What is a Passive Expense?
A passive expense is something you spend money on, on a regular basis, and don’t get enough value from it, or get something from it that is not useful to you. To have a passive expense is like having an employee who is lazy, or who consistently does the wrong work.
Passive expenses are the worst type of expenses you can have. However, many people have several passive expenses! They are either unaware of them, or they just seem like too much effort to eliminate.
Some Examples
These are some examples of passive expenses:
- Membership fees to a gym, club, organization, loyalty program, online- or magazine subscription, that you don’t make use of, or only make very limited use of.
- Paying a monthly premium on an insurance policy that you don’t need.
- Paying interest on a loan at a high interest rate, when you can replace it with another loan at a lower interest rate.
- Paying fees for a service, when you can get a similar service elsewhere, that costs less (e.g. paying too much for your vehicle insurance, or bank charges).
- Missing out on potential income (e.g. earning interest at a lower interest rate on cash savings, when you can make a similar cash investment, that earns interest at a higher interest rate, or owning a property that you can rent out, but choose not to).
Easy first step to Financial Freedom
If you want to become financially free, the easiest first step you can take, is to identify and eliminate your passive expenses.
The biggest reasons why people don’t eliminate their passive expenses are:
- It usually takes effort (e.g. getting cheaper insurance quotes, changing your bank account, etc.).
- The “what if” factor – you may find you’re holding onto some useless service “just in case” you need it (e.g. an online subscription, or some form of useless insurance).
Passive expenses are unnecessary hindrances to financial freedom.
They are the easiest and least painful expenses to get rid of, because they don’t effect your living standard. You’re no worse off without them. You’ll only have more money.
September 26th, 2008 at 10:24 am
Ai… I agree. I did the exercise to just move my bank account from one bank to another and moving my short term insurance to another insurer. Its amazing how much you can save!!!
September 26th, 2008 at 02:37 pm
good tip, Francois. I never thought about ‘Passive Expenses” in that much detail
September 27th, 2008 at 01:12 pm
@Johan
Yup, I had a similar experience. I moved bank accounts about 4 years ago.
It was a lot of effort back then, but if I think about it now, it has saved me about R8000 worth of bank charges since then, and earned me A LOT of additional interest I would not have earned otherwise.
The few hours of effort was definitely worth it.
@Nate
Thanks Nate! Eliminating my passive expenses was the first and best thing I did when I just started out. Like with the example above, it really was worth it.
September 29th, 2008 at 11:12 am
[...] gym membership you have that you never use? Yeah, that’s a passive expense. From Liberta – [...]
September 29th, 2008 at 05:39 pm
Ah, I think I have many passive expenses, but don’t know it until after I’ve spent the money. I’ll have to go through my expenses again to see if I still have any sneaky passive ones in there!
November 28th, 2008 at 02:25 am
Agreed with you Francois.. Passive expenses (only heard of passive income before this) would be a killer if left unchecked. Especially if you had put the payments on standing instructions to your credit cards…