2024-07-11_Spend_Half_Save_Half
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00:00:30.160 | Welcome to Radical Personal Finance,
00:00:31.360 | a show dedicated to providing you with the knowledge, skills,
00:00:33.440 | insight, and encouragement you need
00:00:34.800 | to live a rich and meaningful life
00:00:36.320 | now while building a plan for financial freedom in 10 years
00:00:38.720 | or less.
00:00:39.440 | My name is Joshua.
00:00:40.160 | I'm your host.
00:00:40.720 | And on today's podcast, we're going
00:00:42.400 | to continue our series on intelligent financial goals
00:00:46.560 | that you should set.
00:00:48.080 | Goal number one was very simple.
00:00:49.840 | It was get a job.
00:00:51.360 | If you don't have a job, that's probably a good indication
00:00:54.080 | that you're not doing well financially.
00:00:56.000 | So your first goal and ambition should be to get a job.
00:00:59.440 | Now today, we continue with the basic stuff
00:01:02.000 | that makes a huge difference, which
00:01:03.840 | is spend less than you make.
00:01:06.240 | The unique thing about today's episode,
00:01:08.880 | though, is I'm going to give you a specific amount of money
00:01:13.760 | that I think you should spend.
00:01:15.520 | And that is this.
00:01:17.600 | Set a goal to live on half your income.
00:01:22.160 | I want to persuade you to set a personal goal
00:01:25.440 | to live on half your income.
00:01:28.480 | Now, I need to back up before I defend this fully
00:01:34.880 | and give you a little bit of background discussion
00:01:38.560 | and background illumination on this topic.
00:01:41.280 | I quickly concede that my advice to set
00:01:45.280 | a goal of living on half your income
00:01:47.280 | is not all that common in the world
00:01:50.880 | of personal financial advice.
00:01:53.360 | I also quickly concede that it may not
00:01:56.080 | be achievable by all people.
00:01:58.160 | But I think it's achievable by most people, especially
00:02:02.880 | those who are listening to radical personal finance.
00:02:05.120 | And I think the reason more people haven't set and achieved
00:02:10.960 | this goal is because they've never thought to.
00:02:14.960 | They've never been encouraged to.
00:02:17.040 | That was my story.
00:02:20.240 | And to this day, if I could go back to my youth
00:02:23.360 | and change any one thing in my financial life,
00:02:26.800 | it would have been to always have this goal
00:02:32.240 | at the top of my list and to structure
00:02:35.600 | all of my life around this practice.
00:02:40.400 | I could have done it.
00:02:43.040 | I just didn't do it because no one suggested it to me.
00:02:45.920 | If you go out in the world today and you ask most people
00:02:49.840 | whether you should spend less than you make,
00:02:52.080 | most people will agree that you should.
00:02:55.120 | And certainly anyone who has any experience with money
00:02:57.760 | or wealth will say that you absolutely should.
00:03:00.960 | You must always spend less than you make
00:03:04.560 | if you're going to have money.
00:03:06.800 | If you're going to spend more than you make,
00:03:08.400 | then you will always have debt and all of the slavery
00:03:11.440 | that ensues with being in debt.
00:03:13.520 | So you should have a focus and a target and a requirement
00:03:17.680 | that you're always going to spend less than you make.
00:03:20.080 | But if you ask people how much you should save,
00:03:23.600 | the most common answer you will hear
00:03:25.360 | will be something like 10 or 15%.
00:03:27.920 | Now, there are other complicated formulas,
00:03:31.360 | but I think this is fairly common.
00:03:33.440 | What I find interesting about this, though,
00:03:35.840 | is I consider this a piece of advice
00:03:37.600 | that simply has not kept up with the times.
00:03:39.840 | Why do I say that?
00:03:41.600 | Well, if we go back in history, 50 years, 100 years,
00:03:45.520 | then you and I would have been living in a society
00:03:47.360 | in which money was not nearly as available as it is today.
00:03:51.200 | You and I would have been living in a world
00:03:53.600 | in which food cost us a lot more than it does today.
00:03:57.920 | Housing cost us a lot more than it does today.
00:04:01.200 | You can still find the reality of this all around the world
00:04:04.080 | if you go to poorer countries and poorer economies.
00:04:08.000 | It would be very normal today to go and look
00:04:11.280 | at a low-income household in many regions of the world
00:04:14.160 | and find that in a low-income household,
00:04:16.240 | a worker may spend 50 or 60% of his total income on food.
00:04:21.840 | Just to survive every day,
00:04:24.400 | a worker may have to spend 50% of his income on food.
00:04:28.400 | But in the countries where you and I are from,
00:04:32.160 | it would be almost inconceivable for really anybody
00:04:35.760 | who's paying any kind of attention
00:04:39.040 | to spend more than 20% of income on food.
