Trade-Offs

I’ve mentioned this before in passing, but this notion warrants more than a passing reference.  Important in life generally, the need to understand trade-offs is even more critical when pursuing FIRE or any type of “early” retirement.

What do I mean by trade-offs?  In essence, a trade-off means that (nearly) every purchase or financial decision we make must have some aspect on which we compromise.  It comes from the notion that money is a scarce resource – meaning that we do not have an endless supply.  When we spend, or save, our money, we must do so in a way that gets us the best value we can achieve.  Skip here if you have an endless supply of money – though I doubt you’d be reading about FIRE in the first place if you’re already financially independent.

Buying a house or renting an apartment are good examples of critical points in our lives when we’re presented with the need to make a number of trade-offs.  The apartment or house that’s closest to work or closest to restaurants and bars might be the one that’s the most expensive, or the smallest.  The place further out of the way is probably larger, more modern, and less expensive.  The place with the price in the middle might be close to one spouse’s office and furthest for the other.  Maybe you thought you needed four bedrooms but the house that ticks all the other boxes only has three.

Because we have a limit on how much we can spend, we have to decide how best to use that money.  Is an extra bedroom worth another $700 per month.  Is saving 10 minutes of commute time each day worth $500 per month.  Does having a terrace warrant additional rent of $300 per month.  Can you merge your home office into your guest bedroom, etc.

The trade-off between amenities and dollars has tangible consequences – allocating more money to one thing means you don’t have it for something else.  So when you’re home shopping, you have to ask questions such as: is the bigger house worth leasing a compact instead of a mid-size sedan?  Do you value having a bigger apartment over eating out more often each month?

Eventually something has to give, and it may or may not be the optimal choice.  But it’s imperative that we actually make a choice, or…well, you’ll be out in the cold.  It’s easy to fixate on whether you made the right choice in the end, but I like to think that most of the time we get it right.

So why does this matter, and what’s the point of discussing this here?  Simply put, because FIRE involves significant trade-offs.  Getting to FIRE involves saving and investing significant chunks of your money, meaning, of course, that you won’t have that money available to spend on your day to day living expenses.  It means, potentially, a less expensive house or apartment, car/modes of transportation, restaurants, clothes, vacations, everything.

It means that when you decide to pursue FIRE or early retirement, you have to be prepared to give up things your financial situation might otherwise allow you to have.  If you start to pursue FIRE at a younger age – say, right out of school – it might be easier.  But if you do it while into your working days, or after you’ve been accustomed to a certain way of living, the trade-offs might become more apparent, and the savings aspect more difficult to overcome.

Think first of why you decide to pursue FIRE, or are considering doing so, in the first place.  It’s because on some level – perhaps entirely subconsciously – you decided that you value a certain freedom of your time (and whatever use of it that entails) over the wage-earning capacity in your chosen vocation.  That is, you’ve decided that you’d rather spend your time doing something that is subjectively of higher value than the monetary value that you have the potential to earn.  Or, put less delicately, you probably decided that you want to do something more meaningful, or indeed, nothing at all, rather than devote all your efforts to improving someone else’s bottom line.

And perhaps just as importantly, you’ve realized that you do have the potential to make this a reality, so long as you employ the proper amount of monetary discipline.  So let’s talk about that monetary discipline aspect, because that’s the biggest hitch in all of this.  Sure, it seems easy in concept: oh, I’ll just save some more of my paycheck!  Right…

As a starting point, I’m not talking about trading off your ability to subsist.  I’m assuming that nobody is starving themselves or living off saltines so that they can save and invest more money.  That would obviously be foolish.  It’s more like a continuum, and where you fall on it depends on the balance between how badly you want to retire at a certain age and how much you’re willing to tolerate to get – and stay – there.  I use the word “tolerate” because there’s definitely some of that.  There doesn’t have to be, but in some respects it can’t be avoided.  

Where am I going with this post?  I’d say the point is that, like deciding on a house or apartment, you have to find the right balance so that you don’t give up.  If what you’re foregoing so that you can save becomes too intolerable, you’re unlikely to be able to sustain it – perhaps a case of “FIRE burnout” (clever pun?).  

If you could save 75% of your post-tax salary, but it would require you and your family to live in a one-bedroom, one-bathroom apartment, would you do it?  Would you never eat at a restaurant, would you deprive yourself of all creature comforts, would you take the bus everywhere instead of driving a modest car?

The approach to FIRE can be analogous to eating cookies while you’re trying to lose or maintain your weight.  For most people, if you don’t have one cookie every now and again, but instead choose to deprive yourself constantly, you increase the odds that you’ll snap and one day put down an entire sleeve of Chips Ahoy.  If you have one or two cookies every so often, you’ll be fine, but that entire sleeve – if you’re older than 25 – well, that’ll get you.

So find that proper balance between how you live now and when you hope to retire.  If you deprive yourself of ever going to a restaurant or living somewhere that’s too small, you may be making a sacrifice that either you can’t keep up or that takes away any joy in your life.  Be careful, though, not to use that excuse to justify deferring your investments.  “Oh, well, I guess if this makes me happy…”  That’s a slippery path downhill.

 If you’re reading this, or you’ve started down the path toward FIRE, you’ve obviously got enough motivation and possibly discipline to tame yourself when needed.  Go ahead and have that cookie when you need it, but don’t force yourself to the breaking point.

There’s another aspect of this that might not be as easy to swallow, and that’s having everyone affected by your decision on board, be it your spouse, partner, kids, live-in relatives, etc.  In some respects, you’re also depriving them of the fruits (dollars) of the collective household labor.  And while you may not care about your live-in relatives, you probably do care about your prone-to-temptation kids.  

The discipline that you project is what they’ll pick up – meaning that it’s up to you (and your spouse/partner/co-parent) to set the right example.  So if you’re able to control your spending and make prudent financial decisions, they’ll pick that up right along with you.  Use that as your motivation!  In the interest of not spoiling your children, save and invest more money.  Remember that in the long-run they’ll thank you (or so we hope).

But naturally, don’t deprive them too much either.  Think of the cookies.  Teach them the right balance of spending vs. saving and you’ll set them up for the future too.  That way, when you’re enjoying that early retirement, you can do so with – hopefully – (more) fiscally prudent children.

Like some of my other posts, this one might fall in the category of “duh!”  But as I always disclaim, being more conscious of these things contributes to understanding, which hopefully leads to a more purposeful setting of the balance.  Saving and investment are important if FIRE is a real goal – but don’t compromise everything in your life to get there.  If you make yourself miserable for too long, you’ll be a miserable person whose misery will continue even if retired at 45.  

You may also develop an obsession with frugality that you can’t break later in life.  The whole point of saving and investing more now is so that you’ll have money to spend, along with the time to do so, a little earlier than otherwise.  If you fixate over pinching pennies your entire life (if you don’t have to), you’ll wind up missing out on far more productive – and enjoyable – things to do.