If they came to hear me beg – More heretical thoughts on cutting costs

Much of the focus of FIRE devotees, and certainly the media coverage of FIRE, seems to be on cutting expenses to the absolute minimum possible and racing to hit FIRE as soon as possible.  It’s all about living on beans and rice, dumpster diving, getting your furniture from someone else throwing out their old stuff, living in a sharehouse or at home forever and the like. Myself, I don’t think that this is the best way to go about pursuing financial independence.

It’s not that cutting costs to the bare minimum won’t likely help you get to FIRE earlier because of course it will.  It’s that cutting costs to the bare minimum might make you feel that there are too many sacrifices being made and it’s all too hard so you’re going to give up entirely.

Because I am a huge fan of facts over feelings I wanted to see what the actual math on this looked like, and just how much of a difference it would make to have slightly lower amounts of saving/higher spending.

Getting your spending right

I’ve talked previously about big ticket items, these were things like buying a house or car, and how much you spend on education and holidays.  These are decisions that only really happen once or twice a year in some cases all the way out to perhaps only once in a lifetime in the case of buying a house.

Because of the huge amounts involved, the decisions you make about these items will likely have far more of an effect on how much you will be able to save and invest and therefore how quickly you will be able to reach your FIRE number.

All of them combined can easily mean another million in spending, and therefore a million less in saving/investing.  So getting these decisions right is crucial, they are the decisions that will get you most of your results. 

Hopefully it goes without saying (although I’ll say it anyway) that this also depends on what your income is like as well.  If you have a high income then there is likely plenty of capacity to save even if you’re not cutting costs to the bone.  If you have a much lower income and correspondingly can save much less, well then it has more of an impact.

Also, I’m not saying that you shouldn’t bother trying to cut costs.  What I am saying is that you should bear in mind when cutting costs what impact it will have on whether you manage to stick with your plan or not. 

If cutting out a cup of coffee from your local café each day is going to kill the only remaining joy in your life and you’re going to give up on FIRE as a result then don’t do it.  That’s not to say that you shouldn’t consider alternatives, just that if those don’t work then you’re better off buying the coffee and still saving plenty of money than giving up on FIRE entirely.

Cutting costs

I talked in my last post about cutting costs on your investment.  Cutting your investment costs is easy, it basically requires no sacrifice whatsoever.  Cutting your spending though means that you are giving up something that you were previously buying.  Maybe that’s something you didn’t really care about or were basically just wasting money on in which case it’s easy, but most of the time at some point you’re going to be giving up something that you enjoyed.

I’m going to state the obvious here again, the less you spend and the more you save the quicker you will get to FIRE.  That’s how the math on this works, and I’m all about the maths!  I’m also all about being realistic though, and the reality is that if you cut spending too far then you may well give up altogether. 

Oh no that’ll never happen to me you say!  A few months ago we started a new year, so there were New Years resolutions being made left right and centre.  Many of which were to do with eating healthier, getting into shape, and getting your finances under control. 

I don’t go to a gym any more for a bunch of reasons, but back when I did I was a very regular attendee, generally about 4 or 5 times a week every week quite consistently.  And every January the place would become absolutely packed, you’d be flat out getting on a treadmill or using weights etc.  By February as people found it all too hard the place would be a lot quieter, by March it’d be back to how it was for the rest of the year.

And similarly people are all about getting their finances under control, until they decide it’s all too hard and they give up.  It happens every year, you’ve probably even said it before and pulled the pin.  So yes, you obviously want to save as much as you can, but you want to make sure that you do it in a sustainable way.

Dave at Strong Money Australia had this post recently about making sure that your FIRE journey isn’t making you miserable.  Adventures with Poopsie also wrote about feeling the pressure to cut costs to the bone and ending up increasing her spending to improve her happiness, and as she says “the journey is just as important as the destination and that is what makes it worth it to us.”

Taking longer to get to FIRE is far better than giving up and never getting there at all.  And there is certainly a case to be made that it’s actually better than getting there earlier if you’ve enjoyed the journey a lot more than you would have otherwise, because for all but a lucky few it’s going to be a pretty long time to get there anyway.

So what does the math on this look like you ask?  I’ve taken the assumptions from my last post and assumed again that the steady rate of return is 7% (yes I know that’s not realistic but it makes it a lot easier to calculate), and in the base scenario you’re putting in an extra thirty thousand dollars a year from your own pocket, then run it over 20 years so you end up with about $49,000 based on a 4% withdrawal rate.

