When I was reviewing our savings rate a few weeks ago and licking my chops about the $1k/month we recently freed up by paying off my student loans. I realized that the costs of raising kids eat up a lot of the things we were doing to speed up our Financial Independence timeline. Good thing they are adorable.
It is hard to frugal your way out of $15-30K in childcare costs (seriously, I don’t know how people can do the high end of that scale) and that is why we are firm believers in finding ways to increase our income.
That doesn’t mean we haven’t focussed some energy on optimizing non-income generating activities. With kids, we have to do it all to make Financial Independence a reality.
We frequently hear Financial Independence boiled down to a rule (with caveats):
Save 25-30 times your yearly spend and you have a pretty good shot at not running out of money before you die.
The steps are easy to say and comprehend:
- Get rid of all consumer debt
- Save a lot more than you spend
- Make more money
- Save that money
The implementation, however, is what separates the casual observer from the people who really want to walk this path. For the vast majority of people out there, changes need to be made to make this a reality, and some of them may appear to be impossible or difficult. Going against the norm is a common practice in the Financial Independence community, especially in some touchy areas (see housing and transportation).
I do feel like some of the changes are overblown, and the extremes often get popularized. Those extremes then turn people off of the idea of Financial Independence.
“How am I supposed to live with 5 roommates when I have kids”
“Biking to work isn’t possible for me”
Preach.
The extremes make for good headlines but are too “extreme” for large portions of the population, including yours truly.
5 Things we Optimize to Make Financial Independence Possible
1. Housing
Campers or tiny homes are not uncommon, but they aren’t necessary either. They are definitely not in our future. We live in a single family home that we had built a few years ago and that is our long-term plan as well.
It’s not the epitome of a frugal home either, it is a fairly nice house – granite countertops, wood and tile floors, etc, etc, etc. But it is also very modest when compared to our incomes. The bank would have gladly let us spend 28-35%* of our income on housing, we took a hard pass and decided to take out significantly less than we could have.
*By law, lenders can’t approve mortgages that would take up more than 35% of your monthly income. And most lenders stick with even more stringent requirements, limiting a mortgage payment to 28% of a borrower’s monthly income – Forbes Article
We currently spend under 12% of our pre-tax income on our mortgage, property taxes and insurance.
Obviously, the less you make the more difficult it can be to follow this guideline. Especially if you live in an expensive area and make below an average income. Sometimes the only logical solution is to make more money.
The biggest downfall for implementing this strategy is the costs/hassles associated with moving if you own a home. However, If you are serious about pursuing Financial Independence, it is going to be far more difficult to achieve if you are turning over 25% or more of your pre-tax money to put a roof over your head.
Big Decisions = Big Savings
Related: Top-Down Cost Cutting for the Average American
2. Transportation
This is another area where the extremes become popularized, and become impractical for most people with kids. For all the people that bike everywhere – I am truly happy for you! Saving money and being healthy is an awesome accomplishment. For everyone else:
You can FIRE with a car.
You can FIRE with a new car.
It is 0% practical for us not to have vehicles, we use them almost every single day. Transporting any number of kids under 10 without one doesn’t make sense to me. The extra time it would take to do (insert anything) isn’t worth the cost savings.
Also – We live in Minnesota. Nuff Said.
How we do save on transportation costs since axing the car isn’t an option:
Buy Used Vehicles
I don’t value a new car. My current one has its fair share of rust, but as long as it starts, gets me to the bus and allows me to pick up kid(s) in a timely fashion it will survive in this household. I have been thinking about the safety implications with kids in the car since it is a 2002 Honda, something I need to do some research on.
Public Transportation
I save $2,500 per year by taking public transportation to work every day and we used to save more before Mrs. AE switched to a job that requires her to drive more.
3. Investing
Investing is (or will be) the rocket fuel in our journey (the ball is starting to roll on its own after 4-5 years of pushing it). Finding ways to optimize every dollar is important, especially right now when it has a ton of time to perform those magical compounding doubles.
Minimize Expense Ratios, Fees, and Commissions
AKA – The bite advisors, brokers, and servicer take out of your account win, lose or draw. If we were pursuing a normal retirement (65ish), we probably wouldn’t need to focus as much attention on avoiding these costs*, but for the FIRE pursuit, every dollar counts.
