Latest posts by Wanderer (see all)
- Investment Workshop 43: Socially Responsible Investing - September 13, 2017
- Investment Workshop 42: Double-Fisting your Retirement Accounts - September 6, 2017
- Investment Workshop 41: How Painful Will the Housing Crash Be? - August 30, 2017
Last week, I wrote about a simple rule that helps people get control of their budgets back.
Rent More. Own Less.
Now as with every rule, it’s not a universal blanket that applies to everyone. Rent doesn’t ALWAYS beat owning. But owning big, expensive shit exposes you to the unexpected costs like maintenance, insurance, repairs, etc. associated with owning that big, expensive shit.
And depending on who you are, there are always ways of mitigating those unexpected costs. If you’re Mr. Money Mustache, for example, and can fix a broken window or a burst pipe on your own, or you’re Paula Pant from AffordAnything.com, and understand the financial math well enough to spot an undervalued property. But if you need to hire a contractor every time something goes wrong or if your financial analysis is limited to “But my friend bought a million dollar condo and I also want to feel PRIDE OF OWNERSHIP,” then owning that big, expensive thing is gonna screw you over and you’re better off renting.
The point of doing this, even if it increases your baseline costs, is it allows you to take back control over your spending. Because if your spending looks like this…
…you’re constantly in a state of panic as you run around putting out fires. But once you sell the big, expensive shit and rent them instead, you convert that spending pattern into this…
A steady, predictable baseline spending amount that doesn’t really fluctuate, punctuated by occasional happiness-spiking splurges on fun luxuries like vacations, massages, or wife-swapping sex parties (hey, whatever floats your boat!). And this is important, because the panicky owner up there is spending all his time putting out fires, while the happy renter is happy, relaxed, and sitting by the pool eating an ice cream cone (or another man’s wife, depending on which scenario we’re talking about).
Ahem. ANYHOO, my point is, you can’t sit down and plan out your long-term finances if you’re in a constant state of panic. So that’s the first step. Get out of the panicky meat grinder that Owning too much expensive shit gets you into.
And now we can start the next phase of your FI journey, which is…
Spend Less. Be Happy.
Spending Doesn’t Always Equal Happiness
In a previous life (i.e. two years ago), we were engineers, so we tend to look at money as an unfeeling jumble of numbers on a spreadsheet. But the truth is, money is emotional. It’s one of the most emotional topics there is, right up there with sex and religion. It’s the leading cause of divorce, and that’s because ten people can look at the same spreadsheet and have ten completely different reactions. Just scroll through the comments section on any particular post for proof.
Everyone’s baseline spending looks like one giant monolithic bar graph but in actuality it’s layered, like this.
The Green Zone
The Green Zone is what I like to call the “Wasteful Spending Zone.” This is the region of spending that doesn’t add any bit to your happiness. This is the frothy wasteful spending that people inadvertently build into their budget, usually unintentionally. For example, think parking tickets or bank fees. When you spend $25 a month on bank fees, does that spending increase your happiness? Of course not! If anything, it has the opposite effect.
So as a result, finding and cutting spending that’s in your green zone is free, in that it doesn’t impact your happiness one bit. So when you cut green zone spending, your happiness level looks like this.
No impact. Win-freaking-win!
Examples of this include:
- Buying groceries at a discount supermarket rather than Whole Foods. Same items, lower price.
- Switching to a no-fee checking account.
- Keeping your purse until it breaks rather than buying a new one every season
These types of optimizations are both easy and fun. You’re really just finding and cutting wasted spending, and oftentimes you’ll be amazed by how much of this can build up over time if you’re not careful. Cutting these is a no-brainer, and requires absolutely zero sacrifice, and very few things in life are all-upside-no-downside, so yay.
The Yellow Zone
Now onto the next zone. The Yellow Zone, or what I like to call the “Spending Hot Tub,” is the spending that you does bring you some degree of enjoyment, and if you were to cut it you’d feel a temporary dip in happiness. However, the key word here is temporary. Cutting into this spending does involve some tradeoffs and sacrifice, and yeah it can be painful at first, but this type of spending reduction is like turning up the temperature in a hot tub. It may hurt at first, but after a while, you get used to it, and then you just stop noticing it.
So when you cut spending in your Yellow Zone, your happiness levels take a temporary dip, but after a while, gradually recover as you get used to it, like this.
Examples of this include:
- Buying beer at the grocery store rather than a bar
- Walking/biking to work instead of driving
- Cooking lunch instead of eating out
Cuts like this hurt at first, and you do feel it, but after a while you get used to it and then it just feels normal. The important part of cutting into this yellow zone is that you do it gradually, over time. You have to experiment and figure out what works for you, and you have to give each spending change time for you to get used to it. If you try to slash everything 50% by changing 5 things at once, your happiness will plummet too rapidly and you’ll give up, just like jumping into a hot tub that’s way WAY too hot.
Slow and steady is the key here in the Yellow Zone.
The Red Zone
And finally, the Red Zone, or what I like to call the “Pain Zone.” This is spending that is actually essential to your happiness, and if you were to dip below this spending level, your happiness would drop, and this is key, it never actually normalizes. In fact, your happiness just gets worse and worse below this spending level, because every day you feel like you’re doing without something you actually need. On our handy-dandy happiness chart, it would look like this.
That’s your happiness level plummeting and staying bad. This isn’t fun, and will eventually result in you giving up and returning back to your original spending level, which will be discouraging and frustrating.
