My financial mindset for the last few years has been pretty simple:
- No debt, at all costs 🙅♂️
- Have at least three months of safety net saved up 💰
- Max out my Traditional IRA annually 🏖
My wife and I have managed to avoid debt, build up a safety net of six months, and contribute to our retirement accounts as much as possible. Beyond that, we weren’t really sure what to do. So, inevitably, we spent our extra cash. Not on anything too lavish or wild, but we weren’t mindful and didn’t have a plan. Until now.
Abagail started a new job a month ago after finishing a nine-month-long Medical Assisting program at our local community college. This program was wonderful because it was affordable enough to avoid having to take out student loans, short enough to get into the field and working to see if she liked it, and, most importantly, in a field she was interested in.
I earn a solid income and have been able to support us while Abagail was in school, while also saving at the same time. Once Abagail graduated and got a job, we wanted to figure out what to do with this new bump in income. We knew that we didn’t want to bloat our spending and lifestyle to match it. We’re in touch with ourselves enough to know that buying more stuff won’t help fill the void.
We decided that we’d just save it. Build up our retirement accounts and put the rest into a savings account or a CD. Maybe buy some bonds. Simple enough. We hopped on the bus and went to our local credit union to learn more.
After taking care of some account management business, we asked about long-term savings options. Presented with charts of savings account interest rates and CD interest rates, we tried to parse and understand what it all meant. With Annual Percentage Yields (APY) of less than 1% for the savings, and the CD APYs ranging from less than 1% to 3% based on the length and amount, we asked what a good goal for us to aim for would be. Maybe a mixture of some shorter-term CDs and longer-term CDs in case we need that money? Sounded good.
We left the credit union with our paper print out, a plan to save up a solid chunk of money to get a better APY on a 5 year CD (2.50% ~ 2.75%), and wide eyes, ready to put our money to work for us.
Abagail and I did some quick online research during the ride home to see what our options were aside from CDs and savings accounts. The stock market. Investing. Financial independence and early retirement. Compound interest. Frugality. Inflation. We found it all within a few minutes and were hooked.
That night we watched a dozen videos about all of these different topics. Much like veganism and minimalism, the more extreme approaches to personal finance appealed most to us. They require a higher level of dedication but have much faster and significant results.
For the 5-year CD, we would need to put in at least $100,000 to get a 3% APY. That’s just barely outpacing the current rate of inflation of 2.9%. We started asking ourselves the question of “why would we put $50,000 or so into a CD that doesn’t even outpace inflation?” It didn’t make sense to either of us. It’s less risky and federally insured in a CD, sure. But we’re in our mid-twenties and are in a good place to take some risks.
Now we weren’t totally unaware of the stock market and compound interest. But I’d say that we (or at least I) avoided it because of a high level of fear, uncertainty, and doubt due to lack of knowledge and understanding. We’ve been using Betterment for our Traditional IRAs, but we didn’t really understand much more other than put in some money when we’re young and it’ll grow over time.
In order to overcome our fear, uncertainty, and doubt, we’ve been doing as much as possible to learn about managing our finances. One of our favorite resources has been Mr. Money Mustache, a blog about retiring early by reaching financial independence. Financial independence means one can live off just a portion of the returns on their investments (~ 4%). It turns out the math behind when one can become financially independent isn’t all that difficult to understand. Mr. Money Mustache and many others advocate saving much as much of one’s take-home pay as possible and investing in proven methods like index funds to eventually live off of a percentage of the earnings. The more one saves and can lower their cost of living, the sooner they’ll be able to reach financial independence because the amount they need to earn from their assets is lower.
Our goal is to save at least 50% of our take-home pay. Based on the numbers presented by Mr. Money Mustache, we’re looking at about 16 years until financial independence. That didn’t sound too bad at all when we first set this goal.
Financial independence appeals to Abagail and I because it would give us the freedom to choose what to do with our days. It’s less about the typical retirement scenario and more about the potential of what we could do with that time while we are still young and ambitious. I’d love to work on my creative projects more. Abagail would love to volunteer. Heck, maybe we’d just keep working. The key to that being we wouldn’t have to keep working.
But could we make it happen even sooner than 16 years from now?
Well, there are two ways: earn more money and spend less money. Abagail and I decided that we’ll do both. It turns out that spending less money is much easier than earning more money. We just simply stopped buying things we don’t need and started being more mindful of the money we do spend.
