Allocating the right amount of resources to the different possibilities is key. This is not always easy. Take a relative simple example: asset allocation: ask 10 people and you get probably 10 answers. So what about this other key allocations: how much money do you spend vs save
This allocation is generally known as the Savings rate. There is a tendency to have this as high as possible: the higher the sooner you are FI. That is what we want, right? And yet, could there be a downside to a high savings rate?
What are some possible approaches? Stereotypes might be the best way to make my point.
bare bones essentials
You live with a minimal comfort at all levels.
Housing: basic shelter and heating, no garden, no terrace, not an ideal location, a just a big enough place.
travel – dirt bag travel, maybe only local travel, or staycations. (no judgement here, we have some planned as well this summer)
clothes – not at all important, functional
food – you eat healthy, you do not go to restaurants and probably eat a little too much the same cheap meals each day
you are very conscious about where you spend your money. All levels are enough, not more
Your house is the mix of budget vs needs, not too much wants.
you travel, for the experience on a budget. (That are probabley the best holidays – I remember spending a night in an oil town in Ecuador – great fun, great experience and this only for 11 USD for a double room)
clothes matter, quality is key to keep them long
food is important – you might pay more for good bio food, health mixed meals
ideal life spending
This level of spending reflects the lifestyle that you envision as ideal. This does not mean unthought impulsive spending. It is intentional spending, especially in the areas that help you to be happy and increase the quality of life. In some areas, you will even go from good to great. (Fritz has a nice story)
Hard to put a stereotype on this. After the Utrecht Meetup, it becomes clear to me that more and more people will aim to be here. The insight came during the Antwerp meetup.
In this budget, price or budget is never an issue. You want it, you get it. Ideally, you are financially aware, so no consumer debt to get all of this!
You have the house you can afford. Maybe a pool, a guest house and a bathroom too much
you travel all over the place, in luxury off course
lobster and champagne for breakfast? why not, there is room in the budget!
How to pick?
There is no best answer out there, sorry for that. It is personal finance so, you need to make up your own mind.
Our family chooses the ideal life spending. We try to live
For us, the journey needs to reflect what the destination looks like
In our case, the important things are
1- avoid golden handcuffs that keep you in a unhappy job. We want the option to walk away
2- spend time with family and friends – work less is a great way to achieve this – kids free weekends with my wife are great as well
3- experience life via travel and activities – fun in travel is not related to the price of travel. We stayed local for 6 years in summer. We had plenty of great experiences like bike rides, playing in the city water fountain, biking along the sea,… We now go abroad with kids now for first time: we will do our interpretation of slow travel.
That means that we make room in our budget now to enjoy these 3 items. And yes, our savings rate went down from the early period where we were only focused on FIRE. For us, it turned out that we were looking at the wrong statistics. We now wan to be HOT
Another reason to pay attention is the wiggle room in your budget. It is very likely that your pre FI habits and spending will continue post FI. When this is based on a bare bones budget and you use the 4pct rule or a DGI portfolio to declare yourself FI, what will you do in a downturn? As you are bare bone already, what will you cut? Withe the ideal life spending budget, we could trim down the holiday budget, reduce the personal fun money/ Staycations, more home cooked means and garden diners in stead of restaurants.
A lot depends on your income. When this is high, you can have an ideal life spending budget and still reach a 50pct savings rate. There are people out there that do this. When you are earning below average, then this become harder.
and then there are geographcal differences
Countries with a low social security net often allow for a higher SR. At least, as long as you do well, are in good health and your employer pays for a few extra’s like healthcare and pension savings matching.
When you live in a country that believes strongly in social distribution, then you have more safety nets. At the same time, there are more taxes and generally speaking less pension systems you can organise yourself.
What is your spending sweet spot?