Is it really about not spending the money you make?

109 Replies

Hey BP!  I'm still quite new around here so I know I'm risking outing myself as someone who "doesn't get it yet" by asking this, but I've been consuming everything I can to try to educate myself - podcasts, books, forum conversations.  (I have yet to get out to a local meet-up, but  I'll get there.)  I think of this as part of what it takes for a new investor like me to get up to speed.

One thing that keeps coming up - particularly as I read my way through some of the titles folks on the podcast identify as their favorite business books - is the idea of drastically minimizing expenses.  I guess the volume and frequency of the "you must live an exceptionally modest lifestyle" message has surprised me and I'm curious if you have tips for how to accomplish the spirit of what they're saying without drifting into self-deprivation.  Live below you means, sure, but some of this advice...I dunno.

Of course I get that living on $20,000 a year, for example, would provide a big boost to my wealth building but I've lived on that income before, as I'm sure many of us have, and I don't recall it being very pleasant.  I don't need to splash money all over the place, but what's the point of using real estate as a tool to build passive income and increase my long-term wealth if it doesn't also improve my standard of living as I go along?  Sure my retirement would be GREAT if I save 50% of my income, but...  What am I missing here, BP?

@Ryan Pozzi , I think it matters a lot where you are at.  If you have several thousand sitting in savings why cut back?  If you have 3 unpaid credit cards owing $10K each you really need to cut back.  If you are in your 60s and well set compared to being in your 20s or 30s it matters a lot.  If you don't have a lot saving now and having your investment grow for 30 more years can a major source of income later.  Having only a few years until retirement a few thousand might not mater much.  I have done buy and hold for well into 20 years.  I started slow, and had very little to invest.  We added when we could afford it, and often sold to be able to put money down on several more properties.  Despite turning 60 next year I am still buying.  I am more interested in gaining sudden equity or good cash flow rather than long term payout now.  If I can value add $20K, then I go for it.  I no longer think about a good payoff in 20 years.  I am beginning to pay properties off.  Your investing strategy depends on where you are at financially and time wise.  You won't see me not eating out or not buying the new tool I really like.  I did that over 30 years ago to graduate with less than $10K debt after 10 years of college.

My opinion is yes. The the more you save the more you have for investments. It's that simple. How quick do you want to be financially independent?

It is whatever you want it to be.  I personally don't care much for luxury items so I live a modest life style.  If my properties brought in a million/ year in cash flow I wouldn't change much about myself.   When my wife and I increase our yearly income each year not much changes if your watching us in our everyday life.  It comes down to what you personally want and what you personally want to do with what you earn.

One of the keys that will make your journey easier to is to get a great paying job. That way you can put aside some money while still having fun and enjoying life. 

Alas, it takes money to make money *unless you're well connected* . I agree with you that it doesnt make any sense to be super frugal for many years if you are going to miserable in your prime years. At the same time though, you may not always need to buy the newest iphone, always get $5 coffees in the morning, etc. and find ways to put aside a bit of extra cash that adds up.

Agree and disagree.

I think it's closely related to the type of financial goals you've set for yourself and your family. You shouldn't necessarily live dirt cheap and suffer, but I do believe it's necessary to live below your means. 

Having more money, equates to more opportunities for additional assets or even pay down debt. 

I can see how just saving for retirement would not be a very big why.  The folks I know that 'do without' have a stronger reason than to have a big nest egg someday. 

We and others you have listened to I'm sure just prioritize things differently.  I've never been impressed by or been driven to purchase brand new cars or phones or clothes or exotic vacations, etc. I'd rather have freedom. Not yearning for things that drop in value has allowed me to not have had to clock in anywhere for 17 years.  

We still have wonderful experiences and fun.  My boys and I might play frisbee golf and go for a Costco hotdog afterward for a treat where others may do something costing far more than $8, but we don't feel we are doing without at all.  Another favorite we do is kids bowl free, a national thing.  I'll get a pass all summer for $20 to bowl 2 games a day if I want.  The kids are completely free.  Great memories can be built without large dollar signs.

I don't have to be very frugal anymore, but it's hard not to be. It's what we like and what we are used to. I now have a car that goes too fast and is too small to carry tools or kids.  Big whoop. Got it at a steal with no payments. If purchased years ago with payments when I was broke, it would have delayed my semi-retiement 10yrs. Our priorities are still in the correct order I think. 

It's up to you.  Would you rather pay retail for things that will be worth less (wothless) later? Or change how you define fun and important for freedom?  90+% of workers run on a wheel well into their 60s.  Be normal if you want to.

I bought my freedom after 23 years of investing every penny, working hard and living below our means. Once you make it then you have options. Dropping $5 bucks on coffee or $100k on a nice ride doesn't change anything. The money just keeps growing beyond what we spend every month. 

