Control expenses for financial freedom, part 1.
Controlling your expenses is the best path to financial freedom.
Warren Buffett is credited with saying, “Do not save what is left after spending, but spend what is left after saving.”
I’m kind of a nerd, so nerds might geek out with me this week. If you’re not a nerd, I’ll highlight the sections for you to skip over if you want, but always continue reading after the nerd sections.
I’m going to boldly state this fact, spending more than you make will always leave you broke, period. If you make $50,000 or $100,000 in annual income but have a spending rate of 105%, you will go backwards. It just works that way.
Now let’s get to the premise of this post. Controlling your expenses is the best path to financial freedom.
Let’s quickly form a definition of financial freedom. In the book, “Retire Before Mom & Dad,” author Rob Berger defines level seven, his top level, as “25 years of expenses saved”. This sounds like a solid definition for us to use.
START of NERD SECTION: Here is where we nerd out for a short minute.
Using what Warren taught us, let’s save 15%.
On a $50,000 annual income, that is a savings of $7,500 per year.
On a $100,000 annual income, that is a savings of $15,000 per year.
If we are saving 15%, that means we have 85%. Let’s also assume a 10% tax rate just to keep it simple math, but trust me, my statement will still hold true regardless of your tax rate. After saving 15% first, and our assumed taxes of 10%, we now live on 75%. Let’s call this 75% our Annual Expense Rate. Why? Because let’s be honest, our living expenses will balloon to this full amount. Right?
Let’s move on.
On that $50,000 annual income, you are now living on $37,500 per year.
On that $100,000 annual income, you are now living on $75,000 per year.
Remember, this isn’t a post about how comfortably you are living, as there might be a clear difference in how these two families live, but an argument for both families reaching their financial freedom of “25 years of expenses saved”. That is the goal.
This is a good time to switch to a table for our data. I’ll explain more after you review it.
Family Annual Income
Annual Saving Rate (15%)
Annual Expense Rate (75%)
Goal Amount: 25 years of expenses (FF)
Assume 9.3% interest rate (years to FF)
Before we end the nerd section, let me state that I believe in paying 10% tithing, which puts me at an annual expense rate of 65%. It is my choice to do this and live this way. You still do the same math, and it turns out that because I decreased my living expenses to 65%, I also decreased my goal amount, which decreased my time to 27.1 years. I am just saying, paying God first and living within your means can get you there even faster by our definition. LOL!
END of NERD SECTION
If you see in the summarized table, I added two columns for our goal amount based on our financial freedom definition, and then, using a conservative 9.3% investment interest rate, you can calculate the number of years to reach your goal.
BAM! It will take 28.51 years for both families to achieve their financial freedom goal amounts.
Did you catch that? 25 years of living expenses if saving at the same percentage rate hits the milestone in 28.51 years. Regardless of income, your saving percentage and, more importantly, your expenses dictate how fast you reach financial freedom.
Cut back on your savings and increase your expenses. It will take longer to reach your goal. Increase your savings and decrease your expenses to reach it faster. An example of increasing savings and lowering expenses is when you get more income (new job, promotion, whatever) but keep living on the same amount of expenses (contentment). This increases your saving percentage, lowers your expense percentage, and gets you there faster.
Are you starting to believe me yet that controlling your expenses is the best path to financial freedom? Stay tuned for Wednesday’s blog post, where we continue.