*Now that I know these can cost you tens to hundreds of thousands of dollars, we would optimize no matter what. Can’t un-learn that information
Across all of our investment accounts, we optimize as much as possible while sticking to our investment allocation. That mostly means low-cost index funds (Vanguard and Schwab, but there are others).
Related – Portfolio Allocation: Getting Used to Risk
Use Tax-Advantaged Accounts
401K and Roth IRAs
We have been using the shiz out of tax-advantaged accounts for the last 5 years (Proof Below). Saving thousands of dollars per year now (401K) and likely in the future (Roth IRA). We are at a point where we need to start funding the “early” part of our plans so we won’t be contributing any more than we do right now as we make more, but we will still use these accounts for tax optimization.
Flexible Spending Account
Since we knew we were going to have out of pocket medical expenses the last 2 years we started maxing out our FSA account. With kids, we will likely do this to shed some tax burden for the foreseeable future. $2,650 tax-free dollars, not a huge win but it helps.
4. Food
Food is a touchy subject in our house, we don’t shy away from going out to eat or trying out new breweries. We also aren’t afraid to drop some money at the grocery store on the food we want (salmon anyone?).
In order to have those experiences, we do have to strike a balance with the rest of our food budget. 3 Techniques we used are outlined below:
Cut the Expensive Crappy Fast Food Meals
Spending money on meals that were not worth the price hurt my soul. As I was swiping the card, I knew it wasn’t going to be a satisfying experience. Combine that with the extra caloric fuel for my Dad bod and it was something that needed to go.
Poor planning was mostly to blame for eating out at sub-optimal restaurants. If we didn’t make it to the grocery store on Sunday before the week started, I would eat out more at work. If we didn’t have food thawed or the ingredients on hand, we would run up to the closest fast food joint.
This is a classic example of spending on priorities (sushi and good bear) while skipping the overdone and overpriced burgers.
Happy Hour Pricing
Speaking of sushi, I don’t think I have EVER paid full price for a sushi roll in my life. We are happy hour sushi hounds and will continue to be forever.
Seeking out restaurant deals has become a regular occurrence in our house since I discovered how much we were spending eating out. Groupon, happy hour or splitting meals for the win.
Cookouts Instead of Restaurant Trips
One good thing about having friends that have kids around the same age as ours is they also prefer to skip the restaurant for a backyard cookout. Cheap food, cheaper beer and we still get out of the house and have a good time.
5. Travel
Travel has been, (ahhhh) a little difficult to prioritize over the last 2.5 years with the pregnancy, newborn, pregnancy cycle in our house. But as soon as we are comfortable taking or leaving the kids (a no kids vacation does sound pretty good sometimes) we will be getting back to it.
Our travel optimizations center around what I would call “Amateur Travel Hacking” – we haven’t paid for a flight in a few years (but haven’t taken that many either) and just started to cycle through cards to get bonus points. We haven’t gone overboard figuring out all the best cards and optimizations (yet).
Once we need to start buying tickets for 3 or 4 people, I will step up my game to make family vacations a possibility.
List of the cards we have used so far.
- US Bank Travel Rewards (before I knew what travel hacking was)
- Chase Saphire Preferred (Took the bonus miles, then used the card for 1.5 years)
- Capital One Venture (50K Bonus)
- Citi Thank You Preferred (50K Bonus)
The last two cards we have taken out in back to back immediately after hitting the bonus spend requirements (we put literally everything possible on credit cards). I am currently on the hunt for our next card – with some prodding from my friend Financial Panther I may look at some business travel rewards cards next (Check out what is in his travel hacking wallet).
Another recent post that may help you on the Travel Hacking front Physician on Fire: Credit Cards for People Who Love Travel and Money
Oh, yea! This entire section should come with a big ass warning label that says
“FOR RESPONSIBLE CREDIT CARD USERS ONLY”
Take Aways
Some optimizations will work for you, some don’t.
Some align with your values, and some hurt your soul to think about.
There are a ton of ways to optimize your life to make Financial Independence a reality, it is up to you to apply what makes sense for you and/or your family.
If you want any more information on the above information feel free to leave a comment or reach out on my contact page and I will gladly help you.
we made it from zero to 7 figures in about 12 years without ever going to the extremes. it was just 2 middle class incomes and no kids and a big bull market. having paid in full house changes you. i’ll say that. good luck on the yellow brick road.
Thank you for the comment Freddy – that is an impressive feat on middle-class incomes.
Our mortgage is on the back burner right now, I don’t know what our long-term housing plans are so we likely wont be putting anything towards it.
