Money Crashers: Latte Factor

My latest Money Crashers article takes on one of the great myths of personal finance: the Latte Factor. This phrase, coined by financial guru David Bach, signifies the idea that the key to financial independence is to cut out small, unnecessary expenses and steer that money into investments instead. And you must admit, as a sound bite, it's sheer genius. It's easy to grasp, and it's such a comforting idea — that the only thing standing between you and retiring rich is something so trivial as a latte. All you have to do is cut out coffee, and you've got it made! What could be easier?

In fact, there's only one thing wrong with the Latte Factor: it is, to borrow a phrase from "The Good Place," bullshirt.

In the article, I explain exactly why Bach's calculations don't work, and why they trivialize the problems that are really holding people's finances back — much more complex problems like overpriced real estate, skyrocketing health care costs, and punishing student loan debt. Then I go on to outline some approaches that actually can help you solve these problems, such as rethinking housing, refinancing debt, maximizing your income, and boosting your investment returns.

Spoiler alert: These fixes are nowhere near as simple as giving up a daily latte. But they're a lot more likely to work.

Latte Factor – Giving Up Lattes Won’t Make You Rich But Here’s What Will

How our budget beats (and fails to beat) the averages

Brian and I have never kept a household budget, per se. We rigorously track all our household expenses, and each month I tally them up to figure out how much we've spent in different categories—house, food, car, and so on—but we've never set firm limits on how much we can spend in any given category. I just keep an eye on our spending, and if it looks like it's getting out of hand in any area, we look for ways to rein it in.

For the most part, I use these spending numbers only for internal comparisons: to compare what we've spent this month in a given category to what we spent last month, or last year. If it's lower, I pat myself on the back; if it's higher, I try to figure out why. But I seldom bother to compare what we spend with what other Americans spend.

Recently, though, an article on Money Talks News (MTN) called these numbers to my attention. Entitled "11 Expenses to Cut Now If You Want to Retire Early," it outlined how much the average U.S. household spends in various categories—housing, car, groceries, etc.—and then talked about ways to cut each of these expenses so you can reach financial independence more quickly. Since this is a goal we're shooting for, I went through the article and found that in most cases—but not all—we're already spending well below the average in these categories. So I thought it might be interesting to show how our budget compares to the average and how we're managing to keep it lower (or, in the few cases where it's higher, what's keeping it high). Instead of a collection of general tips like the MTN article, it'll be an actual case history of what one family did and how it worked (or didn't).

1. Shelter

According to MTN, the average U.S. household spent $11,747 on "shelter" in 2018. Consulting the Bureau of Labor Statistics (BLS) report from which they took the data, I found that "shelter" is defined to include rent, property taxes, mortgage payments, maintenance and repairs, and insurance. Since we don't pay rent and have already paid off our mortgage, I guessed that our housing expenses would be well below this average, but when I checked our actual expenses, I found they were a bit above it. Adding up our property tax, insurance, and "home maintenance/furnishing" expenses (averaged over the past three years), we spent more than $11,900.

So how did we manage to spend more than the average family while living in a relatively small, paid-off home? Well, a few different ways. First of all, we live in New Jersey, which holds the dubious honor of having the highest property taxes in the country. And our particular area's tax rate is above average even for New Jersey, so we pay close to the median in tax each year even though the value of our home is significantly below the median. And on top of that, we've spent around $11,300 on "home maintenance/furnishing" in the past three years, for an average of around $3,780 per year (though that included some large one-time expenses in the past three years, such as a new roof and water heater).

So what are we doing wrong? Mostly, just living in New Jersey, which happens to be an expensive place to live. When you compare our average annual shelter costs with the average for the Northeast, which you can see in this table from the BLS, we're well below the average. If the statistics were broken out to the state level, we'd probably be still further below the average for New Jersey.

Would any of MTN's tips on reducing housing costs help us? Well, maybe, but they're not really practical for us. Their first idea, "getting a roommate" (or in our case, a boarder) would require some retrofitting of the house, which would take a while to pay for itself, and it wouldn't be a very comfortable situation for us. "Downsizing" (which in our case would mean downgrading from a house to an apartment) and "moving in with relatives" are sacrifices we're definitely not prepared to make. And as for using our home to make money via Airbnb, when I searched listings for single-room rentals in our area, I found the going rate was around $30 per night. If we managed to rent out a room for one weekend a month—an optimistic assumption—we could only make around $720 per year, which wouldn't make much of a difference.

Fortunately, what we spend on housing by virtue of where we live, we make up for in other ways. Such as...

2. Groceries

The average U.S. household's spending on groceries was $4,646. Ours was about $2,600—less than 60 percent of the average. This is one area in which we're clearly doing well, but how come?

First of all, there are only two of us. The average number of people in a household (or "consumer unit"), according to the BLS, is two and a half, so you would expect our spending to be about 20 percent below average. But when you look at the average "married couple only" household (shown on this table), the average spending for "food at home" doesn't drop; it jumps to $5,000 per year. So compared to other married-couple households, we're actually spending less than 55 percent of the average.

So it's not the size of our household that's making the difference. Instead, it's probably what we eat. As I discovered when we did the Reverse SNAP Challenge five years ago, it's actually pretty easy to eat on a SNAP budget if you cook from scratch and eat very little meat. Other habits that proved very helpful were keeping a garden and doing our shopping at multiple stores, so we can get the best prices on all the different foods we buy. Of course, that only works if you happen to have multiple stores in your area, but even if you have only a couple, keeping a price book so you know which items to buy at Aldi and which to buy at Walmart will help you use your dollars as wisely as possible. And it will probably help you more than MTN's grocery-saving tips, which include using coupons (a strategy that usually doesn't save us much, though there are a few notable exceptions), buying bread at grocery outlets (not as cheap as baking your own), and storing your food so it won't spoil (a good idea, but don't most people do this already?).

