Aha! Moments
Sometimes, you have an “aha” moment that changes everything. It’s like a light bulb switching on, and suddenly you see something that was right in front of you all along. Once you get it, it makes perfect sense. In fact, it’s so sensible that you wonder how you never saw it before. Today, I’d like to share one of those moments with you — the realization of the double win that comes from a lower cost of living.
At first glance, it’s obvious that living with a lower cost of living allows you to save more each year. Let’s say you have a family after-tax income of $100,000, and your annual expenses are $90,000. That leaves you with $10,000 to stash away toward your savings goals. Now, imagine you’ve embraced some frugal habits, and your cost of living drops to $70,000. Suddenly, you’re saving $30,000 a year instead of $10,000. It’s a significant improvement.
But wait! There’s another benefit that’s not as immediately apparent. By lowering your annual expenses, you’re also reducing the amount you need to reach Financial Independence (FI). In other words, you’re not only saving more each year (which reduces the number of years needed to save), but you’re also lowering the target you need to hit to achieve FI. Essentially, you’re running faster toward a finish line that’s closer.
Imagine the Olympics, where the world’s fastest runners compete in a 100-meter dash. The athletes train for years, perfecting every step, every breath, to shave milliseconds off their time. Now, imagine if, on top of being the fastest, one of those runners also had the power to move the finish line 20 meters closer. How much easier would it be to win that gold medal? The effort remains the same, but the goal is nearer, and victory is within reach far sooner. That’s exactly what happens when you lower your cost of living — you’re simultaneously speeding up and shortening the race to financial freedom.
Visualizing the Double Win with Real Numbers
To see this in action, let’s build a simple spreadsheet. (I’ll use Google Sheets for this example.) To view this in practice, we’ll just need four numbers.
First, let’s just take a quick swag at your “FI number.” Some people say 25x (i.e. the “4% rule”), or if we’re a little more conservative, we could say 30x. (Using 30x assumes that you will withdraw 3.33% of your initial FI balance each year in retirement, adjusted by inflation each year.)
Next, let’s assume:
- After tax income of $120k per year.
- Compound annual growth rate after inflation of 10% (a.k.a. the “real” rate instead of the “nominal” rate)
-
Starting savings of $0. Hopefully that’s not the case, but let’s make the example easy.
For the first scenario, let’s say your current cost of living is $100,000 per year. If we are aiming for 30x, we’d have a target of $3.0 million in today’s dollars to reach FI ($100,000 x 30). In other words, you would need 150x your annual savings to get to your FI goal. That’s a daunting idea to say the least!
Now, for the second scenario, consider what happens if you lower your annual expenses to $80,000. The first win is that your new FI target number drops to $2.4 million ($80k x 30). The second win is that you are now saving 40k per year! Now your goal is only 60x your annual savings! Much less daunting. You’re not only running faster by saving more, but the finish line is also closer by $600,000!
Don’t Forget the Power of Compounding
Here’s how the numbers break down:
Original Scenario:
- Annual Expenses: $100,000
- FI Number: $3.0 million
- Annual Savings: $20,000
- Multiple of savings needed: 150x
- Number of years with compounding: 33 years
Lower Cost of Living Scenario:
- Annual Expenses: $70,000
- FI Number: $2.1 million
- Annual Savings: $50,000
- Time to FI (without investment growth): 19 years
That’s a huge difference! By adopting a more frugal lifestyle, you’ve reduced your timeline to FI by over a decade. Of course, these are simplified numbers and don’t take into account things like earnings growth, which would accelerate your progress even further. But the principle is clear: lowering your expenses not only helps you save more but also drastically reduces the amount you need to save in the first place.
On the spreadsheet side, we can solve this using the “NPER” function. NPER is one of the “time value of money” functions built into Google Sheets which solves for number of periods needed. (The others, such as Future Value (FV) and Present Value (PV) make it very easy to think through these types of compounding scenarios. It sounds crazy, but it wasn’t that long ago when I had a special calculator to do these types of calculations!
So here, we’ve simply fed the NPER function 4 variables: the rate, the withdrawal amount each year, the starting value, and the future value (which is negative, since it is a withdrawal).
Key Note: For the sake of simplicity, we’re ignoring inflation here. However, as we all know, the power of inflation over a few decades can seriously erode purchasing power.
The Psychological Impact
There’s also a psychological win here. Knowing that your FI number is closer can be incredibly motivating. It’s like running that Olympic race with the finish line just within sight — every step feels more purposeful, more rewarding. You’re not slogging through an endless marathon; you’re sprinting toward a goal that feels attainable.
Plus, the habits you develop by living below your means — contentment with less, resourcefulness, and mindful spending — become lifelong skills that serve you well in retirement. When you’re used to living on $70,000 a year, you don’t feel deprived in retirement, even if market conditions require you to tighten your belt a bit.
Conclusion: Two Wins, One Strategy
The beauty of the double win is that it’s a strategy anyone can implement. Whether you’re just starting your journey toward financial independence or are well on your way, lowering your cost of living provides two powerful advantages: it helps you save more each year, and it reduces the amount you need to save overall. In other words, you’re running faster toward a goal that’s closer than ever before.
So, as you think about your financial future, remember the Olympic runner who could move the finish line. By adjusting your lifestyle and cutting unnecessary expenses, you’re setting yourself up for a faster, easier race to financial independence. And that’s a victory worth celebrating.