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Freeze That Spending

A common theme in our articles is that we have focused a lot on how we have been able to execute our plan for financial independence and early retirement through establishing and maintaining a high savings rate. When it comes down to it, there are really two ways to achieve this from a strategic point of view and that is to:

  1. Cut total spending
  2. Raise total income

Easy right?  Well, not really because most Americans barely save 5% and wish they could save just 10-15% of their earnings.  Accomplishing the latter goal only puts them on track for a traditional retirement, which means, working 40ish years of their life.

Now, if you can get up to a 50% savings rate you can retire in just fifteen years and if you can get above a 75% savings rate you can retire in just eight years. What a difference, right?

The key to our savings rate success and how we were able to accumulate over 2 million dollars in just 15 years of work has been to keep our lifestyle consistent throughout the years.

Just the other day I came across a spreadsheet from over ten years ago that showed what our annual budget / spending was back in the day when we were still living in an apartment together. I was amazed at what it uncovered. As you know, our 2017 spending target is $39,000. Wouldn’t you know, looking back at that spreadsheet, our actual spending in 2006 was $38,000. So in the course of 10+ years, we really haven’t changed our spending habits, despite increases in salary, inflation, etc.

We have been fortunate to be valued in our careers at our respective companies (or fought for what we knew we were worth), which means that over the course of this period we were able to grow our incomes from a combination of merit increases and promotions. However, whenever these events took place we treated them as if they never happened from a spending perspective.  When we got a raise, we would simply increase the automated transfer from our checking account into our investment account by the after tax value.

While this seems simple enough, it’s not what most of our friends, family or coworkers would do. So what do most people do in this situation?

  1. Trade in their current car for a “higher class” / “fancier” car
  2. Buy a vacation home or move to a bigger place
  3. Do home renovations
  4. Fill up that newfound space with “stuff” – furniture and electronics
  5. Going out to eat more and at more expensive restaurants
  6. Paying someone else to do things they used to do such as:
    1. Lawn care
    2. Snow removal
    3. House cleaning
    4. Mail order groceries
  7. Making a habit out of going on fancier vacations
  8. Buying toys like jet skis, ATVs, snowmobiles, boats

So what’s my suggestion?  JUST DON’T.

This type of behavior is how a family making over $100,000 ends up living paycheck to paycheck.  Lifestyle scope creep is a thing.  It gets to the point where you get used to all of these things and it becomes painful to cut them out.  It feels like taking a step backwards on your progress or status.  Personally, I would rather be financially free than cool in the eyes of others.

So if you have done everything you could do to cut spending… meaning that any more cuts would be a severe quality of life issue… then settle on FREEZING your spending budget. 

Then focus on being as awesome as you can be at work and earn yourself some merit increases or promotions.  If your company doesn’t appreciate you, find something at another employer; you will probably even get a raise as an incentive to leave and join that new employer.  Next, start investing any increase(s) in salary you received and preferably as automated as possible!

Don’t fall into the same trap of spending when your income grows or you will be back where you started.

So let’s say you are making $50K after tax and you are only saving 5%.  What would it look like if you froze your spending budget and hustled your income up?  The assumption I’m making is that you are a hard worker and are aggressive in seeking promotions.  Under those circumstances it is reasonable that you could get a 10% promotion every three years internally or through changing companies.  In the off-promo years you could get merit increases averaging 5%.

Getting 3 promos and being ranked highly against your peers pays off.  In 10 years you can reasonably double your salary.  In nine years your savings rate would be over 50%!

Well, you could do even better than that.  If you make some sacrifices, that don’t hurt too badly, perhaps you could get your savings rate up to 25% closer to the beginning. If you then make the same income increasing hustle mentioned above over the course of a decade and freeze your spending you can achieve over a 50% savings rate in just 6 years!

This is a super simplified “back of the napkin” approach to display the power of freezing your spending. 

I think it is useful in conveying my point but I have to admit, there are other factors I’m not considering here such as:

  1. Inflation
  2. Further optimization of spending habits
  3. Impact of dividend income from your newly invested savings
  4. Impact of growth in principal in your investments on your total savings
  5. Tax considerations
    • More contributions to 401ks / HSAs (lowers effective tax rate)
    • Higher tax brackets (raises effective tax rate)

We as humans are generally pretty terrible at long term planning but knowing this can work in your favor. Making a sacrifice today for the future you 10, 20 or 30 years from now is just not how we are wired.  If you can acclimate yourself to a lower spending level now and be HAPPY at that level for a long enough period of time, early retirement is very achievable.

The earlier you make this change, the earlier you can be on the path to achieving your early retirement dreams. You are empowered to make the choices today that will positively impact you tomorrow. So what will you do? 

 

 

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2 Comments

  1. Daniel

    Great post that covers a lot of ground. You are right about the need to control expenses as your income increases. I was with you on your list, until point 8. Everyone needs jetskis.

    Reply
    • FI Girl

      Daniel – Thanks for the feedback! Of course you have now started a great debate in the FI Heroes household on the value of jet skis and impact on FI/RE.

      We both agree jet skis are awesome; no question about it. But how do you get the maximum value? Do you rent? Do you buy? If you buy, do you buy new or used? Perhaps it depends on where you live or how often you plan on using you jet ski. (See what you started?)

      Other than the fact they are awesome, we also agree that jet skis, while fun, likely will not get you to FI faster (unless you are a pro) but if they are high on your happiness scale then they are totally justified.

      Reply

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