Spend Less Save More: The 1st Pillar of FIRE
A penny saved is a penny earned.
Pillar 1: Saving
The Power of the Savings Rate
Determining What Your FIRE Number Is
The Real Cost of Purchases in Life Energy
Pillar 1: Spend Less. Save More.
In my What Is Fire post, I introduced the three pillars of FIRE. In this article, we are going to take a closer look at Pillar 1: saving more of what you earn.
This is often the most difficult pillar for people to master. We live in a society with an unlimited number of shiny things and luxury experiences to spend money on. At the push of a button, we can have hot food delivered to our door or some amazing device manufactured halfway around the world in a matter of hours. The kings of yesterday would truly be amazed by the luxuries of an average American today.
Saving money is a core element of the FIRE movement. By simplifying your lifestyle, you can significantly increase your savings rate. We live in a period of great excess where the average person has an absurd number of luxuries. It’s not as hard as you might think to save a significant portion of your income.
There are a couple numbers you should know.
The Power of the Savings Rate
This is the percent of your earnings that you save. The higher the percentage, the earlier you’ll be able to retire. It really doesn’t matter how much you make if you spend it all. You could make a million dollars a year and still be flat broke! The table below demonstrates how many years it’ll take for you to retire based solely on your savings rate. I made a few assumptions for you, but regardless of your parameters, the savings rate is the most important factor in your ability to retire early. Also, even a small change in savings rate has a dramatic effect on how long you’ll have to work as you can see in the simple chart below. for a more detailed analysis check out our Retirement Date Calculator that takes in all the factors such as your current net worth and more.
Years to Retire Based on Savings Rate %
Here is a simple calculator so you can figure out your current savings rate.
Savings Rate Calculator
Your Numbers
Result
| Savings Rate | - |
Determining What Your FIRE Number Is
Your FIRE number is the amount of money you need to save before you are able to retire. It is different for everybody, but it is relatively easy to calculate if we assume your spending habits won’t change much after you retire. (If you feel your spending will change, adjust the spending rate as needed.)
FIRE# = Spending Rate X (100 / (Safe Withdraw Rate*))
For Example: $40,000 X (100/ (4% SWR*)) = $1,000,000 needed to retire today.
*SWR – Safe Withdraw Rate (also known as the 4% rule): This is a generally accepted good starting place for calculating what you can safely live off of in retirement. It comes from the Trinity Study.
I’ve made a calculator that you can use below to save you the trouble of getting one.
FIRE # Calculator
Your Numbers
Result
| Amount Needed To Retire (Todays Dollars) |
- |
The Real Cost of Purchases in Life Energy
In the book Your Money or Your Life, Vicki Robin goes into detail about how money represents “Life Energy”. I really like her analogy. Every purchase you make costs you a certain amount of time or working years. There are a couple different ways to calculate this number. To keep it simple, I like to put it into days of work.
For example, if you are an average household making around $63,000 per year, it might look like this.
$63,000 per year / 365 days per year = $172.60/day or $7.19/hour.
Notice I am calculating this based on total days and hours in a year and not by working hours. This is because spending a year’s salary delays your retirement a full year, not just the 2,000 or so hours you work in a given year. This is a powerful way of looking at spending money because it shows you exactly how much you are delaying your goal of retirement with every purchase.
A few quick examples for you to further illustrate my point:
Now that was just for a single purchase. Keep in mind you might buy coffee every day or have your house cleaned once a month (ironically to save yourself time). You might buy a new truck every five years when the shine wears off the one you currently have. Let’s take a look at the true yearly cost of these purchases.
Now some of these numbers start to become a bit shocking. 13.9 days to have your house cleaned once per month? That’s two weeks I could be on vacation every year! But instead the luxury of having someone clean your house delays your ability to retire by two weeks per year! Thankfully these expenses are relatively easy to cut back on.
You can:
Buy coffee on special occasions.
Clean your own house.
Use your new phone or truck for a few extra years before buying another one.
Below is a calculator so you can calculate what the true cost of your purchases are in terms of life energy.
Life Energy Calculator
Your Numbers
Result
| Years | - |
| Months | - |
| Weeks | - |
| Days | - |
“The only real asset you have is your time. The hours of your life.”
So this was a deep dive into why spending less and saving more is such an effective pillar to help get you to early retirement as soon as possible. Ultimately all you have to do is reach your savings goal, which is your FIRE number. The higher your savings rate, the sooner you’ll reach your goal. Even a change of 5-10% in your savings rate can shave a decade off of your work timeline. I find viewing my spending habits in terms of life energy and how much it actually delays your retirement to be a particularly effective tool in motivating us to change our spending habits.
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