America's Disgraceful Savings Rate

According to Trading Economics, in September 2012 the average american was saving 3.9% of their take home pay (also known as "disposable income" - what a monstrous term). The average income in 2012 was $42,693. That is a savings of $1,665 a year, or $139 a month.  5-6% is sadly what we're told by retirement planners, investment companies, bankers, economists, and everyone else we look to for guidance as an appropriate savings rate. Americans aren't even hitting that on average according to those numbers. Last year, - even while getting my expenses under control - I spent $32,500. $8,500 of that was paying off my car. This year The Frugal Beard is looking at spending $19,500-$23,000. I may go a little over, but not much. And that's for two people as I'm currently supported my significant other while she goes back to college. 3.9% savings rate is why the american people are loosing hope in ever retiring - It's a fixable problem, but they can't see the solution. And how could they? Not even the experts aren't willing to push the truth and marketing is pushing the blindfold back down constantly.

I'd like to make an important point before moving on. Sear this into your brain:

Your income does not determine how much you need to retire.

The amount you need to retire is based upon your expenditure.

It has been shown that reducing you spending is as great of a change, if not greater, than receiving a raise of the same amount. Why is that? By reducing your spending you are helping yourself out (at least) two fold: 

• Reducing yearly income needed in retirement
• Increasing available cash to put into investments

And, if available or applicable to you:

• Reducing your tax burden by increasing contributions to tax-advantage accounts
• Recouping money that would normally be spent on interest-bearing debts.

To make the math very easy to play with, NetWorthify put together an Early Retirement Calculator. Just be aware that the displayed savings rates of each country is out of date. Put in your salary information then the average savings rate of 3.9%, and then move that to, say, 25%. Big difference isn't it?. Lastly, put in 50% - which is easily achievable for most people. You'll notice that by increasing your saving rate, more than anything, reduces the number of years you have till financial independence. I'd like to point out that this doesn't mean you have to retire. It means you have financial freedom to pursue your dreams in any capacity you'd like. If that means you continue being on someone's payroll (or on your own payroll) that's fine.

The current savings rate for most Americans places them at 46-50 years of working till they can retire. Even at 6% (which is consider 'great' savings) there is 40-45 years of work left. This is a disgusting amount of time to reach financial independence. No wonder a lot of people think retirement is a pipe dream with these numbers.

Frugality is a Compliment

There seems to be a social stigma against being frugal these days. Hell, a year ago I think I was in the same boat! Frugal? Why would I want to be so stingy or miserly? I'm not poor!

This thought process isn't uncommon in our society. Frugality is mistaken for being poor, cheap or stingy instead of being responsible. This may be because people widely associate success, wealth and riches to how much someone outwardly spends - not saves. Like becoming House Poor in order to own an ostentatious home.

I recently had a conversation with a friend who didn't understand why I wouldn't replace some of my clothes because I had had them for about 3-6 years depending. They weren't worn out, faded or have holes them. They are perfectly functional, comfortable and still in-style shirts, coats, shorts and jeans. They still had good value. I told them that. "Yeah, but they're so old!" was their response. If they had worn out (like a recent pair of jeans of mine), I would quickly replace them. But replace good clothes just for the sheer hell of it? No thanks. Just seems a waste!

I've noticed this mindset carries over to all aspects of life. Everything is to be renewed and refreshed constantly. The throw-away society. Cars every 2 years, phones ever 1-2 years, clothing is purchased on a monthly or even weekly basis, new TV's, the latest gadgets, new shoes, appliances and equipment... We use something for a short while and toss it out or put it away forever in long term storage. It is like using a battery for only 20% of it's capacity and then throwing it away.

There is a huge feedback loop of wastefulness. Buying things makes people 'happy' for a short time and then it subsides and they have to purchase again for another high (it's actually an endorphin release!) - so society has created disposable everything so we can buy again and again (this also helps profits, of course).

Before I had started really looking at the world, I would unknowingly feed this addiction of my Significant Other's (to no fault of her own). If she were sad, we'd go shopping. Bad day? Shopping. Celebration? Cap it off with some shopping. It was classical conditioning, except everything was the trigger. The high of purchasing was the reward.

I currently drive a (paid for) 2011 Ford Fiesta. It is my last big consumerist purchase and I will drive that car into the ground - something I've never done with a vehicle before. My significant other recently sold her car and we are living as a single-car household and relying on carpooling and bicycling. We aren't poor by any means and could afford that second car, but we are frugal. There is more value for us being a single car house hold right now than having the cost and burden of a second car (and yes, cars are ALWAYS burdens or liabilities, not an investment.) We totaled 2012's total automotive cost of one of our cars in mid-2013 and divided it by 12 to get the averaged monthly cost of that car. It was $580. A month. The car payment was $271. Was a second car really worth 580/mo? Even without the car payment we were looking around $280 (factoring in insurance savings). It was a frugal decision to move to a single car - and in my opinion. A very smart, responsible one.

If we get to the point where we need a second car, we plan on paying cash for a used high quality car, probably from the 2002-2005 range that has good engine/transmission ratings, high gas mileage and low cost of ownership that is versatile. Probably a hatch back. Think Honda or Toyota.  

If we do make this purchase, it will not be a display of wealth or success in the traditional sense. People who learn of our purchase might think we're on hard times or strapped for money. They'll assume we took out a loan as well - because that's how you pay for a car in our society these days, after all. Few will think it was a responsible and economic decision with many benefits.

The definition of frugal is:

Frugal - Adj. - sparing or economical with regard to money or food.

That sounds pleasant, but lets also define economical so we have a good grasp of the full meaning of the frugal definition:

Economical - Adj - Giving good value or service in relation to the amount of money, time or effort spent.

I'm not sure why that's looked down upon! Sounds like a hell of a compliment to me. If someone met me and told me I was frugal, I'd tell them "Thank You!". We want economical cars and electricity. We want economically run businesses and economical sustainability. But from looking at the definition, these words can be interchanged pretty easily. Tell me the difference between a frugal car and an economical car (Really! In the comments below please. I'd love to hear your thoughts).

However:

Cheap - adj - Inexpensive because of inferior quality. Miserly; stingy; of little worth because achieved in a discreditable way requiring little effort.

I believe a lot of people have confused the word frugal with the word cheap and some people who label themselves as frugal are actually just cheap bastards in disguise. There is a line. I would not expect a frugal person to go dumpster diving or obsessively horde items because "it was a good deal!" or "it was on sale!" at the time even though they have no defined and justified need of the item. Cheap does not mean good value in any capacity.

Going forward, especially if you are just starting out a lot of people will probably see you as 'cheap' or 'poor' for some things you are doing. No cable? Poor. 7Mbit internet instead of 20Mbit? Don't want to go out to eat for lunch every day? Cheap. Just shrug these people off. There isn't even any need to confront them unless you think you can calmly and rationally explain your position in a way that would get them to change their mind. Realize that being frugal is rewarding in its own right and a huge compliment.

I'd love to hear some stories about what frugal actions you've taken to better your life that have been looked at as being cheap, stingy and miserly by those around you.