00:04:43.840 | If somebody is even spending 20% or more of his income on food,
00:04:48.800 | it's exclusively because he's hiring servants to cook for him
00:04:53.200 | rather than cooking for himself, i.e. going out to eat.
00:04:57.200 | The actual bare cost of groceries, the raw ingredients to eat,
00:05:02.320 | it's very difficult to imagine, even at the lowest income levels,
00:05:07.520 | somebody spending more than 20% on food.
00:05:10.880 | So go back to the math of how much of your income
00:05:13.280 | you should be spending versus saving.
00:05:15.840 | If you're in a living situation in which you're just buying groceries,
00:05:19.280 | you're never paying servants to cook for you
00:05:21.120 | and to clean up your dishes for you,
00:05:22.480 | you're just buying groceries,
00:05:23.920 | and it's still taking 50 or more percent of your income,
00:05:28.560 | and you still have to pay for a roof over your head
00:05:30.640 | and everything else needed on a daily basis,
00:05:33.600 | then if you could save 10% of your income,
00:05:35.600 | you'd be doing really, really well,
00:05:37.520 | which is why historically this has been a basic targeted goal for most people,
00:05:42.160 | save 10% of your income.
00:05:44.080 | If you can save 10% of your income, things can work.
00:05:46.400 | Here at Radical Personal Finance, months ago,
00:05:49.120 | I released the whole recording of my favorite finance book,
00:05:53.200 | which is Richest Man in Babylon,
00:05:55.040 | and the cornerstone habit to build in Richest Man in Babylon
00:05:58.480 | is to save 10% of your income for yourself,
00:06:01.360 | and that works, and that's fine.
00:06:03.920 | But that advice is not even trying if you're saving 10%.
00:06:09.360 | And so what happens is people will generally achieve the goals that you give them.
00:06:14.400 | That's what this whole series is based around.
00:06:16.960 | So when I was 18 years old and I decided I would start saving money,
00:06:20.800 | then I thought I should save 10% of my income.
00:06:23.680 | So I started saving 10% of my income,
00:06:25.520 | but then I wasted the rest of my money.
00:06:28.000 | And if somebody had pointed out to me how if I'd saved 50% of my income,
00:06:33.600 | I could have been so much better off, I would have done that.
00:06:37.920 | Now, there is no specific number that I can say is the absolute number.
00:06:44.240 | Some people set a goal of saving 10% of their income, great.
00:06:47.280 | Some people set a goal of saving 90% of their income and living on 10%, great.
00:06:51.040 | You can choose the goal that you think makes sense.
00:06:55.440 | But I think living on half and saving half is a really good round goal,
00:07:03.280 | spend half, save half, clicks in the brain.
00:07:05.760 | And it feels like a good balance.
00:07:08.720 | So let's assume that you set this as a goal.
00:07:11.200 | What would happen for you?
00:07:12.400 | Well, first and foremost, you will always have money.
00:07:16.160 | You will always have money.
00:07:18.880 | You'll never be broke.
00:07:19.920 | If you're living on half your income, you're spending half your income,
00:07:23.760 | and you're saving half your income, you're always going to have money.
00:07:29.440 | You're always going to have freedom.
00:07:31.360 | For every week you work and have a paycheck, you bought yourself a week off.
00:07:37.440 | For every month you work, you bought yourself a month off.
00:07:41.280 | For every year you work, you bought yourself a year off.
00:07:44.880 | Because the ratio is significant, your savings will accumulate very quickly.
00:07:51.680 | In addition, you'll be enormously flexible.
00:07:56.560 | You'll have so much room in your budget that you're never going to be stressed about money.
00:08:02.240 | I'm trying to create this series to be widely applicable.
00:08:05.760 | I'm going to talk and make some comments that are most applicable to the very young
00:08:09.920 | or to people who are just getting started.
00:08:11.760 | But many things are going to be very applicable to those who are older and more established.
00:08:15.760 | Even if you are older, have a much higher income, and are much more established,
00:08:21.600 | I think you should still set a goal to spend half, save half.
00:08:25.520 | And this flexibility is enormously important.
00:08:28.240 | When somebody comes to me for financial planning, and he lives on half of his income,
00:08:34.480 | then we have so much flexibility around his life decisions that it's not hard to find a plan
00:08:42.400 | forward.
00:08:42.880 | It's not that hard to say, "Hey, why don't you cut your hours back at work so you can
00:08:47.520 | go and get the degree to move into the career that you really want."
00:08:50.320 | It's not that hard to say, "Yeah, let's go ahead and plan in a sabbatical."
00:08:54.000 | It's not that hard to say, "Hey, you're going to be so on track for retirement.
00:08:57.360 | Why don't you do this for another three or four years and then take five or ten years off?"
00:09:00.720 | Or, "Yes, you'll be on track for early retirement at age 50."
00:09:03.520 | It's all based upon the flexibility that we get by spend half, save half.