I’m a devout user of YNAB for budgeting, so we were able to go into our budget and see where we could cut our spending. There were quite a few spending categories that immediately were easy to reduce:
- Entertainment – I was spending an average of around $500/mo on books, comics, video games, streaming services, and things of that nature. The worst part of it all was that I was simply amassing forms of entertainment and barely enjoying any of it. I would guise my purchases under supporting the artists and needing the purchases for research for my own creative projects. I’ll enjoy this some day. I’ve still got a monthly budget for directly supporting creators through Patreon. I stopped going to the comic shop regularly, canceled our monthly streaming services, and started going to the library, which flattened this category to $0.00 per month.
- Dining Out – We have a pretty restrictive diet where we don’t eat added oil or sugar and limit our salt intake. This lowered our historical dining out budget, but we were still spending an average of $300/mo on dining out. The funny thing is that it was pretty much all spent on veggie sushi, which is fun and much cheaper to make at home. Our new monthly Dining Out budget is $50, which allows for a couple small meals out per month.
- Automobile Transportation – Between gas, parking, maintenance, and insurance, we were spending $500/mo for a vehicle we didn’t use often nor relied on for commuting. We sold our car and slashed that expense. Biking, walking, and public transit have been wonderful so far.
- Creative Tools & Supplies – I spent a couple hundred dollars a month on various art supplies and tools for making comics. Similar to books and entertainment, I was just amassing supplies but only using a small fraction of them. I’m committed to not buying any new art supplies unless absolutely necessary for a project – no more what ifs.
There’s about $1500/mo we were able to immediately reallocate to saving without much of an impact to our day-to-day lives or happiness. The power of having visibility into our finances through budgeting is incredible. Our new financial focus has been refreshing and motivating.
Our two biggest remaining expenses are our rent and our grocery budget. There’s not much we can do about our rent, but that’s okay. We like where we live a lot. Our current monthly budget for groceries is $800/mo. We’re going to do a future experiment where we analyze where exactly that money is being spent at the grocery store. We’ve handled clothing purchases on an as-needed basis for a few years, so no real change there. Just some tightening up of what need means to us.
We can pretty easily control what we spend our money on, which has a bunch of side benefits aside from saving more money like not consuming our time with worrying about what to buy next. It’s freeing to not be mentally consumed with thinking about what the next thing we want to buy is. No more obsessing over tech gadgets or supplies or collecting.
The easiest way to earn more money is to sell things. That’s not a great long-term solution since we’ll eventually run out of things to sell but it’s a great short-term boost. We’ve been able to make $9,600 so far by selling stuff on eBay and Craigslist. It takes a bit of effort to take photos, list the items, ship them, meet up with the person, etc., but it is very much worth the energy. Having less clutter and extra cash is a win-win. All of that money went right into savings.
Making more money at our jobs is a difficult mountain to try to summit. Maybe we’ll get a raise once a year. Maybe a promotion. But that number is not very likely to change drastically anytime soon. We could get second jobs or take on freelance projects, but that would eat too much into our personal time and throw off our balance and probably reduce our happiness, which isn’t our goal. So our income is pretty much what it is right now.
We’re definitely going to keep reducing our expenses because that’s more controllable by us than increasing our income (at least at this time). There are more micro reductions we still have left to do. We’ve found quite a few books to be helpful with minimizing our possessions and reducing our spending: Goodbye, Things by Fumio Sasaki, The Life-Changing Magic of Tidying Up by Marie Kondo, and The Year of Less by Cait Flanders.
Abagail and I have reduced our spending, sold and donated items we do not need, starting investing money into index funds, and created a game plan with the ultimate goal of being financially independent in the next 16 years (but ideally sooner).
What has been eye-opening to us is how all of the different aspects of our lives tie together and support one another. Minimalism supports our financial goals by selling stuff we don’t need and not accumulating most stuff. Our diet allows us to enjoy our lives today while being healthy for when we become financially independent. Mindfulness helps us stay in touch with how we feel and what intentions we want to set with our money. You can’t have one without the others.
There are still things we are uncertain about like any unknown risks associated with robo-investing platforms (e.g. Betterment), how to balance early retirement investments with long-term retirement investments (e.g. IRAs and 401ks), and investing in general. We’re going to keep learning. Being in our mid-twenties makes the what if‘s seem less daunting. What if we lost all of our assets or the market tanks? Well, we would go back to work and build it all up again. We’ll do our best to maintain our health and have our living expenses as minimal as possible. It’s not like we’re attempting to live a lavish life – just a simple, happy one.
I’m sure our thoughts and approaches will evolve, but I think we have a solid foundation in place and have taken the first few steps forward. Now it’s about the days, months, and years to come. We’ll definitely be sharing how it goes and what we learn along the way.