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My FI key: separating wants from needs
Old 05-12-2013, 03:42 PM   #1
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My FI key: separating wants from needs

My #1 Key to Financial Independence:
Recognizing the Difference Between My Wants and My Needs

When I started planning in 2009 for a financially independent retirement, I was very clear about one thing. For me, this was all about time. About shortening as much as possible the time I would have to spend in a daily commute-and-work grind. About freeing as much of the time I had left on this Earth -- which is limited for all of us -- to do what I wanted to do and not what somebody else assigned me to do.

When I started this journey in 2009, I had "perceived" personal annual expenses of $33,280. Now, 4 years later, I am FREE... free with yearly personal basic living expenses of $15,000.

It was my focus on the overriding priority and importance of time over other considerations that got me free. I reasoned that if this was about time then it was not about accumulating (or holding onto) unnecessary things… or about keeping up with the neighbors… or about indulging in lots of optional cost-ridden activities. And what I did to stay focused was to specifically and clearly separate and keep track of my basic living costs and the costs of my wants -- in writing and frequently. By doing this, I was able to so lower my financial freedom budget AND accelerate the growth of my stash that 4 years later I’ve reached my goal. My time is mine (and I actually have ended up with plenty of “extra” income to fund lots and lots of “wants”).

The real key, though, is a mental one. I had to learn to tell the difference between needs and wants, which is not necessarily that obvious in our consuming-driven society. It was and is vital that I not mix and mingle – that I not confuse – my basic costs of living with the price tags for my discretionary toys and playtimes. Recognizing and acting on the difference cut years and years off my working life, and made attaining financial freedom much much more doable.

I need a reliable pick-up truck for a vehicle, and I have one in a paid-for 1996 Dodge Dakota that I’ve kept in great shape. Recognizing that I do not need to trade it in for a newer $30,000 truck (even if I wanted one) has kept my basic living expenses from increasing by at least $3000 a year – and saved me from having had to work an extra two years to accumulate the capital required to fund that $3000-a-year expense.

A newer truck or two more years of my remaining life lived in financial freedom? For me, it’s a no-brainer. How about for you?

I need a modest-sized house (1500 square feet for 2) with a garage and a workshop on a couple of acres or so (because I learned the hard way I need to not have in-your-lap next door neighbors). But in 2009 my wife and I owned a much larger house in a suburban community plus a 100-acre vacation property. At best, we used (needed) half the space in the house; the other half we just wanted for show. The vacation property we obviously did not need at all, and ended up wanting to visit it less than 12 days a year. An unexamined financial picture had kept us tied to both those places. Four years later, we’ve sold both properties and used the profits to acquire mortgage-free the right-sized house we really need in a more rural setting that’s also more pleasing to us. Recognizing that we did not need the bigger house or the occasionally used vacation property reduced my basic living expenses by $8500 a year -- and saved me from having to work an extra five-and-a-half years to accumulate the capital required to fund that $8500-a-year expense

A bigger house or five-and-a-half more years of my remaining life lived in financial freedom? To me that’s also a no-brainer. How about you?

And so it goes for me, even with the smaller expenses.

I no longer have a mortgage. I do need to spend money on groceries, medical and other insurances of many types, utilities, truck operation and maintenance, property maintenance and taxes, pet care, investment fees, and income taxes. After a year of judicious cost-cutting that did not require giving anything up, I was able to cut the total of those costs by another $3000 a year. And that saved me from having had to work another extra two years to accumulate the capital required to fund that $3000.

Unexamined living costs or two more years of my remaining life lived in financial freedom? Another no-brainer as far as I’m concerned. What do you think?

I can now cover all my basic living expenses on $15,000 a year and still have a jolly good time enjoying my freedom to hike, bike, canoe, read, blog, netflix, video game, listen to classical music, and more.

If I want to have even more fun, I’ll spend more money – other money -- on civil war tour trips, national park camping trips, eating at restaurants, snowbirding in Florida for the winter, driving off into the country, tackling home or truck improvement projects, and whatever else may strike my fancy. But I am crystal clear that these are all wants. The money I spend on them is separate from what it costs me to meet my basic living expenses. I don’t need the wants. And I don’t let them morph into needs – or even quasi-needs – by letting them slip into my basic living expense calculations or budget.

Even though my passive income is more than 3 times $15,000 a year, it gives me a tremendous sense of control and peace of mind to truly recognize that my personal basic living expenses are $15,000 a year. The rest of my money spending is optional, discretionary, for fun and unnecessary. So I keep it separate in order not to confuse myself into thinking that I actually need a lot more than $15,000 a year to be financially independent.

Have you thought of looking at it that way? How much income do you really, really need to declare yourself financially independent and start living free?

Alex in Virginia
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Old 05-12-2013, 06:09 PM   #2
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Wonderfully thought provoking post.

We have two separate portfolios. The first funds our normal lifestyle living expenses with about a 3% WR. We can enjoy life on this portfolio including nice vacations, normal home improvements, some toys, etc.

