The Rules of the Experiment

I wanted to find how what the absolute minimum amount of money I need to live off of is. By knowing this I would be able to estimate how much I would need in savings in order to retire while keeping approximately the same lifestyle. I believe the typical calculation for annual retirement expenses is 70% of the money you need when you're working. You're eating out less (lunch counts), and commuting less. Some areas of expenses increase, while others decrease, 70% is just an average I read somewhere.

So I challenged myself to not spend any money in November that wasn't absolutely necessary. I would allow myself to spend money on transportation, food, the occasional cab ride, movie, book and to fix or replace anything that broke, but otherwise spend as little as possible. This meant ordering in less than I usually did, not eating out, and not spending anything frivilous. This would establish a sort of baseline of what I would need to retire.

My monthy take home pay is $3,000 (roughly*), and my goal was to have 1/3 or more of it left over as savings at the end of the month. This $3000 doesn't include what I put into my 401k or an employee stock purchase plan, which is deducted before I get my paycheck. I'm contributing the max to my 401k (about $400 a month), and about $300 a month to my employee stock option program, which earns 6% interest even if the stock plunders.

I did this to learn what money I needed to live on, and how much I could put into savings each month. I transferred all but $1000 that was in my checking account to my money market (savings) account at the beginning of the month so at the end of the month I could look at the balance to see how much more or less was in there.

The Results

Some expenses were unavoidable. My rent was $950, the Eletric bill, $50, and the phone bill $95 (Including DSL). That's it, $1095 of unavoidable expenses. $60 for a Metro Card would've been included, but I was laid off in the middle of the month.

This was actually helpful because it meant I would eat fewer lunches at deli's and sandwich shops near my job, and approximated more of a retired lifestyle. On the other hand, having happened in the middle of the month, I have an unclear vision of what it would've been like had I worked or not worked the whole month.

I also bought a keyboard for my home studio for around $150, and ate out three or four times, each time spending around $50.

At the end of the month, I had $120 in my wallet, $1710 in my bank account (meaning I had an extra $710), and $5 in change for a grand total of $835 remaining this month. I spent $2165.

I now have a picture of my monthly spending. I know how much I need to live on, and how much I can put into savings vehicles like the a 401k, IRA or Koegh, or any other investments I may want to make.

The Implications

I wasn't too far off my goal. $835 is 28% of $3000. Not exactly 1/3, but not so bad either. Also, if the keyboard really is a one time expense, and I move in to a less expensive apartment next year (I want to move to a different neighborhood anyway), I think I can do pretty well. Considering that the total savings is 70% of my expenses ($1535 / $2165) and 41% of my salary (using a salary of $3700), I'd say I'm doing pretty wel.

The 10 Year Plan

I have a 10 year plan that I've been explaining to my friends, some laugh at me, others don't believe it can be done, or if it can, that I can pull it off. It goes something like this.

• If I can save as much as I spend each month, then after a year I'll have 1 year's living expenses in the bank.
• After 10 years, ignoring compound interest, I'll have 10 year's living expenses saved.
• Now, if I can earn 10% interest on that money - somewhat unrealistic, but again I ignored compound interest for the 10 years I was saving, so in reality it's less than 10%, I can live off of my interest.

The actual math is more complicated and the numbers are over-simplified, but the idea holds true. I don't plan on actually retiring, just having a nice nest egg, and some financial stability, and most importantly, enough money to fall back on that I'm not worried about getting fired from any job, so I can be more selective in choosing a job, and more daring at work.

Update 4 of December, 2002: I was in Guitar Center today buying a $40 microphone. I tried out a few Jazz basses and saw one I liked for $1200. It sounded good, played good, and looked good. It wasn't great, it didn't speak to me, but it was pretty good. I wasn't really considering buying it, but then I thought to myself $1200... That's one month's living expenses! It's amazing how clear some things are when you can put them in perspective. By not buying a new bass I can live for another month, and forget about the effects of compound interest on that money if I put it into a 401k or IRA. By the time I retire that $1200 could be worth hundreds of thousands.

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