Live the lifestyle you want to live with the understanding you are responsible for paying for it.  Then go out and pay for it with you investments.  Contrary to what many believe and say, you CAN have your cake...and eat it too.  You just have to decide on the cake, and plan how to get it....and taking steps backwards (reducing your lifestyle), although is a way that can get your there, isn't the only way to get there.

@Ryan Pozzi it depends on what your goals are. So, step one, have a plan.

The further down you move your expenses, the more quickly you can accelerate your accumulation.

I'm approaching 50 and am fortunate enough to be in a pretty good place--unlike several of the approaches you read on here, I haven't stretched to buy a property with no money down, haven't bought fixer-uppers but instead bought everything with 25-30% down, generally with fannie mae compliant 30 year fixed loans. I don't buy things that won't cash flow and I'm selling the one non-compliant one to reduce my overall net leverage and pay off one or two in their entirety.

On a personal basis, I'd say the older you get, the less net leverage (cash in bank or t-bills plus money owed) you should probably carry, as you are more resistant to market cycles that way. YMMV.

@Ryan Pozzi

Frugality has been very good to us. We're moving down to around $33K a year for a couple with no kids.  So first of all, it's a LOT easier when you're married and both agree that this is what you want.

Secondly, the expenses you need to go hardest after are typically not related to things that you would necessarily see as daily lifestyle pick-me-ups. The two largest expenses of the American household are housing costs and transportation. Do you have a car payment, like 90% of Americans? Well, you should go after that a lot harder than you should go after the latte you buy down at the corner ever Friday morning. Where do you live?

Since I'm something of the perfect example of that, let me tell you where and how I was living before I realized how much money I was throwing away. This isn't the first time on BP. When my mother and I moved here from Europe, my brother decided that the best place for my mother was a townhouse condo in a very nice part of my area. So we sold our house in Europe and moved in, buying the condo outright. At the time, the condo payment was something around $160/month. You go snow removal, trash removal, cable, exterior maintenance, and sewage expenses for that amount. You got access to tennis courts and a private pool. It seemed like a reasonable deal.

The years passed, my mother died, I got married, my wife bought my brother out, and I have still NEVER used to the pool. I have never played a game of tennis in my life. The condo is very far from my wife's work. I telecommute to my current W2 job, so it doesn't matter where I live. The TV in my house hasn't worked for almost five years now. The snow removal turned out to be a joke and not worth it -- they only do something when it gets heavy and then they do it grudgingly. Sewage costs have risen and risen because the whole development's underground infrastructure is falling apart. The HOA assessment is now up to $400/month, and I own this place outright. There was a "special assessment" last year of $2000 to repave the roads of the development.

Only an idiot would live here, my wife and I have long understood. This place eats money and gives us very little. What it did do for us starting out was give us a place that we could borrow money on easily, and we took full advantage of that. We have been working hard to GTFO since that realization, and we're succeeding, flexing our frugality muscles intelligently.

To get back to the car payment, my wife and I bought three RAV4s in six years, switching them out like furnace filters. Once we got on the financial freedom wagon, we finished paying off the last one, found a mechanic we liked, and now we're car-payment free.

The third biggest line item in the American household budget is food. We live within easy driving distance of two Aldis, and now do most of our food shopping there instead of the local overpriced supermarket chain and the even more outrageously overpriced Whole Foods a few minutes away. We have finally accepted that the only way we're going to get reasonably good food in our area for a reasonable price is to cook it ourselves, after years of trying new restaurants and being disappointed. About the only eating out we still do is a once-a-month outing to a local Chinese buffet. This, for us, has been a major lifestyle change that took time and work to get right, as well as a bit of investment in cooking equipment. But it's saved us quite a bit of money.

Credit cards! 60% of Americans pay interest on a balance every month. Is that you? If so, STOP! That's a wonderful gift you're giving yourself.

You can quickly cut expenses down to the bone and only eat dried ramen and drink coffee from ground you've run water through three times. That's what most people think about when they think about frugality. But getting to the cheapest possible food is not what you should be focusing primarily on, and doing it down to ramen and coffee is not going to be fun for you, as you pointed out. Look at your housing situation first, then your transportation, then go after low-hanging fruit like vampire-like outstanding personal credit, then think about how to change your food budget intelligently. Frugality takes time and analysis when it's done well, and it's done with a steady hand on your household budget.

