In Project FIRE 40 – This the fourth step in my plan, optimising my spending with budgeting,
Last year, a mate of mine said that it is impossible to save while living in London.
He was probably earning £60k-£80k per year. I know a couple with kids buying a house earning less combined. I have friends living off £20k. Saying it is impossible to save is a lazy excuse.
The Frugal Experiment
Being frugal is not being tight…hmm..being frugal is not only about being tight. It’s about optimising spending to be in line with your values. Sometimes our prescribed or desired values and those values our behaviour (and spending) evidences don’t align.
I am not naturally frugal, I am loose with my disposable income. I have generally been good at keeping my fixed or recurring expenses low, or at least I thought I was, that was until a year ago and I did a frugal experiment, it was dramatic and I saved thousands.
Two key aspects of the experiment:
• Going through every regular expense and challenging it.
• Writing down every amount spent for 21 days.
This increased awareness and saved money. Both were powerful exercise, with 1,000s saved and no happiness lost, if anything, happiness gained in terms of reduced financial pressure and greater alignment with my desired values.
It is difficult to repeat this experiment now, as I have moved country and my spending profile has changed considerably, that said, I am now tracking my spending against a budget.
Setting frugal principles
Throughout Project FIRE, I am finding it useful to set out principles (rules/guidelines), a framework to evaluate my decision making against.
• Keep rent low – 30% at most, target 10% – I’m achieving this through geographic arbitrage and living in my 30s, like I did in my 20s (less the partying)
• Find value – I will still spend where I find happiness, but try to find a similar option that is relatively cheaper or do more cheaper stuff with the same “happiness return” – running meets the value test well.
• It’s not the amount I earn, it’s the proportion I save. For others, I suggest aiming for 50%, which easiest with a partner. For me, house sharing is my best option.
• Reduce steps for good behaviours and increase for bad behaviour.
• Know the asset base required to support a spend – See below.
• Every Rand, Pound and Dollar has a job, get the most out of it.
• Spend consciously to align with desired values.
• Optimise fixed expenses
○ Only pay for what I am using (Review everything)
○ Pay lowest for things I want
• Consciously spend the rest
• Bring greatest joy
• Best price
• Know when to go higher price
• Steer friends towards frugal activities. Peer relative spending is a massive drive.
The 300 Spartan Saving Rule
This is based on the assumption that you usually can safely draw down 4% of your asset base in retirement, which is a good rule of thumb, but will need to be flexed according to what is happening to the markets. It is useful for target setting.
Asset Base x 4% / 12 months = monthly spend.
The 300 rule is the corollary of this what asset base is required to support a level of monthly spend.
Using the 300 rule, we know that for every recurring monthly expense, we can multiply it by 300 to work out the asset base required to support that expense.
So an expense of 1,000 per month, requires an asset base of 300,000 to support it. This is powerful, when we use it to compare incremental price differences.
The 9k Daily Dose
From the 300 rule, we can infer that a daily expense needs about 9,000x. So, a daily coffee £3 (R30) requires an asset base of £27,000 (R270,000) to support it. How long would it take you to save that up?
I am not suggesting you don’t have that coffee/beer/muffin, what I am suggesting is perhaps develop a pause before the second or third. Perhaps with a daily habit to a weekly treat.Question your habits, are they worth it?
Wrap Up of Step 4
I am still waiting for my budget to settle, but it is already getting there. I have made dramatic changes to my spending profile to complete Project FIRE40.
For most there is no need to go to that extreme, I am experimenting. Of course the principles and considerations above could help anyone reach Financial Independence earlier, while reducing stress and finance anxiety.
For those wanting to join me on the journey:
Step 4 –Reduce and optimise expenses with Budgeting – Key to FIRE is avoiding and reversing the second application of Parkinson’s law.
Step 5 – Calculating my Number & Setting Gateways – To allow focus and direction
Step 6 – Enhance Income routes – Allowing for financial leverage
Step 7 – Invest Strategically – Allowing for wealth accumulation
This experiment both excites and intrigues me, both the journey and the potential outcome.