All of the other scenarios have various amounts taken off ranging from $200 a year which might buy you a pastry or a coffee each week or a cheap weekend trip away once a year, to $500 which might be a lunch out each week, $1,000 for a cheap domestic holiday each year, $2,500 for a trip to somewhere in Asia, $5,000 for a trip to Europe, $10,000 for a bunch of the above and $20,000 for maybe all of these.  Why yes I do think about food and travel a lot, how did you know? 

If that’s not what’s important to you then you can come up with whatever reasons you want to explain the extra spending and reduced spending.  Maybe for you it’s a couple of concerts or sporting matches, a slightly nicer car, more money on video games, sending your children to a private school, whatever floats your boat. 

Please also note that all of the above examples that I’ve listed don’t mean those are the only luxuries in your life, it’s just an example of what that additional amount might buy you.  So you might already be spending $5,000 on eating out each year, the $200 just buys you tickets to a concert or sporting event.

In any case, what do the numbers look like?

You can see that the extra spending  in these scenarios makes a bigger difference than most of the investment costs in my post on cutting investment costs, this is because it’s a bigger change in the percentage of costs.

As a result you’re fairly quickly looking at the difference being a decent amount of money, as $40k would cover living costs for some people for a year, and after that you might very quickly be looking at a year worth of spending even for someone aiming for HIFIRE like myself. So that’s not fun.

This is where it gets interesting though, because it doesn’t actually take that much longer long to make up that difference as you can see below.  I’ve updated the figures in the year row to show just how much longer it would take to get to roughly the same portfolio size. The $ Difference row shows you that by changing the amount of time taken the $ difference is near enough to zero.

At a 7% annual rate of return on about 1.2 million, it’s less than one month more of working to hit FIRE if you were saving $200 less each year.  A bit over 2 months for $500 a year in extra spending. Just over 4 months to make up the difference of saving a grand less which might have bought you a pretty good domestic holiday each year. 

Even the bigger numbers don’t require as long as you might think.  Two and a half grand spent on a holiday to somewhere in Asia each year will only need you to work for another year compared to if you’d saved it all instead.  You think maybe that holiday each year made the journey a lot more pleasant and helped you stay the course?

If you spent five grand on that nearby holiday and had yourself a coffee and the occasional meal out then it took you another two years to get there. Even saving ten grand less each year only took 5 years longer.  I’m pretty sure that spending ten grand extra each year you could have a pretty pleasant journey to FIRE and you might be quite happy to work another 5 years.  It’s basically starting at age 25, finishing at 50, and whilst it might not be quite as early as you dreamed of you had a great time along the way.

I’ve left spending an extra $20k a year in as a bit of a cautionary tale, but it can actually be interpreted as a positive story as well.  If you’re saving $10k a year then it basically takes you 33 years to get to the same place as you could have been in 20 if you’d saved a lot more, although you’re still retiring nearly 10 years before you’d be eligible for the age pension and still have plenty of good years left.

It’s not the goal of everyone to retire super early, and some people quite enjoy working so long as they get a bunch of niceties along the way.  In which case you would have worked 33 years, hopefully enjoyed some nice holidays and a nicer car etc and now you’ve got around 1.2 mill saved up and it’s probably happy days.

What about if you want lean FIRE or HIFIRE?

The scenarios I’ve looked at here are all pretty much looking at regular FIRE given that after 20 years in the base scenarios you’ve got about 1.2 million bucks and are pulling down about $50k in income assuming a 4% withdrawal rate.  What about if you only want a mill to draw down $40k a year? 

Obviously you’ll get there quicker in all scenarios, but it actually doesn’t really change how much longer you will need to work for.  In fact you get there slightly quicker compared to the base scenario because your savings rate is doing a greater proportion of the work in the earlier years than it is in the later years when your investment returns become much more important.  So you’re looking at very close to the same amount of extra time needed for the different savings rates, albeit slightly less in most cases.

If you want to draw down $70k a year instead and go for HIFIRE then it will take longer to get there in all scenarios, but again the difference isn’t huge.

So what should you do?

As I’ve said a few times now, obviously the more you cut your costs and therefore the more you can save, the faster you will likely get to FIRE.  Yes you want to cut this as much as you can to get you to FIRE sooner, but you also want to make sure that you aren’t cutting so far that you’re not enjoying life and are going to give up on FIRE.

It’s very easy to be overly ambitious with your cost cutting goals, but it’s far better to be realistic and realise that you’re probably not going to enjoy living like a hermit for 15 or 20 years and will give up at some point.  Likely before you’ve even really started your journey!

Trading off working another year or two (or potentially far less) in exchange for a much more enjoyable and sustainable journey makes a lot of sense and means you’re much more likely to end up where you want to be, financially independent and retired at an early age!