3. Vehicle Purchases

In 2018, MTN says, the average household spent $3,975 on "vehicle purchases." That's not the total amount spent to own a car, including gas, insurance, repairs, and so on; that's just the amount spent to buy the car.

By contrast, our annual expense for auto purchases is...well, I can't say how much it is, because we've only bought one new car in the 15 years we've been married, and it's only 9 years old, so I can't say how many years we'll have it. But if you consider that our last car was over 15 years old when it finally bit the dust (and that it died an untimely death in a crash, rather than being put out to pasture in its old age), it's certainly reasonable to assume that the one we have now will last us at least 15 years. And since we paid around $16,000 for it (cash), that means our per-year expense for owning it works out to about $1,066. If the car lasts more than 15 years, it will be even lower than that.

In this particular case, MTN's advice for saving is exactly the same as ours: buy the best car for you, then make it last as long as possible. Their advice to "consider buying a late-model used car" is also sound, though that word "consider" is important; when we compared the cost per year for a late-model Honda Fit to the new one we actually bought, we found that it wasn't actually any cheaper, and it didn't have as many safety features as the new one. So do the math before you decide.

4. Eating Out

The average family's expenditure for dining out was $3,459 in 2018. (For married-couple households, once again, it was actually higher than this average, at $4,065. Maybe families with kids just don't have the time to dine out very often.) Our expense for dining out was a much lower $424 per year, and for a very obvious reason: We hardly ever do it. Brian is a good cook and enjoys it, so we only eat out when we have a particular reason: to celebrate a birthday or anniversary, to entertain guests, because we're going to be on the road or otherwise away from home at dinnertime, because we have a craving for a specific food we can't make at home (though the number of such foods has diminished), or, most rarely of all, because neither of us has the energy to cook. So most of our "dining out" expenses are actually for smaller treats, like pizza at a game party or coffee at Starbucks, rather than an entire meal.

I realize not every family is lucky enough to have a member who's good at cooking and enjoys doing it. However, I maintain that anybody can cook, even if they don't love doing it, and can get better at it (and possibly enjoy it more) the more they practice. So here, again, my best advice for saving money on dining out coincides with MTN: do it less. And when you do eat out, make it count and go for something you couldn't make just as well at home.

5. Gas and Oil

That's for your car, not for your house. The average household, according to MTN, spent $2,109 on these in 2018, and the average married couple, according to the BLS, spent $2,236. I don't have a record of how much we spent on motor oil for our car, since our mechanic changes it for us and it's lumped in under "maintenance." However, I can say our expense for gasoline was $676, roughly one-third of the average.

Why so low? Two reasons: we only have one car between us, and we don't use it for everything. Brian rides his bike to work most of the time in the warm months, so the car sometimes sits unused for a week at a time. We still put a good number of miles on it — about 11,000 in the past year — what with our annual jaunt out to Indianapolis, shorter trips to visit friends in Virginia, and shorter trips around New Jersey for dance practice, concerts, errands, and such. But we prefer to walk or bike whenever we can.

One thing we don't do, though, is to use public transit instead as MTN suggests. In the first place, we don't really have any that could get us to all the places we need to go; our transit system here is mostly designed to funnel people into and out of New York and Philadelphia, not to get them from one place in New Jersey to another. And in the second place, a typical train trip generally costs quite a bit more than the gas required to drive it. If we could afford to give up a car entirely by using transit, that might be cheaper, but as we have a car, it's cheaper to use it than to take a bus or train even when one exists to take. (And sadly, according to CityLab, the transit situation in most U.S. cities is just as bad, if not worse. So for most car owners, MTN's advice simply isn't practical.)

6. Clothing and Footwear

This is another area where we're way below average. The average household spent $1,866 on these in 2018; last year, we spent $421. And that was an above-average year for us, including two new pairs of shoes for me to replace ones that had worn out.

How do we keep this cost low? First of all, by disregarding fashion almost completely. As a general rule, we buy new clothes only to replace old clothes that have worn out or are about to wear out (and only after at least attempting to repair them first). Pretty much everything we own was never particularly in fashion to begin with, so it doesn't matter if it falls out.

And second, we do much of our clothes shopping, maybe even most of it, at thrift stores. Our local one isn't very big, but it's cheap, and by checking there frequently, I can manage to find a surprising number of items that fit and are useful. And we always make a point of hitting the Indy-area Goodwill stores when we're in Indiana over Christmas. We can't get everything secondhand; shoes and jeans for me, in particular, aren't commonly available in my size. But we're able to keep our wardrobe fully stocked mainly with used clothes, which also happens to be the main tip recommended by MTN.

7. Cell Phone Service

This is probably the one expense that makes us look more like we belong on an episode of Extreme Cheapskates than any other. The average US household spends $1,188 per year on cell phones; we spend roughly $161. Although I finally took the plunge and bought myself a smartphone after my purse was stolen in 2018, I only use the most bare-bones plan for it that I could get from Red Pocket: $10 a month (plus tax) for 500 minutes, 500 texts, and 500 MB of data, none of which I've ever come anywhere close to using up. And Brian still has our old feature phone with its $3-per-month (plus tax) prepaid plan from T-Mobile.

Admittedly, this may not be quite a fair comparison, since many families these days are using their cell phones as their primary phones, while we still pay $40 a month for a landline. But our combo of a landline plus minimal cell phone use is still significantly cheaper than the average cost for cell phones alone, and it has the added advantage of ensuring that we can't ever be those people who can't go five minutes without checking their phones.

