So you're going to invest your way to an early retirement huh?

[Huskie87]

I have attached an excel file that you can play with to see the trade-off between lowering expenses and increasing investment returns, I think you'll find the results interesting.

The scenario I've just run is a married couple who earn $100,000 per year.  They currently save $15,000 pretax which provides them with roughly $65,000 in after-tax spending dollars per year.  Using a 7% growth rate on their investments, some modest assumptions about inflation and taxes, their retirement account grows to just under $700,000 over 20 years.

Now, let's say this couple comes across this site and decides they want to be better off in 20 years.  I give them two choices, become a professional investor and beat the markets, or reduce expenses.  Which is a better use of their time?

Well, we can play with the numbers all day, but my scenario shows that if they cut $15,000 in after-tax expenses, this is equivalent to increasing their investment returns to over 15% per year.  They need to more than double their investment returns!  So, go ahead and customize to your situation and find out what this would be worth for you, but if your goal is to invest your way to an early retirement...good luck!  Your time may be better spent learning basic automotive repair and home maintenance.

[zazpowered]

Even better is increasing your income

[ChpBstrd]

I've done the same math. For every $1/year you save, that's $25 you don't have to earn (or $33 if you prefer a more conservative retirement).

An annual $50 meal for 2 at Chili's requires $1,250 in investments. How many weeks of labor does that work out to at your current savings rate? A lot is the answer regardless of your numbers.

[Huskie87]

Even better is increasing your income

Well, in this particular example that would require increasing their income to $120,000, or 20%, and saving that entire raise.  The ability to raise income by 20% might be easier for some than others, I think this blog does a good job of pointing out all the easy ways to cut spending, which is something anyone can do.

[Kaspian]

YES!  I see regular people who fret for hours, struggling to find something which might get them an extra 0.5% in investments but if they cut out one coffee or chocolate bar a week it would result in far more money in the long run.

[Car Jack]

I'd make the argument that if one becomes a professional investor, the only way they're making money is if they are a broker, investing for other people and collecting commissions.  All these people who dabble in stock picking (I did it for a while) tend to act like gamblers.  They tell you about all the wins and neglect to tell you about the losses and trading costs which in the end make the whole thing a losing proposition.

How about....make more money, spend less money, save more money.  It's quite possible to do all of these things.

[NoraLenderbee]

That's an amazing insight. You should start a blog about it.

[Kaspian]

Paula Pant did a pretty great blog entry about this sort of topic last month--definitely worth a read.  It weighs the pros and cons of nickel-and-diming versus other avenues.  http://affordanything.com/2016/11/22/any-benefit/

I like this part:

"Here’s a better approach, in two steps:
#1: Subtract stuff that’s unnecessary.
#2: Add stuff that’ll pose a significant benefit at a slight marginal cost."

[matchewed]

For reaching FIRE your savings rate is key. For maintaining FIRE it is your returns. Both are ultimately important to FIRE.

[pumpkinlantern]

Yes, this is so true!

Having said that, improving returns and saving more are not mutually exclusive.

[theolympians]

Good work Husky; and I like Cat Jack's wisdom. There is a lot of talk everywhere about trying to squeeze another percent and trying to find find the next hot tip. Invest, dollar-cost average, and come back in five years to see where you are at. Don't bounce between stocks and funds, you lose whatever percent advantage in brokerage commissions and taxes....

I love to watch the market, and wonder what if, but I always resist moving money around.

[Retire-Canada]

Unless you've spent a lot of time optimizing your life financially I think the easiest way to turbo boost your FIRE plans is to reduce your cost of living. Not only is every $1 you don't spend $25 you don't need to save, but it's also $1 more you'll save each year during the accumulation phase. Earning more and market returns all require external factors to cooperate to get you ahead, but you can work on reducing costs pretty much as aggressively as you want to.

If you are starting from a typical western world professional lifestyle you can reduce costs from 25% - 75% and still lead a pretty sweet life.

I agree that firing on all fronts [reduce cost of living, earn more and generate solid market returns] is the best plan, but reducing my cost of living is where I can have the most impact.

MMM has noted the process of hedonic adaptation to describe how no matter how "fancy" your lifestyle is you get used to it as being normal. That process works the opposite way as well. As you reduce the cost of your life and you get less fancy for a moment the new state of affairs feels novel and unusual, but after a bit of time you feel normal at the lower cost lifestyle.  I've found that I've gone through a few round of cost optimization and each time it felt like a big deal and I hit a wall. Then later I got motivated to make further cuts until it felt like I had maxed out my tolerance for change.

I suspect I'll continue to optimize my costs for years to come. I've maxed out my earning at the moment and my investments are all low cost diversified index funds so neither of those areas need a lot more work.