00:09:09.040 | However, when somebody comes who is middle-aged, has a normal middle-aged income,
00:09:15.840 | and is spending 90% of his income, one little disruption can make the difference.
00:09:23.840 | One little pay decrease due to a pandemic.
00:09:27.760 | One little job loss.
00:09:30.080 | Everything is too close to the edge.
00:09:31.840 | And so that flexibility is really, really important.
00:09:34.960 | You want to make sure that you maintain flexibility.
00:09:38.320 | And living on half your income will always keep your flexibility.
00:09:42.080 | You'll always have money to make the big investments that will get you quickly to
00:09:47.200 | where you want to go.
00:09:48.720 | So in this series, I'll rehash for the umpteenth time some of those big decisions.
00:09:54.400 | But in life, what usually happens is on an annual basis,
00:09:58.880 | there are kind of basic marginal increases that are available.
00:10:02.800 | So for example, "Yeah, okay, I got a cost of living raise.
00:10:06.000 | I got a small increase at work.
00:10:07.760 | I got a slight promotion."
00:10:09.520 | And those things are important and you should take advantage of them.
00:10:13.040 | However, the big wins usually come from noticing an opportunity when it comes your way,
00:10:18.800 | and then taking it.
00:10:20.160 | You notice that there's an industry that's growing.
00:10:22.480 | And if you just go and become trained as a geology engineer or whatever the current thing is,
00:10:29.040 | then you'll be on track for a great new opportunity.
00:10:32.720 | And so you go and you take it.
00:10:34.320 | And three years from now, you've doubled your income.
00:10:36.240 | But in order to do that, you needed to be able to go and be a professional student again,
00:10:41.840 | and cover yourself while going through class.
00:10:43.680 | You needed to go and be able to put yourself in a situation to pay tuition payments.
00:10:48.160 | Or you find out about a new industry and a new opportunity,
00:10:51.760 | but it's on the other side of the country.
00:10:53.040 | So you need to quickly move to the other side of the country to take the job.
00:10:56.080 | Or so-and-so says, "You should start this great new franchise that I heard about it.
00:11:00.000 | But the franchise fee is $100,000.
00:11:02.720 | So you have to come up with $100,000 to pay the franchise fee to start the new business."
00:11:06.880 | If you say yes to those opportunities when they come along,
00:11:10.160 | then very commonly a few years later, everything is working beautifully for you.
00:11:15.280 | But you have to have a little flexibility and a little bit of money to say yes.
00:11:20.320 | And the guy who saves 10% of his income usually never gets that breakout velocity.
00:11:25.120 | He never has enough money to say yes to those opportunities.
00:11:28.320 | He's already committed 90% of his pay towards living, towards his expenses.
00:11:35.200 | Another big benefit of doing this is you're going to develop frugality muscles.
00:11:39.760 | I think frugal muscles are worth developing.
00:11:42.880 | Whether or not you exercise them at every occasion is up to you
00:11:48.560 | and your long-term ambitions and goals.
00:11:51.600 | But knowing that you have those frugal muscles
00:11:54.240 | and that you can exercise them is enormously empowering.
00:11:58.160 | People who don't have frugality muscles are weak and flabby and not worthy of your admiration.
00:12:06.880 | Anybody can make $200,000 a year and spend $200,000 a year.
00:12:11.120 | It's not hard to live that way.
00:12:13.280 | But the guy who knows he can live on $25,000 a year and still make it
00:12:19.120 | is a much stronger, more resilient person.
00:12:21.760 | In tradition, there have been many cultures that have appreciated this.
00:12:26.880 | By the way, I have to correct myself.
00:12:29.680 | Not anybody can make $200,000.
00:12:31.600 | What I'm saying is that people who constantly search for ease and comfort,
00:12:36.320 | these are not attributes that you should look for.
00:12:38.720 | There are many historical cultures in which people who were fat and flabby
00:12:42.240 | and just always needed to sleep on something that was soft
00:12:44.720 | and sit in a comfortable, soft chair,
00:12:46.720 | they were scorned because of their lack of resilience, their lack of hardness.
00:12:53.360 | And so I think we can take that over metaphorically into the world of frugality
00:12:57.680 | and say that this should be a common thing.
00:13:01.200 | I enjoy staying at five-star hotels.
00:13:04.960 | I really do.
00:13:06.160 | Luxury is fun.
00:13:07.120 | Luxury is great.
00:13:08.880 | It's really nice.
00:13:10.160 | But I don't ever want to lose my ability to sleep on the ground and not complain the next day.
00:13:14.320 | That's a really important feature to have.
00:13:18.240 | It's my ambition to be perfectly comfortable in a tuxedo at a five-star hotel and a fancy soiree.
00:13:26.160 | I also want to be perfectly comfortable in a roach-filled motel room on the bad side of town
00:13:31.360 | because that makes me a more capable human being.
