As I define it, frugality is the habit of living well below your means by spending less. When practiced over the long haul, the most important benefit frugality delivers is personal freedom: freedom from debt, freedom from want, and, most importantly, freedom from having to work for a living.
If you’re fortunate enough to earn an above average income—or if you and your spouse jointly earn such an income—this kind of freedom is well within reach.
All you have to do is make a single commitment: instead of spending like a typical household within your income bracket, you need to spend like an average middle-class American household (or if you want, a bit less than that). Because you spend at or about the national average, you don’t force yourself and those who live with you into a life of abject depravation. You simply spend money at about the national norm.
If you can make this single commitment and stick to it, then you likely can retire ten to thirteen years earlier than typical spenders within your income bracket. That’s more than a decade of personal freedom that you can enjoy before you’re so calcified that you have to spend your time in golf carts or, worse yet, rocking chairs. You’re still in good enough shape to bike, hike, and kayak even.
In today’s post, I’ll present simple linear models to show the massive difference that spending less can make in your life. The data for these models comes from the Bureau of Labor Statistic’s 2012 Consumer Expenditure Survey (CES). Specifically, the models rely upon CES Table 2301, which reports the spending habits of those who make $70,000 or more per year before taxes. Table 2301 splits this data into five separate income brackets. (To view Table 2301 in its entirety, click here.)
I use the CES data to build several linear models of savings growth, one for each of the five upper income brackets. These simple models contain two assumptions. First, they assume that savings grow at five percent each year. Second, they assume that the point of retirement is reached when a four percent withdrawal from accumulated savings is sufficient to fund annual spending. For example, if annual household expenses total $40,000, the models assume the income earner(s) can choose to retire when accumulated savings reach $1,000,000 (because four percent of $1 million is $40,000). This four percent rule is a well-recognized threshold for retirement, but a more demanding threshold could be substituted in its place as long as it were applied consistently to all the scenarios that the models summarize.
Table No. 1 below summarizes the CES data and reports the nest egg retirement threshold for each income bracket.
Table No. 1: 2012 CES Data & Retirement Threshold
|Income||Mean Average Income After||Mean Average||Nest Egg Needed|
|Bracket||Taxes, Soc. Sec. & Pensions||Spending||to Retire|
|$150,000 & up||$212,333||$107,860||$2,696,500|
|US Mean Average||$58,132||$46,204||$1,155,100|
Let’s begin with an example that uses the CES reported figures for the $100,000-$119,999 income bracket, which might reflect a household of two persons who each earn an average annual income of just over $50,000.
If the household spends like a typical one within its income bracket, which I call a “mainstream” household, annual expenses would run $68,275 and annual savings would total $27,748 ($96,023 – $68,275 = $27,748). If, however, the household spends at the national average for all households, which I refer to as a “frugal” household, annual expenses would run $46,204 and annual savings would total $49,819 ($96,023 – $46,204 = $49,819).
As Table No. 1 reports, the frugal household spends less so it needs to accumulate only $1,155,100 to fund retirement. The mainstream household spends more and thus needs to accumulate $1,706,875. Assuming earnings of five percent per year, the frugal household would take only sixteen (16) years to reach the retirement threshold while the mainstream household would take twenty-nine (29) years. The table below compares the frugal and mainstream scenarios side-by-side.
Table No. 2: Frugal & Mainstream Scenarios $100,000-$119,000 Income Bracket
|Frugal Scenario||Mainstream Scenario|
|Year||Accumulated Savings||Earned Interest||Accumulated Savings||Earned Interest|
As Table No. 2 proves, a lifestyle of frugality turbocharges your drive towards retirement. Because you spend less each year, your nest egg grows faster than the nest egg of a mainstream household. And because you continue to spend less once your retirement years arrive, you can retire comfortably on smaller savings.
When I apply this same Table No. 2 model to the other CES upper income brackets, the results show that living like an average US household consistently provides a decade or more of additional retirement regardless of the income bracket involved. The years of freedom gained in each model is reported in Table No. 3 below. Click the highlighted dollar amounts of any income bracket for a link to the supporting data.
Table No. 3: Years Required to Reach Retirement Threshold
|$150,000 & up||7||17||10|
If you’re trying to decide whether to adopt a more frugal lifestyle, these models can help you work through some fundamental questions that most people never bother to ask.
1. Would you rather: (a) spend in line with those who make incomes similar to you; or (b) spend like an average American household and retire a decade or more sooner than others in your income bracket?
2. Is it easier to spend like an average American household if you were brought up in one? Is it easier to spend like an average American household if that’s the way you’ve been spending money in the past?
3. If you wanted to drop your spending down to the national average of $46,204, how would you go about doing it? Would other members of your family be willing to spend less?
4. In order to retire a decade or more early, would you be willing to live in a 1600 square foot home as opposed to one which was twice as large? Would you be willing to buy used cars instead of new ones and drive them until they died? Would you be willing to visit restaurants less often than four times per week (which is the national average)? Would you be willing to take fewer vacations and stay closer to home when you did?
5. Would you be willing to hire tax experts and adopt detailed strategies in order to save on federal and state income taxes?
6. Would you be willing to spend a hour of your free time per week to investigate and implement various money saving strategies and tactics?
* * *
So these are some of the basic questions. How you answer them is of course up to you. If you decide to instill more frugality into your life, there’s a vast community of bloggers who are engaged in the same process. For starters, you can read past posts here or check out the blog roll at the bottom of this page. If you want to check out my book about spending less on household expenses (the Kindle version sells for a frugal $0.99), you can see the opening pages for FREE by clicking here.