The Rule of 173: The True Cost of Small Expenses

April 8, 2023

There are a number of tips and tricks we use to make personal finance simpler. One we love and use often is the Rule of 173, which helps us quickly evaluate small purchase decisions and estimate the true cost of recurring expenses.

Learning this little trick will help you greatly in the realm of mindful spending. You’ll also quickly realize some of those small luxuries you spend money on each month are actually quite expensive!

What is the Rule of 173?

The Rule of 173 is a personal finance rule of thumb that estimates how much a monthly expense would be worth if we invested the money we would have otherwise spent for 10 years. It converts seemingly small recurring costs into a large lump sum figure, helping us understand the true potential cost of goods and services.

To use the Rule of 173, just multiply the monthly expense amount by 173. This will then reveal the total cost, including the gains you would be foregoing, over the course of a decade. This math equation includes an estimated growth at a rate of 8%.

Here’s an example: Let’s take a $40 per month expense at a coffee shop (this is what the average American spends at coffee shops!) and let’s use the Rule of 173 to estimate it’s “true cost”…

$40 multiplied by 173 =  $6,920! 🤯 Instead of spending $40 per month on coffee, if we were to invest that money instead we’d have almost $7k back in our pockets had we just invested those dollars instead! (We can also double check this math by using a standard compound interest calculator – it shows $40 invested per month at an 8% growth rate is $6,953)

Small Expenses Add Up Real Fast…

OK, maybe you love coffee and think that $40 per month (or $7k over 10 years) is totally worth it. That’s OK! We’re not here to judge your spending habits. We’re all about funneling dollars towards purchases that move the happiness needle in your life. But what about all the other little monthly expenses in your life – the ones that don’t provide any meaningful value? 

Using the Rule of 173, here are some examples of saving that many people could make:

  • Lowering utility bills by $50 per month = $8,650 saved over 10 years
  • Saving $65 a month switching to cheap cell phone plans = $11,245 saved
  • Changing banks and avoiding common fees of $15 per month = 2,595 saved
  • Getting a cheaper insurance plan by just $18 per month saves $3,114
  • Also, saving $100 a month by eating out less = $17,300 saved

What’s more, if you did ALL of these things, you’d have an additional $43,112 in savings after 10 years!

Rule of 173

As you can see, shaving tiny, even seemingly insignificant costs, out of various spending categories can make a huge difference over a 10-year timeframe. Furthermore, that adds up to even more money accumulating for your future over a longer period of time like 30, 40 or 50 years!

Using the Rule of 173 to Your Advantage

OK, so you’re loving the rule of 173 and excited about using it in your life… Here are a few ways you can take advantage immediately, and keep using it over time…

  1. Negotiate your current bills. Insurance, utilities, rent, etc. Call up every service provider you give money to and see if there is a better rate available. (here’s a great guide on how to ask for a discount)
  2. Beware of subscription services. There’s a reason many companies are switching to subscription models these days. It’s to cover the “true cost”! Whenever you hear the word “subscription”, think of this as a red flag and use the rule of 173. 🚩
  3. Track all your spending. Reviewing your past spending each month is the quickest way to catch sneaky expenses. Or eradicate bad spending habits you catch. Using apps like Mint, Empower, or YNAB is a super easy way to digitally track all of your spending so you can constantly watch where your money goes. 
  4. Be sure to invest your savings. The rule of 173 only takes you so far. It can calculate how much you can *potentially* save, but YOU need to put in the hard work by actually saving the money you choose not to spend, and learn how to invest it wisely.

Once you’ve squeezed out all the unnecessary spending out of your life, it’s time to help your friends! Tell them about the rule of 173 and show them how impactful it can be to cut recurring expenses out of their life.

The Bottom Line:

The rule of 173 is a super helpful tool that helps you make informed decisions about the tradeoffs of any given expense. It’s a granular way to see just how much growth you could achieve if you were to make a couple of small changes in your budget. In addition, it encourages you to re-think those small ongoing expenses, and exposes the true cost over time.

However, don’t forget that it’s just a rule of thumb. Knowing about it is only half the battle. The real impact it has on your finances will depend on how much you actually save and invest by using the rule as a catalyst for investing more for your future.

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**Feature pic by Dhru J on Unsplash

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