8. Car Insurance

Not much savings here. The average household's annual expense for car insurance is $976, while ours is around $750. And that's for only a single car, with low-to-average mileage. We already follow MTN's advice for keeping the cost down by shopping around yearly; it's just that there's only so low you can go in New Jersey, even with one car that's nine years old and a clean driving record. Just as it's an expensive place to live, it's an expensive place to drive. Probably, in both cases, because there are so many other people doing the same.

9. Alcoholic Drinks

On our expense spreadsheet, alcoholic drinks get lumped in with groceries, so I can't tell at a glance just how much we spend on them each year. However, I can do a quick back-of-the-envelope calculation. We buy the cheap tawny port from Trader Joe's for six bucks a bottle whenever it's available, and it takes Brian about two weeks to go through a bottle, so that works out to around $156 a year. We can't always get the cheap stuff, so occasionally we fill in with a more expensive, though never really expensive bottle — maybe fifteen to twenty bucks — and we occasionally pick up a bottle of bottom-shelf gin or rum, or a liqueur of some kind. (The cheap vodka we buy to make vanilla extract doesn't really count, since it isn't a drink but a food ingredient.)

So, at a rough estimation, you might say we spend around $200 a year on alcohol — less than half the $583 spent by the average household. We've tried MTN's tip of shopping for alcohol at warehouse stores, but Costco doesn't seem to carry tawny port, and their other liquors, though undoubtedly a good value, are higher-quality than we actually need. So, Trader Joe's it is.

10. Medicines

This category, which includes "prescription drugs, over-the-counter drugs, and vitamins," costs the average household $483 a year. Presumably that's the amount they pay out of pocket, not counting any costs that are covered by insurance. I don't know exactly how much we pay for this category, since it's all lumped in under "health care" on my expense sheet, but at a guess, I'd say it's pretty close to this average. Brian only takes one medicine every day, but I require an assortment of meds and supplements to keep me in fighting trim, and while none of them costs all that much, it all adds up. MTN's advice to use a prescription discount card wouldn't really help us, since insurance already picks up most of the cost of our prescriptions, and comparing prices for OTC drugs (and buying generic when possible) is something we do already. Oh well.

11. Cleaning Supplies

OK, we're going out with a bang on this category. The average household apparently spends $184 per year on cleaning supplies, which includes laundry detergent. MTN tells readers "it’s relatively easy and inexpensive to make" your own detergent, but that's only true if by "relatively" they mean relative to making, say, your own clothes. Compared to buying detergent at the store, making your own is neither easy nor particularly inexpensive, as I calculated back in 2013. It might not save you any money at all, and it's certainly a much bigger hassle to make and use.

We, on the other hand, have been using the same big bottle of Kirkland Signature Ultra Clean detergent for over a year, and we still have maybe a quarter of it left. (In theory, the bottle is only good for 140 loads and should have been gone long ago, but we never use close to a full capful, and our clothes don't seem to be noticeably less clean as a result.) If we assume it will last us a total of 18 months, that works out to about $10 per year. The other commercial cleaning products we buy are:

• OxiClean Versatile Stain Remover, which we use for cleaning the toilet and occasionally for getting stains out of laundry. An $8 carton lasts us about 8 months, so that's $12 per year.
• Dish soap — usually the cheap stuff from Aldi, which costs $1.89 per bottle. A 24-ounce bottle lasts us maybe 3 months, so that's another $7.56 per year.
• Mrs. Meyer's Clean Day Multi-Surface Everyday Cleaner, which we bought on a whim at Target to see if it did a better job on our grease-spattered walls than ordinary vinegar and water. It did, but not that much, so we haven't used it often; this $4 bottle will probably last us a couple of years. So that's another $2 per year.
• For really, really tough stains on walls and appliances and such, HDX Easy Erasers — a Magic Eraser knock-off from Home Depot. We only bust one of these out a few times a year, so a $4 box of six erasers will probably last us two years, adding $2 per year to the list.

For everything else, we follow MTN's advice and use homemade cleaners — mostly vinegar and water. I don't keep track of how much vinegar we use specifically for cleaning purposes, but I know that a gallon of white vinegar costs us only $2 to $3 and lasts us for at least a year, so we can't possibly be spending more than $2 a year on that.

So, in total, we're probably spending around $36 a year in this category, less than 20 percent of the average. And it's as simple as (1) sticking to vinegar and water whenever we can, and (2) not using more of the commercial cleaners than we absolutely have to.


So there you have it: why we spend more than average in some categories, and how we spend less in others to make up for it. Of course, I realize that your situation may be completely different from ours, so maybe some of the things that work for us won't work for you. For instance, if you live way out in the boonies, and/or you have several kids, getting by with one car might not be practical for your family. But at least some of the savings tricks that work for our family — like using homemade cleaners, rarely eating out, and buying new clothes only when old ones wear out — can almost certainly work for yours. And then, too, you may be able to save in ways that we can't right now, like living in a small apartment or using public transportation exclusively.

It all comes back to what I've always maintained: there's no right way or wrong way to be ecofrugal. It's all about finding what works for you. (Of course, if you know of any other great savings tips applicable to everyone that we're not currently using, I'm always eager to learn more!)

Money Crashers: 9 Passive Income Stream Ideas

One of the things I like about working for Money Crashers is that every month I earn a traffic bonus based on how many views my articles have received. This is for all the articles of mine that are up on the site, not just the ones I've written in the past month or even the past year. It's not a huge amount, but it's the equivalent of at least a full day's pay that I get every month for work I've already done and been paid for once.

This is an example of passive income - something many financial experts describe as the key to wealth. Basically, passive income is any earnings that come into your pocket automatically, without your having to work for them every month. In most cases, you have to do some work initially to get them, like I had to work writing all those articles for Money Crashers—but once that work is done, the money just keeps rolling in. And the more passive income streams you have, the more money you can take in each month regardless of how much work you do.

