I refrain from telling people how they should lead their life, after all it is their life. However, a lot of people I meet, want to retire early but do not save >15-20% of their pay.
While a lot of the people can save >50% of their pay, but they don’t because of their spending habits.
I remember the first time I read in depth about financial independence and early retirement, I shuddered to think that how can I save 65% of my salary (the number that could help one retire in 10-12 years, see more on that on my post on how can I retire early?). After all, my credit card bills were >70% of my income with each spend justifiable.
Hence, I just debunked the whole FIRE movement as something that only extremely frugal or uber rich people can attain.
Saving was always in the DNA
But the little voice inside me always kept clamouring about early retirement and became impossible to ignore. That is when I started to read about zen living. For a kid born in the 80s in a typical middle class Indian household, a lot of it was a way of life (which I had forgotten in the 2000s).
There are many ways to explain the idea but my version is : “Buy what you need, not what you want”.
Why are people spending so much?
Primary reasons people are not able to reduce expenses and increase savings are: a high disposable income and a habit of saving after spending. When a new iPhone is launched, people spend Rs. 80,000 on it thinking well this is just one time. I won’t buy another phone for a couple of years. I agree that you may not buy another phone for a couple of years, but you will buy something else and again say that it is a one time expense. Hence, every month there are these one time expenses that are actually more than the recurring expenses.
How to overcome the spending habit?
I made a two step approach to overcome spending habit and increase savings:
Step 1: Figure out your essential and recurring expenses
Track your expenses for 3-4 months. I used excel to track my daily expenses (cash, non-cash) for 3-4 months, you may use free apps available. However, I found excel better as I could prepare my own format. I used to categorise the expenses in categories like daily travel, eating out, bills (mobile, Netflix, electricity etc.), shopping and random spends.
Mark the essential and/or recurring expense and the avoidable ones (follow the principle of buy what you need, not what you want). Even for the essential expenses think about what are the ones you can live without (do you really need that monthly club membership that you probably use once in 3 months?).
After rationalising the spends, narrow down to an amount that you think should be your monthly expense. Keep some amount as buffer on top. You can save this in a fixed deposit or liquid fund so that you can withdraw from it quickly, if required. If this portion is left unused for a couple of months or so, you can transfer it to a long term investment like a lump sum investment in equity fund.
Save Invest before spending
As soon as you get your salary, keep the expense and buffer amount and invest rest of the amount. Best would be to set an auto debit(e.g. for a mutual fund SIP, refer my post on best mutual funds). This would force you to sustain on the amount that you have left and thereby prioritise your expenses according to the principle of buy what you need, not what you want.
We, as humans, are extremely adaptable, the moment we have more income to dispose we will find ways to spend. But reverse is also true, when we have less disposable income, we find intuitive ways to live happily in that amount and reduce expenses.
In the end, you should be the one to decide the limit on spending and saving. Because everyone has different needs and wants. What is a need for me might be a want for someone else. Remember the purpose is not to make you sad. The purpose is to achieve your priority i.e. early retirement. So decide your spending limit and basis that figure out the retirement corpus that you need and in how much time can you retire. Follow the mantra of buy what you need, not what you want to increase savings and reduce expense.