Thursday, October 30, 2014

Using Extreme Frugality In The Beginning To Get Things Rolling

Life is a journey. An ever-changing one, at that.
As such, it would be unrealistic to expect that one would maintain the same lifestyle or same ideas about life from childhood to death. We grow. We learn. We change. We hope to become better versions of ourselves as we age.
At least, that’s what I’m really after. A better version of myself. And I’m most “me” when I’m free, not constrained by a 9-5 where a boss dictates my every movement. When I work. When I eat. When I go home.
So not long after I first started walking the path to financial independence I was willing to do whatever it took to better my situation. I had a pile of student loan debt. I had very little cash. I had no investments. Basically, my options were pretty limited. And financial independence or retiring early is all about maximizing your options. Increasing flexibility. Making your life whatever you want it to be.

Scorched Earth

I started this blog in early 2011 after a year of diligently saving and investing. I was saving half of my net income and my progress was more than satisfactory.
But I wanted more. I wanted to test the limits of frugality and my potential. What could I live on? What could I live without? If I could stretch the limits of my comfort, would I become a better version of myself, more knowledgeable in what I can get by without, and thus stronger knowing that I didn’t really need everything that was around me? Was all the stuff in my life a facade? Or barriers keeping me from more progress, from reaching freedom even faster?
So I decided to adopt my own version of extreme frugality. I looked at it like my own variant of a “Scorched Earth” policy, where anything that could go, did go. It was total war on my expenses.
I studied my budget. Where was I hemorrhaging cash? What was costing me money that could otherwise be used to invest and start running, rather than steadily jogging, toward financial independence?

I’m Spending How Much???

My car was costing me more than $450 per month! Say what? That’s $5,400 per year! Not only was that cash that I could use to start really rolling my snowball, but it would take a $155,000 portfolio of dividend growth stocks yielding 3.5% to spin off the dividend income to fund that expense on an ongoing basis. $155k I didn’t have, and, frankly, didn’t want to spend years saving just to afford a stinkin’ car.
So I sold it – a 2006 Pontiac G6 at the time – in a neighboring town and spent three hours getting home, after taking multiple buses and walking for about two miles. I’ll tell you what. That walk home was the best walk I ever had. I was smiling the whole time, doing Rocky Balboa-style fist pumps in the air, with some shadow boxing thrown in for good measure. I felt like I just accomplished a major victory. I freed up some major cash, which could immediately be used to invest. Score!
Not long after that my significant other and I moved into a cheaper, smaller, and much more modest apartment that was also located along the bus line. Makes it a lot easier to take public transportation when you’re not two miles away from the closest bus stop. That saved $150 per month in terms of cheaper rent right there. So I was already up to an extra $600 per month by just attacking two budget lines.
Then I addressed food. I made some difficult choices here that I still don’t regret. Out went a lot of restaurant visits, pizza every Friday night, expensive meals during the workweek, paying for lunch while at work, etc. In came peanut butter & jelly sandwiches, ramen noodles, and a lot more brown bagging it.

Tilting The Balance

Those of us that embrace frugality often discuss trying to achieve a harmonious balance between saving for tomorrow while also enjoying yourself today. My take on that has always been that I wasn’t delaying gratification at all by saving and investing, because what I’m really after is time. And in order to have more time I was working hard to replace my day job income with the passive dividend income that could allow me to pursue my passions in life with reckless abandon and no cares about money. So, in my mind, I was actually hastening gratification.
However, I will say that I titled the balance early on. I was being super aggressive on savings, often achieving monthly savings rates well into the 70% range. I made some sacrifices. I wasn’t always happy about it. It wasn’t a harmonious balance.
I wore holes through my work shoes and kept on walking. I missed a lot of good football games because the OTA antenna I was using to pick up free television would only get one or two channels sometimes. I would pretend the food I was eating was much more luxurious than it really was – sometimes I would mentally convince myself my plate of macaroni and cheese was really fettuccine Alfredo.
But I don’t regret it any of it for a second. It was those early sacrifices that provided the firepower that got me to where I’m at today.

