a mortgage. And 19 percent are paying rent. In other words, 49 percent of people at this age are either renting or paying a mortgage.
Expenses do fall, but not by a huge amount. Total spending of the older set falls 17 percent to $50,178. Lower spending on some things, such as food and apparel, cuts spending even as healthcare expenses rise. Entertainment costs tend to be flat.
THE FIRE MOVEMENT CAN HELP
Early retirement used to mean calling it quits when you turn 60. But a rising group of people are hoping to hang up their apron much earlier, at 40 or even younger. What’s this heresy? It’s called FIRE, or financial independence retire early.
I talk about the FIRE movement several times in this book. The strategy has plenty of holes, but these people are onto something. FIRE advocates throw away the goal of retirement as a time to do no work, and take control of their financial lives as quickly as they can so that they can do what they enjoy now.
Some of the assumptions used in FIRE planning are questionable, but one aspect that makes a lot of sense is spending control. Some FIRE leaders who left the workforce early did so because they had large incomes. Others did it by following the guidance in this chapter but at a higher level. Simply stated, they maximized savings rates to shorten the time needed before being financially independent.
Advocates of FIRE meticulously track where every penny is going. Their goal is to save 70 percent or so of take-home pay, so that they have saved and invested 25 times their annual run rate. If their run rate were $80,000 a year, the FIRE crew would aim to sock away $2 million. That way, they say, they could safely withdraw 4 percent of their portfolio (following the 4 percent rule), or $80,000, a year.
I dig further into the FIRE movement and the 4 percent rule later in the book. But we can all learn from the FIRE philosophy. Two blogs explain FIRE well. Mr. Money Mustache (www.mrmoneymustache.com) pretty much kicked off the FIRE movement with his story of spending 50 percent less than most people. Doing so allowed him to retire at 30. Mr. Money Mustache doesn’t disclose how much he earned. But a 2016 New Yorker article shares some income figures (www.newyorker.com/magazine/2016/02/29/mr-money-mustache-the-frugal-guru). Armed with a computer-engineering degree, he earned $41,000 a year in 1997. He then moved to another tech company in 1999, at age 24, and made $75,000. Mr. Money Mustache retired in late 2005 with a $600,000 portfolio and a paid-off house.
The blogger Financial Samurai (www.financialsamurai.com) also saved half his after-tax income and retired at 34. He gives lots of financial details on how he did it, but his high income while he was working certainly helped.
Even if you love your job and plan to work forever, the FIRE movement brings a precision to savings that’s worth listening to.
Improving Your Numbers
Now that you’ve quantified your spending and compared it to the average, you know where you stand. If you’re happy where you’re at, great! If not, read this section for helpful ways to increase your income and get spending under control.
I doubt that you get much joy paying rent, paying taxes, and saving. So the goal is to satisfy those needs in such a way that money is left for fun. People get into trouble when they get this mix wrong. Some overspend on overhead (such as an expensive apartment or a too-big house). Others fail to (legally) minimize taxes. And some overspend on fun stuff while neglecting their savings.
Yes, getting your spending balance right takes some practice. But this section will help you find ideas that work for you. Remember, only you can decide what’s important to you.
https://humbledollar.com/.
Figuring out if your latte is ruining your retirement
Most personal finance writers demonize the morning brew from your local coffeehouse. But to me it’s a perfect example that pulls together everything you’ve discovered in this chapter.
Next time you drop $4 on a cup of coffee at Starbucks, consider the following questions, which apply to any type of spending:
Have I taken care of my overhead, savings, and tax? If you've paid your mortgage (or better yet, paid it off), have maxed out your 401(k), and are paid up with Uncle Sam, a $4 cup of coffee won't hurt you. But if you’re behind on any of these, the math changes.
Is this a habit? Are you buying coffee every day solely out of habit? Routine spending can add up while the happiness you get from it declines. If you spend $4 a day on coffee, that's $1,460 a year. After you calculate your run rate, decide whether the $1,460 a year translates into that much happiness. Think of another budget item that costs about $1,500 a year. Does that spending make you as happy, or happier, than your coffee habit?
Do I understand the total cost and is it worthwhile? Spending has an opportunity cost. For example, you could have saved or invested the $1,460 a year that you’re spending on coffee, bringing in even more money.
Here’s a fun exercise. Figure out the monthly cost of a discretionary item. Then log in to MSN’s Time Value of Money calculator (www.msn.com/en-us/money/tools/timevalueofmoney), put that amount in the Monthly Investment field, and change the Present Value field to 0. Select the Calculate button and look at the results. For example, if you put the monthly amount for morning coffee ($122) into a savings account paying 2.5 percent annually, it would be worth $16,613 over 10 years, as you can see in Figure 2-6.
FIGURE 2-6: Calculate how much that daily latte really costs.
And check this out. If you invested the $122 in the stock market and got an 8 percent annual return, you would have $21,208 in a decade.
Finding easy ways to stop wasting money
Few people enjoy saving money, but no one likes to waste money. And if you’ve followed my advice up to this point, you possess great insight into where your money
