While a major part of the FIRE philosophy is enhancing your income via excelling at work and doing side hustles, another key part is frugality and minimizing your expenditures, so you can maximize your savings rate. In my opinion, the frugality/minimize path is the more effective, because most increases in your income will see a portion taken out for taxes. Any money saved via frugality is post-tax, and therefore goes straight to the bottom line.
One thing you can do is to tray and maximize whatever company benefits you may have, so that you don’t have to spend the money (and be taxed) yourself. Whenever your company benefits package comes out, get a copy and look through them for what discounts or free-stuff is available that you might want to use. Some examples include:
- Learning Opportunities/Training
- Discounts on products & services (movie tickets, computers, entertainment, etc.)
- Insurance (low-cost Life, Disability, etc.)
- Reduced cost legal services
Use these benefits to try to further cut your expenses, and then bump that money into your savings and investments.
One of the things my company has is a Deferred account – the equivalent of a 401k (paid with pre-tax dollars). You basically don’t get paid this money, you “defer” it to a later date. You can start withdrawing it after you’ve been with the company for 5 years. If you leave the company, you have to take the money out – and pay taxes on it. You can take it out as a lump sum (dumb) or break it out to receive a monthly amount for a period up to 5 years. It’s like a 401K that you could access at age 35!
Previously, I was putting in 6% of my paycheck (the max was 25%) and 25% of my annual bonus (I could put in 100% of bonus). You have to make the decision in December for the following year, and then its locked in. In 2017, I was also putting away $1,376 a month into regular investments, so I’d have something to help “tide me over” from early retirement to age 59 (when I could access my IRAs).
I dawned on me that I could put away 25% of my take home, and that would be around $1,300 per paycheck, or a little more than twice was I was putting away to that investment account. In addition, my cash flow still let me put $300 into that investment account each month. Let’s see, save $1,376/month or $2,900/month? Tough choice. I also realized that, based on my spending, I didn’t really need to get my bonus in 2018. Switch that to 100% to deferred. The result?
Bam! Savings rate went from 30.1% of gross pay to 55.9% of gross pay. In addition, I am building up a sizable chunk of money that, when I chose to retire, I can take it out and use for living arrangements with no penalty. While its taxed, I plan to be in a much lower tax bracket by then. Based on this, I won’t have to dip into my 401K/IRA money till well past 59-1/2. Maybe use this to help do some Roth IRA conversions?
After calculating this in early 2017, I felt like quite the idiot for not doing it in 2017. I also realized that I could use this to retire a full year earlier. Shortly after that, I started the 39 Months blog.
So check out your company benefits and other ways to cut your expenses – and then put those funds into investments!
Mr. 39 Months