Article 6 min read

Is self deprivation required to reach financial independence?

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Lets paint a picture. You just discovered the concept of financial independence. The math is simple, whatever you spend in a year, times it by 25 and that's what you need to save. If you spend less, you need less to retire forever. Easy, right?

The problem with pursuing financial independence is that the math is simple, but the psychology is not. When you are first starting out it can be tempting to cut more and more from your budget to get your FIRE number as low as possible. On the surface this makes sense, but in reality there is some base level of spending all of us need in order to have a life that is worth retiring for. If you've deprived yourself of things or activities that you enjoy in order to reach your target number faster, is that a life you are going to want to live long term?

This isn't to say that you need to spend money to have fun. It's more about being mindful of cutting everything so low that you end up not enjoying the life you've built and end up falling off the path to financial independence. At the beginning when you are excited about the prospect of retiring in 7 years it's easy to brush off little annoyances. It becomes much more difficult when you're 3 years in and sick of cutting your own hair because you don't want to spend the cash.

I want to talk about the ways that you can avoid this type of self deprivation to help you stay the course to financial independence. Money is as much about the numbers as it is about leveraging your spending to maximize the value it brings you. As you read the rest of the post think hard about what actually brings you happiness and what you wouldn't mind cutting out.

Self deprivation is different than prioritizing

Before we jump into the exercise lets define two core concepts to figuring out what is worth cutting. The lines between prioritization and self deprivation can quickly get blurred. Self deprivation to me is consciously removing something that brings you happiness or joy from your life. Prioritization is thinking about and ranking what things bring you joy.

Note that in prioritization you may cut something from your budget that brings you joy. The point is that you cut something lower in your priorities so the joy you "lost" can be made up by something that you care about more.

This quote from Ramit Sethi sums up what prioritization of ones financial life means to me:

"Spend extravagantly on the things you care about and cut costs mercilessly on the things you don't" - Ramit Sethi

For me personally, I value travel much higher than a new car or new clothes. I am willing to cut out a nicer car for the chance to travel. This is a conscious decision that I have made. A newer or nicer car might bring happiness to my life, but going to a new place offsets and surpasses the feelings a newer car would bring me. You might be the exact opposite of me! That's what's great about prioritizing. You choose to deprive yourself.

Figure out what you care about

Figuring out what you spend on and how much you care about it can be difficult. The things the average person spends money on ranges from the roof over your head to getting a weekly manicure. Write down the various items you are currently spending on in the average month. Your list might include:

  • Subscriptions
  • Housing
  • Eating out
  • Clothing
  • Activities
  • Charity
  • Gaming

You get the idea. If you have trouble thinking about what you spend money on, go to your debit or credit card transactions and write down your transactions.

Once you have your list it's time to just sit and think. Think about which one of them you could not live without. The most obvious one to me is housing, by very definition it's not something that you likely would want to cut out of your life. I personally subscribe to two different online gaming subscriptions. In my ranking I think about which one I use more and if both of them might be worth keeping. Try to rank everything and put it in an ordered list from "definitely required" to "I could live without it and not really care".

Cost is still a factor

After you have your list, you need to add cost into your equation. Now you might say this sounds contradictory to the rest of the post. I just spent all this time trying to convince you that money isn't the only thing to consider for financial independence. While this is true, we still have to factor in how much some of these things cost. The reason for this is that you might have two similar monthly purchases where you could cut the more expensive one and still get the same utility out of the other. An example of this might be cutting your cable of $50-100 per month and just having Netflix for $12 per month.

The other reason we look at cost is to see if there are potential ways of saving money or downgrading a high cost activity. This method might allow you to keep doing a hobby or activity you love while still saving money and not depriving yourself of something you really enjoy. An extreme example of this might be a golfer getting rid of your country club fees and just playing at public courses. There are plenty of creative ways to save money on the things you care about.

As you go through your list keep in mind possible duplicates (TV and video subscriptions are really common) and for your higher cost items explore potential ways to save money. You might be surprised after you think about it that there are quite a few things that wouldn't drastically change your life.

Here's what investing $100 extra per month over 10 years looks like

Compound interest graph

Starting amount: $0 | Additional yearly: $1,200 | Growth Rate: 7.0%

Value after 10 years: $17,740.32

A note about big expenses

As your going through this exercise you are likely thinking about your biggest expenses, which tend to be food and housing. These two items are where people spend the majority of their money. If you find yourself feeling like these two categories are too high, you can still apply the same principles. Finding a cheaper apartment, cheaper grocery store, or even a new city are all ways to approach reducing big expenses. It may not be as easy as just cancelling a subscription, but it can be worth considering.

Cut from the bottom

Now that you have your prioritized list, it's time to cut. I suggest starting just with the first few and see if you find yourself missing anything you cut. To really test this spend a couple of weeks without the things you cut. From there continue to repeat removing an item or two from your spending until you notice it has impacted your day to day life. I suspect for most of us we can cut about 5-10 items from our budget without noticing any change at all.

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Try to enjoy the journey

Even though pursuing financial independence requires sacrifice for many of us, that doesn't mean it has to be miserable experience. The whole point of reaching your FIRE number is that when you retire early you have a life that you will find fulfilling and enjoy. Use the steps above to try and optimize your spending to still reach financial independence in a timely manner, without depriving yourself of all joy just because it costs money. Cutting everything out isn't sustainable and the path to FIRE is long so lets figure out what matters and stay the course!