There are many types of financial goals – some require a couple months of planning, but others require years or decades even. Arguably the biggest financial goal for (nearly) everyone is retirement.
Some of us are focused on bringing down the timeline from now to retirement from ‘decades’ to just ‘decade’. That’s still a long time to plan, but it is easier to visualize the goal of retirement when you hope to be there soon.
Background math
Using the 4% rule, we know that there are two things that we need to do to save for retirement in a frugal and efficient way.
- Get our monthly/annual expenses as low as possible.
- Invest everything else into money-producing assets.
The 4% rule implies (in our case) that we need 25x of our annual expenses to be invested in index funds to be able to have that investment cover our expenses indefinitely. The easiest way to make this faster is to reduce our monthly spending.
Reducing spending has a two-fold benefit. Sure, it lets us save a bit more of our paychecks each month, which is great. But, it also reduces the total amount that we need overall since decreasing our spending also decreases the (spending * 25) calculation!
The conflict
Ok, so this is great. If the only thing that we want in life is early retirement, then we should live as cheaply as possible, and we can probably save a shit-ton of money! We might be able to retire in five years.
Except that would be a terrible life. I agree. Fiancee and I both want to do more than just retire.
But, then what? How do we work to still retire soon without sacrificing too much? This is the conflict that every person working towards financial independence will face.
A proposal
What if we try that “terrible life”, just for a month? We were already planning to do a super-frugal January, but what if we try to get our expenses as absolutely bare-bones low as humanely possible.
I want to start out the month by fully paying off all credit cards, so that every bill we have on January 1st is $0.00, and the sum of our bank accounts will be exactly equal to our net worth. We can cancel all subscriptions, but also turn off all auto-withdrawals and transfers, to keep the numbers tidy.
We can spend money that month on:
- Rent
- Utilities
- Groceries, trying to be cheap and efficient
- Household necessities like toilet paper
- Minimum needs for healthy exercise
- Any health co-pays
- Any subscription services that would be very-bad to lose (like data loss)
- Anything necessary for work
At the end of the month, we can look at our spending and see how we did. This should be a theoretical floor for our spending, and we can see where we land on the “simple math” guess of how long it’ll take to retire like that.
I think that if we are really good and aggressive, we could probably save around 75% of our take-home pay.
Projections
The thing that will be really cool to look at from the results, is that we can project out our retirement date from that, using the “simple math” calculator. If we actually hit 70%, that is a retirement in 8.5 years. And it assumes that we never get a raise, bonus, or other windfall to boost the investment, and doesn’t take into account what we have already saved.
Then, we can use a calculator. If we want to add a new expense, we can see how much that increases our retirement date.
Advanced
To get really fancy, we can set up all of our investing and basic spending on auto-pay out of a single bank account. Our paycheck goes in each month, and the exact amount is sent to each necessary expense, and the rest goes directly into investments.
- If we want to buy anything one-off, we need to explicitly divert it from the investments (and see the hit that it causes).
- If we want to set up a new recurring expense, we can rebalance the auto-withdrawals to account for it (and again, visualize how it changes the retirement date).
How does this affect value?
It makes it much easier to prioritize what we truly value in life.
To me, spending $2000 on a bike is enough money to make me agonize over until I’m sick to my stomach (literally, this happened).
If I were able to put that in a calculator, with all of our expenses, and say confidently “this bike will cost me 13 days of retirement” (as a non-factual example). That is obviously a deterrent to spending frivilously. But I’ll probably get at least a couple hundred days of enjoyment out of this bike over the next several years, which makes it an easy win in terms of value, to trade for those retirement days.
How about a new Toyota Tacoma (a dream car I’ve had for a while). Let’s say it costs $44,000. That purchase might delay retirement by as much as 6 months, or maybe even a bit more taking into account the extra gas costs. Ouch. Are we willing to take it for enough road trips to get enough enjoyment to justify the cost? Maybe it’s possible to make a case for it, but it’s certainly not as plainly obvious of a win as the bike. If I was already retired, would I go back to work for 6 months just to buy the truck? That’s the better question.
The main goal here is to be able to make more informed decisions about our spending, and its affects on our financial goals. I feel that we already do a pretty good job of saving, but doing this experiment will help us to be more deliberate when we make purchases, and honestly will probably remove some anxiety for me as well.
Do we want to take a 6-day trip to Switzerland for $4000? Is it worth retiring 27 days later, for example? Maybe it is, if we do it once and it’s incredible. But should we take six of those trips in a year? Probably not!