Isn’t it funny how something to me is so incredibly obvious that I almost laugh out loud when I read the following comment from Nelson over at Financial Uproar.
But, I’d like to see less of the psychology behind why you want to retire early and more of the specifics of what you’re actually doing. How do you achieve such a high savings rate?
Um, I hate to give circular answer, but how can you achieve a high savings rate…see the obsession with psychology. Really that is the reason, but perhaps I should explain that a little better.
My current saving rate is about 50% if you ignore my highly inflated and accelerated mortgage payments, if you include those it jumps up towards 75% of my take home pay. Yes, it’s a HUGE number. That comes about from two main reasons. First off with all income sources my wife and I earn about $110,000/year, so start with a higher income and then do some good tax planning to keep most of it. Then second don’t spend that income, instead get a low set of expenses that are perfectly balanced to your particular needs and wants so I feel just as content as many people who spend double what I do. How?
Ah, now we are into the psychology part of the answer. Being somewhat obsessed with psychology of happiness and spending I’m actually aware of how people can spend money like water and not be happy. We buy things on impulse, we treat ourselves (because we deserve it), we lust over the latest movie or gadget or shoes or (…insert obsession of choice here…) but we still aren’t happy and go buy more. The main difference is I know what I need to buy to be happy and what won’t make me happy. Now what works for me won’t work for you so you have listen to your own subconscious, but here are some general hints.
1) Buy Experience over Stuff. New hardwood floor or that kitchen reno won’t bring lasting happiness, in all likely hood it will turn into your new baseline in under a month. Then the happiness is gone. So save up for a trip instead, you likely will be more happy with your memories than the new floor. (Or in my case next year…do both. As I said these are hints, not rules, you can break them.)
2) Delay Buying Things. Well most people understand that not buying on credit is a good thing, since you save the interest cost. What we often don’t know is the lusting after your purchase prior to getting it can bring just as much happiness as buying the object. So even when I could just pay cash for something, I tend to save up for it. Why? To drag out the happiness and make sure I buy the right thing. So more often than not I don’t screw up and instead I buy the right thing for my wants and I’m more satisfied with my spending.
3) Focus on Equal Outcomes. I tend to really like to watch movies, but I’m often just about 3 to 6 months behind what came out in cinemas. Why? I realized I really don’t care when something was released, when I get around to watching it. So yes I do hit up the cinema, but only like once or twice a year for the movie that I’m REALLY WANT TO SEE. Otherwise, I hit up the library or Netflix to feed my habit. I focus on the equal outcome for me: I just want to watch the movie, I don’t care about where that much. So I spend like a fraction of what others would for a similar movie habit.
There are obviously more tricks, but that should get you started on why I have a high savings rate. I focus on what matters most to me and screw what other people think. I am the Joneses of my life, so I don’ t have to keep up with anyone.
So how about you? What do you do to keep up your savings rate?