I talked about one form of passive income, earnings from investments, in my article on financial independence. However, there are lots of other ways to generate passive income. You can collect rent for properties you own, royalties for books and other works you've created, or ad revenue from a blog or podcast (one of the most popular sources these days. I've never managed to make any money off this one, because my readership is just too small, and increasing it would most likely mean writing about things that are interesting to a wider audience—and of no interest to me.)

In my latest Money Crashers article, I talk about the benefits of a passive income stream, and about nine possible ways to create one. Some take a lot of work up front, like writing a successful book; others are so easy pretty much anyone can do them, like earning credit card rewards. More work up front typically yields a bigger payoff—but even a little trickle of passive income is better than none at all.

9 Passive Income Stream Ideas & Opportunities to Make Money

We're more frugal than the Frugalwoods (no fooling)!

I know that in the world of frugal-living blogs, I'm a very small fish in a pretty big pond. With just over 1,000 posts total and an average of around 2,000 page views per month, I can't compare to leading lights like Mr. Money Mustache, J.D. Roth of Get Rich Slowly, or the team of experts at Wise Bread. And that's okay. I've got my little niche, and I'm pretty content within it.

But sometimes, reading these more successful blogs, I start to feel inadequate—not about my blog's modest scale, but about my finances. These bloggers boast about how they were able to retire in their early 30s just by cutting out luxuries and investing sensibly, and I think, "Well, gee, I do all that—how come I'm 45 years old and not financially independent yet? What am I doing wrong?"

The answer, it turns out, could be that there's nothing at all wrong with how I spend my money—I'm just not making as much as they are.

This came home to me recently when I came across an article in The Guardian by Elizabeth Willard Thames of the popular Frugalwoods blog. She and her husband Nate have built their brand around their personal success story, which reads kind of like Horatio Alger meets Henry David Thoreau: they both had high-powered careers and a big house in the city, but they weren't happy with that lifestyle, so they decided to scale back, save up, and trade it all in for a cozy homestead on 66 acres in Vermont.

In her article, "Mrs. Frugalwoods" insists, "My husband, Nate, and I are not exceptional people...we’ve never won the lottery or had investment banker salaries or been the beneficiaries of inheritances or trust funds." She goes on to concede that they are "extraordinarily privileged" to have had parents who were well-educated and financially stable, so they could grow up "happy, warm, well-educated, [and] well-cared-for," but that just seems like rubbing it in: basically, she's implying that anyone else (like me) who had a similar upbringing could retire at age 32 and buy a farm in Vermont if they really wanted to. The fact that I'm still working for a living in my forties just proves that I'm not trying hard enough.

However, before I could get too glum about this, I happened upon a second article about the Frugalwoods that tackled their story from a completely different angle. The Outline points out that the Frugalwoods' story of achieving financial independence through "extreme frugality" leaves out one rather important fact: how much money they actually have.

The Frugalwoods are "tight-lipped about their income," the article says, but there are enough financial clues on their blog to make it clear that their rags-to-riches story doesn't exactly start with rags. For instance, they reveal that they bought a $460,000, four-bedroom house in Cambridge back in 2012, which they were later able to rent out for $4,400 per month. (That property alone brings them close to $27,000 in income, even after you deduct the cost of a property manager, taxes, and the mortgage they're still paying on it.) And in a 2014 post, Liz notes that they've both maxed out their 401(k) contributions, to the tune of $35,000 a year—a sum they don't even count when calculating their annual savings rate at just over 71 percent of their income.

Now, I think our lifestyle is pretty frugal, but our savings rate has never been anywhere close to 71 percent. We currently save a bit more than 50 percent of our take-home pay, and back when we still had a mortgage, it was less than 40 percent. So I started wondering: how do the Frugalwoods really do it? Just how low are their expenses? Are they really living on that much less than we do—in the Boston area, no less—or are they just making a lot more?

It seems impossible to say, given that the Frugalwoods refuse to disclose their income—but taking another look at that 2014 blog entry, I realized that I actually had all the information I needed to figure it out for myself. After noting that they saved 71.4% of their income for 2014, Mrs. Frugalwoods goes on to add that "If we include both of our 401K contributions...our savings rate is 93.07%." And since she'd already said their 401(k)s were maxed out at $17,500 each, it was clear that this $35,000 per year represented 21.67% of their total income. Thus, their total income for the year was $161,513.61.

Now here's where things start to look weird. If their income was $161,514, and they saved about 93 percent of it in total, that means the amount they actually lived on was 7 percent of it, or $11,305. Except, as they disclosed in their post about renting out their house, their mortgage payment and taxes on their Cambridge house come to $1,921.66 per month, or $23,060 per year. Clearly, the math on that does not work.

More likely, what they mean is that if they counted the $35,000 they saved out of their pre-tax income toward the amount they saved out of their take-home income, their savings would be 93 percent. (Actually, it wouldn't, because the taxes that also came out of that pre-tax income would also have to be counted as an expense—but we don't have enough info to figure out what the right number would be.) So I'm assuming that the $161,513.61 a year I came up with for the Frugalwoods' income is really their take-home pay, not gross. And since we know they saved 71.4 percent of that, the amount of that they actually spent was 28.6 percent of it, or $46,192.89.

Armed with this figure, I clicked over to my budget spreadsheet, where I've been tracking all our expenses since 2005, to figure out how much we spent in 2014. The answer was $28,902.66—more than $17,000 less than the Frugalwoods.

