They say you are supposed to think before you spend. But think about what? When a salesman tries to sell you something, he has the edge. He's studied human psychology, and he knows which buttons to push to get you to part with a piece of your freedom.

And every time you're too tired to do anything else but turn on the TV, the salesmen are there, with their carefully executed pitches. These ten mental exercises are intended as tools to help you push some buttons of your own. Think of them as weapons in your arsenal of self-defense.

Mental Exercise One: Add Back in the Income and Payroll Tax. If you earn $25 per hour, how long must you work to buy a pair of sneakers for sale at $125? It's easy to be lulled into thinking that the answer is "five hours," but it depends on how you look at it. You don't get to keep the full $25, but must give up $5 or so to the government for income and payroll taxes. So it really takes over six hours of work to buy the sneakers.

I always take note of the income tax and payroll tax (not just sales tax) associated with a particular spending decision. In pure theoretical terms, you might say that this is inappropriate because the income and payroll taxes are imposed whether I spend the money or save it. But allocating these taxes to spending decisions helps me mentally assess how many hours of work it takes to pay for things. Sometimes knowing that it takes six hours, not five hours, to buy the sneakers reveals the purchase as not so "worthwhile" as it would at first seem.

Mental Exercise Two: Calculate "Small" Expenses on an Annual Basis. It's easy to see the consequences of large spending; few of us will spend $40,000 on a new car without doing careful research. But the majority of our spending is devoted to small items, not large ones. So controlling the large items leaves the bigger part of our potential savings pool undefended.

If you spend $8 for lunch at work, you are not reducing your potential savings by only $8, unless the decision is truly a one-time event. In most cases, you are instead developing a habit. And the cost of the habit is $8 times 23 business days a month, times 12 months. That's $2,200. It's this type of item that usually explains where all the money goes. Applying Mental Exercise One (described above) could bring the total cost of the sandwich, drink, and chips to close to $3,000 per year. It's a big ticket item masquerading as a "convenience."

Mental Exercise Three: Know Your "Potential Savings Pool" Amount. Forget the rules of thumb about saving 10 percent or 15 percent. Those rules were invented to distract you from what should be your goal—deciding how much saving and how much spending is in your personal best interest. It matters not what others do—it only matters what you do, and to determine that, you first need to know what it is possible for you to do.

Let's say your household income is $80,000, your basic living costs are $23,000, and your taxes are $22,000. Your Potential Savings Pool (PSP) is $35,000. It's your decision whether to save less than that or not, but there's no possible way you can save more. You have to come to terms with this number and determine how it fits into your Retire Early goals. If it is lower than you would like, you need to be that much tougher in ensuring you realize a high percentage of the PSP as actual savings.

Each decision to spend should be viewed as a step away from achieving the full possibilities opened by your PSP. Spending $2,200 on lunches at work all by itself reduces your PSP to under $33,000. It's up to you to decide whether to buy the sandwich or not, but the PSP concept can help you understand how damaging a blow is delivered by each spending choice.

Mental Exercise Four: Convert Spending Amounts Into Percentages of Annual Savings. Each decision to spend is an opportunity to save that is gone forever. Let's say that you earn $60,000 and save $10,000 a year, and you are considering a vacation that will cost $3,000. The natural impulse is to compare the $3,000 cost with your $60,000 income, and decide that an expense that amounts to only 5 percent of your total annual resources is not that big a deal.

The better comparison is with your savings figure, not your earnings. You never have any chance of saving much of your income—before you make any decisions, it is lost to taxes or to basic living expenses. But the vacation spending is truly discretionary.

Go on the vacation by all means if it is "worth it" to you. But in determining whether it is "worth it" or not, you need to know what percentage of your possible savings you are giving up. In this case, the vacation costs 30 percent of your savings for the year. That figure puts things in perspective.

Mental Exercise Five: Weigh the Lifetime Cost. In the above example, the $3,000 you pay for a vacation represents the lost savings for this year. The reality is that, if you decide to save instead, the $3,000 begins producing additional capital (if invested in stocks) or income (if invested in certificates of deposit). Even in CDs, you can earn over 4 percent per year of real return, in today's market.

Sometimes the memories created on a vacation are well worth the cost. Just be aware that the $3,000 put aside now will work for you not just one year, but for as long as you live. The cost of the vacation in present-day dollars is far in excess of $3,000.

Mental Exercise Six: Determine Your Cost of Living on a Per Day Basis. How much does it cost you to stay alive on this planet for 24 hours? It's a fun thing to know. Once you have a budget that you stick to and which includes all your spending, it's easy to convert the annual or monthly figures into daily ones. Some days you will spend less than the average and some days you will spend more. Just knowing the average enhances your awareness.

My wife and I have calculated that we spend roughly $1 each on each of the three meals of the day. If she is able to find the ingredients for a meal in the dented-can bin at the supermarket, we are usually able to keep spending well under $2. But on Saturday nights, we usually spend more (perhaps $4) to create a "special" night for ourselves.

We can have homemade pizza for well under our usual $1 per meal target. Knowing that makes us a little less willing to pay Pizza Hut prices and to write it off as the cost of convenience. On rare occasions, we do it. But it's hard to justify paying $15 for convenience food when the food portion represents only 1/15 of the total expense.

