Our story was recently shared with 8 million viewers on ABC World News Tonight. Awesome!
Hopefully exposure to a huge audience of normal people will inspire a few to think about retirement in a different light. If you haven’t seen the video yet, here is the youtube clip (less than 2 minutes.)
ABC World News Tonight
Overall this was really well done, capturing how we ruthlessly slashed all expenses to save 70%+ of our income. “They made their own soap, grew their own produce, and Jeremy even gave up his costly razor.”
Unfortunately, I think the hosts and many viewers reached the same conclusion: that we lived lean then, so we have to live lean now. (The opposite, really.)
And as the “Investing and Retirement Specialist” at the end stated: “It’s not fun.”
I disagree. Extreme saving was a means to an end rather than an end in itself. Our life is now the opposite of lean. And, like most self-imposed challenges, the journey was loads of fun.
But I think it is worth asking: Was extreme saving really necessary?
Does Extreme Frugality Really Matter
As I explained to ABC, if there was any magic we had it was that we were willing to live like college students longer than it is socially acceptable to do so. Along with earning a good income and staying healthy, this allowed us to aggressively save.
No expense was spared in our quest for freedom.
Analyzing our Budget
In the final years before we pulled the plug, our lifestyle was a finely tuned machine. We lived in a small student apartment, rode bikes, and ate most of our meals at home. And yes, we also made soap. And wine. And kombucha. And kimchee. And bread.
Total annual spending was around $20,000 per year ($1,650/month) in Seattle, which I outlined in full in the post GCC Accumulation Phase Expenses. This includes a couple free vacations each year using miles and points, and some of those “once in a lifetime events” such as getting married and going on a honeymoon (which also cost about $0.)
Some people will see this as extreme. Others will scoff… “You call that frugal?”
But, what if we didn’t do that? What if we “lived a little” – inflating our lifestyle rather than our bank accounts?
The Big 4
The Pareto Principle aka the 80/20 Rule is a great guide for optimizing anything, which is why throughout this blog I’ve recommended focusing on The Big 3: Housing, Transportation, and Food. These are the largest budget areas for most families. It is much easier to trim large amounts from rent or transportation than it is from things that cost little to begin with.
My main way of getting around for 2 years was a bicycle I bought on Craigslist for $50. I later sold it for $60, turning a profit on my transportation. (Plus: no gym membership and no road rage.) I also didn’t shave for most of that 2 years… but I’m pretty sure the non-existent car payments, insurance, gasoline, and maintenance were the bigger boost to our savings. Savings: $500-$1000/month.
A co-worker/friend once gave us a ride home. “You live… here? In this…. place?” Living in one of the new condos in his neighborhood would have doubled our rent, increased my commute, and complicated our lives…. we were 1-block from the grocery store, 1 block from the farmer’s market, a few blocks from the library, and 5 minutes from one of the best parks in town. Savings: $1,000/month.
We made most of our meals at home at an average cost of ~$2/person/meal, or about $200/person/month. We ate well, and our home kitchen was the best restaurant in town. As nomads we eat many of our meals in restaurants, and spend 3-5x as much as we used to. Savings: $1,000/month.
And for Big #4… For 2018, contributing the 401k max ($18,500) at the 22% tax rate will save over $4k in taxes. Put that $4k into a Traditional IRA for another ~$1k savings. Then put that $1k into an HRA for another ~$250 tax benefit. Turbocharge those savings.
Those are big numbers.
The Little Things
We experimented. Some things worked and became a part of normal daily life. Some things didn’t and were abandoned. But there is no loss in trying new things… we don’t need to live the way the advertisements show us how to.
What if we never made wine? Boxed wine is cheaper and better: $0/month
What if I shaved every day? +$10 / month
What if we didn’t share 1 cell phone? +$20-$100/month
What if we never grew our own vegetables? We always had kale and chard: +$10/month
What if we never made our own bread? +$20/month. (But our poor taste buds…)
What if we never brewed our own coffee? $30/month
What if we went to the movies instead of the library? +$30/month
(But… what if I had never read 100s of personal finance books?)
What if we always ran the heater and air conditioner: +$50/month.
What if we always used store bought soap? $0/month.
But which would you rather receive as a gift? Increased spending on gifts: +$30/month.
Seldom is it completely about the financial outlay, but the mindset and secondary benefits… entertainment, better skin, the joy of learning, understanding personal finance…
Did it matter?
We saved thousands of dollars every month on the Big 4. That seems important.
Let’s say we saved $200/month on the little things…
“You did all of that to save $200/month?! No thanks. I’ll just put that same effort into earning $200 more.”
That’s cool… why not both?
Maybe $200/month doesn’t seem like much, but it was still more than 10% of our entire cost of living. By comparison, the average savings rate in the US is less than 5%…
To support a $200/month spending habit would require assets of ~$60,000 based on the 4% rule. Whether $200/month seems like a little or a lot probably depends on if you view $60,000 as a little or a lot.
And lest not forget taxes… to buy $200 worth of stuff ($220 with sales tax) we would have to earn about $310… (22% fed, 7.65% SS.)
And finally… the difference between saving 70% and 75% of income is the difference between being financially independent in 7 years rather than 9. (Why? Short answer, Long answer.) How much you like your job and how much you like store bought soap probably weigh in on this decision.
Since nobody wants to “live like I am poor forever” we can work longer out of choice rather than necessity to support living large later. We did, and we do.
We lived lean. But don’t feel you gotta live lean. The Big 4 will get you 80% of the way there. There are financial benefits in going after that other 20%, but many of the advantages are secondary.
Taxes, Housing, Transportation, and Food typically comprise the majority of household spending. Rather than try to save money on these things, design your life around it. Make efficient spending the normal, natural, tax-advantaged outcome.
Whereas it is impossible to cut costs to zero, there is no ceiling on income. Reduce expenses and grow earnings. Both.
Work is an important and necessary part of saving, but we work better when taking breaks. Take regular vacations, but try to do so for free.
And last but definitely not least, enjoy the ride.
But that’s just me. “It’s pay now to play later.”