So before we even get started, let’s discuss why we would want to save that much money anyway. Blogs like Mr. Money Mustache have popularized the idea of FIRE or financial independence through early retirement.
I love reading articles on that site and the like. As a relatively new FIRE devotee (about a year), I quickly learned that saving 50% of your income is not only possible, but easy. My wife and I were able (over the course of a year) to save about 55% of our income, boosting our savings and investments significantly.
Applying a little bit of the Pareto Principle (80/20 Principle) we can assume that some lifestyle changes and budgeting principles will create more of an impact than others. In my experience, the three most important factors have been: 1) choosing a home that is affordable, 2) choosing a car that is affordable, and 3) planning (specifically meals and trips) in advance.
I specifically wrote this article with normal people in mind. People who are not necessarily high income earners, but those who work and have a reasonable amount of discipline. I found that the median household income in America is about $60,000. So any theoretical calculations will be using this figure. Please adjust to meet your income. Now…let’s get into it…
Choose an Affordable Home
A good rule of thumb is to choose a home that is 2 to 2.5 times your income. So for our imaginary household, that would be a $120,000 to $150,000 home. Translated into rent, you would be looking for a place for about $1,200 a month. My wife and I (we are both public school teachers) live in an expensive metropolitan area, and we have a dual income. Strangely enough, our humble abode comes in at 2.28 times our yearly income.
Now for the why. Simple. Your house is the BIGGEST financial purchase you are likely to ever make. Think about that…chances are this is the most expensive thing you will ever buy. Sobering thought.
When you choose to buy a home well within your means, you can free up large amounts of money. Be realistic. If a neighborhood has good schools and is safe, how much more would you really enjoy living somewhere else that much more? Don’t become “house-poor”.
Choose an Affordable Car
I proudly purchased my first car for $8,000 CASH in 2011. To date (2019) it is still running strong and I have reason to believe it will last me at least another 3 years and likely more.
Recently I was getting routine maintenance done on my car and I saw a sign that said “Your car is the second most expensive item you are likely to purchase, make sure to take care of it”. To be honest, I was shocked when I read that. I mean…I know it’s true, but I just never let that reality sink in.
Here is the deal with cars. If it is reliable, runs well, is clean, and meets your transportation needs, any car more expensive is just a flex. Think about what you get from a nicer car. Probably just a few compliments and a much bigger car note. No one really cares what you drive, and if they do, they probably aren’t financially independent. Now, to be clear, flexing is cool. Just be acutely aware that it is just a flex and can cost you a lot both in the short and long run. Flex carefully.
Plan your Meals and Trips
Before I considered the idea of FIRE, I didn’t pay too much attention to my purchases. I knew we had enough money to cover our major expenses, so I just had fun eating out and buying little gadgets at my leisure.
It wasn’t until I started looking closer that I realized that these seemingly small luxuries were costing us several hundred dollars a month.
Once we realized this, we began planning our meals for the week. We found that when we did this, we could keep our grocery prices reasonably low and still enjoy the occasional fancy dinner with no financial strain and still hit our savings goals. You see, it is one thing to decide Friday night that you are going to go to an expensive restaurant and it is a whole other thing to plan it on Sunday and think all week about spending $100 that you could be saving. We still enjoy the nice dinners and frequent vacations, but we are much more money conscious in the process.
We also give ourselves an allowance. $150 to buy whatever we want that month. I have gone a number of months spending only a fraction or none of my allowance. It seems that frugality is a muscle after all.
In closing, these are the strategies that helped our family go from saving ~20% of our income to over 50%. Please feel free to use them and let me know if they worked for you too! Until next time…