Mental Exercise Seven: Translate Spending Into "Lost Freedom Days." Once you have enough savings that the earnings from your savings equals your annual spending, you are financially independent. The best way to give this idea day-to-day significance is to consider each spending decision as a step towards this goal or away from it.

Let's say you need $600,000 (at a 4 percent earnings rate) to finance your $24,000 annual budget. Further assume that you are $200,000 from your goal, and saving $50,000 a year. You've got four years to go, as things now stand.

But you've got that $3,000 vacation expense noted above. And a $2,000 sandwich and chips expense. And maybe a $1,000 gourmet coffee tab, and a $2,000 convenience pizza category. You like the things you buy with this money. But you want to know how much they really cost you. The least meaningul answer to this question is "$8,000 a year."

The more enlightening answer (and this idea is the core breakthrough idea of "Your Money or Your Life") is "the life energy you give up making the money to support these habits." Now that you have a financial independence plan, you can assess these costs in terms of how much they delay the onset of your personal Independence Day.

How long is your freedom being pushed off by $8,000 of spending? First of all, to refrain from these purchases would speed up your saving. In three years, you will have $174,000 of added savings, not $150,000 (and this doesn't even count the earnings on these amounts).

More importantly, the goal becomes a much easier target. With $8,000 cut from your budget, you now need only $16,000 to live on. That means you need only $400,000 to be free, not $600,000. Do the math! You're there, buddy!

Mental Exercise Eight: Put the Most Effort Where You Have the Most Influence. There are many roads to financial independence. Some think the key is to earn lots of money. Some think the key is to earn high returns on investments. Those are both very good things to do.

For most of us, though, there is a limit on how much we can earn at our jobs, and in many cases we are earning not far from that limit already. There's probably more room for improvement in the area of investments. But here too there is a limit on what we can expect to earn that we hit not long after devoting enough time to learn the basic principles.

Spending, though, is an area a where high percentage of us can make large strides if we care to do so. The magic of spending cuts is that this is an area almost completely under our control. We can try to influence whether we get a promotion or not, but we can't control the outcome of our efforts. We can invest intelligently, but the most intelligent investment plans at times go awry.

We don't have to get anyone's approval to cut spending, though. And the results of our decisions in this area don't depend on the ever-changing moods of Alan Greenspan. If I want to cut spending, I just do it. And my freedom gets closer each time I do.

Mental Exercise Nine: Determine the "Lifetime Cost" of Each Budget Item. This mental exercise was discussed in a post by CindyC72 (#4597). She described how she took each of her monthly spending categories, annualized the figure, and then determined how much savings it would take (presuming a 4 percent return on investments) to "fund" spending on that item. This is a great way of using concepts of financial independence to clarify our thinking about spending.

CindyC72 noted that, at the time of the post, she had enough to pay for her newspaper, her internet connection, and her water bill. So for the rest of her life, she needn't worry about reading, surfing, or drinking!

Mental Exercise Ten: Develop a Short-Term Goal. The reason why spending wins out so often in our thought processes is that spending creates a short-term jolt of pleasure. To combat this, we need to be sending out some short-term jolts of our own. Knowing that some day you would like to retire early is not enough. You need something that is going to happen within the next few years for the force of the jolt to be strong enough to counter the forces of advertisers that want you to spend.

If you are within two or three years of financial independence, that alone is goal enough for you to win most battles. If the ultimate goal is farther off, you need some intermediate goals to get you through the rough patches.

Let's say you are six years away from complete financial independence. Perhaps you could run the calculations on what it would take to "retire" into a part-time job. If this partial goal could be reached in two years, make it your short-term goal. When you reach it, you can develop another intermediate goal.

Following this approach, s series of two-year steps will eventually get you to the point at which you are within two years of the final target--complete freedom from wage slavery. Freedom, it's a mental thing.

Hocus, I love your insights and well articulated thoughts. I hope you are writing a book which compiles in part the posts you have on this board. And, may it be a best seller which hastens your ER.
Thanks for your thought provoking perspectives. NowInMaui

hocus wrote,

Mental Exercise Nine: Determine the "Lifetime Cost" of Each Budget Item

Not surprisingly, even Warren Buffett does this.

The book Buffettology contains an interesting anecdote on Buffett's car buying habits. It goes something like this (I loaned my copy of the book to somebody, so I can't quote the exact figures):

Warren Buffett buys used Mercedes sedans and keep them about 10 years. Someone asked, "Why don't you buy a new one, you can easily afford it?" To which Buffett responded, "I don't want to pay $200,000 for a $50,000 car."

The analysis goes something like this:

New Mercedes = $50,000

Used Mercedes = $30,000

Savings = $20,000

Warren earns a long term 25% return on his investments, so $20,000 x 1.25^10 = $186,265

The 10-Year opportunuty cost for buying a new Mercedes is close to $200,000.

intercst

I hope you are writing a book which compiles in part the posts you have on this board. And, may it be a best seller which hastens your ER.

You accomplished a rarely seen achievement today, NowInMaui. You managed to temporarily humble hocus into silence!

Now that I've recovered, let me say that I do hope to write on this subject (and a few others) on a "professional" basis (meaning, "for money"). I won't go "pro," though, until I can write without really needing the money. In a sense, then, I'll remain an amateur (one who does something for "amour," or "love").

