Learning to Become an Extreme Saver – Part 1

April 12, 2012

We’ve all heard about the many benefits of saving money.  With money in the bank, you can pay for things you need or want without going into debt.  You have an emergency fund to help tide you over in case you lose your job and you have the foundation for a nest egg that can be invested conservatively and grow over time into a substantial amount saved for retirement.  There’s no question that being a saver has several advantages.  But have you ever thought about the advantages of becoming an ‘extreme saver’?

First let’s understand what we mean by ‘extreme saver.’  Being an extreme saver means you’ll save a much larger portion of your income than what most people tell you to save.  There’s no exact number but if the conventional advice is that you should save 5 to 10 percent of what you earn, extreme savers will aim much higher, planning to save 40, 50, or even 75 percent of their after-tax earnings.  If those numbers shock you, they should – not because they’re unattainable but because many people won’t even try.

You might think it’s obvious that people should be extreme savers if they’re able to put aside that much. After all, who wouldn’t want more money? But it’s not as obvious as you think.  For example, imagine you could magically double your income starting today.  You could transform yourself into an extreme saver just by putting all of that extra income into the bank even if until now you haven’t been able to save a dime.  Yet many among us would not choose to do that.  Instead we’d imagine the kinds of things we could buy ourselves with twice as much income and we’d wind up saving perhaps only a fraction of the windfall.

But now consider what an extreme saver gets in return for saving all that money instead of spending it.  If a saver can use his savings to pay for a small purchase without going into debt, an extreme saver may call upon tens of thousands of dollars at a moment’s notice to pay for a huge purchase like a car or even a house without going into debt.  If a saver has an emergency fund that will last three to six months, an extreme saver may lose his job but have an emergency fund big enough to last 5, 10, 20 years – or more.  And if a saver can build a nest egg over time to retire in his mid-60s, an extreme saver is building a nest egg large enough to retire much sooner, in his mid thirties if he chooses – or sometimes earlier.

Last week I overheard some colleagues complaining about their jobs and dreaming about how great it would be to quit.  Whenever I hear this type of conversation, I wonder why people will often commiserate with their co-workers about disliking their job and fantasize about alternatives but won’t think about the real reason why they’re stuck at a job they dislike instead of doing something they really want. The truth is that you can’t leave a job you dislike as long as you are completely dependent on a regular paycheck to support yourself, which limits your freedom to choose what you want to do with your life.   Even if you love your job and have no plans to leave, consider whether your employer feels the same way or whether you will feel the same way next year or five years from now.

Extreme savers don’t spend as much as other people and that means they often have enough money saved up to give themselves more control over how they choose to spend their time.  They’re not stuck in their current job because if at any point they want to work somewhere else, they have enough savings to last them a long, long time until they find something they’d rather be doing.  In some cases, they have enough savings to have the freedom not to work at all.  If you value the freedom to do what you want more than you value the things you can buy with the money you earn, then becoming an extreme saver might be right for you.

So now perhaps you’re thinking, you’re interested in becoming an extreme saver but you may be still be reeling over how it might be possible to save anywhere near that fifty percent of your own income in order to get you there, especially if you’re not even able to save anything right now.  In our earlier example, we imagined doubling our income but the same savings rate can be achieved by halving our spending.

The good news is that it’s not magic, nor does it require you to sacrifice the spending needed to enjoy your life. It’s simply a matter of spending your money more efficiently in the areas where most money is wasted.  My own efforts at extreme saving have allowed my wife and I to save a combined $550,000 over a period of 8 years.  It didn’t happen because we were incredibly lucky or worked on Wall Street.  We saved this much simply because financial freedom was important enough to us to make decisions that kept our spending low relative to what we were earning.  During my last post, I promised you an explanation of how my wife and I are able to live on $12,000 a year each in New York City ($24,000 combined), and I’ll lay out the details in part 2 of this blog post.  But understanding why extreme saving is a good idea is the important first step to motivating yourself to get there.