Phases of Reducing Spending

I believe that there are 3 Phases to the journey of reducing spending on lifestyle costs: Waste Elimination, Optimization and Misery. Today we will walk through each of these Phases and discuss why I personally am not a big fan of a long term (> 5 year) focus on spending.

PHASE 1: WASTE ELIMINATION

The first phase in spending reduction is Waste Elimination. This is by far the easiest and least difficult phase of reducing spending. This is why people who have recently discovered the concepts of Financial Independence start with this phase. During this step you identify and remove things in your life that you spend money on and don’t use (gym membership, magazine subscription, etc.). Most people who have not considered their spending before will be able to find several of these easily fixable situations. These items will not be missed and can represent significant savings.

PHASE 2: OPTIMIZATION

After all of the waste is removed, the second phase is Optimization. In this Phase you identify ways to save money on the lifestyle costs that are utilized. This step includes things like travel hacking, using coupons on groceries, happy hour specials at restaurants and matinee shows at the theater. This step is usually still implementable for most people. Typically Financial Independence believers can handle modestly more work/thought to continue doing the things they enjoy. This phase is not viewed as a struggle because material items and/or activities considered “valuable” are not removed. Often times FI folks enjoy the extra work that this phase requires because they feel like they are outsmarting the general public by getting “deals”.

PHASE 3: MISERY

After all of the spending has been optimized, the third and final phase is Misery. Now “Misery” is my personal term for this step. However, it’s much shorter than calling it “Discontinuing activities and disposing of material items that bring pleasure to your life to save money at all costs”. In this step people make choices to save money that downgrade their lifestyle. This includes things like moving to a less desirable low cost-of-living area, discontinuing hobbies due to high costs and changing their diet to only cheap foods. This step is mostly followed by folks that ascribe to Minimalism and/or Stoicism.

MY THOUGHTS

One of my main reasons for pursuing Financial Independence is to use money to make my life easier. Anything that resembles Misery does not seem to meet that criteria. In fact I find that there is an inverse correlation between effort and reducing spending over time.

I can appreciate Phase 1 and 2 and have employed them in my life, but these are relatively quick steps. I believe anybody should be able to move through those phases within at most a 3-5 year period of time. Once these Phases are over, I don’t believe the effort to proceed into and sustain Phase 3 is worth it.

Also, I feel that the Misery step does more harm than good and can actually hurt your chances of reaching FI. I believe this “saving money at all costs” mentality is a main cause of burnout with the FI community. Since most paths to FI take longer than 3-5 years, people start to feel progressively worse as they endure the miserly journey.

My recommendation to people on the path to Financial Independence is to capture the low hanging fruit of Phases 1 and 2 and then just maintain that level. Then I would move my focus to the Income or Cash Flow side of the equation where the sky is the limit.

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