Updated on 07.31.14

Is Living Cheap Really Worth It? Ask Alan and Bob

Trent Hamm

I was enjoying a rather brazen post at Personal Finance Advice on the topic of the utter simplicity of the basics of personal finance (it’s just spend less than you earn and invest the difference) when this comment, left by “StevenL,” really got me thinking:

I think this makes sense to a degree, but in theory what is the point of being rich if your plan is to live well below your means? To save a lot of money, to have it in the bank to continue living cheaply?

In one sentence, StevenL spells out the problem that many have with converting to a fiscally responsible mindset. If you’re earning $80,000 a year, shouldn’t you be living an $80,000 lifestyle? The actual truth of the matter is that well-managed personal finance means that by living below your means now, you can live beyond your wildest dreams in the future. Perhaps an example will clearly illustrate this principle.

Let’s take a look at Alan and Bob. Both are 25 years old, both are making $50,000 a year, and both will be receiving 4% raises each year. Alan believes that he should live a lifestyle appropriate to his income, while Bob believes that he should live a lifestyle appropriate to 10% below his income and invest the rest. So, at age 25, Alan spends $50,000 and Bob spends only $45,000 and invests $5,000 in a 10% mutual fund.

At age 30, Alan has been living a much nicer life than Alan, with the extra luxuries that his extra spending can afford. He’s bringing in $60,832.65 a year and spending every dime of it. Bob, on the other hand, has been socking away the cash at a rate of 10% a year, and those investments are earning him 10% each year. Bob’s total income is $63,593.36, but he’s still investing 10%, so he actually only spends $57,234.02. Alan drives his Lexus by Bob’s house every day, shaking his head and laughing at Bob’s cheap car. But things are about to change.

At age 40, Alan has noticed that Bob’s lifestyle is catching up with him. Alan brings in $90,047.18 that year and spends every penny. Bob, on the other hand, is still socking away 10% each year. He now has $116,733.77 in investments and is bringing in a total of $100,713.42 this year, combining his investment returns and salary. After socking away 10% of it, Bob spends $90,642.08, which is $594.90 more than Alan. They’re both driving Lexuses now!

At age 55, Alan is still driving his shiny Lexus. He made $162,169.88 this year and spent every dime. Bob, on the other hand, has $335,301 in investments and brought in a total income of $193,762.35. Even after socking away 10% of that, Bob spends $174,386.12, or $12,216.24 more than Alan.

Not only does Bob end up spending more than Alan and living a more luxurious lifestyle, he has a lot of money invested, while Alan has nothing for the future.

StevenL, the reason to save your money and live cheaply now is so that you can live a better, more independent life in the future. You’re choosing to be Alan when in the not-so-near future, Bob will be running laps around you in both security and quality of life.

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  1. Erik says:

    What about the argument that you’ll get more enjoyment out of your money while you’re young and spry (when you can travel or skydive or party) than you would when your body is rapidly disintegrating and all you want to do is bask in the recliner (should you even make it that long…)?

  2. Harm says:

    The column doesn’t say you shouldn’t spend ANY
    money when you’re young, just that you should save
    10%. One other thing, is Bob spending 10% of the
    income from his savings? If that is an IRA, it might
    be hard. Much better to keep reinvesting….
    Living like the grasshopper in the fable, eh, Erik?
    Believe me, when you’re 60 or 65, you (MOST likely)
    won’t be quite ready to “bask in the recliner”, LoL

  3. Wanda says:

    I always think that “I’ll never look as good as I do now… so I better get that cashmere sweater!” But (usually) the voice of reason wins out. ;)

  4. Terry says:

    I earn my state minimum wage and have student loan payments to make. How am I supposed to spend less than I earn and invest the rest???

  5. Joel says:

    Great Article.

    Terry, Sell things on Ebay, Day trade, maintain a blog. Find something you’re good at that you enjoy that doesn’t take too much time out of your day, and use it to earn a supplemental income. Also, take advantage of any government programs for low-wage earners to lower your expenses or increase your income.

