Radical Saving Commentary
I have a personality and a mind that enjoys challenging the mainstream, status quo. If you read my blog, you know I offer opinions on things such as diversification, retirement, income and even home ownership that is not the mainstream views on these subjects. Part of this natural thought process is genetic for me, and I think part of it is that I have read with an objective mind many compelling arguments for such challenging views. The traditional savings and retirement equation needs to be challenged I think.
I’ve spent a great deal of time pondering saving, personal finance and the idea of early retirement recently. What has become apparent is how silly the overall retirement picture is for the majority of Americans. If you take a step back and think about it, we basically spend our entire life, saving way too little so that we can enjoy our older years with freedom. The funny thing is that our older years are often filled with aching, tired bodies and we don’t feel like doing much else than watching TV. We waste our best years sitting at desks in offices!
The other part that strikes me is just how much we overconsume during our “prime years” . The overconsumption naturally leads to undersaving. What if we were to flip this equation. What if we underconsumed and oversaved? Then, wouldn’t it mean that retirement comes earlier? Would you trade an expensive lifestyle now for more freedom, earlier in life and for a longer duration in life? Maybe.
If you look at history in the modern economy in our country, you will see a history of undersaving. Why else would we need to enact Social Security or Unemployment benefits? If we oversaved, we’d have plenty to retire on and we’d have a large cushion if something unexpected happened such as losing a job. Instead, our policies are to encourage overconsumption (in the name of economic growth) and undersaving (in the name of government dependence). Financial independence is something that politicians pay lip service to but nothing more. As financial independence continues to erode, the natural result is the growth of government. Growth of government always results in loss of freedom and liberty on the individual level. Over the coming years, if the stock market is ugly, you will see more and more leaders discussing 401(k) reform in an attempt to take over retirement funding completely (it’s already started).
What would be radical saving?
Most people don’t save anything. The “financially responsible” save somewhere in the 5-10% range. You can easily make an argument that 5-10% savings is far from enough to achieve the kind of retirement that they desire. Radical saving, the kind that can result in early retirement, must then be much higher than 10%. I think radical saving would be saving anywhere between 35-50% of your after tax income. Wouldn’t that be nuts!
Is it possible? Could you really save that much of your money? Of course you could. It would just mean having a drastically different lifestyle. It would probably mean renting a modest apartment or home, rarely eating out, owning one car instead of two, enjoying free quality time with one’s family instead of expensive entertainment, being extremely frugal with utilities and bills, etc. All of that is of course very possible, but rarely at best executed. There are two forces that work against this: 1) obviously a more expensive lifestyle can potentially be more enjoyable and 2) we feel the pressure of society and our neighbors to live like everyone else (also known as keeping up with the Joneses).
My saving situation
The interesting thing is that most people would at least consider this a decent trade off if they could be financially free and retire early (in their 40s, maybe 30s, or even better?). I know I would at least consider it and often still do. The forces working against me are 1) I “own” a home and am somewhat locked into the piece of real estate therefore it is tough to slash my housing costs, 2) I have a wife and baby and while I may be ok with cutting our lifestyle significantly, I have to consider my wife and what she wants (more important than money), and 3) I’m locked into a job at this point where I need a 2nd car.
In order to approach a solution, I should consider the following: 1) if i must stay in my house, look into a refinance to lower my mortgage costs. Also consider slashing utilities and bills such as cable, internet, lawn service, etc., 2) have discussions with my wife to find areas where we can cut back – the first one that comes to mind is cutting our gym membership, 3) keep pursuing a career where I’m either my own boss (start my own business) or reposition myself with my company where I have more flexibility and freedom and get past the regular 9-5 hours – maybe at this point, i can work remotely and get rid of a car.
Radical Saving & Reality
Even though it’s fun to think about the idea of slashing my living expenses by 90% and eating rice & beans every night all while putting away $3-4k each month in savings, I know this isn’t realistic. I have a wife that has needs and I definitely have a baby that has needs (diapers, formula, etc.). There are some costs that i won’t be able to slash. So, the goal then, for someone in my position is to find a compromise. As I mentioned above, the gym membership is a natural place (save $70/month). Maybe I get rid of cable ($100/month) and we rent movies and watch big games at a friends house. Maybe I share an internet connection with my neighbor (save $20/month). Food costs can easily be slashed since we eat out a decent bit – $60 for sushi isn’t exactly frugal. While we still have 2 cars, we can be much smarter about combining errands and cutting trips to save gas. I am considering buying a lawn mower and cutting my own lawn – ($100/month).
I’ve already listed several things that would result in saving several hundred bucks a month extra from where we are now and without altering our lifestyle significantly. Well maybe cutting our cable with be a pretty drastic change. But it’s still worth discussing.
The next step from here is focusing on income. I’m committed to finding new income streams and maximizing my current ones. Increasing income with decreasing expenses equates to some serious cash being built up in your savings. Throw in the potential for significant returns on your money that you save, and your financial picture starts to become beautiful. Your 20s are easily a time to execute some of these ideas. You probably have fewer ‘fixed” expenses then you will for the next 20-30 years (family mostly). Get a head start. Get 20, 30, 100, even 250k put away in your 20s. You wouldn’t believe what is possible. Question every expense and find new ways to increase your income.
This article was featured in the Money Hackers Carnival.