We tried several times to cut back on luxuries, and even some necessities, to gain financial breathing room. It was always a temporary fix, and never worked for more than a few months for us. Years before we formed a personal spending budget, we came across a radical idea, which had helped others reach financial freedom. The idea was to create an income shortfall, by putting money into savings before paying expenses, or having expenses that were higher than income. The pressure of covering the income shortfall encouraged these people to get creative and find additional sources of income.
I never tried this idea, because it sounded crazy when I was earning a large salary, and most of my time was consumed by work. I had always tried to live below my means, and I only knew how to earn income through a job. Finding new ways to make money with the pressure to pay bills scared me.
My wife and I were always pretty good at saving, but sometimes I spent like the income was guaranteed for life. We started budgeting after I realized my spending was getting completely out of hand. Setting a budget and cutting back seemed like the only way to secure our financial future. Over the years we trimmed away at our budget, sometimes so much that even small luxuries were removed, or severely limited. Life was turning into a routine of working hard, feeding our bank account, and fighting off expenses.
There was a point where our expenses just wouldn’t go any lower. Spare cash seemed to be eaten up by unexpected costs of all sizes, and were often unavoidable. We needed to try something different, so instead of cutting back to cover the expenses, we focused on weathering them. Our savings became a buffer to absorb the expenses, and we diligently saved month by month to rebuild the buffer. We learnt to move past the shock of losing money, by focusing on recovering from the loss.
This worked when I was working, but not in early retirement, when the salary was replaced by income from conservative investments. We ran into an expense problem, where we were losing roughly $16,000 a year. It was a reality check, but not entirely surprising, because we’d started traveling more often. My salary had saved us in the past, so going back to work seemed like the easiest solution. I moped around the house for a few weeks feeling like a total failure, because I was supposed to be actively investing our savings by now, or possibly even operating a business to generate more income.
I was on the verge of depression when I tried something crazy on the back of an envelope. It gave me a little hope, so I tried something even crazier, inflating the loss on the report to make it look three times larger. This should have terrified me, but strangely I felt better, because the loss now felt too large for a quick fix. I was forced to take time to think, rather than use an easy option to solve the problem.
In the worst case, the larger made up loss would eat up our savings in 10 – 12 years. At this rate our savings would only last until my late 40s. Once I accepted this as fact, I actually felt better about our situation. I’d still be young enough to work, but more importantly I had time to turn things around while staying retired.
If I had focused on the actual $16,000 per year loss, I would have settled on a quick fix, because the amount was manageable. I could go back to work and easily earn that much, or find any job that paid $16,000 after tax. I could rob funds from my already depleted trading accounts. Even worse, I could have tried using our savings to day-trade, which might have covered our loss for some time, but risked wiping out our savings.
Expanding our income made more sense in the long run, because we were already pretty lean on our spending. Cutting back any more would have pushed an enjoyable retirement into something just bearable. I would have preferred working instead of spending my retirement just getting by. I retired with the firm intention to work for myself, and our financial problem was becoming the perfect motivator to start my own thing.
Joe retired in his mid-thirties to spend more time with his young family. He started this blog to share his story, help others plan their path to retirement, and enjoy retired life.
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