Examples of this include some of the more extreme stuff I’ve read people attemping in order to save money like:
- Reducing your food budget until you’re only eating beans and Kraft Dinners
- Moving in with your parents/in-laws to save money
- Quitting smoking cold-turkey
These cuts hurt too much and, unlike cutting in the Yellow Zone, you never get used to it making each day more and more painful. Eventually, the pain in the Pain Zone becomes too much to bear and you reverse yourself, sometimes even over-correcting and spending more than before to make up for the pain you’ve just endured. This is bad, and cutting into the Red Zone never works long-term.
It’s All About You
Now, here’s the tricky thing about these Red/Yellow/Green Zones. They’re different for each person.
What might be a Green Zone/Yellow Zone spending item for one person might be a Red Zone spending item for another. And that’s what FI blogs (and we are guilty of this as well) tend to not recognize.
FIRECracker and I have…er…some opinions on owning houses. And that’s because for us, owning a big home is unnecessary and doesn’t add even a tiny bit to our happiness. We derive zero joy from cleaning, or gardening, or staring lovingly at a granite countertop like some kinda psycho, so cutting that shit out is Green Zone spending for us. And FIRECracker looooooves to yell at people who believe owning a million dollar home is both normal and completely necessary for their happiness. In fact, you may even argue that yelling at those people increases HER happiness.
But turn the tables around and take something we consider Red Zone. For example, we love good food. Show me a beautifully grilled steak and I will show you a soon-to-be-empty plate. So if someone were to show me a spreadsheet showing how much money I would save by cutting meat out of my food budget and instead becoming vegan, I would tell them to fuck off while throwing chicken bones at them. That’s Red Zone spending for me. But it may not be for you.
The Fake Red Zone
However, the tricky part of personal finance is recognizing what actually is Red Zone spending and what isn’t. For many people who write into this blog, and for many of our personal friends and family, they believe their Red Zone looks something like this.
Their Red Zone, meaning the amount they have to spend to have a normal level of happiness, always seems just beyond what they’re currently spending. And sometimes, this is real. If you’re earning below the poverty line and your basic needs of food and shelter aren’t being met, then this is absolutely real, and a HUGE problem. But if you’re reading this blog on a laptop while sipping a latte at work, then you’re probably not in this situation.
So why do these people think their Red Zone is so high? Well, because of this.
That’s their happiness level, and it’s constantly below “normal” happiness, meaning they’re constantly stressed out and unhappy. So they look at their Red Zone, conclude their spending isn’t enough to meet that level, and get depressed. Then, they decide to work harder, go for that big promotion, get the higher paying job, all to increase their baseline spending level thinking that will eventually make them happy. So they do that, and for a while it seems like this works, but soon they slip back into that pattern of frustration and unhappiness, and they conclude that their spending still isn’t meeting their Red Zone requirements.
All because of that constantly low happiness level. But here’s the big secret in Personal Finance. You know who else has the same low happiness pattern? This guy.
It’s the guy who owns too much expensive shit and constantly has to run around putting out fires when stuff inevitably breaks. This guy is constantly unhappy, and if this person mistakes the source of their unhappiness as their Red Zone requirements not being met rather than owning too much stuff, they will fall into this “Runaway Red Zone” trap.
Finance Blogs call this the Hedonic Treadmill, but this is by no means a new concept. Every major religion talks about this. At some point, Jesus, Buddha, and the Dalai Llama all said something to the effect of “Possessions don’t make you happy.” And people often misinterpret this as “If being happy means I have to live in the desert as a monk, then screw that, gimme my frappuccinos.”
They’re not saying that living like a monk is the key to happiness. But what they, and we, are saying is that the key to UNhappiness is mistaking this…
The Real Path to Happiness
So that’s why Step 1 of the whole process is:
Because by doing this, you eliminate the sources of Emergency Spending and therefore the source of frustration and panic from your life. Instead, you replace it with a steady Baseline Spending level with occasional splurges. Even if that baseline is higher than before, your happiness levels will normalize because the Emergency Spending events disappear, instead replaced with happiness-spiking Splurge Spending.
Then you can move onto Step 2:
Get Rid of the Green Zone
Find and eliminate all the Green Zone spending that you can. All that wasted spending that does nothing to improve your happiness. Find it, kill it, and marvel at your Baseline Spending drop with no hit to your happiness. Take that, stupid bank fees!
Then, Step 3:
Gradually Eliminate Your Yellow Zone
This is process that might take months, or even years. One by one, try to eliminate something in your spending and see if the pain from losing that goes away. If it does, that was Yellow Zone spending and you can safely lost it without impacting your long term happiness. If it doesn’t, that was Red Zone spending and you have to put it back. But over time, and by careful trial-and-error, you’ll find that many of the items you THOUGHT were Red Zone items were, in reality, Yellow Zone items.
And then finally, Step 4:
Watch Your Savings Skyrocket
Once you eliminate enough of your Yellow Zone spending, you’re gonna save a lot of money. It just happens. All the finance bloggers out there who reached FI got there not because of super-high earnings but because they realized that their Red Zone spending levels was actually for less than they thought. And if you figure out where your actual Red Zone is and you bring down your spending to that level, you’ll find they you can spend a fraction of what you were spending before while being just as happy (or maybe even happier thanks to all that Emergency Spending being gone). And if you do that, you’ll find your savings level shoot up so high that you can’t help but get rich.
So to recap:
- Rent More. Own Less.
- Get Rid of your Green Zone
- Gradually Eliminate Your Yellow Zone
- Watch Your Savings Skyrocket
- Retire Happy
And that, my fellow Revolutionaries, is how you
Spend Less. Be Happy.