# The Money Mustache Community

## Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: bevathome on March 11, 2013, 09:53:02 AM

Title: Decisions as impact to financial independence
Post by: bevathome on March 11, 2013, 09:53:02 AM
Is there a formula to calculate how a given decision would impact the time to financial independence?  If I skip ordering out a pizza for dinner tonight at \$13, I could retire 2 months earlier.  If the impact of certain decisions could be understood in terms of time to FI, I think it would really motivate my family to make more frugal choices.

Title: Re: Decisions as impact to financial independence
Post by: JohnGalt on March 11, 2013, 10:04:07 AM
You could probably come up with some rough formula, but I think the problem you're going to run into (at least with the one example you provided) is that the decision to not order pizza one night is going to have such a minor impact that it won't be worth the effort.  Small, one-time expenses don't matter much.  Small, regular expenses do.  So - to be useful - your question probably needs to look more like "If I skip ordering pizza once a month, I can retire x months earlier".

This can be more generalized to say "If I cut monthly expenses by \$X, how many, y, months earlier can I retire?".

If you assume a 4% SWR, every \$1 you spend monthly means you need to save \$300 to cover that expense forever.  So, if you save \$13 per month, that's \$3,900 less you need to save.  Of course, that will also compound as it helps you save more that will grow on it's own earlier to further reduce it - but that really complicates the problem.  When I'm doing it in my head - I just take the monthly expense * 300 and divide by the amount I typically save in a month.
Title: Re: Decisions as impact to financial independence
Post by: mustachecat on March 11, 2013, 10:27:17 AM
http://www.daveramsey.com/article/investing-calculator/lifeandmoney_investing
Title: Re: Decisions as impact to financial independence
Post by: bevathome on March 11, 2013, 11:27:50 AM
Thanks for the thoughts and calculator.

Using the calculator, I can take a baseline with the current 'stash and see when it will be enough to cover expenses if we do not contribute anything more.  Then I can add each contribution (money saved) at the appropriate intervals (the advanced version allows daily, weekly, monthly, quarterly and yearly) and see the impact.  Unfortunately, the calculator only shows the totals in years, so small changes aren't as obvious, but this may still help getting my point across, nonetheless.
Title: Re: Decisions as impact to financial independence
Post by: WageSlave on March 11, 2013, 04:38:53 PM
If you assume a 4% SWR, every \$1 you spend monthly means you need to save \$300 to cover that expense forever.  So, if you save \$13 per month, that's \$3,900 less you need to save.  Of course, that will also compound as it helps you save more that will grow on it's own earlier to further reduce it - but that really complicates the problem.  When I'm doing it in my head - I just take the monthly expense * 300 and divide by the amount I typically save in a month.

This is basically what I do for recurring expenses: frame it in terms of how much bigger does my stache need to be to support this expense indefinitely?  Quick and dirty approximations, based on SWR, are as follows:

4% SWR: yearly expense: multiply by 25, monthly expense: multiply by 300
3% SWR: yearly expense: multiply by 33.3, monthly expense: multiply by 400
2% SWR: yearly expense: multiply by 50, monthly expense: multiply by 600

After doing the multiplication, it should be easier to determine how much longer you have to save to meet those goals.  Likewise, going the other way, for every recurring expense you eliminate, you can derive how much you cut off your stache-building time.

As JohnGalt said, it's hard to use such rules for one-off purchases.  But if you track your spending precisely, you could, for example, tag all purchases like this, then add them up every month, and frame them as a recurring expense.  If you have the discipline to order pizza for dinner only once a year, then it will have virtually no impact on your time to FI.

But if you're like those of us who are still working on such discipline, you don't order pizza just once a year.  :)  Add up all the times you got pizza or ran through a drive through or whatever.  Say you do it only two or three times a month on average.  It could still easily come up to \$30/month.  If you're targeting a 3% SWR, that's \$30x400 = \$12k of additional stache you need to support it indefinitely.
Title: Re: Decisions as impact to financial independence
Post by: marty998 on March 12, 2013, 12:26:13 AM

This is basically what I do for recurring expenses: frame it in terms of how much bigger does my stache need to be to support this expense indefinitely?  Quick and dirty approximations, based on SWR, are as follows:

4% SWR: yearly expense: multiply by 25, monthly expense: multiply by 300
3% SWR: yearly expense: multiply by 33.3, monthly expense: multiply by 400
2% SWR: yearly expense: multiply by 50, monthly expense: multiply by 600

Not sure this is right. If you have a 2% SWR then you need to multiply by 150 not 600. You need a smaller total because you are withdrawing less as a % of the total each year?

In any case I agree it is a good quick way of looking at the overall problem. Then we being the type of people we are, complicate it with compounding, tax etc etc etc
Title: Re: Decisions as impact to financial independence
Post by: arebelspy on March 12, 2013, 12:52:23 AM
This is a good reoccurring expenses calculator, made by a Mustachian:

http://networthify.com/calculator/real-cost
Title: Re: Decisions as impact to financial independence
Post by: arebelspy on March 12, 2013, 12:54:42 AM
Not sure this is right. If you have a 2% SWR then you need to multiply by 150 not 600. You need a smaller total because you are withdrawing less as a % of the total each year?

No, you want a smaller SWR, meaning you need a bigger stache to withdraw your expenses and have it only be 2% of your stache (instead of 3 or 4), meaning you'll have to multiply by a bigger number to calculate it.