What we're working on to finally get out of this housing situation is moving to a large duplex in another part of town and renting out the upstairs. I bought the duplex very cheaply and have been renovating it steady for quite some time now -- it would have been wiser to invest in something else or to carry out this reno differently, but the something else was an opportunity that did not come along and I was working within my skill set on the reno. When we're in the duplex, and this townhouse is sold off and our home equity loans are paid off, and our rental business continues to grow, my estimates indicate that we'll be down $42K a year from the lifestyle we once had, in the paid-off condo with the car payment and the out-of-control living expenses. Yes, we were spending $75K/year back in the day on some really, really didn't need.

If you want to understand how this process works better, I can't recommend @Scott Trench 's book Set for Life and the BP Money Podcast enough. I only managed to read that pretty late in the game, however. The book that changed a lot of things for us, really did resonate with is, was Thomas J. Stanley's The Millionaire Next Door, which Scott frequently mentions is high among his own personal favorite finance books. Since reading that book, I've read everything Stanley wrote before he died, and it's all based around the same topic. His daughter has recently published an update on Stanley's research that'a also worth reading.

I am most definitely happier now with a wife I never but never fight about money with and a household budget we understand every single last little thing about, than we were back in the days when we were wondering where-oh-where $75K a month was going and why it was so very hard...just impossibly hard to get ahead with our W2 income muzzled as a wealth-building tool. We've also been pretty lucky (if not to say incredibly lucky) in our real estate investments at the same time, pumping our money into investments that makes money for us instead of liabilities that aren't good for our financial and personal well-being.

It takes time. But it's worth it. It's not easy, but every little win reinforces the last one.

Smart spending is not about frugality at all.  It's about knowing exactly what you value and being intentional about spending.  "I value time with my family" but I have a big house and costly cars so I have to work tons of hours...  "I want to be healthy" but I eat bad and have not seen the gym in years...  These are challenges we all have.

Show me your checkbook (and calendar) and I will tell you what you value.  What people 'say' and what they 'do' are two different things.

When your checkbook is wired to your goals, life is good (and you are in the minority).  For the record, mine is not yet there.

@Ryan Pozzi

I think you get it.  It’s all about your WHY.  What is it that drives you.  If your goal is to quit your day job then frugality will most likely get you there sooner.  We all value material items differently.  

I still work a W-2 job.  I like my job it pays well, sure it has its stress, but my goal is all about choices.  My goal is 10K of income a month in retirement.  Does that mean when I’m 40, 50 or 60 who knows it’s all about choices.  If you watch the pennies the dollars will grow.  I spend my money on acquisitions.  I have enough money to pay bills, put food on the table and live comfortable.  My cars are paid off, but my personal mortgage is still there.  I have a number of rental properties and I invest the cash flow into new ones.  My family will benefit from my hard work.  I can create generational wealth.  That is my WHY.  To take care of my family after I’m gone.

Good Luck.

@Ryan Pozzi your comment “without self-deprivation” is largely subjective. To me, it’s about consciously making the choice to identify why level I’m comfortable spending at and redirect excess income to investments. We are up to a 36% savings rate and I am far from deprived. Now could I do a lot more fun stuff TODAY with that money, yes, but that would be at the sacrifice of a financially secure future. And knowing we are securing our future brings comfort to today.

Another take away you should be getting from all those podcast/books is to grow your income. You can only cut expenses so far so focus on growing income to grow that savings rate. You have to have the self discipline to know your end goal and what it takes to get there. We want to retire in 10 years, so we are focused on growing our savings rate further and redirecting a portion of that to REI. We have been investing in low fee index funds through our 401ks for many years.

It’s ok to be frugal and a bit of a minimalist. I didn’t have furniture in my house for about a year, that got old for my girlfriend. So I decided to take hand me downs, there is no way I’m spending $5000 on a couch. 

This is just one example, but you want to know what that decision and many other decisions helped me do? Buy a duplex. The down payment came down to the wire, if I hadn’t made decisions like that and lived frugal I would have never been able to invest my hard earned money. A simple decision like that might just be the thing that sets me up for success 20 years from now. 

Hi Ryan,

I think the key point to take away from everything is that it takes "Sacrifice".  You have to give up something in the beginning and not buy and do the things that everyone else does so you can live the life everyone else dreams of in the future. 

Whats having money if you can't enjoy it?  I ate Ramen for 10yrs so I can eat Sushi now.  Once you get past a critical level in investing which I think comes around years 10-12 everything starts snowballing and you can start buying and doing the things you always dreamed of.

I under stand living cheap to buy more rental properties.  What I don’t understand is the people who buy just enough so they can live off of $2500 a month and retire at age 30. I almost feel sad for those people.  Find something your passionate about and you will never work another day again.  

Originally posted by @Mike Dymski :

When your checkbook is wired to your goals, life is good (and you are in the minority).  For the record, mine is not yet there.

but surely they are in decent alignment :) nice post.

