A penny saved is a penny earned. Not really.
Is there really a difference between spending less and earning more? Of course there is. In one scenario you get to drive a brand new SUV…
Is there really a difference between spending less and earning more? Of course there is. In one scenario you get to drive a brand new SUV to work with shiny new rims and an obnoxiously loud exhaust pipe, and the other you’re po’. I don’t think I need to explain which one is which. No one would dispute this.
However 😃, there is one important assumption we made. The assumption is that being po’ (that’s short for “poor” if someone is unclear) is bad and driving an SUV is good. In other words, we are talking about a basic, familiar consumer lifestyle. That is probably a fine assumption. Nonetheless, what if you’re an effai seeker? Apparently it’s all the rage with millennials. You’d have to reconsider those assumptions.
The reason for this is very simple. If you are seeking effai, your goal isn’t to burn through as many resources as possible during your lifetime. Your goal is to get a minimum amount of resources you need — and as early as possible. That’s quite a different form of consumption.
So what gets you there sooner? By being “poor” you end up spending less money.
Spending less money means you require less money to live on.
Requiring less money to live on means you can save it up faster. That’s pretty simple math.
With this in mind, we can now return to the original question: Is a penny saved, as good as a penny earned? The answer to that is absolutely not. It’s far better.
Let’s take Hank and Lenny as an example (I have debated this with my friend Hank many times although I am somewhat misrepresenting his stance). For convenience, let’s also assume they have roughly the same standard of living costing $60k annually (or $5k monthly). They also save the same $3k per month. At that rate, and with some reasonable assumptions, it would take them about 16 years to reach effai (you can check for yourself here). If they started at 20 and keeping life circumstances constant, they’d reach effai at 36.
Turns out though, that Hank is also a very hard worker and got promoted recently. He also got a nice pay bump to go along with a fancier title and is now able to save an extra $1k a month. In other words, he is socking away $4k monthly instead of $3k. That brings his Time To eFfai (TTF 😃) down to 13.7 years from 16 — a savings of 2.3 years. Not bad!
Lenny on the other hand is a cheapskate. Instead of making more money, Lenny decided to cut his expenses by $1k (Let’s ignore the how for the sake of this article). What does that mean for Lenny? Since Lenny cut his expenses, he now lives on $4k a month instead of $5k. That puts effai 13 years away. That’s an additional 0.7 years sooner than Hank.
Additionally, since Lenny cut his expenses, by $1k without changing anything else, he just freed up $1k to put towards savings. Lenny is now able to also save $4k per month just like Hank. This makes effai only 11 years away — a full 5 years earlier then originally anticipated.
In short, each penny you save, from an effai view, actually has two roles. First, it’s a penny you don’t have to produce with your passive income anymore. Second, it’s a penny you can redirect towards savings — Increasing significantly your savings rate.
So, no, a penny saved is not a penny earned, it’s two!
There is actually one other way to look at all of this. I find this to be far more impressive to think about than 11 years versus 13.7 years. Consider instead how much less money you actually need. For example, let’s go back to Lenny. He went from spending $5k to $4k and increased his savings from $3k to $4k.
Now take the 4% rule. Oh? You’re not familiar with it? I realize that I haven’t written about it yet. I’ll summarize it super quickly for the sake of this article:
You can passively earn a dollar a month forever by intelligently investing $300.
Now take the 4% rule. By cutting $1k a month from what Lenny spends, Lenny does not need to intelligently invest $300k. In other words, Lenny just saved himself from saving $300k.
This gets a tiny bit better actually. You should never think of your retirement number in today’s dollars. You always have to take inflation into account. The $300k we just saved for Lenny is in today’s dollars. Since Lenny is retiring in 11 years — and with an inflation rate of 2%, Lenny shaved off a whopping $373k off his retirement number. Cha-ching.