Since I engaged on the path to early retirement, I’ve been able to significantly decrease my family’s expenses. This year so far, we’ve been saving 60% of my after-tax revenue. The result has been extremely positive, with a 29% increase in our net worth so far, putting us on a good track for financial independence.
The best of all this is, many of the things we did, did not require any sort of sacrifice. Some of the things we did will not work for everyone, but many of them are reasonably straightforward.
Savings and sacrifice
A lot of people equate “increase your savings rate” with “sacrifice some of the stuff you love doing”. I’ve had that kind of discussion with friends a few times when I first pitched the idea of Financial independence to them.
It turns out, for many things, that this is not true. What you choose to spend your money on is really up to you, but if you look into your expenses, you’ll likely find out that many of the things you spend money on are the result of “following the herd” rather than spending money on stuff you actually enjoy.
The concept of “spending money is not a sacrifice at all, it’s about finding what really make you happy in life” has been beaten to death on other FI blogs so I’ll leave it at that… for now.
Increase your income, decrease your spending
There’s nothing groundbreaking here, but it is worth once again emphasizing that you have 2 ways to increase your savings rate: decreasing your expenses, and increasing your income. Also, have many have stated before me, it is in general much easier to decrease your expenses than it is to increase your income, yet most financial blogs tend to focus on the “increase your income” part (in particular blogs that want you to believe in get rich quickly kind of schemes).
I have “chosen” to do both, and have found it to be the easiest way for me to ensure my path to financial independence. Some of the things we did this year were “one off” changes that will not have a lasting impact, others were drastic changes in our lifestyle that will have a long term impact.
It’s worth mentioning that we are a reasonably frugal family, and that we were already in a “good” income zone prior to this year. Nevertheless, my numbers show that we were saving 30% after tax last year, and we are now up to 60% this year. It’s awesome to see the results to our net worth almost instantly, too (although we’re now reaching a place where stock market changes have more impact on our wealth, than our savings rate).
So what did our family do to increase our savings rate from 30% to 60%?
1. Budget correctly and be more aware of expenses
If you’re just starting with the whole Financial Independence thing, and there’s only one thing you can remember out of this article, it should be this section.
The first move to increase my savings rate was a complete shift in my way of thinking. Although my wife and myself were pretty frugal, I did not care about closely look at our expenses. My wife did, and it led to many heated debates between the two of us. My financial goal in life had always been to “make enough money that I don’t have to care about it”. This worked fine only because I made quite a large amount of money and because I didn’t have any huge crazy “wants” (yeah, we don’t call those “needs” in the FI blogosphere).
The turnaround point was becoming so annoyed at my job that I became painfully aware there might be a day I would hate working so much that I would not be able to provide for my family anymore. Being the only income earner, and with 2 kids, this frightened me dramatically. I jumped onboard the “let’s check our budget” train with my wife, and things have changed dramatically since then.
It’s one thing to go out with colleagues once a week, and think it’s not a big deal financially. It’s a complete different story to actually track that kind of expense monthly, and realize it’s costing you several weeks worth of salary every year.
As many other bloggers have mentioned (or the very famous book your money or you life), once you start looking at your expenses seriously, you find many things that you just don’t need, that are very easy to reduce or cut entirely. Most of these are not necessarily big ticket items, but they easily add up. They also, in our case, were the easiest things to cut off, for no additional pain or constraints in our daily life.
Tracking my budget also stopped a very bad thing I was doing: allowing myself to spend more on small ticket items after a big ticket expense. Specifically, I recall a year where we had to spend more than $10’000 in hospital bills. Compared to that insane cost, I did not feel bad at all going out for lunch every single day. What’s $10 compared to $10’000, right? I told my wife more than once: “we’ve just spent $10’000 in hospital bills. Why do you care about spending $1 less on eggs by getting them at a discount?”. It turns out she had the right attitude, and I did not. Budgeting allowed me to turn things around in that aspect.
