How F.I.R.E. savings really work

You’ve heard of people saving tons of money and the retiring at age 40. Sounds great. How do I do that too? Well it’s not as hard as people think. It just requires some discipline. Let’s look at the following example of a person making $95K per year and being an over all good boy/good girl who has a property with a mortgage and some student loans. This person is in decent shape financially so not a financial basket case but has lots of room for improvement.  So let’s light a fire under this guy’s behind to see how rich we can make him in ten and twenty years.

Scenario 1: Homer Homeowner Base Case

  • Homer works for a big company in town
  • He has some student loans to pay off for his engineering degree at State U.
  • Homer bought a three bedroom house for his wife, young daughter and him in a modest neighborhood (good)
  • He contributes 15% of his pre-tax income into 401K retirement but has no other savings (good)
  • Homer went hog wild and leases a BMW 3 series car as he wanted on since college (bad)
  • His family eats out and drinks out a few times a week (bad)
  • He buys his morning coffee at the Starbucks drive through every am and buys a second coffee at the Starbucks near work  (bad)
  • Lunch is eaten at the work cafeteria and out at a restaurant on some days (bad)
  • His family has the top of the line Comcast Cable package with Speed Boost Technology in Internet (bad)
  • He likes to buy his nice clothes at Nordstom to look stylish (bad)
  • They like to take nice vacations down to California and Cabo in Mexico once a year plus also do some beach trips to stay at a hotel on the Shore (bad)

So over all Homer is not going into debt and is living within his means. But there are no savings. Not great.

Scenario 2: Adding some frugal living and FIRE to the mix

Let’s help Homer cut some costs. He seems like he needs it.

  1. Homer is going to bring his own coffee to work and make his own second cup at the office
  2. The cable package is going to be downgraded to a more moderate once
  3. Homer bring his lunch on half of the days
  4. The car lease once over is shifted to a lower cost car payment on a used RAV4
  5. Dining out is a cut a bit
  6. Drinking out is a cut a bit
  7. Vacations are cut a bit

The outcome is an extra $ 11,100 saved per year. Not too bad.

Over ten years if invested in the market those savings grow to $202,575

Over twenty years if invested in the market those monthly savings turn into $652,217. Nice!

Compare that to the do nothing scenario and Homer is $544K richer at the end. Great job Homer!

Scenario 3: FIRE scenario

Let’s help Homer cut even more costs

  1. Homer is going to bring his own coffee to work and make his own second cup at the office
  2. The cable package is going to be cut to just internet with streaming add on and a Mohu Leaf antenna for local broadcast
  3. Homer bring his lunch every day days
  4. There is no car payment as he buys a used RAV4 with cash he saves each month
  5. Dining out is a cut to once per week
  6. Drinking out is a cut almost completely
  7. Vacations are cut a bit more
  8. Reduce utilities costs
  9. Get corporate discount on mobile phone plan

The outcome is an $20,068 saved per year.

Over ten years $305,909 if invested in the market

Over twenty years $985,014 if invested in the market.

Compare that to the do nothing scenario and Homer is $877K richer at the end. Nice!

See file below of the Excel file shown in the examples

Why it works

  • You cut wasteful discretionary spending like buying coffee out and eating out
  • Reduce fixed monthly costs like Cable TV and utilities
  • Cut back on big ticket items like Car leases
  • Reduce dining out
  • Eliminate drinking out and booze on the cheap at home
  • Hang out with friends and socialize instead of going out so much

Your own scenarios: Try it out to see how much you can save!

I want you to go through the same exercise as Homer did using the template to put in your current scenario, middle case and FIRE scenario. See how much you can save.

See attached template and use the your tab to put in your own data and see what you can cut. At the bottom it will show you how much extra you would save in a month, over ten years if invested and twenty years if invested.

You will find that cutting back produces results fast and will shift your mentality from a spendy one to a more frugal one rather quickly. Good luck future millionaire!

Advertisements

This site uses Akismet to reduce spam. Learn how your comment data is processed.