In the early days, we as humans developed a system of bartering where if I had one chicken and chickens were plentiful I maybe get a little salt or flour for it, and if chickens and meat sources became scarce, maybe I could then trade it for 3, 4, 5 times the value.
I think everyone would probably agree that they prefer our method of cash-for-goods rather than trying to figure out how to exchange chickens, goats, salt and pepper for each other.
What I’d like to focus on today is not just the cash-for-goods trade but also the time-for-cash trade that precedes it.
Now, if you’re like me, or the average North American, you currently go to a job for a set number of hours in exchange for a set amount of money and you then go on your way to spend this money on the things you need and want thus employing more people to make these things you need and want and the cycle keeps repeating itself.
So if our time spent = our cash and our cash = our goods then its fairly straight forward to assume our goods = our time spent.
Something that I think most people miss is just how impactful our spending habits are on the total time we end up committing to our workplace over the course of our lifetimes. There are many many people who don’t even stop to debate whether or not they should have their $500/month car payment or maybe try and negotiate to a cheaper insurance, cell phone, cable providers etc. etc. that list can go on a ways.
Have you ever stopped to think about how your lifestyle robs you of your time?
For simplicity’s sake lets break life down into a few popular categories that everyone can relate to:
1. Housing
2. Vehicles/Transportation
3. Travel
4. Food
5. Hobbies
These 5 things are where we spend most of our money, agreed?
Now there’s a wide spectrum to these costs and everyone has a different priority to each one, but let’s take extremes and somewhere in between below:
EXTREME SAVER
The extreme saver is the type of person to be “cheap” in all facets, they rent a bedroom in working life and intend to do the same in retirement. Always keeping housing about as low as possible. For travel this person takes the bus, rides a bike and walks everywhere so they hardly spend anything. Vacations? Probably not. This person believes they have all they need right where they are and don’t care about seeing the world. When it comes to groceries they make peanut butter sandwiches, cans of beans and maybe some spaghetti for dinner (or cereal). They might watch a bit of TV or something but they typically only do free things like hiking, cycling etc. you get the picture for this type of person.
Now lets look at the next type:
EXTREME SPENDER
I’ll keep this one within reason, we’re assuming they make a fairly normal salary and aren’t a professional athlete or anything like that.
This person has a 4,000 sq. ft house for themselves with a pool and a hot tub in the back yard, they buy brand new trucks and cars every year or two for themselves and they’re spouse and they probably have a muscle car or motor bike in the garage. They also like to go on trips all over the world and are the type that don’t even look at the price tag while they’re there and just deal with it when they get home. For food this group eats steak and seafood regularly and love to order in and go out to restaurants several times per week. Hobbies include being a member at the golf club, paying a personal trainer and constantly needing to be out with friends for drinks etc.
NOW THE MATH
To help tie together what I’m talking about visualize cutting any of these expenses out of your life and increasing your savings rate by doing so, this is the effect that it has long term:
As you can see even a 5% splurge or savings goes a long, long way!
The point to this exercise is to be aware that these two people could be making the exact same amount of money at the exact same job. And the inflation/deflation in the lives that they lead is at the expense of one having to work longer in their lives.
A good exercise I feel everyone should either run through in their head or on a piece of paper what their salary is, what an absolute bare bones life would cost them with none of the luxury and then work from there up in comforts based on your own personal passions and interests.
I’m sure we’re all familiar with the 4% rule by now (or the x25 rule), and if you’re not now would be a good time to look it up but what if we applied the rule to each individual spending category and then weighed out how important these things really are to us.
Here’s an example, say you’re someone who’s never had a paid off car, you constantly trade in every few years and have a rolling $500 car payment indefinitely. That $500 car payment is $6,000 per year and would mean that you need to save an additional $150,000 (6,000 x 25) in your retirement nest egg than if you bought an older “good enough” car and just drove it until it was 20 years old. Or if you’re someone who needs vacations in their lives but insist of spending for 1st class flights and the best hotels so you rack up a $30,000 yearly expense travelling instead of say $5,000 doing more modest adventures is that bringing you enough enjoyment to warrant you having to work until you’ve saved up an additional $625,000 in your retirement fund to maintain the same lifestyle?
There’s no right or wrong answer to any of this, if you’re on one end of the spectrum or the other different people have different needs, wants and get different amounts of happiness out of these things. If you want the pool and the trainer and the trips and you’ve accepted that that means you’re working for an extra 15 years and that doesn’t bother you? Absolutely go and do it, the key is to be aware that that’s what you’re doing and that’s what you’re giving up in exchange for these things in our lives.
So where do we fit into this?
We’re in the middle of the pack here, we have a nice enough house, we drive cars that are a few years old and plan on keeping them until they’re probably 10-12 and then trading in and starting over, we eat fairly cheap but our biggest guilty pleasure is the vacations that we take each year, these trips probably tack on 7+ years to our working life but they’re our favourite thing to splurge on and we definitely want to keep at it with our son when he joins us in a couple months time.
If you’ve got some free time try this out for yourself, strip down your expenses to bare minimums and see how quickly you could retire and then add up all the luxuries that you like just to see the trade off that you’re making then you can assess and make your decisions in a more knowledgable way. Who knows? Maybe you can speed up your own F.I.R.E. journey just by cutting a few expenses that you don’t need or want!
Questions? Comments? Leave them below or at:
Instagram @FindependenceCanada
Thanks for stopping by,
FIC.