I once had a writing job that on paper offered a great deal of editorial freedom. This was a dream job, and it took me years of effort to acquire it. The day the job was taken away for reasons of internal company politics was the day I began searching for an alternate path that ultimately turned me onto the Retire Early principles.

My wife had been suggesting for some time that I begin writing in my "free moments" rather than waiting for financial independence. It's no fun for me to write just for myself, though, so I had not taken action on her idea until I discovered the Retire Early board. Hearing responses (both positive and negative) brings the thing alive. So thanks for reading and responding (and positive is a wee bit more appreciated than negative, I must admit!).

<<I hope you are writing a book which compiles in part the posts you have on this board. And, may it be a best seller which hastens your ER.>>

Hocus,
You do indeed have a way with words and rank,IMHO, as the writer "Laureate" of this board. Your many recommendations to your well thought out words attest to the fact that many on this board would agree with me. You are one of the many reasons I turn to this board almost everyday.

You are one of the many reasons I turn to this board almost everyday.

Now cut that out! I have to wake up every morning thinking that the world is out to get me if I am to retain any sort of edge in the business world. I'm not retired yet, you know.

hocus said:
I have to wake up every morning thinking that the world is out to get me if I am to retain any sort of edge in the business world. I'm not retired yet, you know.

Don't worry, hocus. I'm out to get you. In 47 days I'll be retired and I intend to get back to a long lost love that's been on hold. I'm talking about writing and I'll have both the time and the desire to do it justice. I may not be a journalist, but unfettered passion doesn't need a formal education. I hope I've given your your edge back. <BG>

1HappyFool

Unfettered passion doesn't need a formal education.

Welcome to the journalism world, my friend. I'll place my bets on unfettered passion over formal education anyday. In fact, the journalism was better when the only "education" a reporter received was a lecture on the closing hours of all the bars in the neighborhood of the newsroom.

You might want to check out an article in the Washington Times today which reports on a study finding that "the nation's media are out of touch with the average American because they live in expensive neighborhoods or have atypical lifestyles." The author of the study states that "what struck me was how much people disliked the news media and felt it condescended to their views and lifestyles."

By avoiding journalism school, you might stay out of the traps that have made many reporters think they are so much better than the people reading their words. There's not much need for more words, in my view. There's a lot of need for more passion for the truth, though.

This is why I argued in an earlier post that, if 50 percent of the population turned in their resignations on Monday morning, that week the United States would experience its greatest productivity ever.

People who work at what they love work hard and those who aren't working for pay have little patience for power games. They produce whether the boss is watching or not because the "boss" is the vision inside their heads that they are trying to make a reality.

In a sense, everyone who retires early becomes an entrepreneur. Some produce friendships at the golf course. Some offer family counseling services from the steps of the front porch. Some create beautiful gardens. Some write. Some make pottery. Some poetize.

God created many varieties of birds to inhabit the earth.

In response to your ten mental exercises leading to freedom, they all sound great. One doesnt know how much he spends until you look at things this way.
But, if everyone does this, our economy would be ruined.

This would creat a huge freefall in our system.
I get your point on control of your resources. I do agree on the norm of savings is 10-15% of your earnings ,this is a trap. At one time i was saving 20-30% of my income. I have a family and a mortgage, with that comes more expenses. I try to save by cutting my trips to school during the day. I travel 6 miles a day to and from school. I like to order pizza on the weekends while im studying. Dont misunderstand what im trying to say here ,its just that not everyone can do all of these things, if they do, what effect is it going to have on our economy of credit? I look at it this way, I try to watch my spending and save as much as i can, I let the other people spend all their money and i invest mine. The investing has paid off.In one of my classes, marketing, brings the point home all to well. In marketing thats what its all about,exchanging the firms goods or services for your money. It is an equal exchange. You got the good or service and the company gets your cash. What you want to look at is the fact that is that good or service worth the cash that you will be giving up? Great article. Hope to hear from you. Again, dont misunderstand what im saying
We need the spenders out there to better our lives and saving and investments. Thats whats so great about the free market and capitalizm,there are those who spend and drive our economy and there are those who save and invest in our economy to market products for the people who like to spend freely.

This is excellent! The author has obviously given considerable thought to the subject. As he suggests, it can be hard to resist the temptation to spend money promiscuously when the goal of saving (the alternative) is entirely abstract and distant; but when the goal is made more tangible (e.g., saving enough to pay for some specific items, or shortening the time remaining until Financial Independence Day), the benefits of saving can come alive!

Along these same lines, I would highly recommend a 1996 book by Thomas J. Stanley, Ph.D., and William D. Danko, Ph.D., The Millionaire Next Door, which speaks to the saving-and-budgeting habits of most American millionaires. (Yes, most American millionaires do budget--assiduously--which is how many of them became millionaires in the first place, and how they stay that way.) According to the book, most who do not budget use the alternative pay-yourself-first method (which I personally like); it allows you to spend whatever you wish-- after you have first put aside a very large chunk of your income for saving (to satisfy short- and intermediate-term needs) and investing (for long-term goals, like retirement).

Whichever method one prefers--careful budgeting or the pay-yourself-first method, or even a modified combination of the two--one thing is clear: Out-of-control spending, with no view to future needs, does not produce wealth. Or even financial security.

As the authors of Millionaire said in the very beginning of the book: "Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high."

Again, I commend the author, hocus, for a very fine essay. I recommend it enthusiastically. For anyone interested in wealth building (or even earlier retirement), it should be required reading!