However, it only took me a few minutes to figure out that this wasn't really a fair comparison. By 2014, we'd already paid off our mortgage, so our living expenses were naturally much lower than theirs. So I went back a little further and looked at our expenses for the year right before we paid off the mortgage: October 2012 through September 2013. For that period, our total living expenses came to $38,983.65—still a good seven grand below the Frugalwoods' level of "extreme frugality." Apparently, we were actually living more frugally, despite spending over 60 percent our our income, than they were while spending less than 30 percent of theirs.

Now, the point of this isn't to brag. Well, maybe just a little, but the main point of it is that if you, like me, have been reading blogs like Frugalwoods and thinking, "Oh man, I've never been able to save 71 percent of my income, I must be doing it all wrong, I'll never be able to buy my farm in Vermont"—stop. Instead, substitute this thought: "My financial situation is unique, and I can't reasonably compare my savings rate to some blogger's (especially one who's refusing to disclose his or her income). What I can do is to learn as many tricks as I can to cut my expenses so that I can close in on financial independence as fast as is reasonably possible for me."

And if that's your goal, it would appear that maybe you actually could learn a trick or two from a little-fish blog like this one that even hot shots like the Frugalwoods haven't picked up yet.

Money Crashers: 9 Passive Income Stream Ideas

In one of my earlier Money Crashers posts, I talked about how to reach Financial Independence by saving up enough money to live on your investments alone. The basic idea here is that the interest you earn from your investments provides "passive income," which you get without having to life a finger, and if you have enough of it, you no longer need earned income, the kind you get by showing up to work every day.

However, one point I didn't really discuss in the article is that investments aren't the only way to earn passive income. You can also receive ongoing payments for work you've already done, or for rent you charge on something you own. So in my latest Money Crashers article, I talk about the various other ways there are to earn passive income, including rental properties, residual sales income, sales of creative works, various ways to monetize a website (through ads, affiliate marketing, or subscriptions), car advertising, and earning cash back when you shop.

As I note in the article, you probably won't get rich doing any of these things, at least not without putting in a lot of work up front - but having one or more of these passive income streams to add to your investment income can get you to FI faster. And in the meantime, it gives you a nice cash cushion for emergencies.

9 Passive Income Stream Ideas & Opportunities to Make Money

Money Crashers: How to Become Financially Independent

It's been a few years now since Brian and I, having paid off our mortgage, decided to set our sights on Financial Independence (FI) as our new long-term goal. At that time, I did what I considered some extremely rough back-of-the-envelope calculations to figure out how long it might take us to reach this goal, based on our present rates of spending and saving. I made a guess, based on the historical averages for the federal funds rate, that we could count on our investments to bring in a return of 4 percent each year. True, this doesn't look like such a safe assumption now, when the federal funds rate has been stuck at close to zero for over five years—but then, back in the late '70s and early '80s, it was at over 10 percent for nearly the same period, and often above 15 percent. So my theory was that it all balances out.

Since then, I've discovered that my wild guess is actually a well-established rule of thumb, generally known as the 4 percent rule. It's based on a 1998 study called the Trinity Study, which found that as long as you have about half your retirement funds invested in stocks, you can safely withdraw 4 percent of the total each year without depleting your reserves. Over the long term, this rule holds through all the ups and downs of the market. Numerous financial bloggers, from Trent Hamm of The Simple Dollar (whom I don't always consider reliable) to J.D. Roth of Get Rich Slowly and Mr. Money Mustache (both of whom I generally trust), rely on the 4 percent rule. And while many sources, from CNBC to the New York Times, have questioned whether the rule still applies in today's economy, a 2015 study found that for households with "considerable wealth"—enough to ride out a market downturn—it's still a reasonable guideline.

The main thing that struck me back then, as I fiddled with the numbers, was how much more benefit you get from cutting your expenses than you do from increasing your income by the same amount. Every dollar you add to your income (after taxes) helps you once: you can add it to your savings. But every dollar you cut from your expenses helps you twice: it increases your savings, and it decreases the total amount you need to save, because you now need less to live on. According to my calculations, a hypothetical saver who trimmed $5,000 a year from his expenses would shorten his time to FI by more than twice as much as he would be getting a $5,000 raise.

All this struck me as so interesting and useful that I decided to turn it into a post for Money Crashers, so I could share it with a wider audience. In the first part of the article, I outline the formula I used (which, I acknowledge, is still a very rough approximation) for calculating how long it will take you to reach FI at your present rates of spending and saving. Then I go into ways to reach FI faster by saving more, and I go into specific strategies for earning more and spending less (with an explanation of why the second approach helps you more). And finally, I outline a simple approach to investing for financial independence, known as a lazy portfolio. Investing this way means:

1. Pick out two or three funds with low fees—either ETFs or index funds that cover the whole market as broadly as possible;
2. Invest a fixed amount in each of these funds every month (automatically, if possible, so you don't even have to think about it); and then
3. Just hold the funds until you're ready to start withdrawing. Don't try to adjust based on performance or market conditions; that's a good way to guess wrong and withdraw your money at exactly the wrong time. Just sit tight, and let it work out in the long run.

I first learned about this strategy from Andrew Tobias, one of my personal household gods, and it's worked out well for me—especially the part about not having to think about it. The term "lazy portfolio" was new to me until I started working on this article, but now that I know it, I'm going to use it often in casual conversation.

So if you want the complete scoop on everything you need to know to become financially independent, you can check out the complete article here: How to Become Financially Independent Quickly Using the FI Formula. However, I would ask you to please disregard that word "quickly" in the title, which was added by the editor. I do not, anywhere in the article, promise that this strategy will help you reach FI quickly; I only help you figure out how quickly you can do it, and then suggest some tips for getting there a little faster. But it is not, in any way, a get-rich-quick scheme, and if you click on the article looking for one, you will surely be disappointed.