00:13:35.360 | I myself don't admire people.
00:13:38.720 | "Oh, life has to be in this perfectly comfortable space for me.
00:13:42.560 | I just can't do it."
00:13:44.080 | Now, when you have money, it's fine to spend it, obviously.
00:13:46.720 | Most of us don't want to go through life living the same way we used to.
00:13:50.160 | But you should have the confidence and the satisfaction of knowing, "I can do that."
00:13:54.320 | So if you begin this habit when you're young,
00:13:56.160 | let's say you're earning just a very little amount of money
00:13:58.480 | and you are building the frugal muscles of living on 50%,
00:14:01.680 | that's going to put within you an enormous level of confidence
00:14:05.680 | because I know how to spend absolutely nothing if I have to.
00:14:10.560 | And now, when you think about risk in the future, it won't bother you very much.
00:14:14.960 | One of the things that I've observed in coaching people
00:14:17.920 | is sometimes people will hire me and they'll say, "Joshua, listen,
00:14:20.160 | I booked a consultation with you because I'm thinking about starting a business."
00:14:22.880 | Or, "I have this big risk in my life and do you think I should do it?
00:14:26.320 | What do you think I should do?"
00:14:27.840 | And in many cases, a guy might be sitting on tons of money,
00:14:31.200 | but the reason he doesn't have the—and by tons of money,
00:14:34.320 | I mean tens of thousands of dollars in savings,
00:14:36.560 | sometimes six figures or multi-six figures in savings.
00:14:39.520 | But what happens is he's scared of, "What if this doesn't work?
00:14:43.200 | And what if I have to live on less than $100,000 a year?"
00:14:45.840 | And so he waits, and he waits, and he waits, and he waits, and he's not sure.
00:14:49.920 | So if you have frugal muscles and you know,
00:14:53.040 | "Hey, I don't want to live on $30,000 a year.
00:14:55.520 | That's not my idea of a good time. I really prefer my $90,000 a year lifestyle.
00:14:59.920 | But I've been there before. I've done it before.
00:15:02.080 | I know I could do it and it wouldn't be the end of the world.
00:15:04.160 | And in fact, I can do it and be just fine."
00:15:06.480 | Then you have a level of confidence and you can move through life more aggressively.
00:15:10.800 | You can say yes to more options more aggressively.
00:15:13.600 | It's difficult to earn lots of money and to earn lots of money quickly.
00:15:19.360 | It takes a lot of work and a little bit of luck.
00:15:21.520 | It's difficult to accumulate lots and lots of money.
00:15:24.720 | But you can develop frugal muscles really quickly.
00:15:27.600 | And in six months, 12 months, 24 months, be really good at living inexpensively.
00:15:32.400 | People do this all the time when they have to.
00:15:34.880 | Guy goes through a divorce and he finds out, "You know what?
00:15:37.600 | If I move into this box truck that I bought that was an old U-Haul truck,
00:15:40.960 | and I set up my house in there, and I shop where I can get the day-old bread,
00:15:46.480 | and I figure out a source of cheap meat and eggs and milk and pig butts to live on,
00:15:52.400 | then I'm in a better place where I can live pretty inexpensively and I can put my life back together."
00:15:58.480 | Happens all the time.
00:15:59.360 | Then all of a sudden, he discovers he's free.
00:16:01.680 | He discovers he doesn't have to do the job that he hates.
00:16:04.000 | And if he discovered that 20 years ago, maybe his life would be in a much better situation today.
00:16:09.760 | So frugal muscles are worth developing and they're worth exercising,
00:16:14.320 | even if you don't always choose to live like a total cheapskate.
00:16:18.720 | In addition, one powerful benefit of save half, spend half is
00:16:24.000 | you'll keep your focus on increasing your income.
00:16:26.320 | Basically, my goal for you is to be a few years behind your friends in consumption
00:16:34.160 | and decades ahead of them in wealth building.
00:16:37.840 | And when you impose deprivation on yourself, you impose limits on yourself that are artificial
00:16:47.360 | and arbitrary, such as, "I'm only going to spend 50% of my income."
00:16:51.360 | You build your self-discipline, which is a very important skill for long-term success.
00:16:55.840 | And you recognize, "Hey, if I want out of this, I got a way out of this.
00:17:00.480 | I just got to increase my income."
00:17:01.920 | And so instead of sitting back and luxuriating in kind of the soft,
00:17:06.400 | flabby fatness of high consumption on a low income, you still have a little fire in your
00:17:12.000 | belly because you say, "You know what? I'd like to have some nicer things.
00:17:14.800 | And I can have them as soon as possible when I increase my income."
00:17:18.960 | And I see this not infrequently.
00:17:23.440 | Usually, it's a guy who gets out of college, first job out of college.
00:17:28.000 | Maybe he's making 50 grand a year.
