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The Reluctant Frugalist

Frugal Living is the Fastest Way to Financial Independence

So I’m not naturally frugal. I don’t crave minimalism or get express enjoyment from having less. If I could drive a massive 2016 Silverado without payments I would probably go for it. But, I am a practical frugalist. I realize that the dollars and cents add up, and a dollar saved now is a dollar I can put to work for me down the road. Frugalism is a means to an end for me. The end goal is Financial Independence. I want to work because I want to, not because I need to.

My approach to achieving financial independence is three-fold:

Increase income through raises at work.

 I try to be a rockstar at work, and by focusing on being the best at what I do, I can consistently count on a raise of 1-3 % plus potential bonuses

Create diversification by generating multiple income streams.

To rely entirely on one source of income is risky, similar to having all of your money tied up in a single stock. By creating multiple streams of income you offset and decrease that risk. Additionally, as an entrepreneur new ways to minimize taxes become available

Minimizing expenses

The problem with earning more as an employee is that the more you earn, the more the government taxes you. As such, it is not necessarily the most efficient way to create more income to invest.

Case Study (Make more vs Spend less)  
Assumptions: We are focusing on the impact of federal marginal tax brackets on wealth creation and so for this example, we are ignoring state tax as well as Social Security and Medicaid taxes.

Luke and his wife live off of $30,000. He is salaried at $40,000. He Falls in the 15% marginal Tax bracket and after standard deduction and exemptions are added back in his tax bill comes to $2000 leaving Luke $8,000 to invest.

Christopher and his wife live off of $80,000 and because they fall in a higher marginal tax bracket, in order for them to save an additional 8,000 to invest, they would need to earn at least 100,000 (The Federal tax bill after deductions would be 12,000). So for our example, Because Luke’s cost of living was lower, he only had to earn 10,000 in order to save 8000. In stark contrast, Christopher would need to earn $20,000 in order to set aside 8,000.

In summary: While earning more is great. It is inefficient.

A serious conversation about wealth creation must look at expenses. I started by simply tracking expenses for our family using Mint. I meticulously categorized every transaction for 3 months. and I started to notice the patterns. After looking for what I could cut, we started to make progress.

  • Rent $1300
  • Cellphone $150
  • Cable $120
  • Car Payment $350
  • Gym $60
  • Water $35
  • USAA $111
  • Electric $200
  • County Waste $20
  • Food $800
  • Student Loan $2000

So in 2013, my bills were approaching $5200 per month not including any charitable giving, or personal spending. A high debt burden can make wealth creation difficult because it forces you into the situation of trying to pay down debt while in a higher marginal tax bracket.

With this in mind, we focused on reducing our expenses so that we could eliminate the debt that was preventing us from maximizing our investments.

1. We focused on the recurring bills specifically the cable, $120 per month which we canceled. We cut the cord and now we stream our TV shows over the internet and use our Amazon Prime Membership.

2. We got our food bill down to $500 per month

3. We became more energy conscious and got our electric bill down to $150.

4. Paid off the student loans: savings 2000 per month

What else can we do?

5. We are looking into switching out our cell phone plan for Project Fi – estimated monthly savings $100

6. Pay off the car $350 that would mean our monthly bills would come to $2,233 or $26,796 annually.

So what does financial independence look like?

Using the commonly quoted SWR (safe withdrawal rate) of 4% to calculate our financial independence goal, we need to save $669,000. We should reach this goal within 6 years.

By comparison, if we did not make any lifestyle changes and focused entirely on wealth creation, we would need to save 1.5 million which would take us much longer, be less efficient and more stressful.

So I see a compelling financial case for Frugalism, even among big spenders.

Reluctant Frugalist out

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