Is the “spend less” of early retirement, the “eat less” of dieting?

February 13, 2018

If you’ve ever lost weight, you may appreciate the comment more than if you haven’t and I will expand.

A number of years ago, I saw a documentary on “the Fat Smoker” and his answer to losing weight was “Eat Less and Exercise More“.

Simple right?

Well, it could be that easy, but what proportion of each contributes to weight loss best?

Anecdotally, I’ve found the equation to be ~ 0.8 (Eat Less) + 0.2 (Exercise More), which indicates that eating less contributes to my weight loss by a 4:1 ratio when I’m losing weight, or the Pareto Principle 80/20 rule. Turns out that Very Well Fit  agrees with me. Really, what both they and I are doing is highlighting the importance of nutrition in the equation. 

The eating less (or better) contributes 80% of the benefit I receive. Not to nullify the 20%, it’s important, but if I could only do one, I’d eat better in an instant. In times of stress / high volume work its a lot easier to simply maintain my diet and not exercise than try to find the time to exercise long hours.

Further, you can eat your way out of an exercise deficit; however, it’s very hard to exercise your way out of an eating calorie surplus. If I run 10km, I can erase the benefit with a single Venti Latte. That’s dangerous. People tend not to realize that. 

What does this have to do with financial independence?

The simple equation for saving for financial independence is Make More and Spend Less.

Yes, I have extremely simplified the equation, as we did with weight loss.

Of course, there can be a level of specificity that improves both weight loss and financial independence; however, at it’s root, it is a very simple concept. Spend less money than you make and invest the difference. The more you save and invest, all else equal, the sooner you will be financially independent.

Let’s ignore, for now, that making more money, like exercise, can be complicated. For example, would you do weightlifting, cardio, HIIT or crossfit. For making more money, would you focus on a higher salary, more side hustles, better investment returns? For simplicity purpose, we will lump those together into ‘make more’.

Why is this important?

It is important because people don’t always realize the implications of their spending versus earnings.

Let me give you an example.

If you are in the top tax bracket in Canada, each additional $1 that you make results in $0.49 cents in your pocket. Each additional $1 that you don’t spend results in $1 in your pocket. Think about that, immediately a $1 saved is worth $2 earned. That is incredibly powerful. It is clear, to me, that at some point you have to focus on savings over earnings to be financially independent if you want to maximize your return on investment; unless you’re a billionaire unicorn founder.  

Wait, it’s even more powerful when we continue this thought exercise.

What is the number one rule to consider when planning how much investments and savings you need to retire?

That’s right, the 4% rule, otherwise known as the safe withdrawal rate. What this means is that you can withdraw 4% of your portfolio each year, every year, into perpetuity and you will not hit zero. Effectively, it’s when you can retire and never need to work again. 

A simpler way to think about it is to multiply your annual expenses by 25 (25 x 4 = 100).

Let’s think about that as it relates to an additional dollar earned relative to a dollar saved.

The importance of the dollar saved on the financial independence journey just increased. if 25x my annual expenses drives what I have to save, then I can dramatically reduce my required savings target if my annual expenses are lower. If my annual expenses are $25,000 (Mr Money Mustache, showed family expenses in 2014 of $25,000.) then I need $625,000 to retire. An achievable number if I am working to earn a 1%er salary and if I am asking for a raise when deserved.   

If I am spending $100,000 per year, which is not inconceivable if you’ve worked your way to a high salary and you’re in a high cost of living city, then you need $2.5 million to retire. Ouch. That’s challenging. That’s a lot of money. 

Early on my journey, I focused on getting my earnings as high as possible.

Now, I have switched my focus. I am targeting rationalizing my expenses each year and increasing long-term passive income. Other benefits to a lower annual spend:

  • less stress
  • better prepared for downturns
  • You make more, because your investments increase
  • children don’t become accustomed to high expectations
  • Buying what you need, versus want, is better for the environment
  • Focusing on needs, versus wants, is better for your mental health

Is the equation 0.8 (Spend Less) + 0.2 (Make More)?

What do you think?

What’s your vote?

How do you structure your early retirement road map?

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2 comments on “Is the “spend less” of early retirement, the “eat less” of dieting?

  1. Aaron Mar 2, 2018

    A minute ago, I signed up. Reading your blog, the sign up Window pops up frequently, and darkens my screen, it takes several tapping of the screen too make it disappear. Very annoying!!!! I know, you are trying to attract more readers, but blocking the text with your pop up Window and a darkening of the screen is overkill. Have a smaller window, pop up on the bottom of the screen, and don’t darken the screen, will have the same effect without the annoyance factor.

    Also, the text on your site appears in a very light grey color, like a 30 % screen. Obviously this is by design it may appear to be very fashionable, but for someone more senior than you, it is very hard to read. Make your print 100% black, easier to read. Make reading your blog a “pleasant” experience.

    I’m already retired, I also live near Canada’s “cheapest” city, just like you. Just saying. Always interested to learn more, especially about the Canadian aspects of FI.

    Thank you,

    • Thanks for the feedback. I don’t like the current setup either, and its my own blog 🤗. I’ve downloaded a number of themes and will be improving the site tonight and this weekend with my wife.

      It will be black font on a white background, the cleanest and easiest to read and I will go with a minimal sign-up pop-up, agreed.

      I quite appreciate all of the comments and feedback people are giving me, it’s really help improve the process.

      All the best Aaron,

      Finance Stoic