00:17:30.080 | And previously, he was living like a broke college student.
00:17:32.640 | And now he can buy all of his little toys and trinkets and things that he wants to do.
00:17:36.720 | So he loosens his belt and he just starts spending money without worrying too much about it.
00:17:41.120 | And now he's satisfied all of his desires.
00:17:43.760 | But what he often doesn't see is what his desires are going to be 10 or 15 years from
00:17:47.920 | now.
00:17:48.480 | And the fact that he's now kind of fat and flabby and satiated with, "I've got all the
00:17:53.040 | fun stuff.
00:17:53.680 | Look, I got this cool new TV and I go out to eat all the time and party with my buddies
00:17:58.080 | in Spain and ain't this great."
00:18:00.160 | Then he's missing out on where he can be a decade or two from now when all of a sudden,
00:18:04.560 | the numbers start to increase and everything becomes more important.
00:18:07.840 | If you can just insert a little bit of forced privation on yourself and you say, "No, I'm
00:18:12.400 | just going to spend 50%."
00:18:13.280 | And now you have other motivation to increase your income.
00:18:17.680 | Again, you'll just be a few years behind your friends in consumption, but you'll be
00:18:22.400 | decades ahead of them in wealth building.
00:18:24.560 | I'm not laboring on the topic of wealth building in this particular episode, but I do want
00:18:31.600 | you to know how big of a difference this makes in the long term.
00:18:36.080 | The chart that changed my entire mindset around financial planning, I've done various
00:18:43.040 | podcasts on this, was when I read an early retirement extreme by Jacob Lund Fisker, when
00:18:47.840 | I read the chart showing how quickly you can become financially independent based upon
00:18:53.520 | different savings rates.
00:18:54.960 | I'll link to a podcast episode I did exclusively on this in today's show notes.
00:18:58.960 | But the idea is, where does that 10 or 15% number, that advice that you get usually come
00:19:05.440 | from?
00:19:05.940 | Well, interestingly, if you are investing your money in stocks at about the historical
00:19:11.520 | rate of return of the stock market, and you're saving 10% of your income, then it'll take
00:19:17.920 | you about 45 years for you to be financially independent, able to retire, about 40, 45
00:19:23.840 | years, which is conveniently enough the number of years between about age 20-something and
00:19:30.320 | about age 60, 65-something, when you get out of college, you get a job, and you start
00:19:34.880 | working.
00:19:36.020 | And then you retire at 65.
00:19:37.460 | And so the idea of saving 10% makes a lot of sense.
00:19:41.460 | But if you could save 50% of your income, you can be financially independent in fewer
00:19:47.940 | than 20 years, which conveniently enough puts you well on track for a pretty cool early
00:19:54.980 | retirement scenario.
00:19:56.420 | Start working at 22, 25, something like that, with a big job, living on 50% of your income,
00:20:02.260 | by 45 or 50, you are financially independent, just by living on half your income.
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00:20:39.460 | What about the extreme cases?
00:20:43.060 | How do you actually do this?
00:20:44.500 | I'm going to give you some how.
00:20:45.940 | Let's do how first.
00:20:46.740 | So how do you do this?
00:20:48.260 | What are some practical tips?
00:20:49.460 | Well, the first thing is just do it.
00:20:52.180 | So if you are, again, 16 years old, and you get your first paycheck, what you do, cash
00:20:59.540 | the first paycheck, first paycheck is $300, put $150 in one pocket, put $150 in the other
00:21:04.980 | pocket, put $150 in the other pocket, and you only spend out of the one pocket.
00:21:08.660 | Divide that out, put it in a separate bank account, just make a habit that from now on,
00:21:13.940 | whenever I get a paycheck, I split it in half.
00:21:16.020 | If you're signing up for a job, on day one, if you have the option to put multiple accounts,
00:21:21.300 | figure out what 50% of your income is, and on day one, just sign up for 50% split, and
00:21:27.140 | put 50% in a savings account, 15% in a spending account.
00:21:31.060 | It's that simple.
00:21:32.980 | You'll forget about it in just a few weeks or months.
00:21:38.580 | You just won't ever think about it again.
00:21:39.860 | It's an automatic habit that you'll set in place.
00:21:43.300 | If you have a dual income household, then set a goal to live on one income.
00:21:48.020 | Whenever possible, when people are getting married, I always encourage them, "Listen,
00:21:52.340 | you got two incomes, you've been living fine individual, separate, just set a goal just
00:21:59.220 | to live on one income and save an entire income."
00:22:01.940 | It's a really simple and straightforward way to do it.
00:22:04.260 | If you set it as a goal, you can work towards it systematically, and there are various ways
00:22:11.060 | that you can kind of make a change in this direction.
00:22:14.020 | The first thing to do is whenever you get an increase, save half, spend half.
00:22:18.500 | Let's say this year, you get a pay increase.