Ways to cut expenses in retirement...before retirement

This week's Dollar Stretcher newsletter features an article called "Reducing Expenses After Retirement." Laid out in a slideshow format, it offers useful tidbits on such matters as cutting the cost of transportation, food, and entertainment once you no longer have the demands of a nine-to-five job to cope with. I flipped through it without too much optimism, thinking that advice for retirees might not be that helpful for someone who doesn't expect to retire for a good twenty years or so. But in fact, I found that the problem was just the opposite. Not only did the advice in the article apply to me and Brian, it all applied so well that we were pretty much following it already.

The five topics covered in the piece were:

1. Driving expenses. The article points out that a couple working two jobs probably needs two cars, while after retirement they can go down to one. Sound advice, but Brian and I did this years ago, after I left my office job to become a freelancer. Working from home is still work, but it doesn't involve a commute, so it allowed us to become a one-car family even with two two incomes.

The article also notes that the extra time you have to spare in retirement may make it easier to do your own auto maintenance, at least for basic jobs like oil changes. The truth is, our jobs don't keep us on such a busy schedule that we don't have time to do an oil change on a weekend; we used to do it all the time with our old Accord. We haven't been changing the oil on our "new" Honda Fit (actually about four years old now) partly because the tools we had for the old one didn't fit it, and partly because we thought only a professional could reset the new car's electronic oil life indicator. However, this turns out to be pretty simple to do yourself (this YouTube video shows how), so it might be worth investing in the proper oil filter wrench for the new car—or just using an old belt to remove the filter, as recommended in this other video.

In any case, being employed certainly is no barrier to doing this job ourselves. In fact, it seems to me that doing this job ourselves is probably easier for us now, while we're still reasonably spry, than it's likely to be in twenty years, when we don't bend so easily.

2. Food costs. The article lists several reasons it may be possible to spend less on food during retirement. First, kids are probably grown up and out of the house, so you're no longer "feeding ravenous teenagers" (a problem we've never had and never expect to have). Second, you can cut out the lunches and overpriced coffees that are part of so many people's workday routine. And third, after retirement you can spare the time to pare down your food bill by shopping sales, clipping coupons, and even gardening to raise your own produce.

Again, this is all sound advice, but it's advice we've already been following for years. Neither of us has ever made a habit of lunching out on workdays, and while I did at one point spend a couple of bucks each day on coffee and a roll for breakfast before taking the train to work, I eventually gave that up as well in favor of home-brewed coffee and an English muffin in a paper bag. And though we aren't exactly extreme couponers, we've always kept our grocery bill down by shopping multiple stores to get the best deals, buying store brands, stocking up on sale items, and using coupons as appropriate. As for our garden, I think that's a hobby that's just as useful for de-stressing from the work week as it is for keeping busy in retirement. So once again, these are tips that work just as well before retirement as they do afterward.

3. Selling unwanted stuff. The article recommends "giving your closets...the cleaning they so desperately need" and selling all the excess stuff at a yard sale, on eBay, or in whatever other way you can to pick up a few extra bucks. This only works, however, if (a) you actually have a lot of excess stuff lying around, and (b) it's stuff that other people would be willing to pay for. Brian and I have been pretty good at getting rid of stuff we no longer need over the years, so that we don't have huge piles of unwanted items lurking in every closet and corner, but I'll concede that we probably a fair number of things we don't really need that we've never bothered to dispose of (because, as I noted in my first post of the year, we had plenty of room to spare). But I feel quite confident in saying that none of these things have any significant value. We had a yard sale once, a few years ago, and made so little money that we concluded it would be a better use of our time to spend the whole yard-sale weekend shopping, rather than selling. Even if there happen to be a few items in our Freecycle pile that might be worth a few bucks to someone, the meager amount of money involved definitely isn't enough to justify the extra time and hassle. Anything that had enough value to make it worth selling, we've already sold.

4. Entertainment costs. With all the extra time on your hands in retirement, the article suggests, you can dump your pricey satellite TV and instead enjoy local events, such as outdoor movies and concerts, or check out books, movies, and music from the local library. This struck me as one of the sillier ideas in the article, because what is there about an outdoor movie that takes more time than watching the same movie at home on your "premium movie package"? Just the time it takes to walk there and back, and that counts as exercise. The same goes for watching the same movie on a DVD from the library. There's literally nothing about this advice that's more appropriate for retired people than it is for working folks—which is why Brian and I eschewed cable completely for so many years, and only have it now in order to save on our phone and Internet bills.

The only idea in this section that seemed valid to me was that retired people can more easily give up restaurant meals and invest some time in learning to cook at home. Cooking from scratch does indeed take more time than eating fast food (although there are many meals you can make at home in less time than it would take to go out and order them at a restaurant). And learning to cook, if you don't already know how, is an even more significant time investment. But if you already know how to cook—or if you have a husband who knows how and enjoys it—then there's no good reason to eat out any more often during your working years than during retirement. You just save the more time-consuming dishes for weekends.

5. Home maintenance. The last suggestion in the article is to devote your extra time in retirement to taking over home maintenance tasks, such as yard work, that are now hired out. It goes so far as to suggest that yard work and gardening together could provide enough exercise to take the place of  "your expensive health club membership," for a further savings. Here, once again, we have a piece of advice that works just as well before retirement as afterward—if not better, because younger muscles are better equipped for pushing a mower and wielding a hedge trimmer. And, of course, if you've never had a pricey gym membership in your life, you can't save anything by dropping it, though you might gain some health benefits by adding more activities to your routine.