If everyone did this, our economy would be ruined.

It seems to be a commonly held idea that people must waste money for our economy to thrive. I don't see it this way, but I'm willing to be persuaded if someone can present an easy-to-understand explanation of how this works.

To my way of thinking, wasteful spending can never be a good thing. Let's say that 80 percent of the population decided tomorrow to stop ordering take-out pizza and instead make their pizzas at home. What would happen to the economy? First of all, there would be fewer take-out pizza joints, that's true. But I don't see that as a bad thing. It's just consumers voting with their feet (or mouths) for fewer take-out pizza joints, and the market economy responding by giving them what they want.

Those jobs don't just disappear into thin air, though. All the people that used to be employed at pizza joints would now look for work in other fields, fields where the market economy is telling them their services will be more valued. Perhaps they will become dog-walkers, or kindergarden teachers, or pottery-making instructors. It doesn't matter to me what they choose to do so long as the new work is more useful and less wasteful.

Of course, if enough people begin saving large amounts of money, that group will indeed give up working in the paid economy altogether. But again, I don't see this as a bad thing. They will still be alive. They will still be doing things. And they will have the money to do things. If they golf, they will help the golf supplies industry. If they plant gardens, they will help the seed companies.

Where is the damage to the economy that everyone talks about? If it is really true that our economy depends upon people making bad spending decision, then I hope it does fall. But I don't see that this is a necessary consequence of a trend toward frugality. The advertising industry might get hurt. But if advertising is causing poor decisions, wouldn't it be a good thing for the economy for the resources being devoted to the advertising project to be
redirected into something more useful? What am I missing here?

It seems to be a commonly held idea that people must waste money for our economy to thrive...

In economics, I think this is called the Paradox of Thrift.

The basic idea is that as people (collectively) save more (beyond a certain point), total savings would go down. This would be due to a shrinking economy.

There are many industries which are not "needed" but still thrive. I suppose, in a sense, any industry not dealing directly with food, shelter or healthcare could be deemed a waste.

In economics, I think this is called the Paradox of Thrift. The basic idea is that as people (collectively) save more (beyond a certain point), total savings would go down. This would be due to a shrinking economy.

Thank you for supplying some background. I'm still skeptical, but at least I'm "Informed Skeptical" instead of my usual circumstance of being "Ignorant Skeptical."

So they call it "The Paradox of Thrift." I guess since they have an official name for it and all, there must be some truth to it. NOT! I guess what I'd like to know at this point is, is this idea the product of one school of economics (such as Keynesians) or do all economists agree with the cockamamie idea (not to skew the question at all). Basically, I want to know who to blame.

No, I'll be good. There's probably all sorts of charts and things in the textbooks supporting this idea, so it's just downright boorish for me not to submit to the wisdom of it all. I just don't understand how it works.

We're saying that people save more, and therefore savings...go down. It's not the first time that hocus has been stumped. It's a puzzlement, though. Guess I'm not "economist" material.

hocus: "We're saying that people save more, and therefore savings...go down."

It is kind of th analog to the supply siders mantra that if you reduce tax rates, then tax revenues will increase. <grin>

Just my $0.02. Regards, JAFO

I'm still skeptical...[even though] [t]here's probably all sorts of charts and things in the textbooks supporting this idea [the Paradox of Thrift]."

I'm with you here, hocus. I make no pretense of having a deep understanding of economic theory; that said, however, this strikes me as just another example of the thinking of the zero-sum-game crowd.

According to this bunch, any good economic news carries with it the seeds of bad economic news. That is why Alan Greenspan worries so intensely over the low unemployment figures--thereby implying that a little more unemployment would be a good thing for our society.

It is the same sort of perverse thinking, in my opinion, that would lead one to believe that a robust economy is incompatible with an outbreak of responsible spending habits.

That is why Alan Greenspan worries so intensely over the low unemployment figures--thereby implying that a little more unemployment would be a good thing for our society.

That's a great comparison. I'd wager that 50 percent of the population has no idea why Dan Rather is always telling us we should be rooting for people to lose their jobs. If we want to understand what is going on in the world, we need to know this. I have no special expertise in this field, so anyone should feel free to challenge what I say. But I've never let a lack of expertise inhibit me from expressing my views. ;-)

To simplify matters, let's assume that there are only 100 people in the country, 10 are high-pay executives and 90 are average workers. On Day One, nine of the 90 workers are unemployed, so the unemployment rate is 10 percent. On Day Two, three find jobs, and the unemployment rate falls to 7.5 percent.

From my way of looking at things, the economy is clearly better off--84 workers are going to produce more than 81 workers. The only explanation I can come up with for Greenspan's anxiety is that the 84 workers will be a little less worried about losing their jobs on Day Two than they were on Day One. If each of them asks for a tiny raise, it could mean that, despite the increase in productivity from Day One to Day Two, corporate profits might go down a bit and the 10 executives might get paid a little less.

So, to the extent that your pay is dependent on getting workers to accept smaller wages than their work merits, economic growth for the country might produce an economic loss for you personally. I say, so what? I don't mind having my pay cut a little if that is what it takes to get the economy moving ahead. In the long run, I believe that I'll share some of the benefits of the growth that will come from the increased employment.