Whoa, that’s awesome.
We currently have a 4 year old kid and, just like you and the author, we haven’t cut our spending to the bare bones, since it’s not feasible (we still live in the city, even if we have a home in a rural area, we still have 2 cars – husband is self-employed as well and has to go to his clients with a lot of chemicals, I’d rather have our ‘clean’ car for the kid and our regular trips etc.).
But we do work on increasing our income and keeping expenses under control.
Another area that’s saving us money and costing us at the same time is food. I cook at home, which saves money since we don’t dine out. But we use only fresh ingredients, daughter eats a lot of fruits (and has a taste for berries, which are incredibly expensive) so we break even. What we save on cooking at home we probably spend on my ingredients 😀
Nice job with these optimizations. The housing one is huge. 12% of your income on housing is really good. Most people pay a lot more than that.
I think traveling is going to be a tough one with kids. It’s going to be hard to get enough points to cover everyone.
We are definitely aided by above average incomes on the 12%, but a lot of people in our position will still go up close to the max spend. Not sure how people get by with the bite homes, taxes and transportation take.
Yea, it will be a challenge, we likely won’t do anything major until they are 4-5 years old so they can remember it.
Beer and travel are definitely our sacred cows too. Still spend more than we should, but thats ok. As long as you optimize other areas of your life, then you have the freedom to spend on a few things that really add value to your life.
Love it Mrs. WOW – Great minds
Hit your savings goals and the rest is guilt free spend!
Owning your house outright is the cheapest housing you’ll ever have. In 2016, the last year Mrs. Groovy and I worked, our fixed housing costs came to $4,496 (taxes, HOA, and insurance). This was 4% of our pre-tax income. And it would have been less if Mrs. Groovy and I worked the entire year. We retired on October 14. So I total concur with your analysis here AE. Stay well below the lender limit of 28%. Anything below 15% is dandy and will set you up for a nice FIRE run. Nice post, my friend.
Thank you, Mr. Groovy
4% is outstanding – can build some serious wealth spending so little on a major category. I am going to have to do some serious thinking on when/if we will attack paying down our house faster
Well done AE, we are taking a similar approach. Nice house in the suburbs, a few cars, etc… You don’t have to go crazy to make it work. Keeping housing costs low as a % of total income is key and I think you’ll find the travel is going to be a big challenge as the kids get bigger and they start asking about trips to Disney World like all of their friends!
The best route is to keep your costs the same and start increasing that income each year- good luck!
Our mortgage is the same as our actual living expenses and that’s with 60% of the mortgage paid off! So jelly of your 12%. We don’t live in a fantastic neighborhood either.
“We are happy hour sushi hounds and will continue to be forever.”
Lol! Yes! It sort of hurts because I’ll never go to a restaurant that has HH if it isn’t HH time haha.
Its always fun to read about someone doing similar things. My husband and I also had a modestly nice house built for well under what the bank would have loaned us. And I also consider myself an amateur travel hacker! I think my next card will be a chase ink business for the 80k points. Great post!
We do many of these things to optimize our savings. Some work better than others depending on where you’re at in life – I agree that it’s hard to bike to where you need to go with little children & cold winters!
My employer provides a “wellness benefit” of $500 per year to spend on anything related to improving employee wellness (massage anyone?). You’d be surprised how many people leave that money on the table because they just don’t get around to turning in receipts. I make sure to max it out yearly – I’m going to go to yoga class anyway, may as well get it paid for!
I like this post a lot because I feel like I really identify with it.
We recently discovered the FIRE community and have been reading blogs and listening to podcasts all over the place. I see a lot of people living at the extremes. Which is cool… I’m inspired by those who are living incredibly frugal lives or those who are solely income-focused. I’m finding takeaways I can use from both ends of the spectrum. For us though, we happen to be more in the middle.
We’ve made a bunch of optimizations, have increased our investing/savings a ton, and are being more intentional with our spending. We’ve made some big changes and it’s working really well. But like you I am not going to feel guilty if I enjoy a craft beer or nice glass of wine. We eat in waaay more now, but going out occasionally is something we value so we are going to continue to do so. The HH thing made me laugh because we definitely plan around those things when we can. We have 2 paid off economical vehicles. I don’t need to downsize to a bike when it’s not feasible for us (although it would be cool if I could bike to work).
Anyway, I enjoyed the post and agree that different families can FIRE in different ways based on what makes sense for them.