How to Save 50% of Your Income Without Sacrificing Your Lifestyle

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2:34Mindy Jensen:On our last episode, we had Mr. Money Mustache on to talk about the shockingly simple math to early retirement. The truth is early retirement isn't about how much you earn. It's about how much you save. The math is very simple. So why isn't everyone doing this?

2:56Mindy Jensen:Hello, hello, hello, and welcome to the BiggerPocketsMoney podcast. My name is Mindy Jensen, and with me as always is my has a high savings rate co-host, Scott Trench. Thanks, Mindy. Great to be here as always with my 401k co-host. I don't know if that works, but we'll go with it. We've talked about this thing often that people desperately want to achieve financial independence, but they don't want to make any changes to their current lifestyle. And I think that there's a little bit of tough love and some good news on the other side of that, that we'll be able to highlight in this episode. I think that you have to voluntarily reduce your current lifestyle in order to achieve financial independence.

3:33But on the other side of financial independence, you may be able to spend much more than the entirety of your current income, even adjusting for inflation, and still have plenty left over. And so that's the silver lining.

3:43Mindy Jensen:Scott, I am excited to talk about this episode and kind of wrap up what we learned from Pete. Let's start off with our actual savings rates on our journey to FI. What was yours? When I first started my career, I was making$48 ,000 a year, and I was probably at a 30 % savings rate out the gate. That was three months in, I have a Corolla or whatever. And there's just like a limit at that point based on how I set things up to how much I could possibly save. By the end of year two, my savings rate was closer to 50 to 55%. And that was because I purchased a house hack property and I switched jobs and was able to increase that income from about$48 ,000 to$60 ,000,$65 ,000 annualized after that first year.

4:28It's between those two things. So how about yours when you first started out?

4:31Mindy Jensen:So we have always been savers. and I distinctly remember, like one of the earliest jobs I remember actually doing a big savings. I had discovered that at the time, the contribution limits to the 401k was$15 ,000 and I happened to be making a whopping$30 ,000 a year. So I went into my HR department and I said, can I put 100 % of my salary into my 401k starting in January? And she's like, well, no, you wouldn't get a paycheck then. And I'm like, well, be that as it may, can I do it? Is that allowed? And she's like, well, you could do it, but you won't get a paycheck. I'm married, my husband makes enough to cover us.

5:13Mindy Jensen:Like, it's okay, I wanna do it. Three times she came back and checked with me three separate times. So at one point I had a 50 % savings rate, but that was just my salary. And then Carl was also working. He was also contributing to his 401k, but he made a lot more money than I did. I was making 30 and I think he was making about 100. At that time, our savings rate was 50 % of my salary and probably another 50 % of Carl's salary because we were living off of half of his. He was contributing some to the 401k. And then when my salary came back in, then we would live off my salary and he would supercharge his 401k savings.

5:55Mindy Jensen:But then we were also doing after-tax brokerage investing. So I would say at a minimum, our savings rate was 50%, but it went up probably, I don't think we actually tracked this, but I think at one point we were probably at 75 % because Carl started making more money and then we started spending less. That's the big key is if income expands while expenses stay relatively flat, or better yet, if they can go down, like in your situation, then your savings rate is going to naturally shoot up. And that's a problem I think a lot of people have when they begin their FIRE journey is many people, I think, discover FIRE when they're making somewhere close to a median, maybe a little bit above a median income.

6:35And they don't realize that if you're on the FIRE journey and you're diligent at work, it is almost certain that over a 10-year career, if you're starting at an entry level, you're going to advance into something that is not entry level by the end of that career. And that's going to result in a huge income or much, much greater income than when you start. This is actually a frustration in the FIRE community because everyone's like, I want to hear the story about the person who makes$50 ,000 a year and achieve FIRE. Well, we have a lot of people who started out making$50 ,000 a year. We have very few people who finish the play as a multimillionaire close to retirement who are still making$50 ,000.

7:07And that's the challenge with computing your savings rate. It's very hard to get to those really high savings rates at a low income. It's very easy at a high income if you keep your expenses flat.