It could be argued that this discussion strays from the topic of early retirement. I don't think so. The possibility of early retirement arises largely from the increased productivity of our economy. Some see this increased productivity as a problem and have fostered a growing consumerism to keep the old work-until-you-die mentality going regardless of the productivity gains.

But that game is failing now that consumerism is leaving people increasingly stressed, isolated, and depressed (see Post #7456). So people are starting to look for new solutions to the productivity "problem." My view is that the idea of early retirement (broadly defined) is not going to remain an interest of only a small group for much longer.

This is an excellently written post. I actually found it on the post of the day section so I guess I'm not the only one to think so.

This isn't so much a negative response as a caution to those who are great budgeters. I realize a majority of people out there are in need of the kind of self control that hocus has described.

I think there is are a number of people who take this type of advise too far. I have the good fortune to work in an area that currently has lots of opportunity and some good pay to boot (Electrical Engineering). I know a lot of people in the industry who I think work far too hard and save and budget way too much (they are not the majority, but there's enough of them).

I know hocus wasn't trying to tell us to sacrifice our lives just to save, but some people actually do that. Whether that means not spending money, or just working too hard. I have friends that work more than 12 hours a day regularly and claim that it will all slow down once they have made it. Whatever 'made it' means I don't really know. I hope that I can look back on my career in 20 years and say that I enjoyed it. I also hope I can say I made the most of the time away from work too. If that means I had to spend $3000 of my savings to take a 2 week vacation with my wife when I was only 25, well that's probably worth it.

Like anything else, I guess there is a happy medium. Some people live beyond their means and that's definitely not good. Some live comfortably below their means while still others live their lives so they can retire. I wouldn't want to be in either the first or last category.

ca2

ca2 wrote,

I have friends that work more than 12 hours a day regularly and claim that it will all slow down once they have made it. Whatever 'made it' means I don't really know.

I hope they're getting paid overtime, or are in line for a big block of stock options. Working 12 hours per day in the "hope" that you'll be rewarded is just nuts.

intercst

Wow,a 2fer. Two awesome posts (the lead and #7131)in the same thread by the same author. Wanna try for the hat trick??

Kris

Thought provoking post, Hocus. I'm gonna dive right in here with the codicil that I have only read the thread in response to your post. I have not read most of the 7000+ posts on this board, though I have popped in from time to time. I came upon your post in the Foolish Week in Review report (thanks Cheeze!), and felt compelled to respond. So, if some of my points have been made already, I do apologize.

This will all sound negative, but let me say up front that I do agree with the basic thrust of your message: think before you spend. That said. . .

Let's take your $15 pizza example. You calculate that you can save $2,000 a year by avoiding this indulgence (which I believe you mean is 2K spent on similar food indulgences, not just pizza). This becomes 133 episodes, a large amount, but easily believable. Still, let's say you do NOT indulge at all. Well, you still have to eat -- and even at your remarkable rate of 1 buck each for you and your wife, your savings only become $13 dollars for the meal. So, instead of $2000 in savings, you have $1734, a nice amount but not as much as you imply. I would make the same argument on the "work meals out" and gourmet coffee. (NOTE: at $1,000 for coffee that works out to 250 grande lattes and 15 or so pounds of ground coffee at the nearby Starbucks. I'm a coffee addict, but that exceeds my habit greatly.)

As for the vacation example, well, my only regrets in life are trips not taken, so I might be biased on this issue. Travel fills me with new ideas, bonds me to my family (constant companions), and refreshes me: money so well spent, I cannot even figure the returns. That said, I don't spend $3,000 every year (or even most years) on travel, so even if I cut out a trip a year, I would not save $3,000. You seem to view this vacation expense as an annual event, and for those that it is, I would argue that they are like me, and need and want the travel experiences.

Still, unless you are implying that people never take a bonus vacation (cuz I assume everyone takes a trip of lesser expense each year), I would argue that $3,000 a year is an unrealistic savings. Figuring that you only take a 3K vacation every third year, by cutting that out you'd only save 1K a year, on average. I think for most, that is closer to the real annual savings.

Now, I know that this is minor quibbling, but since you argue that every dollar saved matters, I would argue that your analysis overstates, setting an unrealizable goal, forgetting about replacement costs and, maybe overestimating the original expenses. My guess is that the $8,000 savings in foodstuffs and vacation you posited is closer to $5,400 and therefore overstates the savings by almost 50%, a rather tidy sum. True, you are simply using examples to prove a point, and the principle does work, but I think you overstate vastly.

Finally, however, comes my biggest problem with your post. Your example that by saving $8,000 annually, your retirement savings must be less leads me to ask you one major question: why are you retiring early in the first place? Since you've removed meals out and travel from my annual budget (saying that I won't need to replicate those costs), you've made it so that in retirement I cannot eat out OR travel. (Not only that, but I potentially cannot develop a new hobby that costs additional dollars, though that's probably covered in my initial planning.). I would argue that the only reason to retire early is to do something with your time -- in many cases that means additional travel to see relatives or new places, the pursuit of hobbies, or at least the right to relax and not have to cook every single meal.

My point, again, is simply that removing the costs you talk about from your present life does not take into consideration what you expect in retirement. Do you really wish to retire and have the only change in your life be that you don't go to work every day? Or do you wish to retire and enjoy those years with the freedom to do what you want to do? For me, and I imagine most, the answer would be the latter.

