If you spend any time around the Financial Independence movement you quickly come across the 4% rule, which basically says you can withdraw from your investments 4% inflation adjusted forever without running out of money. The inverse of this is take your annual spending x25 and this equals the investments you need to cover those expenses.

There is some debate around the edges, but enough other people have written about this we’ll use this. More reading here and here plus a great podcast episode here among many others sources you can find with a quick google search.

It’s really powerful to understand this but to the uninitiated it can feel overwhelming: if a professional couple making $60k take home incomes with zero savings is spending essentially all of their money this means they need $1.5M to be financially independent, which if you have a savings rate of zero is unattainable and overwhelming.

At first glance it is hard to understand how making coffee at home vs Starbucks, cooking at home, or even a $300 a month car payment can even put a dent in this. But, it’s shocking once you understand this: for middle-class America the path to Financial Independence is most easily attained by spending less.

Let’s take that $300 car payment for an example. Even beyond factoring all the other costs of driving, avoiding a car payment alone means you need $90k less in assets ($300/mo x 12/year x 25) to support that cash outflow, forever. That is crazy. So is this table:

If you spend $3,500/month you need over $1,050,000 to be Financial Independent. But if you can spend $2,000/month you only need $600,000. This means you need $450,000 less money to support your lifestyle, forever.

It is just insane. And if you can live on $1,500 a month which is far more than anyone needs for a happy life, you only need $450,000 forever. Alternatively if you spend $2,500 but have $1,000 from renting part of your house or a part time job, you still only need $450,000 forever. 

And $450,000 just isn’t that much money if you are middle class in the US and you learn basic frugality skills and invest it. I’m sure the average person wouldn’t agree with me here, but check out this chart assuming 7% annual return: 

In the first part of this article I noted that if you dropped your spending from $3,500 to $2,000/month you need $450,000 less investments to be Financially Independent. But that’s only half the story: if you take that $1,500 a month and invest in, in 15 years you have $475,443 in investments. That’s a combined $925K net positive to your financial life!!!!  All from cutting $1,500 a month in spending and still being at a super comfortable level of living expenses.

If you don’t like my numbers for starting and ending spending, you can pick any that you want, but the math will be the same: $1,500 less in spending a month = $925k of incremental-needs-adjusted wealth. Boom.

And if you are someone making a middle-class income spending 100% or more of all your money, spending $1,500 less in a month isn’t that hard. But, it’s also not all or nothing. If you spend even $500 less in a month the math still works out to be $150k less investments needed + $158k of future invested value = $308k of incremental-needs-adjusted wealth. Your financial picture gets brighter for each step you take.

It is clear: Spending Less is an Unstoppable Wealth Building Machine.