You Can Only Cut so Much From Your Budget

New Mexico Big Jim Pepper Seedlings

This week I thought we’d talk a bit about budgeting, frugality, how it all ties into FIRE, and how you can focus these efforts to do the most for you. I know I’ve seen similar posts before, and although I couldn’t pull a specific example off the top of my head, I thought I would give my two cents on the well-trod ground anyway.

Much of the FIRE community extols extreme frugality as a virtue. I think higher amounts of frugality are great, even if it won’t work for everyone. That or what I consider extreme frugality is different than what clothes mean. As always, I’ll try to be the devil’s advocate against my position here and hopefully add to the discussion.

Frugality is a muscle

I’ve seen frugality described as a muscle in a lot of examples. See this Mr. Money Mustache post. I like this analogy a lot since it leaves room for growth. You’re not just flipping a switch and suddenly becoming super frugal, you have to work for it. I’m still working on this muscle myself, there are parts of my budget where I could be more frugal. Maybe it’s just me cutting a small bit from my budget by doing it myself or finding a cheaper alternative for something I already buy.

But just like learning a language or lifting, each time you use this skill, it gets easier.

You can only cut so Much

But when you get to brass tacks, there is still only so much that you can cut out of your budget.

Reaching your FI target, be that maintaining your current lifestyle or having the bump in income to live your ideal lifestyle, requires an amount of cash.  Even if you start living in a van in the woods, bathing in the river, and dumpster diving (one of the only situations I could envision where you could potentially save close to 100% of post-tax income) until you reach FIRE there’s still only so much that you could cut out of your expenses.

The other side of the equation

As always there are two sides to the equation. Income and money spent (or outgo as I call it). If you can only cut so much until you’re camping down by the river, what about the other side of the equation?

You can pretty much always increase the income side of the equation. Either take on another job, increase your skills, start your own business or any of the other roads to Rome. I agree with the general sentiment that it’s a lot easier to increase the income side of the equation. This allows you to more easily make the math line up living in a bush down by the creek.

But is living next to some lichen down by the river the best path to FIRE or are we at risk of becoming just as extreme as the CEO living paycheck to paycheck on the hedonic treadmill?

As I’m the only person I have as an example for all of this I could, if I wasn’t as much of a nerd, see myself doing this. Spending most if not all of my take-home pay after maxing out my 401(k) and buying very nice things on leverage with the excuse that as my income grows I’ll start to set aside the extra without ever doing it. That wouldn’t be the ideal life either.

The middle way to FIRE

The big issue with either end is the ability to keep with it when you reach those extremes, be that the pure hedonic treadmill or extreme austerity.

If you’re cutting down to the true bare minimum; living in the cheapest place you can find, not using your utilities more than necessary, eating rice and beans, and so on. For some people, that might be all they need. But for someone such as myself, that amount of cutting back would make me miserable. On the flip side of that, if you’re blowing your paychecks every month, eventually you’re going to slow down as you age.

Instead, I fall somewhere in the middle, probably more on the spendy side. Just looking online I can rent places for as cheap as $700 in my area, which would allow me to save an extra ~$600 a month, I could cut back to rice, beans, and ramen for every meal, and I could take my daily showers at work, and so on. I could probably cut back even further if I even set my mind to it.

But would I enjoy that lifestyle? For some, the answer may be yes, and that’s fine. But for me, that’s not really how I want to live on the way to FIRE.

Enjoying the journey is a piece of advice I’ve seen from a lot of people in the FIRE space especially after they’ve achieved FIRE. I think this is a great bit of advice for those starting on it.

To put it more succinctly, FIRE is about designing the life you want not the life others think you want. While, especially from a personal finance angle, delayed gratification is essential, it is just as important to remember that you’re living now. Spending a bit on yourself now to enjoy life while designing the life you want isn’t a bad thing. Buy your weekly coffee if it improves your day but don’t buy a fancy coffee machine if that’s not your thing.

The Diminishing Returns of Saving more

Unless you plan to live that same lifestyle after you hit FI, it probably won’t speed up your progress to FI by all that much to save much more past a point. As shown in this Of Dollars and Data post the higher your savings rate the less it affects your time to retirement, even if it doesn’t quite get to the numbers usually seen in the FIRE community, is being miserable for several years worth being able to retire a few months, maybe a year or two, earlier? For some people the answer would be yes, reaching FI is worth that extra amount of misery, for me I think I’d be fine working an extra year or two if that means I can enjoy my fancy loose-leaf teas.

This also brings me to one of the problems I see with the usual advice of taking your expenses and multiplying them by 25 to get your FIRE number and that being the end of it. It works for a ballpark estimate while you’re farther away but it doesn’t take into account that things change once you hit FIRE. Life goes on and your expenses change. Your plan should have some wiggle room in it, assuming you don’t think the 4% doesn’t already give you some of that wiggle room.

Granted my only suggested improvement is to see what it costs others doing similar things to your goal and then tweak it based on the data you have where possible. For instance, there are plenty of budgets out there for people living a geo-arbitrage style, you can start there and then adjust as you go, say, buying more food or spending less on entertainment when traveling compared to what you find out there.

So what should you cut?

All of this brings me to the question of what is best to cut. As usual, it depends. You should cut the expenses you can do without or have at a lower amount. For example, I don’t mind being hot, I don’t plan to turn on the AC all summer, those 95F days were pretty rough though. It’ll have to get pretty hot before I’ll be willing to do so. With a little bit of wiggle room for differences in the use of my other utilities but it looks like that will save me about $60 a month.

Another example of stretching my frugal muscle is cooking my food. I’ve become comfortable enough with cooking that I can just make my food rather than going out to eat. For instance, the gyros I made in May cost me about $5.52 each. Looking at nearby places I’ve seen them going for $7.70, $8.25, $8.99, and $10. I can’t comment on the quality of each, but that leads to a savings of about 28% to 45% depending on which you pick. That’s a pretty good amount of saving for doing something I already enjoy. Granted I’m making some bold assumptions here. Namely that I’m making the same size gyro as these places and are identical (for instance the $10 gyro comes with fries) so maybe knock a dollar or two off the price or add a $1.50 to include my trail mix. I still come in a little under.

I’ve also gotten comfortable seeking out recipes, my library has plenty of cookbooks and the internet is great for finding things I like or think would be good to try. Usually, I grab a cookbook on a specific region, say a Chilean cookbook, and thumb through to see what recipes sound good or are interesting. It’s how I discovered Halva after all.

On the flip side, I like my morning smoothies. It is one of the largest expenses on my grocery bill. While I may play with the amount of stuff I add to them, I’m willing to pay that extra amount to have those smoothies.

Bringing it Back

So to kind of wrap it all up; enjoy the journey, cut the expenses you don’t need, and train your frugality muscles. But don’t let it become living in a patch of dirt down by the river or living paycheck to paycheck on a six-figure salary. Spend on the things that are important to you and don’t make FIRE the only thing.

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