Sorry to ramble on and on. And as I said, I do agree with the thought behind your post. I just think you need to analyze your conclusions a little bit more.

thanks again for provoking thought,

the freep

Finally, however, comes my biggest problem with your post. Your example that by saving $8,000 annually, your retirement savings must be less leads me to ask you one major question: why are you retiring early in the first place?

I would argue that the only reason to retire early is to do something with your time -- in many cases that means additional travel to see relatives or new places, the pursuit of hobbies, or at least the right to relax and not have to cook every single meal.

Man, I can see you have never had the egotistical nitwits for bosses I've had all my life! Like, "move that pile of bricks from there over to there." The only reason for retiring is to do something with your time? How about not having to drive in rush hour traffic to work every day? How about not having to get out of bed until you feel like it? How about not having to deal with nitwit Veterinarians who thinks it's their soul purpose in life to make technicians lives miserable? I've never had a job I liked. I'm lazy and I know it. Luckily I started putting money away in a tax deferred annuity at an early age for early retirement.

<<How about not having to drive in rush hour traffic to work every day? How about not having to get out of bed until you feel like it? How about not having to deal with nitwit Veterinarians who thinks it's their soul purpose in life to make technicians lives miserable? >>

Well, fair enough. All valid reasons. My phrasing could have been better. Guess I need another one of those lattes. :-)

My point, however, still stands. Saving extra by evaluating expenses is smart. But assuming that your post-retirement lifestyle will be the same as your pre-retirement lifestyle when you have scrimped and saved every penny by removing any excesses implies that your expectations in retirement are slim, and that your only reason to retire is that you hate working. I'm sure that is true of many, but I'm sure many more have goals and plans far beyond that.

Good luck, and I hope you get free of bad bosses and terrible commutes sooooooooon,

the freep

ariechert says:

Man, I can see you have never had the egotistical nitwits for bosses I've had all my life!

LOL - I've had a Captain Ahab for a boss myself. Just being home without having to put up with this bozo was vacation enough. Besides, if you've invested well, pretty soon the 4% you need to just live turns into 1%, and you can take trips with the other 3% - lots of trips - right, intercst?

arrete - enjoying life one hour at a time

arrete wrote,

LOL - I've had a Captain Ahab for a boss myself. Just being home without having to put up with this bozo was vacation enough. Besides, if you've invested well, pretty soon the 4% you need to just live turns into 1%, and you can take trips with the other 3% - lots of trips - right, intercst?

I've found one of the best parts of being retired is not having to travel. <grin>

I still have a couple of hundred thousand frequent flyer miles left from when I was working and I've been retired over 5 years. About the only time I use them and get on a plane is when they are close to expiration.

intercst

Man, I can see you have never had the egotistical nitwits for bosses I've had all my life! Like, "move that pile of bricks from there over to there." The
only reason for retiring is to do something with your time? How about not having to drive in rush hour traffic to work every day? How about not having to
get out of bed until you feel like it?

When I first read YMOYL in 94 I was so exited that someone thought like me. I wanted to share this enthusiasm with friends, family and co-workers. People could understand trying to avoid the boats and motorhomes. But when you got around to the lattes and pizzas they all pretty much shrugged their shoulders and said yeh but you got to live. I quickly stop sharing these ideas, but unfortunetly the cat was out of the bag. They never missed an oppotunity to point out that it wasn't going to work out. Retiring early I mean. And I have to admit there was plenty of times I began to wonder myself. Not to mention I didn't know anyone personally that invested in stocks never mind having a big port. My how that changed when I retired. The feeling of freedom that I thought about every working day had to be experienced to really know that yes it was worth it absolutey. No matter how much time I took off, which was 5 months the previous year. It's not the same as knowing you don't have to go back. Jimmy

No matter how much time I took off, which was 5 months the previous year. It's not the same as knowing you don't have to go back. Jimmy

I discovered by accident, when I was surfing the net, The Retire Early Homepage. The I scrolled down and found the "Can I withdraw money from my 401" site and used the 72(t) calculator that showed me I could get as much from my tax deferred annuity as what I was making working. I asked my wife, "Why am I working?" and then I told my boss, "I'm outta here!" I've never been happier. This board continues to be a source of inspiration to me.

I quickly stop sharing these ideas, but unfortunetly the cat was out of the bag. They never missed an oppotunity to point out that it wasn't going to work out. Retiring early I mean.

Tonight at a BBQ the subject changed to thoughts of where people (the other 23-26 year olds) wanted to retire to at 60, or even RE at 50. A friend jokingly asked if I was hoping to be retired in 15 years. When i said "I sure hope so" he looked rather shocked. Ahhh, if only he knew.

On the opposite end of the spectrum I have another friend who is hoping to get his account up to $40k, and then head to Sweden to "live till the money runs out". I'm able to talk to him on money related things, since I know he's at least somewhat on the same frequency, and that I don't have to worry about him thinking I'm crazy. Questioning thoughts are good, though just straight out doubting is another story.

4aapl (who's still plotting the best way to break the news :)

I know a lot of people in the industry who I think work far too hard and save and budget way too much.

Thank you for challenging some of the ideas in the original post. By adding your more moderate perspective to my own rather extreme one, you may render parts of the original post more palatable to some board participants.

