The economics of being broke
After 6 years of studying economics, I thought I’d be good with money. Yet when I started my career in London, I was surprised to find that when I became broke, I stayed broke. I had good qualifications, steady jobs most of the time, and yet I found myself consistently without money. I mean zero cash in the bank, look-behind-the-sofa-for-coins-for-dinner broke. I’ve been thinking a lot about how tough those years were, and how it should have been much easier to escape the cycle than I made it.
It all came down to one unavoidable truth: personal economics is a series of interconnected decisions, that I treated as thousands of individual decisions, and paid highly because of it.
The obvious reasons
There are a few obvious reasons why it’s difficult to get a bit of savings, and get away from being broke all the time. It’s hard to save when you don’t have much cash coming in. When you take on debt and can’t get out of it quickly, it adds up. You become a debt zombie, only able to pay back the interest, and never claw your way into the black.
The best investment you can ever make is to pay off your debts, but it’s impossible to make that investment without extra cash. The more desperate you are, the higher the debt cost. It’s a vicious, vicious cycle. But it’s also well documented, and not what I want to explore here.
Looking past the first variable
I was constantly making the cheapest decisions I could. I took pride in being able to live in grim circumstances to save money. I’d happily live cheaply on the outskirts of London, and take the hit on a long commute. I’d buy the cheapest clothes I could find. I’d eat ready meals night after night.
Simple costs are easy to consider. It’s straight up £X vs £Y and my maths is good enough to usually know which number is larger. But I learned that things are rarely that simple.
Let consider a basic example. Jo lives in London, works an hourly job 5 minutes walk from London Bridge, and is paid London living wage. She naturally looks to live away from central London, so she looks along the Northern Line to find the best place to live. That’s how it works, right?
The first map below shows average monthly rent for a one person sharing a one-bedroom flat, along the Northern Line. The average cost reduction is £21.60 per month, per tube station away from LBR. Jo should clearly move far out to save money.
It all seems pretty straightforward. Let’s add one simple parameter: commuting costs. The further you have to travel, the more you pay — simple.
Jo buys a weekly travel card, because she gets paid weekly, and can’t afford the large monthly outlay. Now, the degradation of cost drops to £8.07 per station per month. It makes less economic sense for Jo to live far out, but it does still make sense.
But, Jo considers her time to be worth something. If she had more time, maybe she’d work an extra hour, or studying/read/train to improve her earning potential. Maybe she’d just be happier and healthier, which makes her more employable.
Let’s go on an assumption — Jo’s time is as valuable to her as it is to an employer. After all, your time is the only asset you really have to sell. I’m going to assume Jo values her time at £10 per hour (roughly LLW), as she could either work extra, or improve her long-term employability. The average increased commute time is 3 minutes per tube stop.
Assuming two journeys per day, five days per week , we get to a £7 monthly cost per commuting minute. You now have an aggregate £12.00 monthly cost increase per tube station you move away from London Bridge. That’s right; if you place a monetary value on your time, then it makes more economic sense to live in Central London than away from it.
Travelcards
Commuter travelcards are a great example of where you need money to save money. Let’s use an example of someone who lives in Zone 4, and commutes to Zone 1 every day.
Weekly travelcard annual equivalent: £2,459.60
Montly travelcard annual equivalent: £2,180.40
Annual travelcard: £1,892
The weekly travel card is exactly 30% more expensive than the annual one, but requires almost £2k initial payment. Saving money is expensive.
And this applies to more than just travel cards. Think of Pay-As-You-Go phones, gyms, anything where membership, commitment and up-front payment can give you access to savings.
Up-front costs of saving money
So you need initial capital to make long-term beneficial decisions. Travelcards cost thousands of pounds. Higher rent has substantial extra up-front costs, in high deposit and agency fees. You need to have money to save money.
But what about other ways to lower costs?
Let’s say you move into a new place, and have no cooking equipment. You make a daily decision on what to eat. Note: I actually did this.
Ready Meal:
Sunk cost: None
Variable cost: c. £5 average (per person, for main + sides)
Annual cost: £1,825
Cook for yourself:
Sunk cost: £33 for pots and pans, £13 knife set
Variable cost: c. £3 per meal (pp, using examples here, and personal experience)
Annual cost: £1,095
Considering cooking for yourself to be £2 cheaper per meal (obviously this varies based on what you’re cooking), this means it would take just 23 meals to break even, and from there you’re saving money each time. Again — it’s clear which is the better option, but if you take every decision as independent, the ready meals will win every time. It might sound obvious, but they won every time for me.
EDIT: It was pointed out to me by Tomislav Capan that to be fair we should assign the same cost to our time when cooking (which is longer than a ready meal). Assuming 30 mins differential in cooking vs ready meal, that’s a cost of £210 per month, making cooking overwhelmingly worse for you than ready meals. However, if you enjoy cooking then the same costs don’t apply. In short: if you enjoy cooking, do. If you don’t, don’t. Thanks Tomislav!
Of course it’s not just the knives and pots and pans. It’s spices, cutlery, plates. It’s buying the bag of rice that you’ll only use part of this time, or the XYZ. It’s about removing yourself from doing what is cheapest at this exact moment in time, and thinking about what’s cheapest over next month. This is the mindset that I adopted when broke, that I struggled to get away from.
It’s the same mentality as doing a ‘big shop’ and taking advantage of the savings. I decided what to eat every night, and it cost me more.
Another obvious benefit of cooking for yourself is that it’s very time-economical to end up with leftovers for lunch the next day. Without any chance of leftovers, you’re eating from a supermarket/takeaway, which costs me roughly £6 a time.
It does sound obvious how important cooking is when you’re completely broke, but it took me a long, long time to realise that it was vitally important.
Economics is a social science
There’s some psychology also at play here, that I don’t understand well enough to quantify, but it’s important to note. For me, these included:
- normalising having £0 in my bank account — whenever I had money left over, that money would soon be spent
- I lived in a room with no windows and screaming neighbours to save on rent, and spent much of my time out of the house to stay sane. Time out of the house is typically much more expensive than time in it. My sunk cost (rent) savings were likely outmatched by an increase to my variable cost (entertainment)
- An unhealthy lifestyle (time in pub, ready meals, poor quality of sleep) wasn’t conducive to making good long term decisions, or making myself particularly employable at the time
Conclusion
The main thing I’ve learned from this time is:
When making economic decisions, consider it a single series of sequential, related decisions, rather than a series of one-off decisions.
You can apply this to almost anything. Purchasing cheap jeans, boots or coats. Deciding which car to buy. What to eat this evening. Where to live.
I only learned this lesson after years of being in debt, living unhealthily and making a series of terrible economic decisions. I hope others can learn a lot quicker than me.