00:22:20.820 | Well, take half of your pay increase and put it to savings using some form of automatic
00:22:26.420 | contribution to an account, and then put half into your spending budget.
00:22:30.900 | So at least save half, spend half of your increases.
00:22:33.700 | I always am a big fan of the pie methodology, the idea being you just got to start going
00:22:40.020 | in the other direction.
00:22:41.300 | Let's say right now you're saving 0% of your income.
00:22:44.900 | Well, all you're going to do is start by going from 0% to 1%, and then set yourself a schedule
00:22:50.100 | where every three months or every two months, whatever you think you can do, you're going
00:22:54.500 | to go and increase by 1%.
00:22:57.060 | So you go from 1% to 2%, 2% to 3%, 3%, 4%, on and on.
00:23:02.420 | If you just do that but you stick to your schedule, within a few years, you're at 30%,
00:23:06.740 | 40%, getting your way up to 50%, and set a goal to get there systematically over time.
00:23:12.260 | A lot of this automatic stuff will help you to get there just based upon your basic spending.
00:23:21.060 | What I mean is you'll get there little by little just by restraining the excess spending
00:23:28.340 | that you don't need to make.
00:23:30.100 | This doesn't cover all circumstances.
00:23:32.660 | If you are more established, you have your financial life and everything is set up and
00:23:36.820 | structured around a current level of lifestyle, then you have two choices.
00:23:41.780 | You can't get there with just little bits of eating out one time less per month.
00:23:47.540 | Well, then you need to change something structural.
00:23:50.420 | You should look at where you live and ask yourself, "Can I change something structural
00:23:54.740 | about where I live in order to reduce my housing expenses significantly?"
00:23:59.140 | Look at your taxes.
00:24:00.980 | Can I change something structural about what I'm doing so that I can reduce my tax bill?
00:24:05.380 | I'm fine with your 50% going into a retirement account, as we'll talk about in a future option.
00:24:10.340 | And now, hey, getting there, I saved a bunch of money on taxes.
00:24:13.940 | Can we go from a three-car family to a one-car family?
00:24:17.620 | Is that possible?
00:24:18.580 | Can we make it on one car and now we can get rid of a car payment?
00:24:21.860 | Can we change something structural with our situation?
00:24:25.380 | And in most cases, if you want to, you can.
00:24:27.940 | Related to this, if you can't do it, set it as an ambition to do it when you can.
00:24:36.980 | So the biggest lock-in for most people has to do with children.
00:24:41.460 | So I'm a good example of this.
00:24:43.300 | I'm at a point in my life where the structural expenses of my life are very high and they're
00:24:49.140 | difficult to change.
00:24:50.660 | I have a household for seven people.
00:24:53.300 | I have five children.
00:24:54.500 | There's a certain kind of house that works best for a family with five children.
00:25:00.580 | I'm not nearly as flexible as I was 10 years ago when it was just my wife and me.
00:25:04.980 | That was simple.
00:25:05.780 | It was pretty easy.
00:25:06.580 | We could fit in anywhere.
00:25:07.620 | So children are the biggest impact here.
00:25:10.900 | So if you're at a point in your life where you're kind of where I'm at, where you're
00:25:14.740 | kind of locked in and it's difficult to make big structural changes and there's nothing
00:25:18.500 | that's obvious, then create a plan for how I'm going to do this in the future.
00:25:23.220 | So today, I might need this big house, but 10 years from now, I might be able to go ahead
00:25:27.060 | and move back into the studio apartment.
00:25:29.220 | Many people don't do this.
00:25:30.580 | Why?
00:25:31.860 | Well, because we get used to living in a big house and, okay, that's fine.
00:25:35.460 | And so they stretch it for an extra 20 years until finally they decide to downsize.
00:25:40.340 | Well, why not be more flexible than that?
00:25:42.020 | Why not make a plan to downsize a little bit earlier?
00:25:44.500 | So much of the time, and to be clear, like, listen, I don't judge you for the decisions
00:25:48.980 | you make.
00:25:49.540 | My job is to help you figure out what's going to work for you based upon your restrictions.
00:25:57.540 | But the higher your requirements are, the harder it is to get where you want to go.
00:26:04.420 | And so when someone comes to me and say, "Listen, Joshua, I've got this big house.
00:26:08.660 | I don't need it anymore.
00:26:10.180 | My children are grown and gone, but I really have this big house and this fancy lifestyle
00:26:13.780 | and all this stuff.
00:26:14.820 | But I also want to retire early and also want to have financial security."
00:26:17.700 | Buddy, something's got to change.
00:26:20.420 | You got to be the one to change it.
00:26:22.100 | And so if you can't get there with just little small habit changes, you got to change it
00:26:26.340 | with something structural.
00:26:27.860 | So plan ahead for that.
00:26:29.700 | Make a plan and say, "All right.