My own view is that there are many people who work too hard at corporate and government jobs, but few who spend too little. I agree that in theory it could happen, but it takes an unusually strong-willed individual to spend less than is appropriate in a culture so dominated by consumerism.

My experience is that life is freqeuntly made fuller by spending less. For example, I have not paid to go a movie theater in three years now. I know that there are many who view this as "going too far." My analysis is that the activity I took up to replace movie nights--talking two-hour walks with my wife--is more enriching. So I both spend less and enjoy life more.

If there were no limits on time, at some point I would break down and pay for a movie ticket again. But it's way, way down on my list of fun things to do. Once I stopped going to movies as part of a routine, I came to appreciate how much less enjoyable the experience had become than it had been years ago.

My wife and I received free movie tickets as part of a promotion, so we returned to the theater that one time. I was annoyed by having to wait in line, and by the pushing and shoving when we were let in. I was irritated by the noise all around us as we watched. I was less than thrilled with the quality of the film.

I gritted my teeth like a captive while sitting through the long stream of advertisements for both other movies and completely unrelated products. And I felt like a chump for having used up some of the time that I am always complaining I do not have enough of to have this "experience."

I have no problem if one takes from the original post some tools for reducing spending, while continuing to spend substantial amounts on "basics" like movies. Don't ask me to join you, though. There are no lines to take a walk in the park, no pushing, no advertisements, and no admission fee (let's not give them any ideas, though!).

If that means I had to spend $3000 of my savings to take a 2 week vacation with my wife when I was only 25, well that's probably worth it.

You picked a good example for making your point. On the one hand, vacations can be very expensive. For most of us, vacations are one of the highest discretionary items in our budget. Perhaps someone who speaks Spreadsheet can tell you the lifetime value of putting $3,000 in a mutual fund at age 25. My guess is that the number would be high enough to make many of us think twice.

That said, though, the expense vs. return ratio is not that bad for vacations if you do careful planning. There's a big difference between going on a vacation and going to a movie. The movie experience is a passive one. For that reason, it rarely is a life-changing experience (there are exceptions--thank you, Alfred Hitchcock!).

But vacations can fill one with a sense of wonder, if done right. The planning leading to a vacation is a learning experience and the vacation takes you out of the normal routine. The best vacations deliver one of the treasures of childhood, where each time you open your eyes you see something you never saw before.

Here's a test I use to determine whether an expense is "worth it" or not: Do I remember the experience a year later? There are some movies being made today that I can't recall 45 minutes after seeing them (I know from watching videos at home). Vacations, though, stay in my mind for long stretches. I can remember exactly what I did each day on vacations I took four and five years ago. I don't worry too much about the cost when I get memories in return.

Still, there are a lot of vacations that are a waste of money. The worst are the trips which people feel "forced" to take. For example, if you are taking a vacation only because you will otherwise lose vacation days at work, you stand good odds of taking a vacation you will not enjoy. You may find yourself wishing you were home, but unwilling to return because of the money "lost" by returning.

I've also heard stories of just-married couples who did not enjoy their honeymoon trips. They felt that they had to spend a lot of money to make the event "special." But, with the wedding planning to handle, they did not have time to plan their getaway. The result is what I call the "New Year's Eve Syndrome." Joy does not often come to those trying to force it to conform to expectations set by the calendar.

hocus wrote,

<<<If that means I had to spend $3000 of my savings to take a 2 week vacation with my wife when I was only 25, well that's probably worth it.>>>>

You picked a good example for making your point. On the one hand, vacations can be very expensive. For most of us, vacations are one of the highest discretionary items in our budget. Perhaps someone who speaks Spreadsheet can tell you the lifetime value of putting $3,000 in a mutual fund at age 25. My guess is that the number would be high enough to make many of us think twice.

The S&P500 has returned 13.67% over the past 30 years. A 25 year old should live at least to age 80, so you have 55 years of investment returns:

$3,000 x 1.1367^55 = $3,449,000

Of course, 55 years is a long time to wait.

Over on the DELL board last year, we had a DELL employee lamenting the fact that he had sold $5,000 worth of DELL stock to take his wife on a Lake Tahoe ski vacation in 1992. Value today of $5,000 worth of DELL stock bought in 1992? A little over $1 million.

Maybe I'm warped, but I think the investor that bought the $5,000 in stock got the better part of that exchange. <grin>

intercst

You are simply using examples to prove a point, and the principle does work, but I think you overstate vastly.

Thanks for your general comments on the original post, and also for challenging some of the examples. I did not mean for the numbers attached to the examples to be taken as precise estimates of the savings possible by cutting various types of spending. The amount that can be saved varies greatly from person to person. I was just trying to illustrate the princples at issue, and you seem to not have much objection with the principles.

Did I overstate the potential savings available? My best evidence for thinking not is my experience in cutting my own budget categories. I still have some of my earlier budgets and I remember how hard it seemed at one time to decrease my budget to figures that I now consider laughably high. Before I went through the process of rethinking all my spending, though, I would have agreed with you that savings of the type I now enjoy were not a realistic possibility.

One comes to believe in the power of cutting spending only by seeing the results. But many of us don't engage in the process at all because we don't believe that there is enough power in the idea to make it worth our while to devote much energy to it. My suggestion is to take small steps in the direction of saving more. Your ideas as to what is possible may change over time if you see some benefits from your initial efforts.

Do you really wish to retire and have the only change in your life be that you don't go to work every day?

