Being thrifty versus receiving a financial windfall

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What's more impactful on your financial future between lowering expenses or receiving a financial windfall?

Most people with bad money habits and a mountain of debt live in constant hope of receiving a financial windfall to solve all their problems. But what if there was another option to secure your financial future that you could start doing right away?

Lowering your cost of living might not sound sexy, but take a look at these numbers and you might be surprised at how they can change your future.

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Money problems and the easy fix

What's usually the most common thing people think when they run into money problems?

I wish I would win the lottery. Then all my problems will disappear and life will be good.

People are constantly after windfalls which will solve all their financial problems in one fell swoop.

Unfortunately the hard truth is that if you were bad with money before winning the lottery, you'll likely continue being bad with it after you win. The only difference is that now you'll have a much larger amount to burn through. Your bad money habits will now be super charged.

The same thing applies to people earning incredibly high salaries but still find themselves living pay check to pay check, constantly in debt and wondering why they never have enough money. They've fallen victim to lifestyle creep, convinced that yet another pay raise is the solution to their problems.

Related Post: Lifestyle Creep

The thrifty choice

There's an alternative to wishing for a large sum of money only to find out you still have all the same financial problems. The alternative is simply being thrifty, living frugally and spending intentionally.

I can feel you rolling your eyes already. How could lowering expenses by a modest amount possibly have an equal or greater impact than receiving a large financial windfall?

Don't worry, stay with me here, the numbers may surprise you.

Digging into the numbers

Let's take a look at someone on the path to financial independence who we'll call Joe Bloggs. Joe has $300 000 invested and earns $5 000 per month. Joe invests $1 000 each month while spending the remaining $4 000.

Here's a look at Joe's numbers along with how long it will take him to reach financial independence:

Investment Balance $300 000
Monthly Income $5 000
Monthly Expenses $4 000
Monthly Saving $1 000
Years to Financial Independence 15.33

It will take Joe 15.33 years to reach FI. That's really good compared to most people, but Joe wants to reach FI as soon as possible.

If Joe were like most people, he'd sit back imagining how great it would be to have a financial windfall magically fall into his lap. Well, let's take a look at how things would change if an extra $100 000 somehow found its way into Joe's account:

Investment Balance $400 000
Monthly Income $5 000
Monthly Expenses $4 000
Monthly Saving $1 000
Years to Financial Independence 13

Keeping all other factors the same, Joe was able to take his FI date down from 15.33 years to 13 years by investing that $100 000 windfall.

But what would happen if Joe didn't have magic on his side? What if instead he looked for ways to be thrifty and lower his expenses? Let's take a look at how lowering Joe's expenses from $4 000 per month to $3 200 and investing the difference affects things:

Investment Balance $300 000
Monthly Income $5 000
Monthly Expenses $3 200
Monthly Saving $1 800
Years to Financial Independence 10.33

Simply reducing Joe's expenses by 20% and investing that amount brought his FI date down to just over 10 years, down from the original 15 years!

The power of keeping your expenses in check

It's truly amazing the power cost of living has on our financial future. If we let our expenses get out of control, we'll likely work till the day we die with a pile of debt, still wishing for that financial windfall which would have solved all our problems.

Of course there's nothing wrong with receiving bonuses from work, increases in our salary and any other financial windfalls. However if we're constantly increasing our cost of living, we'll always be chasing the next windfall.

Simply lowering our cost of living by a modest amount can have an incredible impact on our financial future.

If you would like to figure out your FI date, take a look at the financial independence calculator found here. Be sure to play around with your expenses vs monthly investments to see how small changes can have big impacts over time.

Article by Thrifty-B

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