home) represent in total and on average 2/3 of the gross household income, or nearly CHF 6,300 per month. It should be noted that a household is a group of people sharing the same home and who can have several incomes and expense items. Savings is also an important point in the composition of the household budget, which we will discuss later.

Mandatory expenses

Mandatory expenses include taxes, social security contributions (AVS/AI/AC and LPP) and compulsory health insurance (LAMal). These expenses alone represent 27.5% of gross household income, or a whopping CHF 2,650 per month or CHF 31,800 per year!

It is difficult to influence social security contributions if you have a salaried job, unless you lower your income (which is not as stupid an idea as it seems...). So let's focus on other mandatory expenses. Taxes and health insurance represent CHF 1,700 per month and per household, or 17.7% of gross income. That's CHF 20,400 per year. To cover this type of expense for the rest of your life, a portfolio of more than CHF 580,000 would be necessary using a tax rate of 3.5%. According to the study Trinity, this withdrawal rate ensures, with any style of balanced portfolio and in any market conditions, the survival of the capital over a period of forty years. This should be enough, unless you retire very early!

Regarding taxes, you can lower them by setting up a 3rd pillar pension account, by buying real estate in order to deduct debt interest and maintenance costs, by deducting training costs, income acquisition costs such as transport and ... by having children! But since many tax deductions are based on other expenses, we often see a transfer of costs from one item to another. Note that there is also the possibility, with a significant impact, of moving to a canton and/or municipality with a more accommodating tax policy.

For health insurance, it's a little easier. You can make the competition work and opt for the highest possible deductible. This has the advantage of taking responsibility for your health, of not going to the doctor for everything and for nothing, and above all of making substantial savings. On the other hand, you have to keep a little cash aside to prevent a big problem. As with taxes, you can try to live in a less expensive place from the point of view of health costs.

In my household, I managed to reduce the expenses for taxes and health insurance to CHF 12,000 per year. I would need a portfolio of CHF 340,000 to cover these expenses for my entire life, with a deduction rate of 3.5%. This is still significant, but already more accessible than the figures given above.

 The accommodation

Housing represents the largest financial outlay for households after compulsory expenses. Annual housing costs amount to an average of CHF 18,000 per household per year (CHF 1,500 per month). This still represents 15.6% of their gross income. Using the same withdrawal rate, a portfolio of CHF 515,000 would be necessary to cover these expenses for 40 years. All that, just to put a roof over your head... it's crazy! And with that, you're not even a homeowner and you don't leave anything as an inheritance for your descendants. As long as you buy at a good price, and you can afford it, acquiring real estate is therefore preferable to renting in the long term.

Whether you opt for one or the other solution, the choice of property must in any case correspond to each person's lifestyle. It must not be unnecessarily too big or too far from the workplace. I live with my family in a spacious but not excessive apartment that costs me CHF 13,000 per year in interest and charges. In theory, I would need a portfolio of CHF 370,000 to cover this expense for the rest of my life. But since I plan to amortize this property over a period of about twenty years, my household ultimately only needs a portfolio of CHF 260,000 to cover all the interest during this period. The amortisation is considered as savings, which we will see below.

Reducing your housing costs is a key step in becoming more frugal and making serious progress towards financial independence. Is every room, bedroom, bathroom, toilet, kitchen, laundry room, dressing room... really necessary? Do you need a garage to store a bunch of stuff you never use? Or do you need more time to live your life, spend more time with family and friends? While you think you own your home, it may actually own you...

Food

Eating well, there is nothing like it. However, as with everything in life, moderation is essential. Food represents the third largest expense for a Swiss household, with an average annual cost of CHF 14,400, or 12.6% of their gross income. This amount includes food and beverage products, i.e. goods purchased in stores and consumed at home, but also the entire part relating to catering and hotels. This amount would require a portfolio of CHF 412,000 with a withdrawal rate of 3.5%. To reduce this bill, it is not just a question of limiting restaurant outings. It is also a question of reducing the commission ticket, by frequenting hard discounters for example.

Food is a very individualistic and relative thing. Buying chicken breasts in bulk and making a small dish with some rice for dinner is cheap and very healthy. Maybe you prefer pasta. Making spaghetti with sauce takes little time and money. Add some meat and you have a hearty meal. cheap. You can prepare large quantities for the entire week. Again, you don't need to be extreme here, but taking your budget seriously will make your ability to achieve financial independence at a young age that much greater. You don't need to eat rice and beans for the rest of your life, just set priorities.

My household is in line with the Swiss average, i.e. CHF 14,400 spent per year on food, both outside and at home. So there is clear potential for improvement from this point of view, but we must still have a few vices!

Transport

Transport is also a major expense for most of us. Private and public transport costs, at CHF 11,000 per year, represent 10% of the gross income of Swiss households. A wallet of CHF 315,000 would be needed to cover these costs. Is it really worth it?

Do you drive a nice, luxurious car to work? Then you probably have a household budget close to the average Swiss household. If what really matters to you is to live more independently by working less, you should reduce your transportation costs as much as possible. Try carpooling. If you live close to your job, buy a scooter, a bike or take the opportunity to walk part of the way. If you live too far away, consider moving or changing jobs. Use public transportation and/or opt for a fuel-efficient car model.

Combining several of these criteria, our household is now at CHF 4,500 per year. A portfolio of CHF 128,500 is sufficient to cover these expenses over the next 40 years.

Savings

Savings are obtained indirectly by adding up all the income of a household from which all expenses are subtracted. Deposits in a savings account, payments for the 3rd pillar, purchases of stocks and bonds, investments, depreciation, etc. are not counted in expenses, so these items are part of household savings.

Each Swiss household saves CHF 1,200 per month or CHF 14,400 per year, or 12.2% of their gross income. I have read some comments on websites from readers who were shocked by this amount, which seemed enormous to them. But let's put it into perspective a little. First, let's not forget that this is an average and that this figure is therefore distorted by some very high incomes, who can afford to save a lot. Then, it should be noted that savings also include debt repayments and/or payments into 3rd pillar pension accounts, which can very quickly represent significant amounts. Furthermore, we are talking about savings per household, not that of a single person. Finally, with 12.2%, Swiss households are far behind the savings rate of the French, which amounts to 16.8% and which a priori do not seem to be particularly economical, at least as far as their public finances are concerned.

The lower your expenses, the greater your savings capacity, the more you can put aside for the future, the less your current and future financial needs are, and the faster you can become financially independent. 12.2% of gross income is frankly not huge, I would even say that it is insufficient if you want to claim to become an early rentier. But for that you have to put a little good will into it and stick to your principles. My E-Book will give you more details on the importance of savings capacity on the path to financial independence.

Conclusion

In terms of the expenses of a typical Swiss household, a portfolio of almost CHF 1,800,000 would be necessary to meet all your basic needs for the next 40 years. As for me, I "only" need CHF 1,100,000 to cover these basic expenses during the same period. That's a difference of CHF 700,000! Of course, even reduced, the basic amount required remains significant, but we are talking about forty full years of retirement, or double that of most people... To refine the details, we would of course have to take into account other expenses, but also the social security to which you will be entitled at retirement age and for which you have already contributed. My E-Book and its Excel tool will give you more details on this.

I want to become financially independent so I can live more and work less. I want to have time for myself. I don’t want to live the daily grind of work-home-sleep until I’m 65. I don’t want to be stuck in traffic on Monday mornings when I could be spending my morning at the beach. Without financial freedom, you don’t have that choice. The sooner you realize that your expenses are holding you back, the sooner you’ll want to cut back on those expenses and the sooner you’ll have freedom!