I plan to continue working after reaching my Retire Early goal. My hope is to be able to choose low-pay but high-fulfillment work without any worries that this decision would cause any distress to my family. Once I have enough money to pay all basic expenses, I can give up corporate work without any pangs of conscience.

Others on the board have a variety of ideas as to what to do with their early retirement. Some want to spend more time with family, some want to do creative work, some want to smell the roses, some want to start their own businesses. The common theme is acquiring independence.

There's nothing wrong with developing an early retirement plan that allows for more spending after retirement than before. If one wanted to travel or take up new hobbies, that would be reasonable. I don't have many expensive hobbies, and have an interest in limited but not extensive travel.

If I make a spending cut and feel deprived of something as a result, I reverse the decision. I don't favor frugality that leaves one feeling less alive. However, I've made the happy discovery that many spending cuts leave one feeling more alive. It's a paradox, I know, but a happy one for me.

Thanks again for your kind words and for taking the time to offer a contribution to our board. I'm sure there are many that read the post who had thoughts along the same lines, and it is a benefit for board regulars to hear these ideas expressed. It would be dangerous indeed for us to talk only amongst ourselves and come to believe that we must be right because we never hear a discouraging word!

Over on the DELL board last year, we had a DELL employee lamenting the
fact that he had sold $5,000 worth of DELL stock to take his wife on a
Lake Tahoe ski vacation in 1992. Value today of $5,000 worth of DELL
stock bought in 1992? A little over $1 million.


I have just about gotten to the point where I learn
from my mistakes more often than I regret them. Sure,
the $1000 that I spent in 1985 on a now-unused camera
would be worth 1.3 gazillion dollars if I had bought
MSFT.

But I didn't. Can't be changed. Now what's for dinner?

Madness

intercst writes << Over on the DELL board last year, we had a DELL employee lamenting the fact that he had sold $5,000 worth of DELL stock to take his wife on a Lake Tahoe ski vacation in 1992. Value today
of $5,000 worth of DELL stock bought in 1992? A little over $1 million.

Maybe I'm warped, but I think the investor that bought the $5,000 in stock got the better part of that exchange. <grin>>>

Again, doesn't this all come down to perspective? What if that Dell employee sold 1/4 of his stock at that time. That means his remaining 3/4 are worth $3 million dollars. I don't think he's too badly off, do you? And what if shortly after that trip, God forbid, his wife had passed away? What if that trip gave him the memories he cherished for the rest of his life?

I do appreciate the perspective of many here that freedom is paramount. And I truly respect that everyone is vastly different: I would miss the communal experience of moviegoing, to understand how others react to identical experiences, to see how a broad segment of society can exist together happily for a period of time. To me, this is important, but I understand that to others, the experience has nothing to do with those things.

Despite what you might think, I do evaluate every spending decision carefully. I save whenever possible. But I also know that I will be very active when I retire early, and I want to make sure that finances NEVER become an issue. Again, this comes down to personal choice, and having watched others find themselves trapped in retirement wishing they could do more.

Thanks for the welcome to the board. I certainly came in swinging :-)

the freep

Madness wrote,

<<<Over on the DELL board last year, we had a DELL employee lamenting the
fact that he had sold $5,000 worth of DELL stock to take his wife on a
Lake Tahoe ski vacation in 1992. Value today of $5,000 worth of DELL
stock bought in 1992? A little over $1 million.>>>>


I have just about gotten to the point where I learn
from my mistakes more often than I regret them. Sure,
the $1000 that I spent in 1985 on a now-unused camera
would be worth 1.3 gazillion dollars if I had bought
MSFT.

But I didn't. Can't be changed. Now what's for dinner?

I agree, if you weren't holding MSFT in 1985.

But if you were holding MSFT in 1985 and you sold $1,000 worth to buy the camera, I suspect the regret would be much worse.

intercst

Your ideas as to what is possible may change over time if you see some benefits from your initial efforts.

Concerning especially the words, "what is possible": I once saw an observation that went something like this: "Sometimes things are possible if we want them enough."

I think this dovetails nicely with the thought you were expressing.

I agree, if you weren't holding MSFT in 1985.
But if you were holding MSFT in 1985 and you sold $1,000 worth to buy
the camera, I suspect the regret would be much worse.

intercst

On that I agree completely. Acts of commission seem
somehow worse than acts of omission

Madness

Madness wrote:
Sure,
the $1000 that I spent in 1985 on a now-unused camera
would be worth 1.3 gazillion dollars if I had bought
MSFT.

But I didn't. Can't be changed. Now what's for dinner?



LoL... very well stated. Thanks for the perspective.

Some very good points. However, in reference to your first article "Mental Exercise One: Add Back in the Income and Payroll Tax".

I live in California and our state sales tax rate is 8.25%. This is added to the price of the shoes.

When you add in the Social Security tax of about 6% and Federal income tax (28% for most), that comes out of the $25, you are left with earnings of $14.25.

As a result the shoes with the $125.00 price tag now cost $135.32. After dividing the $135 by $14.25 it appears you have to work 9.4 hours, or one day, plus 1.4 hours the following day, to get one stinking pair of shoes, which by the way, could be replaced with shoes that are just as functionally effective for half that amount.

jackslade

nice post, complements (without repeating) the 9 steps in Your Money or Your Life