Maybe that title should be: A Tale of Two Camps? Oh well, I couldn't resist the Dickensian lure of the other choice. This is an age-old debate that's been pondered and analyzed for as long as the concept of financial independence has been around. There are some good arguments for both sides and, if you're on this path or looking to traverse it, you're bound to consider it yourself. In this post, I want to express my opinion on the topic and explain why. So, for the record, I'm a believer in...
Cutting costs, first and foremost.
To me, this is a no-brainer, although I would encourage anyone to do both. Or, more precisely, attempt to do both. I say attempt because increasing one's income isn't always within their control for various reasons: you might be in a low income field and already near the top of the pay scale; or you might need to switch careers to break into higher income brackets; or upper management may not agree to compensate you fairly for your contributions.
As for this last point, you should seriously consider jumping ship to a place where you will be more fairly compensated for your work. Of course, in the increase income camp, this is the easiest way to move upward. Most companies are stingy with raises and promotions, rewarding only the top contributors or promoting based on favoritism and who is best at office politics. I say, fuck that! I've been caught in the middle of my fair share of office politics and it's not my bag. I do my damnedest to steer clear of workplace drama. However, it goes without saying that if you want to get a real bump in salary, it behooves you to switch companies, otherwise you'll most likely only see a cost of living increase instead of a real, worthy pay raise.
First, this is completely within your control. You can start today, so it's also an immediate action that will see the benefits of quickly. There are numerous ways to cut expenses from stopping eating out everyday to buying groceries and cooking for yourself to ditching cable television and paying for cheaper streaming services, etc. I'm not going to go into the nitty gritty of all the ways you can cut your expenses because everyone is unique and there are too many to list for this discussion. However, if you truly want to cut your expenses, I would highly recommend looking at the things you can absolutely do without and nip those in the bud first. Cut the major things first and then, slowly perhaps, start pruning other areas until you're comfortable yet seeing a difference in your lifestyle. Hopefully, a liberating sense of freedom from those weekly or monthly money pits that your money used to disappear into.
Second, lowering your expenses also lowers the amount of money you need to save to reach financial independence. Duh. If you spend $60,000 a year, you'd need to amass $1.5 million to live 25 years without an income. However, if you only spend $40,000 a year, you need $1 million saved to live 25 years without an income. And it only gets better if you live on less than that. Of course, this is using the Four Percent Rule, which is the amount of money a retiree can withdraw from a retirement account in a year while still maintaining a balance that will provide a steady stream of income. Like the debate of cutting costs or increasing income, there are varying opinions as to the optimal amount one should save to safely retire. Again, this is up to each individual and his/her annual expenses play a major role in the choice as I've shown above. Just remember: the lower your expenses, the less you'll need to safely pull the plug on relying on someone else for your livelihood.
Third, it reduces your dependability on work income. This one is a bit vague, but I'll give an example from my own experience to illustrate what I mean. I was out of work in 2017 for eight months. It was unexpected and I won't get into the details (if you want to know more about it, read Reasons to FIRE: Job Experience 2.5), but I weathered that span stress-free because my expenses were very low. You see, I had established an emergency fund (EF) of almost $20k. During these 8 months my wife and I ended up moving out of state, which cost quite a bit of money since we hired a moving company to haul our stuff 1,000 miles to a new apartment. In addition, we had to spend money getting our house ready for sale. So, as you can see, there were expenses I hadn't planned for during this period of unemployment. Nonetheless, I managed to get through this period by living on my savings because my normal expenses were so low. If we had stayed put, I could've gone longer, and this was just my EF. I didn't touch any of my investment principal. Had I done that, I could've gone a couple of years without income.
Now, let me point out some of the disadvantages of just focusing on increasing income. Note that I've listed a couple already. However, I think one of the chief disadvantages is lifestyle creep. Pursuers of FI strive to squash lifestyle creep because it can severely hinder the attempt to reach one's goal. We're only human, though, and no matter how much we try to avoid it, I think that it becomes even harder if you are making >$100k. In my experience, people tend to rationalize to themselves that they're already sacrificing X,Y, and Z so they don't want to deprive themselves of something else, or they might view it as rewarding themselves for remaining so diligent in their pursuit. Nonetheless, before they know it, they've already let certain expenses creep into their lifestyle that are unnecessary and now they've become accustomed to the luxury; to the point of defending it. Now, let's say that person loses their job where they were making all that money and living the luxurious lifestyle. They panic because they probably have payments due on some of those things they've become dependent upon. They are in a frenzy to reconnect the income stream to stop the money hemorrhage in their savings/investments to cover the bills.
Another disadvantage is keeping one's skills at their sharpest to be worth more money to an employer. Let's face it: competition for higher paying jobs out there is fierce among younger and younger applicants. I don't know what you do for a living, but I'm a software developer. I've been in my field for more than 20 years now. I've experienced job burn-out 3 times already. I'm just not interested in keeping up with bleeding edge technology anymore. Not because it doesn't interest me, but because the treadmill has sped up to the point that while I'm trying to learn one thing, two or three more have just come out. Once I can wrap my mind around one new thing, it's already made obsolete by something else. I actually miss the days when technology didn't evolve at the break neck speed of today. I'm not sure how the younger generation does it, to be honest! Of course, employers love it. Why would they pay a veteran like me 6-figures (when I just learned X technology) when they can split my salary between two young guys who know the same tech and want the experience? Yes, ageism is alive and well, my friends.
This isn't to say you can't pursue both options: cut your expenses and then focus on increasing your income. As a matter of fact, I'd encourage you to do both. However, I maintain that the first thing I'd suggest focusing on is cutting your expenses. Cutting costs inevitably has its limits, though; let's face it, there's only so much you can actually cut. But, increasing your income is a much slower process. Hell, regardless of how well you are at it, the possibility remains that it could be years before you reach a salary you only dreamed of. I'm at the cusp of earning a 6-figure salary and I've been at it for more than 20 years. Now, I don't have a college degree because I taught myself, which was probably a hindrance in my youth. On the other hand, I never had to worry about repaying student loans. It could potentially put me at a disadvantage if I were trying to get a position and it came down to me or someone who had experience and a college degree. But, I digress.
My main point is this: first, focus on cutting your expenses. You'll see immediate benefit to this. But be careful! Don't cut to the point of being miserable. After all, you've got one life and you should live it comfortably. And if you've already cut as much as you can or as much as you're willing to, then start focusing on increasing your income. This may be as simply as switching companies every two or three years to maximize your pay increases or maybe even switching industries, which is more difficult, but definitely doable. Both should lead to an increase in the amount of money you're able to put toward your investments and hasten to path to financial independence. Good luck!
No comments:
Post a Comment