The second iportfolios our fun money or risk taking portfolio. We spend that on moreextravagant wants, such as a boat or vacation property or riskier investments such as a real estate or business investment.

What this gives us is the security of knowing that we could squander our entire fun money portfolio and still not ever have to return to w*rk.

(We are 43 and 42, BTW.)

AIR
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Old 05-12-2013, 06:39 PM   #3
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I totally agree that there is a difference between need and want. I do the mental thing all the time with other people, but I do it silently. I have a co-worker that I first starting working with in 05/80. She started working for the US Gov in the position that I did not become until 12 yrs before my retirement. I took an early retirement, so my pension was reduced 6%. Her pension was not reduced and it was higher due to her staying working there after age 55 and she worked more years than I did. They never had any kids and we have 2 plus we have a granddaughter that we spend money on. Our house is modest, but bigger than their house, which only has 2 bedrooms. We have never received an inheritance and both of our parents are deceased. We bought groceries and helped my mother-in-law in her later life. They received an inheritance from his parents (not sure how much) and probably from her parents also. She told me that she received $100,000.00 from her brother when he died. She constantly says that she needs to get whatever article of clothing, or shoes or accessories to match something else. She takes off work when QVC has their Silver days. Her DH is exactly the same as her. He buys clothing and shoes the same as she does and they encourage each other to buy. They also collect things. She has told me that their closets and the extra bedroom is stuffed. They buy new cars constantly. Also, neither of them cooks. They eat just about every meal out and he has to go to the mall every night, to buy a cup of coffee. She told me that she has to work her part-time job. I feel so sorry for them. I don't understand how they can enjoy a life doing the things that they do. If someone told me that I had to eat dinner out for the next year, I would scream. I much prefer eating at home. I also would scream if I had to go to the mall every night and had to shop as much as they do. I am not much of a shopper. I hate car shopping and we keep our cars 10-12 years. Anyway, every time that she says I need whatever, I am silently saying you WANT whatever.
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Old 05-12-2013, 07:32 PM   #4
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This has been a very hard lesson for my adult children to learn. I am hoping that now that each has turned thirty that this will be figured out soon...
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Old 05-12-2013, 07:51 PM   #5
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Great post.

For us the biggest "want" that we said no to was owning a car. As nice as it would be to have one, we live in a city where a car is completely unnecessary. The amount saved has probably translated into one of our rental properties over the years.

That said, we are happy to splurge on a number of wants - DW and I are off to Cambodia for short holiday later this week.
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Old 05-12-2013, 08:32 PM   #6
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This has been a very hard lesson for my adult children to learn. I am hoping that now that each has turned thirty that this will be figured out soon...
A lot of people never learn the difference. I was always fairly frugal, and lived below my means, but about 10 years before I retired I got even more focused on the goal of retiring as soon as I could pull it off financially. Having the time to do what I wanted to do became way more important than accumulating more stuff I didn't need. I'm sure we all know lots of people who continue to buy, buy, buy stuff that they don't need year after year, and then express amazement at how anyone can afford to retire anymore. I don't think a lot of these folks have ever really stopped to think about what changes they would need to make in order to be able to retire at a reasonable age - they just continue on autopilot, working year after year, and accumulating more stuff.
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Old 05-12-2013, 08:34 PM   #7
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Fantastic post ! I have always measured my 'wants' in *number of days work required*, using a rate of $200 / day. I still have my 36" TV (which is nearly as deep as it is wide !) because it wasn't worth me working 3 days to get a similar sized flat panel. It's only a TV ! I bought myself a tablet for my 50th birthday. Rather than using 3 days of retirement for an iPad I spent $150 and redeemed credit card points to pay for it - no freedom "spent" !

I had a realtor many years ago who said "everything is a compromise". Truer words were never spoken.
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Old 05-12-2013, 08:52 PM   #8
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Thanks for the well thought out OP. Lots of useful stuff there, for sure.
But, I'll be the wet blanket on one point: I just don't find the binary need/want distinction to be useful at all. Everything that exceeds a cardboard box to live in, 2000 calories per day to eat, and enough clothes to stay warm and out of jail is really just a "want." And "wants" have no upper bound. So, the challenge I think most of us face is 1) deciding what things are worth buying and/or deciding how best to spend a given annual/monthly amount of funds to get the most enjoyment. I find the "number of work days needed to buy" metric to be useful for deciding if a thing is worth buying, and the "would this next $100 buy me more fun if I used it to buy X?" (i.e. a marginal utility appraisal) as useful way of working through the best use of funds.

But, I'm still only semi-ER, so maybe Alex in VA's method does work better. And, regardless of how we arrived there, we appear to be close to the same spot: Driving an older car, having "just enough" house, and mindfully expending resources on things that bring us satisfaction.
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Old 05-12-2013, 09:02 PM   #9
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Ms. Suze was hitting this last night (along with retiring at 67).
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Old 05-12-2013, 09:16 PM   #10
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Good post. I always enjoy reminders to be frugal.

