A misconception is running around the financial world, that great sacrifice and delayed gratification is required to reach financial independence. This is simply not true.
The reason so many feel becoming financially independent is a sacrifice, is the misguided notion that spending anything less than all you earn is somehow a great sacrifice. If I net $200,000 a year as a physician, I might feel I am making a great sacrifice if I live on only $150,000. The $50,000 I ‘could have’ spent but chose to save for my future, is classified as a sacrifice. We worry about all the things we ‘gave up’ by not spending that extra $50,000 on stuff each year. Worry should be saved for something that matters.
The median household income in the United States in 2020 was $67,521, according to the US census Bureau (that is gross, not net). Imagine the reaction I would get if I told the half of US households who earn less than the median US income of the great sacrifice I was making by only spending $150,000 a year on my lifestyle.
If I saved that $50,000 a year ($4,167 a month) throughout my 30 year career in medicine and earned an average of only 8% interest compounded monthly over those 30 years, I would have $6,251,730 in savings. If I then took the money out using the 4% rule, I could withdraw $250,069 a year to live on.
We must stop deluding ourselves into thinking we are living a ‘less than satisfactory’ life when we don’t spend all our income and borrow additional money to purchase cars, boats, vacations, and houses enabling us to spend even more than our income. Learn to be content with what you have and you will never feel like saving is a sacrifice. Here is my story as an example.
When I graduated from my residency I was doing just fine on a resident’s salary. My wife also worked and earned about the same income as I did. But we made the conscious decision to live on only one of the incomes, and we saved the other. During residency we lived in a nice apartment, had two paid off cars, and took one nice vacation a year. We also had the food and clothing we needed.
Frankly, our life would not have been better if we had spent the other half of our income. We would have had more expensive cars, more expensive vacations, and more expensive clothes. But I can’t imagine it would have made us any happier. We never felt as if we were sacrificing anything by living on less than we earned.
Then I became an attending and my income jumped. We bought a house and increased our lifestyle to roughly an $80,000 a year spending level. We also borrowed $500,000 over the next four years on things that we felt we needed, now that I was an attending physician. After acquiring this large debt we felt the need to pay it all off. You can read the full story of our journey to becoming debt free in my book The Doctors Guide to Eliminating Debt.
During our journey to becoming debt free we continued to live a nice lifestyle without feeling like we were sacrificing anything. More expensive cars would not take me to the hospital any quicker. Spending more would only have meant each item we bought cost more. We already had a home, two nice cars, a motorhome, and took great vacations.
We set our lifestyle at the $80,000 – $100,000 budget level. Anything I made above that was available to do anything we wanted. We could spend more on our lifestyle, we could invest it, we could use it to become debt free, or we could give more to charity.
There was never a feeling of sacrifice because we were not spending all we earned. Earning more money does not mean we need to spend more money. Those two line items are not linked, they are independent.
Once you have determined your lifestyle, don’t increase your lifestyle when you get a raise. This trap that many fall into should avoided. The trap is the feeling that if I get a $1,000 a month raise, I need to increase my spending by $1,000 a month. NO! Don’t do it!
This is the trap so many professional athletes fall into. They sign a $25M contract and think they need to go out and spend $25M. They begin living a lavish lifestyle that only can be supported as long as they continue to play their sport. Once their professional athletic career ends, so does their lavish lifestyle.
Johnny Depp has recently been in the news and is someone who has a high income. I googled ‘Johnny Depp Spending’ and learned the following:
-He spent over $30,000 a year on wine
-Dropped $108,000 on suits during a trip to Singapore
-Blew $5M to shoot his friend’s ashes into the sky
-Purchased 14 homes
-Bought 45 luxury cars
-Employed 40 staff members to the tune of $10M a year
Just how many luxury cars does it take to make someone happy? Would Depp have felt like he was sacrificing if he only had 4 luxury cars? What if he only owned 3 houses? He told a court in London that he had spent all of his $650M in earnings and was $100M in debt. I have lived a very nice life spending less than 1% of his earnings.
His story may sound ludicrous and you might think it doesn’t apply to you. Yet the concept is the same whether you earn $650M or $65,000. Spending all your money is never the right answer and saving some money for the future is not a sacrifice.
Set a reasonable lifestyle and stick to it. When you make more money than what is needed for your lifestyle don’t spend it. When you already have a $100,000 boat, earning more money doesn’t mean you need to trade up to a $200,000 boat. The $100,000 version is still just as good as it was when you bought it and was probably more than you needed to spend for the same level of fun.
Choose a reasonable lifestyle, one that is below our monthly earnings. Practice contentment. Save money every year. Help others in need. If you do these things, you will live a long and happy life. If not, you will always feel you are sacrificing and you will never have enough.
When John D. Rockefeller was one of the richest men in the world he was asked how much is enough. His answer was “Just a little bit more.” If the richest man in the world could not find satisfaction in his income, what does that say for the rest of us?
When you learn the concept of ‘Enough’ you will never feel like saving money is a sacrifice. It will simply be your lifestyle. You will also automatically become wealthy and financial independence will be inevitable.
One thing I never seen discussed is the present value of a future income. In your example above the $250,069 annual income from your 25% net savings rate (which really isn’t that much, 25% gross would be much more impressive, so I agree with your premise) is worth $119,218 in today’s money (2.5% inflation rate).
This doesn’t take away from the analysis you did above, but we don’t want anyone thinking they can start saving $50,000 per year for the next 30 years and be comfortable at $250,000 in 30 years (which sounds great at first glance). Thanks to inflation, it doesn’t work that way. Many of us know you have to adjust your savings amounts as you go, but many (most?) of us don’t think about this.
As for the lifestyle creep comments, I do agree with the overall thoughts, but would point out there is definite value in improving your life as you get raises. We are now retired and thanks to a pension and our nest egg, can live on double what we spent when I was working. I would say that means we delayed gratification (we didn’t miss it at the time but didn’t know what we were missing) unecessarily. Now instead of getting the cheapest possible seats on a flight (and be grumpy when we got off the flight) we now get the first class (or business class on international) tickets. The few extra hundred dollars have made us so much happier. Same for hotels. We stopped getting the cheapest we could find within a 15 minute driving radius. Now we get the ones that are nicer and much closer to what we are visiting. I wish we had done this long ago. Our nest egg would have been smaller, but our happiness would have gone up. And we still aren’t spending even close to what we could (in the neighborhood of 65% of the 3.5% rule amount).
So I guess I am saying, everything in moderation, including moderation. Don’t spend your entire $1000 raise, save half and spend half. Spend a bit more Corey, you won’t regret it! I am pretty sure you don’t have a $100,000 boat. Don’t worry, neither do we.
Scott C,
Yes I did not take into account inflation. I have no idea what that will be. But it will happen whether we save or not. No matter what the inflation rate, I will be so much better off in the future with the extra $250K of income. As far as not spending a raise, I am saying once we have a reasonable lifestyle, we will not get much better by spending more. But the example you gave was not a reasonable lifestyle. If I were to live my life always picking the cheapest option, then I would indeed be delaying my gratification and missing out. When your goal switches from having a fun vacation, to having the cheapest vacation we can, (only doing the things in our coupon book) then we are missing out on what life has to offer. There is a big difference between picking the $80 a night motel 15 minutes away, vs. the $160 a night hotel two blocks away, vs. the $850 a night hotel two blocks away. There is a difference between cheep, reasonable and extravagant. I too think we should avoid the two extremes of cheap and extravagant. Spending a little bit of the raise will not harm us. But spending all of every raise (what most people do) doesn’t give us all the joy we expected to get and we also will not have anything available for the future.
Thanks for your comment.