So all in all, I'd have to say there really isn't a word of advice in this article about spending less during retirement that isn't just as useful before retirement. In fact, adopting most or all of these habits before retirement, as Brian and I have done, should allow you to get to retirement much sooner. In the first place, you'll be saving more money during your working years, so you'll build up your nest egg faster; and in the second place, you won't need as big an egg to retire on. Once you're used to living on a smaller budget, you won't need to accumulate as much to support yourself throughout retirement in the modest lifestyle to which you have become accustomed. So it's definitely in your interest to adopt frugal habits while you're still working, rather than waiting until you retire—because every dollar you save before retirement benefits you twice.

Moving the goalpost

It's been about a year now since I first noted that our goal of paying off our mortgage—up until then, the main target of all our efforts at saving—was coming into view out on the horizon, and started wondering what we should do with our money after that. Unlike many couples our age, we don't have any kids to put (or at least assist) through college, and while we do need to save for retirement, I was thinking of that as a goal that was still a couple of decades away at least. After all, I reasoned, we both like our jobs, so there's no reason to retire early...and even if we wanted to, we'd need at least one full-time job between us for the health benefits.

However, since then, I've learned three important things that have helped change my mind on this point:

1. While Brian is pretty happy with his job, he doesn't really love it so much that he'd definitely want to keep doing it even if we no longer needed the money. In fact, he would really like to have the option of retiring early, whether he decides to do it or not.
2. Under Obamacare, our estimated cost for private health insurance will drop to about $7,750 per year. This, according to the Kaiser Family Foundation's Subsidy Calculator, is what the two of us would pay for a "Silver plan," which means one that would cover about 85 percent of our health expenses and would guarantee that our out-of-pocket expenses in a given year could not exceed $4,500. It's also nearly $4,000 less than the best price I could previously find at ehealthinsurance.com, an online shopping mall for health insurance. (I considered only those policies that actually had an out-of-pocket maximum, which was a surprisingly small percentage of them, considering that the whole point of insurance is to protect you against catastrophic costs.)
3. If Brian were to lose (or give up) his job, we would also qualify for a health insurance subsidy. Based on my average annual income since I first became a freelancer, we could get about 80 percent of our insurance tab picked up by the government. This makes surviving on one income—or even no income—a much more realistic possibility.

So, now that we have finally succeeded in making our final mortgage payment, I'm officially setting my sights on a new goal: Financial Independence.

The term "financial independence," or FI, gets bandied about a lot in personal finance blogs and articles, and people use it in several different ways. The "Declaration of Financial Independence" on the Dollar Stretcher website lists a wide variety of criteria for FI, from "being comfortable with the things you have" to "having sufficient retirement savings." Trent Hamm of The Simple Dollar, in a 2008 post, gets a little more specific, outlining three different levels of financial independence. Level one is "freedom from financial reliance on loved ones" (i.e., earning enough to pay your own way); level two is "freedom from financial reliance on creditors" (being out of debt); and level three is "freedom from financial reliance on income" (having enough to retire whenever you choose). This third level is also the definition used by Amy Dacyczyn (all hail the Frugal Zealot!) in an article called "The Unemployment Opportunity," which appears in her third Tightwad Gazette book. This top level of financial independence—also known as being independently wealthy or having "walk away from it all money"—is what we're looking to as our new financial goal.

One point Dacyczyn notes in her article is that a key to achieving this level of FI is to reduce your living expenses as much as possible. The less you need to live on, the less you need to have saved up to provide you with enough interest to pay all the bills. In fact, when I started doing some very rough back-of-the-envelope calculations to estimate how many years it might take us to reach FI, I made an interesting discovery: when aiming for FI, cutting $5,000 from your annual expenses is much more beneficial than adding that same $5,000 to your income. One reason is that the extra $5,000 in earnings will be taxed (and since it's tacked on to your current income, all that extra money will go into your highest tax bracket). When you cut expenses by $5,000, by contrast, that whole amount goes into your savings. But even more importantly, reducing expenses helps you in two different ways: it both increases the amount you can save each year (speeding up the rate at which you can move toward your FI savings goal) and decreases the amount you need to live on (making the goal number itself smaller).

To illustrate, let's take an aspiring saver whom we'll call (what else) Rich. Rich currently earns $55K per year after taxes, of which he spends $30K and saves $25K. Assuming that his investments can bring in roughly 4 percent interest per year—a reasonably safe bet, based on the historical average for the federal funds rate—Rich would need $750K in the bank to bring in enough for him to live on ($750K times 4 percent equals $30K, the amount he spends now). Rich already has $250K socked away, so he needs an extra $500K to become financially independent. If he continues to save $25K per year, it will take him 20 years to reach this goal ($500K divided by $25K equals 20).

Now, suppose Rich gets a raise that increases his income to $60K a year (again, after taxes). Since FI is his goal, he pumps all this extra cash into savings, increasing his annual savings to $30K a year. With these increased savings, he'll need only 16.67 years to reach FI ($500K divided by $30K equals 16.67). So, he'll get there 3 years and 4 months sooner than he would without the raise, which is good news.

But, suppose that instead of earning an extra $5K, Rich had instead found a way to save an extra $5K each year by cutting his expenses. He's still saving $30K a year, but now his savings goal is lower: since he only needs $25K a year to live on, he only needs $625K to bring in that amount in interest. With the $250K he already has, he only needs to save an additional $375K. And if he's now saving $30K per year, he will reach that goal in just 12.5 years ($375K divided by $30K equals 12.5). This means that he's just shortened his time to FI by 7.5 years—more than twice as much as he was able to shorten it by earning an extra $5K.

So (to get back to a real-life example), I'm looking on the mortgage we've just freed ourselves from as our opportunity to be like Rich. It's reduced our annual expenses (since our only housing payment now is our property taxes), thus making FI a more reachable goal for us, while simultaneously boosting the amount that we can put away toward it each year. Now all I have to do is figure out the best way to invest that extra money so that we can move toward our new goal as steadily as possible.