And yes, it involves writing things down in a spreadsheet diligently, but I swear, you’ll love that spreadsheet after a few months, only the first few months are painful 😉
2. Change jobs when opportunities show up, and do not increase lifestyle as the result of a pay raise
I had a job change offer from my company last year, to relocate from Japan to the US. The offer came in with a 35% bump in my salary, without even negotiating. This happened because salaries are generally higher in the US, and the Yen was under heavy pressure right at that time. It was basically a combination of luck and being willing to experience new things.
Not everyone will get an offer from their company to relocate from one country to the other, I get that. On the other hand, not everyone would actually seize the opportunity if it showed up. I hear a lot of people saying they would “leave the US in a blink if taxes increased”. The reality is, most people I know would never have the guts to live in another country than the one they were born in.
Bottom line is, it’s not about the change of country, it’s about being willing to take job opportunities when they knock on your door, or make sure you make such opportunities happen for you.
Of course, the international move had its set of difficulties, but the main thing to do was to ensure we would not increase our expenses by moving to a new place. Overall, we’ve been fairly successful at that, meaning that the salary increase has been a significant bonus to our overall savings rate.
The takeway point here is, make sure to not increase your lifestyle when you get a raise. This is the mistake number one and why most people will never be financially independent.
3. Reduce your recurring expenses
Some financial bloggers have stated that your $5 morning Latte at Starbucks is not what’s preventing you from becoming financially independent. That’s true. A morning Latte at Starbucks is not going to kill you budget. A morning Latte every single morning of your working life, however, is a sure way to kill your savings. (hint, that’s roughly $100 a month in coffee).
This is why it is essential to focus on reducing expenses that are recurring. In my case, it was focusing on my lunch routine and my phone bill that did the trick.
I’ve described this in another article, but I chose a phone plan that works for me, and stopped eating out for lunch, for a total increase of $2700 a year in savings!
What’s important to emphasize here is how these changes had no direct impact on my happiness in general and are not sacrifices. For the phone plan, I just switched to a plan that was more adapted to how I use my phone (more data, less voice). For food, I engaged into a more healthy habit of eating a salad for lunch, which is much less expensive (I make it myself) and much, much more healthier than my former habits (which included a burger every friday).
Lunch and Phone were my two big expense reductions this year. For other people, it could be a decision to switch from cable to Netflix or Amazon Prime. Or it could be to cut down on groceries, or your utility bill. The essential takeway point here is that recurring expenses are the ones which will have the bigger impact on your expenses long term.
4. Work on a side gig
I’ve mentioned it a few times on this blog, I have a side gig, which is a website. That website brings a significant amount of additional income to our household, and I have focused significant amounts of effort in 2015 to increase that side income. I’m happy to see that it’s on track to improve by 25% compared to 2014, and hopefully the numbers will stay at similar levels in the years to come.
These numbers fluctuate a lot of course, but try and get a 25% increase in your salary this year… yeah, that’s tough unless you change jobs. Investing in myself has been a good decision so far, and I’ll spend hours on my hobby more willingly than on my day time job.
5. Choose to not own a car
My wife and I chose to not own a car. This is a decision that has had good and bad consequences, but overall the result is extremely positive.
Not everyone can choose to get rid of their car. The choice was easy for us because we hate driving so much, that it helped us define where we wanted to live (a very walkable area close to my office), but for many people, owning a car is more than a convenience. In the US, cars as such a part of the everyday life that owning *only* one car is considered a sacrifice, so most people here think I’m crazy when I say I own zero.
It’s still worth keeping in mind though. The health and cost benefits of not owning a car should not be underestimated. We save an average of $10’000 a year by not owning a car. Given this value, we were ok with spending a little bit more on housing (our rent is expensive) to live in a walkable area.
My household worked on increasing revenue and reducing expenses. Reducing expenses has had no negative impact on our lives, despite what many people might think. Increasing my income has, on the other side, had significant impact on my lifestyle: a change of countries, additional hours to work on my side gig.
If you were to choose only one of these 2 sides of the FI coin, reducing your expenses is by far the easiest of the two. But a combination of expense reduction and income increase is what can turn a “10 years til’ Financial independence” into a much faster result.