"A dollar saved is better than a dollar earned."
We've all heard that one before. The ability to save more than you earn is a fundamental principle upon which FIRE is built.
Hands-down the most important step for reaching FIRE is how much of your paycheck you can keep and invest.
You cannot earn/invest your way out of bad money habits. It will eventually catch up with you no matter how much money you make. If you're spending more than you earn, you're going to be broke. It's just simple mathematics!
It's sort of the equivalent of trying to outwork a bad diet and expect results in the gym. In fact, there are so many parallels between good financial habits and being fit and healthy it's uncanny. Most health/fitness experts would agree that your diet probably plays the biggest role in keeping your body happy. The other two major players would most likely be exercise and sleep. If you're nailing all three of those, there's a pretty good chance your body is feeling awesome.
Savings is to FIRE, what eating the right foods is to living a healthy lifestyle.
And if we follow this little analogy a bit further we might conclude that…earning money in FIRE is equivalent to or around the same level of importance as exercise when it comes to health and fitness. And maybe we can put getting a good night’s rest at the level of investing.
It's not a perfect one for one comparison but it makes for a good metaphor so let's keep rolling with it.
I'd wager that 90% of FIRE content is either about saving money or investing. But we seldom read how to earn more money even though it has astronomical benefits when implemented correctly. It's true that FIRE is income agnostic, two people with a savings rate of 65% will both reach FIRE in around 10 years even if one earns $60K and the other $400K.
But there comes a point of diminishing returns for both saving money and investing.
The purpose of this article is to explain how beneficial it is to spend more time and energy increasing the amount of $$$ that flow into your accounts. Anyone who is on this path is already doing some form of exercise (earning money) but if you can look past your standard crunches and pushups you'll discover there are gymnasiums out there filled with weird and wonderful machines that provide all types of workouts. And when you combine a great diet with a dialled-in training routine that works best for you, the gainz can be off the charts.
This chapter will help you maximize your gainz and cover all of your bases when it comes to increasing your savings. You'll find the following sections very helpful:
BFYB Factor
The aim here is to illustrate just how much of an impact increasing your income (even a tiny bit!) can have on your journey towards FIRE.
Let's try and apply the same metric to the three most important focus areas IMHO when it comes to reaching FIRE.
- Save more than you earn
- Increase how much you earn
- Invest your savings
We'll call the metric BFYB (bang for your buck).
BFYB = The amount of effort required to improve a focus area
Let's look at our first focus area (save more than you earn) and re-establish why it has the best BFYB value.
Increasing Your Savings Rate
Using The Australian Financial Independence Calculator we can plug in Joe Smith's journey towards FIRE starting from $0.
We're assuming he is a single 30-year-old Sparky from Brisbane who owns his 3 bedroom home (no mortgage), works 38-40 hours a week, doesn't have kids and all the below numbers stay constant over the next 30 years to make the modelling super simple.
Ok, so an Australian who earns $80K with a savings rate of 30% can retire in 21.2 years. Not too shabby.
A 30% savings rate is already way above the average but let's just assume Joe, whilst obviously a diligent saver already, is living a pretty normal consumerist 21st-century lifestyle with a heap more fat to cut. I don't think it's unrealistic or even that hard for him to go from a 30% savings rate to 40% given his circumstances above. The difference between 30%-40% is $5,538 a year or $106 week. I would almost guarantee that 90% of Australians spend more than $106 dollars a week on things they don't need or even want half the time (myself included). Optimising big-ticket items like housing, transport and food would almost certainly save a whole lot more than the $106 a week we require for this example.
Anyway, if we bump the savings rate up to 40% we wipe off 4.5 years!
BFYB: Great
Everyone's circumstances will vary but the effort required in my guesstimation for Joe to increase his savings rate 30% to 40% is rather small and the BFYB is high.
This is what we want. Low effort, high reward.
And it's why focusing on your savings rate is absolutely the best way to decrease the amount of time towards FIRE… up to a certain point.
There comes a point of diminishing returns where focusing on your savings rate will not yield a good BFYB and the hard part is that it's different for everyone because of circumstances. I can only speak for ourselves but this is what our savings rate BFYB chart looks like:
Currently, we can pretty much save close to 40% of our after-tax income without breaking a sweat. That means no sacrifice or comprising on anything. The effort for us to save 40% is almost the exact same as saving 10%. But the effort required to maintain a savings rate of >60% is when things start to change. For us to optimise our lifestyle further and squeeze out a few more percentages is astronomically harder to do when we start to get around the 65%-75%+ range. Don't get me wrong, we could do it. And that would speed up our journey to FIRE… but at what cost?
If I can draw from our earlier metaphor of our savings rate being similar to a diet, we could say that cutting out junk food during Monday-Friday and making sure you eat some sort of leafy greens every day is a realistic goal with huge health benefits. But if we tried to never drink alcohol or eat Macca's ever again, firstly we might be setting ourselves up for failure and secondly, whilst being the healthy option, it's not going to have as big of a health benefit as the first goal. There are diminishing returns for eating healthy just like there are diminishing returns for improving your savings rate.
Increasing Your Income
This is the focus area that doesn't get enough attention.
Increasing your income has a direct correlation with your savings rate but for whatever reason, a lot of people never put in the time and effort to improve it. There's so much low hanging fruit that doesn't really require a whole lot of effort but has a high BFYB value.
