When most people look at what it takes to be financially independent, they’ll generally look at it in two ways. First – earn as much money as possible and eventually generate enough returns from your investments to cover your costs. Second – focus on lowering your costs to the point where the returns generated from your current savings are enough to sustain your lifestyle for the foreseeable future. While there’s no right or wrong answer, the online community generally focuses a good amount of time on the cost end of the equation, which in my situation, initially ended up doing more harm than good.
Typically in these scenarios, the “4% rule”** is brought up, and without getting into too many of the details just yet, the basic rule is this: if you spend $40,000 per year, then once you have $40,000/0.04 (or 40,000 x 25 to make it easier), or $1 million dollars, you no longer have to work anymore. As soon as you hit a million dollars, you can (in theory) walk right out of the office and never look back. Why are costs seen as so important? Let’s say you’re suddenly able to cut out $10,000 per year in spending – now you no longer have to save $1 million dollars, and you can walk out of that office the minute you reach $750,000. Cut out another $10k of spending? You can call it quits at $500k. But at some point is this really realistic?
I went through a similar exercise myself when I was planning out exactly what I needed to be financially independent. I created a spreadsheet, monitored all of my transactions through online tools like Mint and Personal Capital, and tried to figure out exactly how to optimize all of my expenses. In doing all of this, I honestly became a little obsessed. I became so enamoured with my budget and limiting my spending that I started to feel like I couldn’t spend at all. I had reached a point where even saving 50% of my income didn’t seem like enough, and at times I’d forgo seeing friends or participating in activities simply because I felt like it was outside of my budget. I had gotten caught in a cycle where I was so driven to save that I was missing out on things in life I really shouldn’t have been.
Finally, I had an epiphany. I could make more money. It sounds stupid calling that an epiphany, but I was in a funk where it felt like no matter what I did I would be stuck getting paid the same amount for some time to come. At that point I decided to give myself a reality check, and tried to think of other things I could do to improve my earnings. I picked up a side hustle translating websites and in 2 hours of work I was able to cover my week’s food budget (I told you I wasn’t spending much). I started hustling more in my actual job, pushing myself to really capitalise on as many opportunities as possible in the workplace and focused on improving the earnings side of the equation.
With this shift in mindset, I decided to relax a little bit on the budget and made sure that I was living my life fully. In the end, I probably added an extra $5k a year in spending, which according to our equation means I’ll need an extra $125k before I’m able to retire. As a result of my hustle at work, I was actually able to get myself a raise which more than covered the extra spending, and now I feel like my head is in the right place to keep hustling and stay positive.
Costs are definitely important to focus on, but I’d argue that focusing too much on the cost side limits our potential. Take the time to look through your budget and eliminate areas which aren’t absolutely necessary, but don’t lose sight of the fact that you are capable of pursuing the quality of life you deserve. You can always lower your costs later on, but now is the time to hit the pavement, hustle hard, and focus on the prize.
**For those of you interested in learning more about the 4% rule, check out what my friend The Mad Fientist has to say about it.