Extreme Frugalism — Is It Worth It?
Why we are trying to save 40% of our take home pay
The journey towards financial security is a long and difficult road of dedication, grind and the constant weight of having to make sensible, unemotional decisions. After a while, you get to thinking what you can do to light a fire under your financial planning, and quicken the pace towards the dreamy goal of financial freedom. Enter Extreme Frugality and the quest to save 40% of take home pay.
The Foundation Of Financial Freedom
Financial Freedom is a term that is banded around without much consideration these days. Once, it was a term that needed clarifying, a term that was pretty obscure and only understood by those with a savvy financial education.
Now however, it seems not only that most people understand the concept, but that its the cool thing to be pursuing. The truth is, those that are pursuing it with intent and understanding, realise how god damn hard their long term goals are.
For families like mine, we also understand how silly we were for not getting on board sooner. We started in our thirties, and we need to bear down with twice the intensity to achieve the same result as those younger than us. We had debt when we were younger, we spent poorly when we were younger and made decisions without the appreciation for what they might mean in the future.
Now, we weren’t much different to most, and its great to see younger generations getting this education through social media and the positive light entrepreneurialism and minimalism have today. So what does a strong financial foundation look like?
This is how I like to look at it:
- No consumer debt
- Some sort of emergency fund in place
- A sensible plan for contributions to retirement
- Paying yourself first, before all else for the purposes of investment
- Paying off your mortgage if you have one
There are many plans you can follow that help with this if you are new to the journey, personally we’ve been using Dave Ramsey’s model, but the devil isn’t in the detail here. What I’ve learned is that if you are making the big steps towards a plan that looks something like that above, you are laying a foundation for a prosperous financial future.
The good news about getting hooked on a journey towards being financially independent is that right from the start, its a lot of fun. you might not think that selling everything you dont need, finding extra jobs and working over time sounds fund, neither did we — but it is. When you see the huge amount of ground you can cover quickly it becomes a real inspiration to do more.
Before you know it, you’ll be well on your way towards your goals, likely with a stronger relationship both with money and your partner. After a while though, you start to wonder what more can be done, how else you can keep the momentum. The reality of course is that momentum will slow, progress will start to plateu. This is inevitable, and it is more than fine to accept this and keep going at the new, slightly slower place safe in the knowledge you will achieve you goals.
But, there is a way you can increase your progress, it takes more giving up today for gaining tomorrow, but more and more people are making that choice. How? By saving 40% of their take home pay.
Make no mistake. This.is.hard. The level of budgeting and discipline required is huge, but when you look at the benefits of saving 40% of your take home pay, they are huge. But why that particular number? Who knows who started it, and it probably isn’t important — what is important is that is is a significant portion.
10% used to be the recommended figure, but truth be told that isn’t enough to provide for later life these days. People simply aren’t saving enough. With pension contributions falling way below that required to maintain lifestyle, and mortgage debt continuing to rise and remain present into later life, drastic saving needed to really build security.
A big slice of cake, saved rather than spent
In Tony Robbins’ book “Money, Master The Game” he talks about your mortgage payment being split into principal and interest. Simply by overpaying your payment by the amount that goes towards your principal — you half the life of your mortgage. Think what you could do if you saved 40% of your take home, and allocated it to your mortgage.
Or, think about what you could do if you invested the money instead. If you take home $2000 and save 40%, that’s $400 a month going towards either retirement of tax efficient investments. Over a thirty year investment life, at an averaged conservative compounded annual rate of 5% — thats over $330,000!
Now, these numbers are very rough and ready and there is no denying that saving 40% of take home pay for a lot of families is simply beyond the realms of practicality. That said, even if you use it as a target, and work towards doing what you can, the principles of cutting expenditure, accepting a change in lifestyle and slashing spending habits have the ability to do wonders for your future over the long term.
Screw the Joneses
I hate this family. In my youth I tried hard to keep up with them, I failed and ended up with a mess to clear up. When I realise I was playing a fools game I looked hard and realised I didn’t even want the life they had. Even if the life you want is hugely luxurious, requires untold wealth to fulfil, the Jones will always have more, because there will always be more Joneses out there, always a rung above the social ladder than you. The solution? Live your own life and forget EVERYONE else.
The important thing is to live a life you aspire to, not others. That is why my wife and I decided we are giving this Extreme Frugality thing a go. Whats the worst that can happen? We fail and we are no worse off. But what exactly is involved?
Firstly, you need to get the foundations down first. I doubt trying to save this hard is the right thing to do if you are still battling with debt. Try and get that knocked out first before you turn your attention to bigger things. To be honest, this will probably be a natural progression anyway as you progress through the steps of whatever plan you are on, as the addiction bites — you’ll be trying to do whatever you can to eek out as much speed as you can.
Secondly, you have to be straight up with yourself. You have to go in knowing that your lifestyle is taking a hit. Knowing that there is a period where you aren’t going out to see friends much, that the cable TV is going, and that the dinner table is going to look a lot less extravagant. Once you’ve made that decision it’s pretty straight forward.
Take your take home pay, find out what 40% is — and start working like never before to try and put that amount away at the START of the month. Why do I think the start of the month is important? Because in my experience if you do it last, you won’t do it — something will always come up to get in the way.
You are going to have to cut everything you don’t truly need. You are going to have to negotiate on every bill. You are going to have to consider moving house, and in most cases find extra work.
You will need to budget, and most importantly of all — stay.on.that.budget.
This is a huge amount of work, but it’s exciting. Don’t focus on what you are losing in the way of lifestyle. Focus on what you are gaining long term, focus on how you will come together as a family, and how you will appreciate the things that are free in life.
Is it worth it?
Life is short. I know this. Every day as a Rescue Pilot I see lives that are impacted by the tragedy of life cut short. You might think that would make me way more chill about spending habits, and for a long time I was, but then I realised I was just using it as an excuse.
At the end of the day we have to make our own choices. The choice to try this is ours. It isn’t about being money obsessed, or about being a scrooge. It’s about doing something really hard, accepting the challenge, and getting the benefit that down the road, we will have complete control about how we lead our life.
You might decide that you value the disposable money you get every month and want to spend it, that’s fine, I have no problem with that — provided it makes you happy. You might decide that your social life is exactly the thing you need after work to unwind. That’s great, especially if you’re young I agree there is a fine line that needs to be walked where you balance being sensible and enjoying life.
I’m not preaching here, I’m not a success story — we are starting this step of our journey like any other. We will no doubt face challenges, we will no doubt face failure, but what is wonderful about Medium, is that we will be here sharing our journey along the way.
Here’s to doing what we can, here’s to the future, to doing what makes us happy and to carving a path to our dreams — whatever they may be.