When we think about how we spend our money, it’s easy to think about “discretionary” spending. The coffees, clothes, and chinese takeaways. If we’re not making as much progress as we’d like, it’s easy to focus on our discretionary spending.

This “discretionary” expenditure is part of the equation. But it’s the “fixed” costs that hit many of us over the long run. It’s the costs that don’t seem discretionary in nature.

However, any financial decision we make is discretionary. It’s just that sometimes, we exercise our discretion once, and we pay for the consequences of that one decision (or set of related decisions), month over month, for many years, without realising that each time, there’s a decision that could be made.

I remember reading (in the New York Times I think) that fixed expenditure represented approximately 50% of the average household’s budget in the 1950s and represents approximately 75% today. That’s enormous. 

Two of these “fixed” costs relate to housing and cars.

Two of the most impactful types of financial decisions you can make are how much to spend when buying (or renting) a home; and how much to spend on cars. 

So I present two ways to get ahead financially: buy less car, and buy less house. 

Less house

If you can pay your mortgage off 5 or 10 years earlier, the long-term financial impact will be enormous.

Think of all of the interest payments you won’t be making. And the repayments you were making on the mortgage will go towards building wealth that will in turn earn income and lead to a much more comfortable retirement, or put you in a position to help your loved ones, or enjoy your life that much more.

It’s not just the price that you pay on the house that you save. It’s the rates. It’s insurance. It’s the cost of heating. It’s the cost of maintenance. All of these costs add up.

Sure: if you buy a house that’s worth more, and property increases across the board, you might find yourself better off. But you might not. And as I’ve mentioned before, property has a number of qualities that makes it riskier than many people think. The counter to this is that reducing your exposure to property is reducing your exposure to financial risk.

Less car

Don’t get me wrong. I like cars. And I will eventually drive nice cars. But if you see me in a nice car, it is only because the rest of my financial house is well and truly in order. 

Two simple heuristics:

• Never borrow money to buy a car. If you can’t afford to pay for it outright, you can’t afford it.

• When considering your net worth – which, for most people, is the key metric you should look at – do not include the value of your car(s). Cars are depreciating, lifestyle assets and are not on the same level as assets that are likely to retain or grow in value over the long-run, like financial assets and property. 

Which is why, despite wanting to drive a Lexus RX350 and a Porsche 911, my wife and I drive an emasculating Toyota six seater and a Mitsubishi 4WD that has driven 475,000 kilometres.

“Less car, less house” – is that really more “wealth”?

I can empathise with those of you who might question this approach. We only live once, and we might as well spend our time living somewhere we love. And if we care about cars, we might as well drive the cars we want.

I agree that thinking about “wealth” in narrow financial terms is missing the point. Living the life that most clearly reflects your values and priorities is what it’s all about.  

So it comes down to trade offs. If living in a bigger house than you need, or a newer car than you need, gives you value, then that’s fine.

What I really advocate is being mindful when we make these trade offs. Because these “fixed” costs are expensive.

The cost of living in that house or driving that car might be working working longer and harder than you need. It might mean you’re less able to take professional risks, like starting up that business or taking that sabbatical. It means you’ll have less money available to travel, and less money for helping your loved ones in their journey through life.

These are hard decisions. But they are the ones that are worth the effort.

Related: Budgeting – some contrarian thoughts