7:16Mindy Jensen:Scott, I think that a lot of people are going to be pushing back, especially people who are newer to the FI community, are going to be pushing back on this. Well, I couldn't save 50 % of my income. Okay, I don't think it's reasonable to assume or to expect that somebody goes from a 0 % savings rate to a 50 % savings rate. But you can go from 0 to 5 or 0 to 10, probably pretty easily. And you can go from 10 to 12 or 10 to 15 or 10 to 20. You can incrementally ramp this up. And the reason that we are sharing this information is because there's still a lot of people who don't understand that your savings rate is so important to your overall ability to reach financial independence.

8:00Mindy Jensen:You said this so succinctly and so well in your book, Set for Life, talking about how if, I can't remember the name of the person you use, let's call him Scott. If Scott earns$100 ,000 a year and spends$100 ,000 a year, he has nothing left over to save. But if Scott spends$75 ,000, he's saving 25%. He's also saving one third of his spend. So every year he works, he is accumulating another third of a year of spending. If he drops that down to spending$50 ,000, every year he works, he's generating two years of spent. I think there are some people, I know there are some people because I am this person, you need things phrased in multiple different ways before it clicks.

8:55Mindy Jensen:And when I read that in your book, I was like, oh, of course, if you are making 100 and spending 50, then year one, you have generated year one and two expenses. But it didn't occur to me to think that way. That's why I love you so much, Scott. You think differently than I do. That's a logical extension of the work that Mr. Money Mustache did in his article, right? All I'm doing is taking that point and condensing it down to the savings rate component, right? Savings rate is a double whammy. It's a double benefit to your financial independence goals. And I think the way I phrased it in the book, Mindy, is a little bit more extreme example of, let's say you're making$100 ,000 a year and you save 10%.

9:29That means you spend 90 and you're going to accumulate 10 a year. Nine years to accumulate one year of cash that would support your financial position. Let's say you spend 50 on that$100 ,000 a year income. Now in one year, you're going to accumulate$50 ,000. And for simplicity, I'm assuming no after tax. So not only are you accumulating another$40 ,000, but you're accumulating your freedom nine times faster because you've committed a year of cash in one year instead of nine years in the first example. So it's so exponential. And the benefits don't stop there because when the next opportunity comes along at work, for example, you can say, you know what?

10:06I don't need more cash. I really don't. I'm already saving plenty. I really like equity. Or I'd like a bigger bonus potential. or boss, could you give me a chance to sell something on the side? And maybe that doesn't work if you're working at, you know, Walmart in a massive corporation, but that does work if you're working at a small business. Absolutely. Someone will be interested in that. That's what I did, right? Yes, that's what my savings rate is, right? Well, after that first year, it becomes really hard to compute my savings rate because I got an equity position in bigger pockets and I didn't ask Josh a single time for a raise.

10:37I never asked our private equity sponsors for a raise in the entire time. that I was working at BiggerPockets. I just consistently said, I'd love more opportunities to sell and I'd love more equity when those times come. I didn't even ask for specific amounts. Everybody knew the whole time, the whole way along that I wanted more upside. And I could do that because I spent such a small percentage of my income. And if you don't think that that mindset greatly benefited me over the long term, you're crazy, right? I could have gotten a higher base salary and missed out on huge amounts of potential at my job.

11:08That would have been a huge mistake. Now, is that always going to win? No. And did it always win? No. But it was a consistent over a long period of time, much better way to approach things. And so you're like, what's the savings rate? Well, when BiggerPockets sold in 2018, for example, to our first private equity sponsor, well, that I had an enormous savings rate, right? Like 80, 90 % because I made multiple years of my annual salary in one go. That's an enormous contribution to my financial position. There's a little bit of lumpiness that will begin coming into your finance position if you have the opportunity or set of circumstances that could even somewhat mirror a dream with a startup or a small business, for example.

11:43Mindy Jensen:We need to take a quick ad break, but more when we're back.

11:51All right, let's jump back in.