00:26:30.980 | At this point in my life, I need the big house, and I'm going to keep it for right now.
00:26:36.020 | And however, I'm going to have a plan where in eight years when two of the children are
00:26:42.740 | off at college, then the two other children and I, we're going to move into a smaller
00:26:46.820 | place so that we can get back and get to this 50% number."
00:26:50.340 | Then finally, you have the option of changing your income.
00:26:54.580 | And so if you go through and we can't make any changes or we choose not to make any changes
00:27:00.420 | on expenses, then go back to income and set a goal that as my income increases, we're
00:27:07.140 | going to get to the 50% number.
00:27:08.980 | Why is it so common that people 5X their income and don't make much progress on their
00:27:16.260 | finances?
00:27:16.900 | Well, it's because we can happily spend just about any level of income.
00:27:21.300 | Your income today is almost certainly 5X what it was when you were 20 years old.
00:27:25.780 | When you were 25 years old, that's just how life goes.
00:27:29.220 | But you don't notice it and it just goes up.
00:27:32.100 | So if you have your expenses, just naturally follow along.
00:27:34.980 | We can do a little bit more, have a little bit nicer things.
00:27:38.500 | The goofy example but real example that I observed in my family growing up was our morning
00:27:44.340 | orange juice changed.
00:27:45.700 | When I was a young child, we had orange juice every morning and it was always orange juice
00:27:51.620 | from concentrate.
00:27:52.820 | So you got the little tube from the frozen department at Publix and you put it in your
00:27:57.940 | pitcher and you mix it up with water and that was what we drank as orange juice.
00:28:01.220 | It was orange juice from concentrate.
00:28:02.980 | And then as my older sibling started to move out of the house, then we started to have
00:28:08.340 | real orange juice, fresh squeezed orange juice, not from concentrate.
00:28:12.660 | And that was the sign of our increasing wealth.
00:28:15.300 | Or another funny one that I certainly remember was maple syrup.
00:28:18.580 | When I was a boy, my mom always made maple syrup.
00:28:21.460 | She used some corn syrup and maple extract flavoring to make maple syrup to go on pancakes
00:28:26.740 | and waffles.
00:28:27.700 | Then we reached a certain point in time where all of a sudden the real maple syrup started
00:28:32.340 | showing up on our table and we knew that we were rich now because we changed our orange
00:28:38.660 | juice and our maple syrup.
00:28:39.780 | So it just kind of naturally happens is that you spend more and more as the money is available
00:28:47.140 | if you don't have a goal.
00:28:49.140 | So once again, if you right now are saving 15% of your income and you set as a goal to
00:28:54.580 | get to 50% of your income, as your income increases, just lag your expense growth.
00:29:00.500 | You may indeed have those high structural expenses.
00:29:03.140 | You may have a high mortgage.
00:29:04.820 | You may have high other things.
00:29:06.100 | You may have high car payments.
00:29:07.540 | When the cars get paid off, just keep them an extra five years.
00:29:11.460 | Don't trade them in at six years old.
00:29:14.020 | Keep them until 11 years old and then trade them in.
00:29:17.380 | And then by that time, you can probably go ahead and get a new car and still keep it
00:29:20.900 | 50% of your expenses.
00:29:22.500 | Cover your needs, don't spend all your money.
00:29:25.300 | There's going to be a base level of needs that everyone has to cover.
00:29:29.780 | And so if you're there, cover your needs, but don't spend all your money.
00:29:33.780 | Set as a goal to get to 50% of your income in terms of savings and spending.
00:29:39.860 | And even if it takes you 10 years to get there, you'll be grateful for it and you'll start
00:29:44.660 | to reap the benefits quickly along the way.
00:29:47.060 | Remember, we live in a world in which many people spend more than they make.
00:29:50.260 | So if you're spending less than you make, you're doing well.
00:29:52.980 | We live in a world in which some people save 10% of their income.
00:29:56.020 | So celebrate when you get to 22% of your income.
00:29:58.260 | That's going to be amazing.
00:29:59.220 | Think how quickly your wealth is growing.
00:30:00.980 | And when you get to 40% of your income, you're in a very rarefied area, a very rarefied company.
00:30:06.260 | And your wealth is growing really, really quickly.
00:30:08.340 | And so you'll have motivation to get there.
00:30:10.580 | What if you're in an extreme situation?
00:30:14.340 | Your income is extremely low or your income is extremely high.
00:30:18.580 | Remember, I'm setting goals.
00:30:22.740 | They may not be achievable by you or they may not be relevant for you.
00:30:26.740 | If your income is extremely low, you're working as a minimum wage worker and you're supporting
00:30:32.260 | a household with children, you're not going to be able to make it to 50% of your income.
00:30:37.540 | And that's perfectly fine.
00:30:38.740 | But you still got to live on less than you make and you still got to save something.
