In the first two parts of this article series, we discussed how your lifestyle affects your ability to retire early and examined a couple thought processes to help you make sense out of quitting the rat race and the financial considerations inherent in such a bold decision. In the third and final post, I will talk about how to design a frugal lifestyle that enables super early retirement.
These techniques can work regardless of your age and income level, but as always, everybody’s needs are uniquely different.
I only ask that you consider these techniques with an open mind and apply them, if necessary, in a way that makes the most sense for your life. Some of these techniques may not apply to you while others probably will. My intention here is not to judge or lay blame on anyone, as I have been just as guilty as the next person in so many of these very same wasteful spending habits.
Design a simple early retirement lifestyle
This article series is designed around the concept of “lifestyle” and examines how crucial your style of life plays into your ability to not just retire early, but be happy, healthy and productive in your everyday endeavors. There is no doubt about it – the more frugal your lifestyle is, the easier it will be to retire early – and stay retired!
Consumer spending accounts for nearly 3/4ths of our nation’s economy. That’s huge! Take a look around you and note all the things that you call yours. Things like computers, cell phones, flat screen televisions, stainless steel kitchen appliances, upgraded countertops, nice furniture, a big home, cars and tools…everything counts. The stuff that you and I have accounts for driving our economy forward, spurring on growth and economic stability.
Of course, that is not to say that most Americans spend money wisely. Many don’t. For so many years, I made huge financial mistakes that set me back years in my working life. I am working to correct as many as I can, and more importantly, not make the same mistakes again. The minute that I decided to retire early is also the minute I needed to begin downsizing my lifestyle.
But I had to do it smart. I wanted to nix the things that I get no joy from, but maintain those things that genuinely make me smile. Instead of blindly whacking expenses out of my budget with a sledgehammer, I instead employed a much more reasoned downsizing approach, and one designed with early retirement in mind.
Allow me to lay out a 4-step process to make early retirement lifestyle design easy.
Early retirement lifestyle: Step 1
The first step in this process is to take stock of the lifestyle that you currently live and simply be honest with yourself. Things like unused gym memberships, expensive cell phone or cable/satellite television plans, magazine subscriptions and other entertainment-based services are stripping hard earned money away from Americans via easily-forgotten monthly fees.
Monthly fees are a killer to an early retirement lifestyle. They are automatic and generally slide in under the radar, especially for those of us who are less strict about budgeting and tracking each of our expenditures, which leads us into the next step of this process.
Early retirement lifestyle: Step 2
The second step is to know where your money is going. The more aware you are of each dollar that comes into and goes out from your bank account, the better equipped you will be to catch that wine club membership that you pay for but no longer use, or that extended service plan that you pay monthly for but never seem to use, or your subscription to an online dating web site that you promptly and meticulously ignore. How much is alcohol setting you back every month? Or those work lunches, or new clothes or that expensive dog food?
One way to start tracking expenses is to take some time and go through your bank and credit card statements. Look at each expense and categorize them. Categories might include Food, Restaurants, Auto Insurance, Auto Maintenance, Rent/Mortgage, Work Clothes, Casual Clothes, Gas, Entertainment, etc. Try not to group too many expenses into the same generic categories because these expenses can get lost in the shuffle and fail to indicate just how much you might be spending on specific portions of your life. For example, if you buy lunch at work every day, consider breaking this out into “Work Lunches” rather than including those costs in either the more generic Food or Restaurant categories.
Then, add up each category to get an idea of how much money you’re spending on particular portions of your life. Are you happy with those numbers?
This will take some time, so do not feel rushed. Whether you use something like Microsoft Excel or a hand-written spreadsheet does not matter. The important part is doing it.
By doing this exercise, we begin to realize where our money is being spent every month and whether or not our happiness matches those expenses. For example, my wife and I rarely watch television and found, through tracking our expenses, that paying for a more expensive television package brought no additional happiness into our lives.
Early retirement lifestyle: Step 3
The third step is save money now to benefit your future self. There is an interesting phenomenon at play in the United States. As the Fiscal Times reports, Americans tend to increase their savings during times of economic instability and then subsequently decrease savings when times get a little better. What does this mean for us? It means that Americans only save when they feel like they have to. When times are great, we blow through money like crazy.
Frightening stat: Americans suck at saving. Almost half of Americans save no more than 5% of their income every year. I repeat, “no more than” – meaning this range extends from 0% – no savings at all – to 5%, max. This abysmal level of savings is setting so many Americans up for a lifetime of work.
Our inability to save is exacerbated by inane media hype over “consumer spending” with blatant implications that the more we spend, the better the economy does. This Forbes report seems to sympathize with American corporations that Americans are saving way too much of their money and, therefore, aren’t wasting as much as they once had on mind-numbing American consumerism.
The report cited a savings rate in February, 2015 of 5.7%. Americans saving too much money? I think not.