$15,000/yr. is quite low. Does that include health insurance? I'm pretty cheap myself and could get by on about $17,000/yr., but my actual expenses in retirement will be more like $23,000, because I have to tack on an additional $5000 or $6000/yr for health insurance.
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Old 05-12-2013, 09:18 PM   #11
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Great post. I have pretty much always LBYM but there was much room for improvement in the past. Recently I have really tried to drill down and separate my needs from wants while enjoying my life to the fullest. What you have stated here is in line with my thinking but you articulated it much better than I could have. I also see this as a key to my success and it is very liberating and empowering for me to put it into practice in daily life. Although I sometimes have nagging thoughts that I'm missing out compared to others but I'm content with my decisions.
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Old 05-13-2013, 06:15 AM   #12
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Her DH is exactly the same as her. He buys clothing and shoes the same as she does and they encourage each other to buy. They also collect things. She has told me that their closets and the extra bedroom is stuffed. They buy new cars constantly. Also, neither of them cooks. They eat just about every meal out and he has to go to the mall every night, to buy a cup of coffee. She told me that she has to work her part-time job. I feel so sorry for them.
I suppose we all know someone like that. One I see (fortunately, rarely) at work and he is one of the most unhappy people I've ever met. He's the one in his mid-50's and still living paycheck-to-paycheck, working three jobs to make the payments on his credit cards. Poor guy.

He's the one most stressed about the impending pay cut in July. But that's okay, he can have the overtime that I would have had to work if I stayed. Me, I'm gonna sign up for some photography classes and spend more time on that hobby and time in the parks and woods and with family and friends.

And I guess I'll have to struggle along without the 30 foot boat or jacuzzi with the TV that comes down from the ceiling and the new pickup truck and the backyard pool and all the other things that the guy at work is slaving to pay for.

Poor me.
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Old 05-13-2013, 06:54 AM   #13
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With no mortgage I am fairly certain we could live on $40k a year. I have never tested this theory. Ideally though I would love to retire on $150k a year, so I can live the life we are currently accustomed to in retirement. But then I do not want to work till 65,so will have to settle for far less.
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Old 05-13-2013, 06:55 AM   #14
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Fantastic post, thanks for sharing. You've done a good job laying out that we each have to define our own personal needs/wants and then plan our finances accordingly. One person's want is another's need with lots of tradeoffs regarding how we choose to live our lives to be considered.
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Old 05-13-2013, 07:30 AM   #15
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Nice post. Like was said here, you have to 'define' what your personal needs are, because actual needs are very minimal (basic food, shelter). I have also done this exercise but my (to be) retirement budget is larger. I include a line item for R&R (repair/replace) for car and house, health insurance premiums, and my discretionary budget needs to at a minimum be large enough to cover all out of pocket health care costs. These are some of my 'needs' as I consider them necessary to be self sustaining.
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Old 05-13-2013, 11:25 AM   #16
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Alex, here I am today trying to talk myself into a camcorder purchase (that is, of course, the camera, the memory cards, the cable, the new external hard drive) and I read this.

Dang you! Do I really need it? Am I actually good enough at editing to own a specific piece of gear like this? Won't the iPhone and the GoPro suffice?

Sigh...yes, yes, they will. Thanks, Alex.
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Old 05-13-2013, 03:48 PM   #17
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You should start a blog. You write well and have an interesting story to tell.

On the other hand, you probably have a larger readership here than the average blog does.

Keep posting.
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Old 05-13-2013, 07:28 PM   #18
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Nice post. I discovered that I had been LBYM for many years and that I could afford to retire. I don't put it into the yrs to work vs wants equation as explicitly as you do but I valued ERing while still relatively young (55 yr) and relatively healthy I do know that even now, 2+ yrs into ER, that I could cut back more and still be happy.

My DW is in the one more yr syndrome and I believe is not quite sure how to separate her needs vs wants. I think everyone needs to figure this out for themselves.
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Old 05-13-2013, 07:46 PM   #19
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Same here. I have always been LBYM all my life. Did not even know the LBYM concept until I joined this website. I have never had to separate wants from needs. Just bought what I needed, therefore wanted.

Can't wait to FIRE. Just trying to find the courage to make the jump.
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Nice post. I discovered that I had been LBYM for many years and that I could afford to retire. .
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Old 05-13-2013, 07:50 PM   #20
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Good post. I always enjoy reminders to be frugal.

$15,000/yr. is quite low. Does that include health insurance? I'm pretty cheap myself and could get by on about $17,000/yr., but my actual expenses in retirement will be more like $23,000, because I have to tack on an additional $5000 or $6000/yr for health insurance.

Hello, ER Eddie...

Thanks for replying to my post.

The short answer to your question is "yes, the $15,000 does include health insurance." You can find the full answer regarding my health care coverage, its cost and how I arrived at my health care insurance choices in the post I wrote on that subject entitled Taming my healthcare cost monster.

Take care,

Alex in Virginia
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