  6. Shauna says:

    The principle makes a lot of sense, I just believe it can be taken further. I’m currently contemplating a career change that would allow me to make just about what “Alan” and “Bob” are making at the same age. The difference is that I am used to living on about $25,000/year and I intend to continue to do so and put the additional $25k towards debt reduction and savings. About 10 years of this will allow me to buy the loft of my dreams and enjoy a comfortable mid-life as well as retirement.

  7. divorced guy says:

    You left out the part about “live without the extras, save and invest, pay off the house early” and THEN get raped by the court system as the ugly EX wife, who never made a mortgage payment or paid a bill, gets 90% of the house equity, 35% of your income, and lives like a queen, while you eat dogfood, suffer bad health care, and live in a trailer house for the next 20 years. FORGET SAVING! Spend it…at least you’ll get to enjoy it SOMETIME in your life!

  8. Reality says:

    What about REAL people who only make 20-25K per year??

    “Let’s take a look at Alan and Bob. Both are 25 years old, both are making $50,000 a year, and both will be receiving 4% raises each year.”

    OK, What Planet are Alan and Bob living on?? I can’t be Earth because I dont know of ANY 25 year olds with jobs that pay $50,000 a year!!

  9. liko says:

    I was a below average student and was making $60k at the age of 25. Pretty much all my friends from school (average state college – WSU) made over $50k by the time they were 25. All it takes is a 4 year degree in MIS, Computer Science, or any Engineering major and it almost guarantees you that kind of a salary by the time you’re 25.

    Or, if you don’t like school just an union electrical apprenticeship and you’ll be make close to 80k by the time you’re 25 (my brothers did that).

  10. rk says:

    this is a good article, and I believe in setting aside 10% of your income yearly (more if you can afford it), but the problem is that few IRA’s pay 10% (most are 7 or 8%) and the market fluctuates a good deal. Also, there are very few industries where you can count on a yearly 4% raise.

  11. Claire Fuller says:

    I’ve been saving 10% ever since I was a school teacher at 24 yrs old making 20K/yr. My 403B mutual funds don’t make that much.
    Although my realestate did quite well during the boom.

  12. Steve in W MA says:

    You should be setting aside 20%, not 10%.

    the reason you do it is that your future earnings are not guaranteed and you need to pay for retirement.

    If you can’t afford to put 20% aside by the time you are 30 then you are on alert that you are in financial trouble and need a plan to get out of it within the next 5 years or so.

  13. Steve in W MA says:

    Realistically speaking, both of the characters in this little story are living very high lifestyles.

  14. deRuiter says:

    Terry #4. Get a second job, or get a BETTER job, sell some superfluous stuff, start a part time business in your spare time from your minimum wage job. do some baby sitting or dog walking to earn extra money. WHAT KIND OF A DEGREE, FOR WHICH YOU ARE DROWNING IN STUDENT LOAN DEBT, prepares you for a minimum wage job? Sounds like there is a problem with which you are not dealing. A person who makes only minimum wage is a student, or an adult with no sense or ambition, anyone can make more than minimum wage if they want to earn more money. Get work cleaning houses, weeding gardens, pick up aluminum cans and recycle them for money, DO SOMETHING!

  15. Rozann says:

    Years ago while living in WA state we knew a family, Dad was an othodontist, mom was a stay-home-mom, three children. Mom wore the same dress to church every Sunday the four years we lived there. I found out that she was frugal in many ways. I wondered what they did with his good income. After we moved away and began receiving their annual Christmas letter, it became clear. She was frugal in those ways so they could spurge on a winter skiing vacation to Austria, or a week long stay at Disney World, or a family trip to Hawaii. They took there children on fantastic vacations, and have them the gift of experiences. She was not interested in clothes, jewelry, shoes or any other “show off” sort of consumerism. What a lesson!

  16. Marie says:

    I noticed a typo: “At age 30, Alan has been living a much nicer life than Alan” – should be “than Bob.”

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