Let's look back at Joe Smith from above but change one thing. Instead of him saving $5,538 a year, let's have him earn an extra $5,538 (after tax) a year and see what happens. Joe increased his after-tax income by $5,538 which in turn wiped off 2.7 years!
BFYB: Really good
We're going to be talking about the low hanging fruit later on but if I'm being honest, Joe could easily make an extra $5,538 (after tax) purely from giving up more of his time. If we assume he's making an after-tax hourly rate of $28, he would only need to put in an extra 197 hours worth of work over the year. And that's not even factoring in overtime or weekend rates. An extra hour for 197 working days a year is really not that much.
Some of the stories I've heard first hand from young London bankers are absolutely mind-boggling. Think 70-80 hours per week… and work on weekends is to be expected!
2.7 years is not as good as our savings example above which wiped out 4.5. But if we combined them, we get epic results!
Improving our savings rate and increasing our income by the very same amount has annihilated 6.53 years of working.
Now we're cooking with gas!
But just like our savings rate, there are diminishing returns in the pursuit of increasing your income. And I keep coming back to circumstances but unfortunately, it's very much a circumstantial question when we start talking about this focus area because we all aren't on an even playing field.
Below is my personal increasing income BFYB chart:
Let me explain what this means because it's important.
Let's say I'm unemployed next year (which is what's most likely going to happen when we move back to Australia) and my salary is $0 (ignoring any investment income of course). I'm scanning through the classifieds looking for my next job, which, for this example will be the sole source of my income.
For my circumstances personally, it doesn't require any extra effort for me to land a job paying $100K as opposed to around $35K annually. I don't want to sound overconfident but I have a certain set of skills and experience that the market is willing to pay me and I'm 99% sure I could land a job paying close to $100K no worries. In fact, I'd probably have a harder time getting my old job back at Coles if anything. Beyond $100K is when the effort required starts to increase and the BFYB value starts to go down.
Remember, BFYB = The amount of effort required to improve a focus area.
The effort required to earn a salary past $100K starts to increase a lot and for me personally, the extra effort doesn't justify the extra income at around the $130K-$150K mark. Beyond that, there's too much sacrifice with not enough gain. Too many responsibilities and work-related stress that I don't feel is justified for the extra $$$. You may have certain skills and experience where earning $150K is actually quite easy and no different (in terms of effort) than earning $100K.
If we look at the ABS data from 2018 the median income for a full-time employee in Australia is $76K a year. If we adjust for two years of inflation we can round it off to 80K and we now have a benchmark.
$80K a year is the standard form of exercise for full-time Aussies. One light jog and occasional push-ups weekly would probably put you in the average to above-average category of exercise in Australia as sad as that is.
If you're earning under $80K a year and have already optimised your expenses, you may be in the position to grab some really low hanging fruit and increase your income for an excellent BFYB return.
Adding in some resistance training 2 hours a week is such a small amount of effort that has an incredible return. Not only will you become healthier and stronger, but you’ll also potentially save yourself a lifetime of injury and illness that's so common in our sit down all day 21st-century culture. Cardiovascular and resistance training has shown to help with sciatica, pelvic tilt, back pain, heart disease, diabetes etc. I have always considered myself a pretty active person but even I had hip issues 3 years after starting full-time work which I 100% attribute to sitting down all day and not stretching my hip flexors or strengthening my glutes. These hip issues crept into a lower back pain issue and before I knew it, I was going to the physio a few times a month. It didn't take longer than a few weeks of specific stretching and strengthening exercises to completely resolve all of my issues and I continue parts of that program to this day nearly 10 years later.
You don't need to jump into a 5X5 strength split or start yelling "Yeah buddy…Ain't nuttin' but a peanut!" after every rep in the gym. Three focused 45-minute sessions a week offers great health benefits just like spending a bit more time increasing your income can wipe years off your FIRE journey!
Now you know why reducing expenses is the FI community’s favourite option to achieve financial independence faster and the following few chapters give great ideas on how to do so.
There’s only so far you can go when it comes to reducing expenses in a BFYB way though, so once you’ve done that (or simultaneously), it makes sense to focus on increasing your income, at least until you reach the same BFYB point!
I’ve got to say, increasing income is one of the most underrated tools for fast-forwarding your FIRE date. There’s a floor on how much you can save, but no ceiling on how much you can earn! So once you’ve got your spending sorted, read on to 2.4 where I make the case for increasing your income.
About Aussie Firebug | aussiefirebug.com
I'm an early 30's country boy from regional Victoria on the path towards FIRE! Big fan of all things tech/finance/sports related and love the Collingwood Magpies. Started a blog/podcast that details my partner’s and my journey towards financial independence back in 2015 which I continue to run to this day.
NOTE: Aussie FIRE is a free educational resource prepared by Pearler, with permission from the co-authors. At Pearler, we strive to make investing for your long term goals easier and fun, but we only provide general information and/or general advice. We don’t present you any options based on your personal objectives, circumstances, or financial needs. Any advice is of a general nature only. All investments carry risk. Before making any investment decision, please consider if it’s right for you and seek appropriate taxation and legal advice. Please view our Financial Services Guide before deciding to use or invest on Pearler.