11:53Mindy Jensen:I love that you're thinking about it in a different way. Most people just want to be shown the money. So I love that you're looking at different equity plays and that benefits you greatly down the road. So your savings rate allows you to take advantage of these alternative ideas. If you were making 100 and spending 100, you would still have the ability, but you probably wouldn't think about that because money is not your primary focus. Like saving money is not your primary focus. Another aspect of a higher savings rate is a lower total buy number needed. So if you're spending$100 ,000 and you want to retire early, you're going to need$2.5 million amassed before you can retire.

12:38Mindy Jensen:If you're spending 50, you need half of that,$1.25 million in retirement money. And if you're spending 25, you need a quarter of that, just like a quarter of the spend. You need a quarter of that. It's a lot easier to amass a$500 ,000 net worth than it is to amass a$2.5 million net worth. Math doesn't lie. And it's all a spectrum here, right? Like very few people in the bigger pockets money community want to spend$25 ,000 a year for their entire life. I'm not necessarily saying that that's what you ought to do. I'm saying, however, that you should attempt to spend$25 ,000 a year, ridiculously small amount of money.

13:17Maybe we adjusted for inflation to$35 ,000 a year. I was spending about$25 ,000 10 years ago now when I was getting started on this journey. But you start there. You start there and you do that for a little bit and you get happy with it and find contentment there. Your asset base begins to swell and then you can ease off. Right. And once you get the other side of the capitalism snowball, you'll find that the average return, especially if you're using safe withdrawal rates of like a 4 % to compute your portfolio, the average return is almost always higher than that, which is the reason why we use the 4 % rule.

13:48And so you'll begin to see your portfolio expand and expand, and you can begin spending more on there. That's why lean fire is such a good, you know, that 1 million mark or so, maybe even a little less, is such a good milestone for many. It's freeing because then you can begin thinking about other things. Like, for example, I think it'd be silly to turn down a really good risk-adjusted bet on equity in your company and instead opt for a higher base salary if you're approaching those numbers because that could massively multiply. It has potential upside for you and often comes with additional benefits or better overall risk-adjusted compensation.

14:20There's only trade-offs here, but the game gets so much easier if you're able to keep your expenses low relative to your income or your asset base because you can take more and more and more chances. It's not just like a little bit more optionality. It's exponentially more optionality.

14:35Mindy Jensen:Cutting expenses for most people is not going to be difficult. You have to want it. I mean, this isn't going to be you're living the exact same life that you have been and now you're just able to save more. You're going to have to change your life. And one of the best examples that I can remember us ever talking to on the show is Mrs. Frugalwoods way back on episode 10. She said, and I'm paraphrasing, but it's a great episode. She said, you know, we discovered this concept of FI and we decided we wanted to get there as fast as we could. So we cut out every expense we could, absolutely everything for a month.

15:10Mindy Jensen:And then we decided, you know what? That month wasn't our favorite. We miss these three things. but we cut out these hundred things. We missed these three things. So they found a way to inexpensively add them back in. Specifically, she liked to take yoga classes but yoga classes are$20 a pop or they were when she was taking them. And she discovered that if she would arrive to the yoga studio early and check people in, she could get a free class. And she's like, well, I'm gonna do that. I wanna keep the yoga but I don't wanna pay$20 a class for it. There's all sorts of examples of creative ways to be frugal, creative ways to reduce your expenses so that you can get down to a 10 % savings rate this month or a 20 % savings rate.

15:56Mindy Jensen:Increase just a little bit, look for creative ways and ask in the Facebook communities, ask in your whatever frugal groups you're in, whatever fire groups you're in. The immense creativity of this entire community is overwhelming. Ask in any Facebook group, ask in the BiggerPocketsMoney Facebook group, What are ways that you have found to reduce your expenses? And you will be overwhelmed with the responses. In fact, we're going to post that in our Facebook group. So hop on over to facebook.com slash groups slash BP money to share your favorite frugal tips and your favorite tips for reducing your expenses.