Frugality And Age

I often talk about trying to get your snowball rolling as early and as fast as possible. Early as in starting as young as possible. Fast as in contributing as much capital as you possibly can. And this is due to the power of compound interest.
You have a golden opportunity while you’re young. And you have to take advantage of that.
Consider the power of compound interest for someone who’s 25 years old and starting out with nothing. Putting away just $500 per month and receiving a 7% compound annual growth rate on their capital means they’re looking at almost $262,000 at 45 years old. A mighty sum, but not enough to become financially independent for most people.
That’s why you need to be serious about frugality while you’re young. Don’t take light of your opportunity. Not only is time on your side in regards to compound interest, but it’s also on your side in regards to what you might be willing to live with and without.
Consider my car-free lifestyle. I did it for a number of years. It was a lot of fun, and I’ve certainly ran into my fair share of interesting characters on the bus. And zipping around town on a little 49cc scooter was also a great time, albeit probably a bit dangerous. But I did it. And my dividend income that’s going to exceed $5,500 this year is at least partially due to those sacrifices.
But I now have a car. I paid $5,400 cash (less than what I’ll receive in passive income this year alone!) for a 2006 Toyota Corolla. Could I get by without a car? Well, not up here in Michigan where I’m staying right now. But if/when I end up moving back to Florida I absolutely could. Will I? Probably not. It’s nice to have. It’s a creature comfort. And I got a steal on this thing. Plus, my significant other doesn’t have a car. It’ll be nice to have one car in the household for emergencies, getting to places that are difficult/impossible by bus, grocery shopping (lugging 10-12 bags around by bus isn’t fun), and traveling (we like a good road trip).
So maybe I’ve gotten a bit comfortable at my dear old age of 32. Nothing wrong with that when you make the sacrifices young and get that snowball rolling, putting some serious wind in your sails. If you can build up some serious speed at the outset, you can lay back on the throttle a little bit and allow your momentum to coast you along.
When you’re young ideas like living with roommates to save some cash is much more palatable than when you’re 45 years old. And what about walking/biking around town? Your knees and ankles might not be the same when you’re older. Same goes for eating cheap food. I’m no nutritionist, and I’m not suggesting you sacrifice food or health for saving money. But I am saying a 25 year-old can probably eat PB&J for a while with no problems, whereas a version of you 20 years older might not do so well. And I’m eating like a king compared to the way I was eating just a few years ago.

Working With A Tailwind

As I mentioned above, a burst of frugality in the beginning can positively impact your financial progress for the rest of your life.
Consider the previous example of a 25 year-old putting away $500 per month. What if this same person can get serious about frugality and put away $1,500 per month until they’re 45 years old? As I’ve already proven for more than four years now, this isn’t all that difficult for someone with a modest income.
That input changes the outcome dramatically. The $262,000 they were looking at before is now dwarfed by the new result of $786,000. That is enough for someone to become financially independent, as a yield of 3.5% across a portfolio of high-quality stocks would provide $27,500 in annual dividend income. And that income will likely grow above the rate of inflation. Anyone with even a modicum of frugality should be able to get by on that type of income with minimal sacrifices, if any.
Meanwhile, one’s pace doesn’t need to be constant. As I discussed at the outset of this article, life changes. We grow. We change. I like having a car right now. Will I in a year or two? I have no idea. Am I living quite as frugally as I was two or three years ago? I’m trying, but it’s difficult. I’ve added health insurance to my expenses. The minimum payments on my student loans have gone up. Add in the car and the budget has inflated.
But the secret sauce is that I’m now working with a tailwind behind me in the form of dividend income, so I’m able to coast a little bit off of the momentum I’ve already built up.
I’m on pace to exceed $5,500 in dividend income this year. And I’ll probably set a goal for $7,000 (go big or go home?) in dividend income next year. That’s thousands of dollars being pumped into my pocket that I wasn’t working with before.
Consider my earlier example of getting rid of my car. I saved approximately $5,400 by going through the radical and life-changing event of selling my car. People looked at me like I was crazy when I did that. Here I am working at a car dealership and I own no car. The irony of it all!
But the dividend income I’ve built up in the time since has now basically created a bigger difference in my life. I had to sell my car and take the bus around town before to generate this kind of difference to my budget, and create that kind of capital with which to invest. Now I do nothing at all, as the dividend income hits my brokerage account with no action on my part at all. Isn’t that something??

Conclusion

Frugality is a permanent lifestyle for me. I’ve embraced it because I have learned that more money doesn’t buy more happiness. And I’m very happy right now, with no regrets at all over the choices I’ve made.
However, these days I’m living with harmony and balance. The dividend income I’m receiving is a wind in my sails, and allows me to lay off the throttle a little bit to really kind of “zone in” on maximizing the balance between savings and happiness.
Life changes. We grow, but we also grow older. As such, embrace your youth. Not only is time on your side in the mathematical sense, but also in a sense of being able to live with certain extreme lifestyles. You see plenty of 25 year-old backpackers, but how many are out there doing it at 45 years old? Even if you have the finances to travel the world, you might prefer a comfy bed in a halfway decent hotel room over a shared hostel at 45, right?
Take frugality head on. Go with less. Figure out your comfort zone. Shed the barriers around you to see just what you’re capable of, and what exactly makes you happy. Then, later, if you’re uncomfortable you can always scale back and allow the hard work the you of yesteryear put in so that the you of today can amp up the comfort just a bit.
What do you think? Has your level of frugality changed throughout the years? Was it easier when you were younger? Do you think it’s natural to scale back a bit as we age? Does a tailwind of passive income make that easier?
Thanks for reading.
Photo Credit: bplanet/FreeDigitalPhotos.net

This article was written by Dividend Mantra. If you enjoyed this article, please subscribe to my feed [RSS]

1 comment:

  1. Great read, one question. I am around your age and a new investor. I thought the max that can be contributed is $5500 a year to an IND account. Do you get taxed for extra contributions?

    ReplyDelete

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