Early retirees Lauren and Steven Keys don’t accept many of the traditional savings strategies: tracking your expenses, budgeting, or even the popular ones. The first method pays for itself.
When you “pay yourself first,” you’re essentially turning your savings into a fixed cost; you decide how much you want to save and then you “owe” yourself that amount each month. Once you’ve paid yourself and the rest of your monthly bills, you’re free to spend any excess as you wish.
“Most people start with ‘how much money do I have to save?'” Steven told Business Insider. “We approached our finances from the complete opposite, which was, ‘How much money do I need to spend to be a happy, fulfilled person?’
For the Florida-based couple, who leaves full time working in their late 20s after saving most of their earnings, that number peaked at $26,000 a year.
“We just asked ourselves, ‘How do we make everything as cheap as we can without making huge sacrifices?'” Steven said. “And then we found that we were very happy making about $18,000 to $26,000 a year combined .”
Even as their salaries, which started under $40,000, increased over time, they maintained the same lifestyle, he added: “We thought, ‘Well, there’s no reason to spend more if we earn more if we are already happy. We’ll just save more and get to freedom faster.'”
The ‘wipe-out method’: Spend enough to live a happy life and invest 100% of the surplus
The Keys kept their expenses between $18,000-$26,000 a year, which works out to about $1,500 to $2,200 a month, and “wiped away” their residual income in investment accounts.
They invented their own accounting strategy”deletion method.” In a way, this means paying yourself last: You figure out the bare minimum you need to live a fulfilled life, and then sock 100% of the excess into savings or investment accounts.
Where your money “breaks” depends on where you are in your financial journey.
For example, if you don’t have an emergency fund, you can put your balance in a high-yield savings account designated for emergencies. Once you have enough money set aside (Experts recommend saving about three to six months of expenses), you can use the balance to pay off high-interest debt. When you are debt free, then you can roll your balance into an investment account where your money can accumulate over time.
The Keys maintain a $5,000 balance in their checking account, which is more than enough to cover their monthly bills, and as income from their various income streams comes in, that balance grows. At the end of each month, “we sweep all that excess money into a more productive investment account, leaving the checking account with a clean base balance of $5,000 again,” they wrote on their financial independence blog.
To work, this strategy requires you to spend less than you earn, they noted: “If you’re not yet at a point where your expenses are much lower than your income, then you need to work on that first.” .” But once you’ve created a gap between your income and your expenses, “consider ditching your budget entirely. It’s less stressful.”
When you wonder how little you can spend each month or year without feeling deprived, consider the freedom you can create for yourself by living on less, Lauren said: “Don’t think in terms, you can’t afford to buy things; but, you are buying your future again. You are buying time and freedom versus a new car or gadget. It’s crazy when you put those two things against each other.”
Tracking their net worth instead of their expenses
While the Keys have never tracked their spending, their net worth is a metric they keep track of every month. Between their real estate holdings, stock market investments and cash, their net worth stands at just over $1 million as of February 2024, according to investment account statements and property appraisal documents seen by BI .
“The reason we like net worth more than anything else is because it captures the whole picture and encourages big-picture actions that impact your total financial situation in a positive way,” said Steven.
For example, let’s say you’re paying off high-interest debt and automatically transfer $2,000 from your checking account every month.
“If you’re looking at how much money is in my checking account as your financial metric, that’s going to be very misleading because it looks like you just lost $2,000,” he said. “If you look at your net worth, you will see that this is simply a transfer of assets from one place to another. You haven’t lost any money at all. In fact, you made a smart choice by putting it somewhere where its yield is higher.”
It’s also motivating to see a number like net worth increase each month, added Lauren: “When we did our monthly checks, it was really encouraging to see how much progress we were making. It’s a nice boost if you’re struggling to see your choices add up over time.”