00:30:45.140 | So work towards it and be patient.
00:30:47.140 | I have watched a lot of people make a lot of mistakes because they didn't notice when
00:30:52.420 | things changed.
00:30:53.460 | In 2024, you may be earning minimum wage, supporting a big family, and things aren't
00:31:01.700 | going so well.
00:31:02.900 | But in 2034, you could be in a completely different situation.
00:31:07.540 | So don't turn around and just start spending all your money.
00:31:10.420 | Keep this goal in the back of your mind.
00:31:12.180 | Keep this goal in the back of your head for when you get there and focus on your income.
00:31:15.940 | If your income is very high, there are many people who spending 50% of their income would
00:31:23.060 | be pointless extravagance.
00:31:25.460 | Recognize that there's nothing magic about any of these numbers.
00:31:29.380 | If you can live on 20% of your income, great.
00:31:32.020 | Live on 20% of your income.
00:31:33.620 | Now we got to figure out what to do with the other 80%.
00:31:36.180 | There's no magic about the number.
00:31:38.980 | My goal is to say, "Hey, this is a really good round number.
00:31:42.580 | This is really doable for many, many people.
00:31:45.380 | And this dramatically accelerates the wealth-building process and dramatically accelerates the
00:31:50.820 | options that are available to you as compared to 10%.
00:31:53.940 | So basically, I'm saying we shouldn't make 10% the default.
00:31:59.940 | If we're going to make any number the default, let's make it 50%, not 10%.
00:32:05.780 | Let's train our children to expect to spend half their income rather than 90% of their
00:32:12.580 | income.
00:32:13.380 | And they'll be really grateful for that 15 or 20 years from now.
00:32:17.140 | Final comment.
00:32:19.220 | This is a concept, not a rule.
00:32:21.380 | So be smart about how you implement it.
00:32:24.660 | Let's say that you're a young man and you're saving 50% of your income and spending 50%
00:32:30.740 | of your income.
00:32:31.460 | And all of a sudden, a chance comes along for you to buy a house.
00:32:35.220 | Don't get bent out of shape because a house is a consumption expense.
00:32:40.580 | And after all, is this going to be spending my money?
00:32:43.140 | No, buy the house.
00:32:44.420 | That's why you're saving the money.
00:32:45.540 | So take 50 grand or whatever you've got in savings by that point in time and buy the
00:32:49.540 | house.
00:32:50.020 | What we're basically trying to avoid is getting used to just consuming 90% of your income.
00:32:59.300 | But along the way, you're going to make big purchases, you're going to make big investments,
00:33:04.420 | you're going to make big gambles, take big bets on something.
00:33:08.900 | And not everything is going to go great.
00:33:11.060 | Once you experience having some money saved up, you're going to see the options that are
00:33:16.660 | available to you.
00:33:18.020 | So the goal is just keeping your expenses, your standard expenses down so that you can
00:33:23.700 | make those big things.
00:33:25.060 | So don't get all bent out of shape and say, "Well, if I take all this money, I'm going
00:33:27.700 | to get out of shape," and say, "Well, if I take all this money from my savings and
00:33:30.820 | I put it all into this house that's available, then everything's going to fall apart."
00:33:37.540 | No, just buy the house.
00:33:39.220 | It's going to be fine.
00:33:40.020 | And then final, final comment is if you can't do this, it's okay.
00:33:46.580 | But you can still teach other people to do it.
00:33:49.860 | I think there are a lot of us who will probably never accomplish all of the things that we
00:33:56.820 | wish we had accomplished when we were younger.
00:34:01.220 | I've reached that point in my own age in which I feel that very keenly.
00:34:05.380 | There are many life paths and life decisions that are now out of my ability because the
00:34:10.420 | years keep going along.
00:34:11.620 | So one of the things that I can do is learn from that and then turn around and just try
00:34:18.580 | to help other people.
00:34:19.940 | So you may never be able to get your income high enough and your expenses low enough to
00:34:24.740 | be able to live on 50% of your income.
00:34:26.820 | That's okay.
00:34:27.380 | That's fine.
00:34:29.380 | Teach your children differently and help them just to look at things differently.
00:34:34.820 | At the end of the day, most of us are going to hit the goals that are given to us.
00:34:40.820 | So let's give other people a really life-changing goal like spend half, save half, live on 50%
00:34:49.140 | of your income as compared to just modest good advice like save 10%.
00:34:56.580 | Not everybody is going to achieve any goal.
00:35:00.660 | Not everybody's going to achieve 10%.
00:35:03.060 | Not everybody's going to achieve 50%.
00:35:04.500 | But if we just install the standard goal being to spend half, save half, a decade or two
00:35:12.820 | from now, you're going to get a whole bunch of big thank yous from those who were inspired
00:35:19.460 | to go after that goal because they were capable of it rather than achieving a less impactful
00:35:25.780 | goal.
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