Making Big Money from Little Changes

Early retirement is a simple concept.

It comes from spending much less than you earn and investing your savings to create passive income.

Obviously the more you can save and invest, the earlier you can retire.

There are many articles planned that will go into the nitty gritty of different investments and what I think is the fastest and simplest path to financial independence.

For today, let’s look at some easy ways to boost your savings rate and how we can get that magical compounding working for you straight away with just some simple tweaks in your spending.

When most people think of saving, their eyes glaze over and their bottom lip starts to quiver as they become frightened, assuming they must miss out on something.

I find this hilarious!

People have become so accustomed to blowing all their money these days. Their body trembles in fear at the thought of making any changes.

A sure sign of weakness if ever there was one!

You’re not like that though, you’re smart!

You approach your finances from a position of strength. Where your future self is thanking you for the enviable financial fortress that you’ve built for running your life efficiently.

You’re not scared of change and you do what needs to be done, to get the desired outcome that you’re after.

Improving your spending is basically just gaming the system. Getting what you need for the lowest cost to you and in the most effective and efficient way possible.

Sometimes a good wake-up call is looking at how things cost over a longer period of time. This can definitely boost your motivation when you see how much money you’re future self is missing out on.

The perfect time-frame to work on is 10 years. It’s close enough to feel real and long enough to see small expenses making a big impact.

Crunching the Numbers

One of the most common expenses that can eat into your savings is restaurants and take-away food.

These days, the average young couple probably eats out about twice a week.

And they will probably spend $60 a pop for a decent meal with a drink or dessert each, or $120 a week. (I know singles who spend multiples of this! But let’s be conservative.)

If they instead just go out to dinner once a week instead of twice, they don’t actually miss out. (wouldn’t want that, would we?)

Let’s see what happens to this little $60 weekly expense over a decade if they had invested the money instead.

If we plug it in to a simple compound interest calculator and say the investment is earning 7% per year.

It spits out a total of $43,107.  This is a shitload of money for one extra dinner out, I’m sure once versus twice a week is not worth over 40 grand.

Another easy tip to get started with, is called the “Latte Factor”.

Know a fancy flat white fiend who needs a constant cafe fix?  We all know someone like this.

We’ll be generous and assume our couple each only have one per day. $8 a day for a couple of coffees isn’t worth mentioning is it?

It is when you realise…It’s All About the Increments, Baby!

Five days a week for ten years on the other hand is costing them $28,738.  So if they switch to actually making their own coffee, they can pocket the 28 grand.

If that’s a bit hard, they can still have it every second day and bank an easy $14k.

My partner has told me of the many office workers she knows who buy lunch out every single day. A simple $15 daily lunch is burning through $53,884 every ten years.

If only one of the partners did this, including their other habits, the couple is still missing out on over 100k at this point!

That’s a fairly good improvement and we’re only in the food category.  We haven’t even talked about groceries yet!  (update: there’s now a detailed post on Frugality & Food here.)

Get your savings into gear

One of the biggest financial mistakes has to be car loans.

There will be a future article about cars.  (update: here it is – Frugal Car Ownership!)

But for now let’s do a little calculation and assume people pay cash for cars (very rare).

You and your friend both have $40k and you’re both shopping for a car.

You decide that a $10k car is enough and your flashy friend chooses to go all out and spend their $40k.

You’ve decided you want to retire early so you don’t want your money tied up in such a non-productive asset, hoovering up your future wealth.

Instead, your remaining $30k is invested like our other examples returning 7% per year.

After 10 years your $30k is now worth $59,015. Nearly $60k richer just for making a more sensible car choice. This benefit would accrue for every time you make a more sensible car choice.

I know what you’re saying… who pays $40k cash for a car.

Absolutely right, they get it on loan which is a thousand times worse!

Remember these savings benefits accrue every decade, so the difference compounds over time.

I did the sums out of curiosity and over a regular 45 year working career this simple car choice (spending $30k less) each 10 years, ends up compounding to over one million dollars!

The difference between financial freedom and wage slave is all about choices.

Mindset Shift

I’m clearly only scratching the surface on the possible ways you can optimise your finances.

Looking at how things cost over a longer period of time is critical if you want to retire early.

When you check your spending, you will find some expenses that don’t really mean that much to you but are sucking away your future financial freedom.

It’s time to get cracking on finding ways that you can cut the unnecessary waste and plough that cash into investments that will set you up for life.

Have a play around with this compound interest calculator and see how small amounts can make a big difference to your future.

Becoming dependent on constant rewards and short term enjoyment like the masses, leads to limited future lifestyle choices, lifelong mandatory employment and a weak financial position.

Instead, build financial strength by becoming a long term thinker and decide what’s really worthwhile in your life and what’s just unnecessary crap.

Focus on what you truly need for lifelong happiness and fulfilment, not just a short term pleasure.

Remember, if you’re doing the opposite of everyone else, usually you’re onto something!

Hopefully you can see now that the devil is in the detail when it comes to early retirement and you may be sitting on a future investment goldmine with just a few smart lifestyle choices.