What are we saving for?

Last weekend, Brian checked our bank balance at the ATM and noted that it was about time to make an extra payment on our mortgage principal. Ever since we first bought this house, we've been making these lump-sum payments pretty much any time we had cash to spare (beyond the amount we keep on hand as an emergency fund). We did this partly because we're both really uncomfortable with debt and eager to get it paid off quickly, but also because, in the present economic climate, it seemed like pretty much the soundest investment we could make. During the first two years, in particular, we had a 30-year loan at 6 percent APY—a much better interest rate than we could earn at any bank, and a much safer return than we could hope to get in the unpredictable stock market. After two years, we refinanced what was left of the balance for 15 years at 4.5 percent APY—but by that time interest rates had plummeted to nearly nil, so a guaranteed 4.5 percent return still looked like a pretty good bet.

There's no doubt that doing this has helped us financially. If we'd simply kept paying off our original loan at the original rate, we would have paid more than $375,000 in interest charges over the 30-year life of the loan. As it is, we'll end up paying less than $40,000 in interest, and we'll have the loan paid off in less than eight years from the time of purchase. And that's if we stopped making prepayments right now; if we continue to pay at the rate we've been going, we can have the whole thing paid off in less than seven years. By April 2014, or maybe even sooner, we'll be debt free.

And then what?

For pretty much the whole time we've been together, we've been fixated on this one financial goal. For three years, all our spare cash went into a fund to be put toward the down payment on a house; once we had the house, we started working all out toward getting it paid off as fast as possible. We never really stopped to think about what to do with our money once we reach that goal. Of course, we will still need to save for retirement, and indeed, we have been doing so during this time: Brian has money taken out of his paycheck to put in a 401(a), and I put a lump of my freelance earnings into an IRA once a year. So once the mortgage is paid off, we could simply take the extra money we've been putting into the house and start feeding it into our retirement accounts instead. But when Brian suggested this, I questioned whether it would really help us. Owning our home outright was a specific goal that we knew we could reach faster—a lot faster—by paying down the principal. But would putting more money away for retirement help us retire any sooner? Probably not, because we need our jobs (or Brian's job, at least) to provide us with health care. There's always private health insurance, of course, but the costs, at least in New Jersey, are astronomical. To get coverage comparable to what we now have, we'd have to spend four figures a month—just about enough to make up for the mortgage we'd no longer be paying. So unless the new state-run health exchanges mandated by "Obamacare" lower health care costs by a significant amount, at least one of us will have to remain in a full-time job until we're both eligible for Medicare, which won't happen until 2038. And who's to say that we'll want to retire even then? We both like our jobs, more or less, and neither of them is so physically demanding that we couldn't keep doing them well into our 70s.

So while we could start putting more money away for retirement (and almost surely will), this won't really give us a new goal that we can work and save for with the same fervor we're now putting into paying off the mortgage. It almost certainly won't absorb all our extra cash the way mortgage prepayments are doing now. So what will we do with our savings? Will we continue to save just as a matter of habit? If so, where will we stash the money, once we no longer have our nice safe 4.5-percent-guaranteed investment to tuck it into? Might it actually make more sense, if interest rates remain as pitifully low as they are, to—gasp—spend more of our money?

Amy Dacyczyn addresses this question at the end of her first Tightwad Gazette book, in an article entitled, "When You Don't Need to Be a Tightwad." She says it's not uncommon for a couple to find, "after decades of pinching pennies," that their mortgage is paid off, their kids are through college, and they have all the money they need for retirement—and they find themselves "confused as to how to let go of a lifestyle that has brought order and control to their lives and that they have come to enjoy." Family and peers may pressure them to spend in ways that they don't find rewarding, and they may be unsure how to respond to kids' or grandkids' pleas for treats when they can no longer plead poverty. The solution, according to the Frugal Zealot, is to "understand that the tightwad life is not only about spending less...it's about spending in a way that reflects your values, and that should not stop if you have a billion dollars." (If the idea of a billionaire tightwad sounds farfetched, recall that retail mogul Sam Walton continued to drive a beat-up old pickup truck throughout his life, and Warren Buffett still lives in the same house he bought for $31,500 more than 50 years ago.) Thus, for example, tightwads who have achieved their financial goals might choose to spend more on environmentally sound products (like organic veggies or solar panels that have a long payoff time); they might choose to support local businesses that have higher prices; or they might give more to charity. They could also treat themselves more in ways that aren't inherently wasteful, like going out to dinner or hiring people to do the jobs they've always disliked (whether that's painting the house or cleaning the bathrooms). And of course, those who have jobs they don't like can choose to retire early—or switch to a different job that's less lucrative, but more satisfying.

So I suspect that, once the monthly mortgage payment is no longer a part of our lives, we'll be doing a little bit of all these things. Sure, we'll put away more for retirement, because it can't hurt to have extra, and because that cash cushion will help protect us against a financial crisis like a job loss or a major medical problem. But at the same time, we'll need to start adjusting to the idea that it's okay to spend more when we want to. We can ramp up our charitable giving, increasing our donations to the groups we consider most worthy (while continuing to screen out those that don't use our money effectively). We can continue to buy some of our holiday presents at yard sales, but not feel bad about filling in the gaps in the gift list with expensive goodies that we know will go over big. We can pay someone to landscape the back yard if we want, rather than putting it off until some future time when we have a free week and good weather and no troublesome muscle problems. We can buy the good orange juice, the stuff that's not from concentrate, even when it's not on sale.

It will be a big change, I'm sure. But I suspect that in time, we can get used to spending our money, and maybe even like it.