For comparison sake, my wife and I squirrel away nearly 70% of our income every year. Of course, this means that we don’t drive a BMW or Mercedes, pay for expensive cable television service or have the latest in cell phone technology. But strangely enough, we’re also happier than ever. We never feel deprived. Instead, we feel ready to retire.
The second step in this process, where we account for our monthly expenses, will hopefully make our savings goals that much easier to accomplish. For example, keeping track of your monthly expenses might reveal that $200 a month that you spend on work lunches, beauty products, etc can instead be saved for your future enjoyment.
Establish savings goals, and set these incrementally as you slowly begin to take more and more control over your financial lifestyle. For example, if you don’t save anything now, start with 5%. Then after a few months, increase it to 10%. Then 15%, and so on.
I personally recommend a savings goal of at least 50%. Not only will saving half your income swell your investments and load them up with piles of cash, but you will begin to develop a more frugal lifestyle. Your expectations for “stuff” will diminish. Your desire to eat out at restaurants all the time will decrease. You will notice the difference that savings makes in your life and will begin to feel less stressed at work, especially if you don’t particularly like your job.
The ability and willingness to save is life-changing.
Early retirement lifestyle: Step 4
The fourth and final step is make better buying decisions that directly support your desire to retire early. Recognizing when to spend money and when to save it is an art as much as it is a science. And much of the time, the desire to spend money is all in your head.
There is nothing wrong with spending money. After all, we each need a certain collection of “things” to live our lives and maintain relative sanity throughout the course of our years. Stuff like televisions and DVD players, computers, beds, refrigerators, cars, homes, books, coffee mugs, jet skis, picture frames, plants, pets…
The problem? We all tend to over-buy. We also make impulse buys.
Cars are one of the things American tend to blow significant chunks of money on. Like I wrote about on this blog, I drove around a supercharged 1999 Corvette for several years of my life – a completely impractical car, expensive and unnecessary to the extreme.
It was a badass car. I felt like a badass while driving it. But it was a stupid purchase that drained tens of thousands of dollars from my bank account over the years. I completely over-bought in my automotive needs. I wasn’t smart about where my money was going in support of a perfectly legitimate need (transportation).
I needed a car, but did I need a Corvette? Or a BMW? A Mercedes? A Porsche? Maybe all I needed was a four-wheeled drivable machine to get me to and from work everyday – think a Honda Fit, Toyota Corolla or Ford Fusion. Something, I don’t know, reasonable!
Homes are another big expense that Americans tend to over do. When I first moved to Arizona, I bought a 1700 sqft home in the suburbs, about 30 minutes away from work. I was single, no pets. Of course, my two-stall garage had my Corvette and my hand-me-down Cadillac STS previously owned by my brother.
Huge home, full garage of cars, 30-minute drive to and from work every-damn-day. Another huge waste. Not only that, but I bought the home in February, 2007 – right before the housing market took a giant dump, plummeting the value of my home almost instantly.
Gadgets represent another significant expense, and we’re now getting into the more questionable area of “need”. Most of us have smart phones, me included. Some of us also upgrade every chance we get, sometimes standing in line for hours to get our hands on the latest gadget. Is this reasonable?
For you, it might be. For my wife and I, it isn’t. We both have smart phones, but we also aren’t quick to upgrade them. We have two very old tablets that we occasionally use to read at night and two smart phones. That’s pretty much the extent of our gadgetry.
We also don’t spend a lot of time on our gadgets, but we are definitely in the minority. A Nielson report revealed that the average American adult spends 11 hours a day on their gadgets. The American lifestyle of increasing reliance on gadgets is pushing our pocket books to the max with this type of discretionary spending.
Decide whether or not the money that you spend on gadgets is truly worth it.
Early retirement is a mindset
In the end, all of the decisions that we make to enhance our savings and reduce our spending ultimately comes down to a willingness to make a change in our life. Deciding to retire early is as much of a mental state of mind as it is a set of deliberate actions in support of your early retirement goals.
To retire early, figuring out how much your current lifestyle costs is critical to making the whole no paycheck thing work. And the less expensive our lifestyle becomes, the easier it will be to retire early.
Determining what truly makes us happy and only continuing to pay for those things will often reduce our monthly expenses because most of the stuff that we have, after a couple days, just becomes “stuff”. It loses its emotional value and no longer holds the shiny-new-object place in our life. So, why not save your wallet the trouble and resist the temptation to buy “stuff” in the first place?
In this blog post, we talked about the importance of saving as much of our income as possible and changing our spending habits from those of the typical American consumer to a future early retiree. In truth, whatever changes we make to our lifestyle begins with a willingness to make that change.
You may find that your life becomes easier to manage the further into your early retirement lifestyle that you get. As your wealth begins to build, your worry over your job begins to melt away. The sense of empowerment that we all get as our wealth builds is a powerful accomplishment that positively affects so many different areas of our lives.
Thank you for reading the “How to master your early retirement lifestyle” blog series.