Lately I’ve noticed a big push towards the concept of financial minimalism and for those of you that are not aware this is the concept in which you cut out every expense in your life that does not add to your overall enjoyment and well-being and doing that allows you to shift your focus and your spending towards the things that do matter and improve the quality of your life. This is after all something that I’ve been implementing throughout the last decade, I mean it’s basically no surprise that I try to take it as a personal challenge to spend as little money as I possibly, can to cut back on the things I don’t really use and turn everything into an exercise of how low I can get the prices down. In a way this is my weird idea of fun and it happens to be economical at the same time.
Doing this is also what’s led me to accumulate a pretty hefty nest egg in terms of my investments without ever feeling like I’ve missed out or deprived myself of anything and doing that has allowed me to shift my attention and my focus towards doing the things that I enjoy the most, such as doing shopify product research for my dropshipping business.
From that perspective financial minimalism is amazing and they all a lot of my financial success to recognizing the value of $1.00, delaying gratification, being mindful of the type of spending and experiences that really just had the most value to my life and otherwise just not buying stupid. But as great as this is and as much as I love talking about it financial minimalism does have one main flaw that needs to be addressed it’ll be the first to admit I wouldn’t be here today if I just saved as much money as I could and otherwise lived a hyper frugal existence, without ever leaving the house. Because that alone is typically not enough to build up your investments to the point where that will cover whatever lifestyle you want to live, so for the way I see it – here’s the biggest problem of financial minimalism, exactly what you could do about it and how doing this could end up improving your finances.
The way I see it, financial minimalism is all about taking a really simple uncomplicated and bare-bones approach to your finances, by doing that you could lead a more financially flexible lifestyle with less obligation and that gives you more freedom to pursue what you really want to do, so it’s all about cutting back and what doesn’t matter so that you could spend more on what does.
It’s a constant battle of prioritizing your expenditures, figuring out where you get the most value, delaying gratification (which means you can’t purchase aliexpress best sellers) and then sticking with it long term. The end goal is about maximum what you have right now and then investing the difference to give you the financial security to basically pursue whatever you want to do and walk away from what you do not want to do. But there’s also another side of this that’s not really talked about that much and that’s because cutting back and saving a loan can only take you so far.
You can only save and cut back so much money before eventually you can’t possibly save anymore or cut back anymore and then at that point you’re stuck. So then what do you do? Well, I will attempt to answer that, and to do that let’s begin here with savings.
If you want to be financially independent it’s really as simple as counting two things: number one – how much money do you spend every year and number two – how much do you have invested to cover that lifestyle. Financial minimalism fits into this mold perfectly because the less money you spend the less money you need and the faster you could reach that point of having your investments cover your lifestyle.
Not to mention saving as much money as you can has several huge benefits. Number one: if you cut back your spending by $1 that $1 is really worth more like $1.30 before taxes if you had to go and work for it. Like imagine what you would have to do to have an extra $100 in your pocket right now. You would need to go and make an extra 130 dollars because Uncle Sam needs their fair share.
So from this perspective, anytime you save money it’s almost like you get a bonus of 30% because that’s not money that you need to pay more tax on just to keep. My analogy for this is somewhat like would you want to eat this Snickers bar and enjoy it for a minute and then spent 2 hours on the treadmill trying to burn it off or would you rather just not eat the Snickers in the first place. I mean maybe you want the Snickers bar and that’s cool but at least for me it seems so much easier to cut back than work extra just for a little bit more.
The second the other benefit to saving is like I said that’s less money you will need to be financially independent just consider this most people calculate how much money they’re gonna need to retire by multiplying their annual spending by 25 to 30 and then once they’ve hit that amount invested they’ve made it. This is also it’s known as these safe withdrawal rate. So that means if you’re 25 years old and you spend $40,000 a year just multiply that by 30 and that means you will need 1 million two hundred thousand dollars invested to safely generate an income of $40,000 a year that you could spend indefinitely without ever worrying about running out of money.
That also means in other words for every $1 you spend you will need $30 invested to be able to cover it. This is one of those things for me that once I saw it I couldn’t unsee it like I view that $200 car payment is not costing me $200 a month but instead 72,000 dollars invested because that’s how much money I’m going to need in order to sustain that expense indefinitely.
The same thing could also apply to you spending $100 a month dining out to be able to cover that expense indefinitely you will need an extra thirty six thousand dollars invested. This is why cutting back even just a little amount will have a big impact on how much money you’ll need in the future and just remember for every $100 a month that you cut back on will mean $36,000 less money that you will have to have saved up in order to pay for it and at least for me recognizing this was pretty eye-opening.
Third, for the majority of people cutting back and saving money will have the fastest most immediate impact on your finances over anything else and this is the one area that you really have the most control over you decide if you want to get that Mercedes or they used Honda, you decide how much you want to spend eating out every night, you decide if you want to live in a really expensive part of town or live ten minutes away for half the cost.
So in terms of what you can do today literally within minutes going through your spending cutting back and saving money is going to have the best ROI above anything else that you could possibly do.