And one big takeaway I think from this discussion was touched on a little bit, think about growing your income. Have an abundance mindset not a frugal(not exactly interchangeable with "scarce" but I'm using it) one. Yes, frugality needs to be in mind but not so much that we are more focused on using three toilet paper squares instead of four opposed to putting in the time, doing the work, building skills, and growing the income. The scarce mindset can spill over and hinder our potential. The abundance mindset keeps you in the Scarface zone where the entire world and everything in it is coming to you, chico.

@Ryan Pozzi

Haven’t read the responses, but I’ll just give you a short and sweet answer. It’s not “the” answer, but an answer.

I avoid credit card interest. I bought a personal home for half the price my banker said I could buy. And I never buy brand new cars. And I avoid lifestyle creep.

I still take 1-2 vacations a year, but the above simple advice is what I’ve told my kids they need to do to “get ahead”. None of that is real estate advice. Just life advice. Oh, and choose your life partner very carefully (financially speaking).

Saving money is good.  A better question is how can you make more money.  

These responses are very helpful!  They are reinforcing for me that I was only hearing one side of the story (or possibly mishearing one side of the story.)  I'm completely on board with a goals-based "work backwards to figure out how to get there" approach.

I think my wife and I are fortunate about the position we're starting in because we own our home and our card free and clear and we have strong savings and a well-funded retirement portfolio. The last of the major drags on our current financial life is credit card debt, but we've been working on it. We've gotten under $10,000 in carried balances and we have a plan in place to be down to one card by the end of the year. We're in our thirties so I still feel like we're keeping a good pace. I know many people come to the REI campfire with more left to deal with than we do.

We value community-based charitable giving and the arts.  I recognize it's a non-necessary luxury, but our symphony tickets, for example, are probably staying in the budget.  (Yes, I can hear the boos from the hardcore FIRE community folks in the room.)  I feel reassured knowing that, while there are other views that have worked well for other folks, a prioritized lifestyle and a smart budget, rather than specifically a deprivation-based budget, is a goal for many in this field.

Thanks so much for sharing your own journeys - and keep it up!  I'm digging hearing what it has taken for you to get where you want to go.

Originally posted by @Mike Dymski :

Smart spending is not about frugality at all.  It's about knowing exactly what you value and being intentional about spending.  "I value time with my family" but I have a big house and costly cars so I have to work tons of hours...  "I want to be healthy" but I eat bad and have not seen the gym in years...  These are challenges we all have.

Show me your checkbook (and calendar) and I will tell you what you value.  What people 'say' and what they 'do' are two different things.

When your checkbook is wired to your goals, life is good (and you are in the minority).  For the record, mine is not yet there.

 Well put.

Originally posted by @Brian Ploszay :

Saving money is good.  A better question is how can you make more money.  

 This is the correct answer.  You can only save so much money since the only money you can save is the money you have.  

So instead of needing to live within your limited means, why not expand your means to the limits based on what you need.

@Ryan Pozzi

Go call your local bank right now and apply for a personal loan for what you have in outstanding credit card debt, or, if your credit is good enough, get a new credit card with a 0% balance transfer option for, say, 12 months. Put the $10K on that. No need to pay 15-20% interest on your carried balances until the end of the year.

Trust me, no one in the "hard core FIRE community" is ever going to rag on you for symphony tickets. If I count as part of that group, well, before I say anything I'm going to have to justify why my wife has a $10K pottery studio with three kilns, a slab roller, a wheel, and supplies like you wouldn't believe. A very large segment of the FIRE community is primarily doing this to be able to devote their lives to the arts after they "retire." For me, I want to be able to do research and write full-time.

Originally posted by @Steve Vaughan :

  Great memories can be built without large dollar signs.

 This should be printed 100 point bold with flashing letters.  

A few years ago, I had a discussion with another father of young children who said he could not imagine depriving his children of the necessary things in childhood that create wonderful childhood memories.  His example was a yearly trip to DisneyWorld (or DisneyLand, I can't remember which) where they stayed a few days at a lodge inside the park.  I mentioned that I could create great memories for my kids by going to a big lake in a small town, or to the beach near the end of the season, for a fraction of the cost.  The other father insisted that it took a $3500 Disney vacation to create such memories.  To each, his own.  

If someone can spend like that and still save enough money to invest, that's great.  If someone who spends like that complains that they simply "can't" save enough to invest, well that's a different story.  Someone who doesn't earn enough to spend big and save big has to make a decision on what's really important to themselves.  If you want to invest, really want to invest, then you will save.  If you want to live a lifestyle that prevents you (on your current income) from saving enough to invest, that's a choice you can also make.  Neither is right or wrong, but one will help you become an investor more quickly than the other.

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