An article on the The Simple Dollar had examples of three families of what it was like to live on half of their income. Here’s the story for Living on the Tips.
Our family of four lives on less than 50% of our income without much effort. We have what we need and can buy most things we want. We have a nice house that we upgraded ourselves. We don’t need more stuff, we need more freedom to spend our time how we want. We don’t see it as a sacrifice to live on less. We don’t feel deprived. The sacrifice what we are making is trading our time for money as full time employees. Aggressively saving money is an investment in future options to stop trading time for money.
Budget
We don’t budget in the traditional sense. A more accurate way to say it is that we haven’t been able to follow a budget. We’ve tried multiple times over the years but were never able to stick with it. It was too much work and was too restrictive. It felt so confining and it made us feel like failures every time we blew it. Following a budget is like a following a diet, it is easy to start but hard to stick with long term. Instead of keeping us on track, the budget didn’t provide the feedback we needed. One unexpected expense or one bad month and we were done with the budget. It was too hard to recover.
If we don’t follow a budget how do we know we live on 50% of our income? We track our spending by using an online financial program. Once it’s set it up, the tracking is automated. The value in tracking is being able to easily find all your spending, income, and investment numbers in one place.
When we started tracking online, the program reported a low savings rate. For one thing the 401(k) investments were not included in income on the online financial program. We changed the way that we calculate savings rate to include retirement contributions as income and count the mortgage principal as an investment since it is building equity. The first year of tracking savings rate this way we found we were saving about 42% of our net income. This was much better than we expected but money was leaking out all over the place. There were some pretty big holes to fill and since we were tracking, we knew where to watch our spending more carefully.
The best tip for a high savings rate is to disappear money before you can spend it. We have automated investments that come directly out of the paycheck and we pull money out of each direct deposit into separate savings accounts and other investments.
How did we decide how much we could save? The strategy that we decided to implement was to live on one entry level income. We made this choice since we have kids starting in our mid-twenties. We knew that full-time child care could eat up a lot of the income that we could have made. So Mrs. LOTT stayed home with the kids and worked part time on nights and weekends as they got older. Then two things happened and our income started to increase. First, Mr. LOTT’s income went up as he gained experience and became more valuable at work. Second, Mrs. LOTT starting working more and more as the kids got older and started school, eventually working full time. The income increased yet we continued to live on the initial income, investing and saving any increase.
The next tip is to have to manually manipulate the numbers every month. The value in tracking is digging into the data. This isn’t for everyone, but if you like numbers it is a valuable way to see what is going on. Having to calculate savings rate in the spreadsheet forces you pull the numbers and that activity provides a feedback loop that helps you make adjustments to your spending without having to follow a strict budget. This forces data disfluency, helping to identify trends and patterns that the automated software will not find on its own.
We didn’t always save half our income
There were several years back in our budgeting phase where our spending was increasing and we weren’t really aware of it. We had no idea that there was a different way to live or do things. We didn’t know of anyone that saved half their income, paid their house off early, and didn’t accumulate debt. It seemed like we were doing ok because we were doing much better than our peers. We didn’t have debt, we were saving, we didn’t live paycheck to paycheck, we were able to put a 20% down payment on a nice house. Looking back, we were not reaching our potential for saving. Now that we save more and are focused on what matters to us we don’t really feel like we are sacrificing that much. While we still feel like we are toiling away at work we feel like there might be an end goal in sight due to our increased saving and decreased spending.
Mortgage
For the last few years we have been paying extra principal payments to pay off our mortgage faster. For some reason a lot of financial advice is against paying off your mortgage early. They say you can get better ROI in the market. They say you are going to lose out on your itemized deduction on your taxes because the interest is deductible (this was written prior to the new tax law for 2018, the interest deduction will be less of a factor now).
Paying off the mortgage in the next two years is our top financial priority. Saving and investing is less about potential return on investment and more about the feeling of freedom. Our mortgage is by far our largest expense. Paying it off will provide financial security in the event that we lose one of both of our incomes. Once it’s gone, we will have a large increase in monthly cash flow for other investments. Plus, it is very motivating to pay it off since we get paid on alternate weeks so we pay an extra mortgage principal payment weekly. Financial changes take time, so weekly progress is motivating.
Things we don’t do that others might see as a sacrifice
When we talk to people about the way we live, we frequently hear people say that they couldn’t do or give up things to live the way we do. We don’t go out to eat very often and we make the majority of our food at home, we don’t have our kids involved in over-scheduled in activities, we drive paid for cars (one of which is 15 years old), we don’t have expensive birthdays or Christmas, we don’t take huge vacations, we don’t have recreational equipment like a camper or a boat, we don’t go out on the weekends and drop a few hundred dollars, we don’t have the latest electronics or technology, we don’t have fancy new furniture, we don’t buy designer clothes, purses or shoes, we don’t have cable television, and we could go on. These things are not what is important to us.
Side Hustle
We don’t have one. Would we like one? Yes it would be awesome to have extra money coming in. Maybe this blog will be turn into a side hustle instead of just a personal online journal.
DIY
Yes, we DIY. YouTube makes you feel like you can do anything! One of the main things that we would do with more time would be to spend more time making stuff. There are some different parts to DIY. One is fixing your own stuff. Another is making new things. We do both if we can.
Take action today: Start tracking your spending online with an automated program.
Mortgage interest deduction:
This year would have been the first year that we wouldn’t have itemized our deductions on our income tax because we will not pay enough mortgage interest. This makes us looks way smarter than we actually are. We get the benefit of the standard deduction without having to pay the interest to the bank. Since we are paying off our mortgage early, have saved over $82,000 in interest payments versus saving less than $1,000 per year in paid taxes (from 2012 to 2017 the total was $4,600).