16:34I'll share mine here, which is you always like to start with all these examples of things to cut out or whatever. But I always start from the opposite spectrum of like, what are the absolute largest line items in your budget? And how do you eliminate them? And like the most obvious one is housing, house hacking or living with a roommate. Are you going to live with a roommate or house hack and then blow$2 ,000 in a month on eating out or entertainment or whatever? No way. That one choice of house hacking is going to have so many downstream effects on the overall way you're spending. You're going to go home every night and remember, oh, yeah, I'm doing this in order to become financially free.

17:11And I have so much. I have a huge surplus, of course. but like, I'm not going to go and just blow it now on this other thing. If you sell that fancy pickup truck and buy a Corolla that's eight years old, you're not going to have to go and get it washed on a regular basis, right? You're not going to be, you know, spending a lot of money to maintain the thing. There's a great example in the millionaire next door about this business owner who was gifted, a very successful business owner, Deca Millionaire, you know, in 1990s, his friends gave him a Rolls Royce, like business associates who had made a lot of money.

17:42And he said, I don't want it. He just gave it back because his hobby of throwing bloody fish that he would catch at a local lake into the backseat of his 15-year-old pickup was incongruent with driving a Rolls Royce, right? As was the image that he wanted to project in a general sense to his employees. They didn't want to show up to the facility in his uniform and a Rolls Royce. And I think that's a great mentality to adopt in these early years, especially a fire. It's probably a good one for life, but it's so important to assume that identity for yourself in these early years to get things going, right?

18:17And that applies to so many other areas, right? If you're not going to wear a super expensive watch, for example, and then not have a nice shirt to go with it or not these other things in many cases. So the accumulation of even one of these status artifacts, even as a gift, can actually be a curse, right? There's examples, again, in Millionaire Next Door, parents will buy their children homes. And that seems like such a good gift. but now the children who are not in the same income tax bracket as their neighbors, yeah, they don't have a mortgage payment, but they have property taxes. They have the schools that the other neighbors are sending them to, the hobbies that the people that are so it's putting yourself in that environment that's conducive to saving money and it becomes easier and easier over time.

18:57One thing that I think you were mentioning here is the time component as well. This is not an overnight exercise, right? You're not going to go from spending a lot to spending a little in a month. You can cut out some things and do a cold turkey reset, but to really radically cut your spending over a long period of time, you've got to make these changes one after the other in the biggest areas of your life over time and get comfortable with them and let them ride for a while. And then again, the optionality to live a middle or upper middle class or even fat fire lifestyle may come back to you in spades one day from your asset base if you are able to start the journey by cutting them in a semi-permanent way in the big areas.

19:34Mindy Jensen:I hear what you're saying, Scott. I'm going to push back a little bit and say that it might be difficult for somebody to embrace the concept of house hacking, especially someone who has children who has discovered this idea and decided that they want to pursue financial independence, but maybe they bought the house five years ago and they've got the low interest rate. Their house doesn't necessarily work for house hacking with their current situation. So if that's you, I hear you yelling at the radio saying, Scott, I can't do that. There's other things that you can do. And every dollar that you take out of your expenses can go into your investments.

20:09And I think there are things you can do, but one of the biggest realities there is just don't upgrade from here. If you just stay put in the house, in the current vehicle that you drive, pay them off, whatever, and don't allow the next big purchases to come into your life, then you will naturally grow out of this problem over time. I wish there were a faster option, but I do think you will not be able to dramatically ramp your savings rate from 20 % to 60 % if you're in that situation. It'll creep up year by year as you make the conscious choice year by year to forego these large additional expenses that could come in, like the remodel for the house or the next car or whatever.

20:51It's harder for someone who's in this, you know, that middle phase of life. It's so much easier for like the 23-year-old, the 25-year-old who's single to make these decisions to get that snowball moving. Or I would also argue the 50-year-old empty nester than it is for that person who is, you know, just starting or about to start a family, for example, and doesn't want to make those trails. Because I would argue that the nice house maybe is more important than fire for a lot of people in that stage of life. Maybe the aggressive pursuit of fire inside of seven years isn't worth that trade-off for a lot of folks.