It was a very good month for net worth. Our asset value went up over 7% due to a combination of a strong market rebound, continued regular contributions to our investment accounts and reinvestment of all quarterly dividends that hit our accounts in March. However, our spending was up again, increasing our monthly average spending by $100. Our assets now sit at 15X our annual spending, which is a nice jump from 14.3 last month. However, we’re still a good bit off of our peak of around 18X one year ago despite substantial gains in our investment value from that time.
The Impact of Spending
It is interesting to look at our numbers and consider the impact of even relatively small changes in your spending. This past month, our monthly average spending went up by $100. Factored in over a year, our spending went up $1,200 ($100 X 12 months). Assuming you could safely live off of your portfolio while taking 4% each year, this seemingly small increase in spending means that we would need an extra $30,000 to support that increase indefinitely. This canceled out a big part of our portfolio increase as seen in the chart.
This just goes to show that it is far easier to cut your spending by seemingly small amounts, than to save these seemingly large amounts. For example, many people could save $100 monthly very easily by skipping eating out once or twice, cutting cable, changing phone plans, etc. Conversely, maxing out a 401(k) ($18,000) + a Roth IRA ($5,500) for an entire year would get you only about 80% of the way to saving enough to have an equivalent impact.
On the flip side of the coin, there is only so much saving you can do until you begin to feel like you’re sacrificing. Looking at the numbers in this way also makes you realize that it is hard to save your way to complete financial independence. Even if we could save $100,000 (which on our incomes we can’t) by working an extra year, it only allows us only $4,000/year in additional retirement spending. This realization is one of the reasons that we are so committed to our FI date, regardless to where our numbers are at. We are very happy to have the security of being in the neighborhood of FI, knowing we have enough to at least support all of our necessities without having to ever work again. Our goals are more in alignment with the idea of a “Fully Funded Lifestyle Change” as espoused by the blogging couple at Slowly Sipping Coffee.
Like most people in the FIRE community, barring a complete catastrophe, I don’t think we’re ever in danger of running out of money and not being able to support our living expenses. I also don’t think we’ll ever be massively wealthy where we can live anywhere, buy anything, travel in any style, etc without budgetary consideration. We therefore believe that after covering our basics, it will be far easier and more fun to be creative with earning small incomes or being creative with spending in retirement while living with much more freedom compared to continuing lives that revolve around jobs just to save more money.
Let’s look at an example. We love to ski and plan to buy a ski pass every year for the rest of our lives as long as we are healthy enough to be able to use them. We’ll assume a yearly ski pass is $1,000 per person. For two people, this is $2,000/year. To support this expense, we could save an extra $50,000 ($2,000 X 25).
Alternatively, we could plan to each work part-time at a ski resort (ski patrol, rental shop, bartender, etc) to get free passes. Let’s assume we have to work 2 days/week for 5 months/year (mid-Nov to mid-April) to get this benefit. Let’s assume we make $10/hour after taxes. Over those 5 months we would make $320/week, or $1,280/month. After 5 months we would make $6,400. Using this money towards our living expenses would eliminate the need to save an additional $160,000 ($6,400 X 25).
Eliminating the need to save enough to buy our ski passes plus the very small income earned in the process would be the equivalent of saving an extra $210,000 towards a traditional retirement. Would it be better to work full-time for 3 extra years to save this amount, or would it be better to be “retired” for 7 months and then work 2 days a week for the other 5 months to have the same financial impact? I know what the answer is for us.
How about you? Are you more committed to change your lifestyle based on reaching a FI number or a FI date? Are you willing to be creative by earning small amounts of income in early retirement or are you committed to a more “traditional retirement” characterized by not working? Do you have creative ways to decrease your spending to give yourself some leeway? Share your thoughts below.