This weekend, we joined some friends to the Adirondacks mountains up in New York State. After a little drive, we were in the middle of nature, in the cold, cold, nature.
We walked the beautiful trails for over 3 hours and it got me thinking about the true importance of financial independence in my life. I will try to share my thoughts in a readable fashion, hopefully, you can find some value in my observations.
First off, nature is beautiful. I find it so relaxing and hiking is such a great hobby to have. When you think about low-cost activities, there is not much that can beat hiking. Apart from a small up-front cost for proper clothing and footwear, hiking can be done for free or a small park entry fee.
Having low-cost and free hobbies
Having expensive activities can be a huge drag on your financial freedom. I think that it is super important to follow your passions and hobbies but find the best way to do them.
Of course, everyone has some costly activities. For us, it is snowboarding and skiing. A single day can cost anywhere from $0 to hundreds of dollars. Some rent mountainside cottages or hotels for the night, eat and drink at the restaurant and go to the biggest hills in the county but it is not the only way to enjoy yourself.
We go skiing at local hills for under $50 a day and usually use coupons and promotion to save on the lift tickets. Another great way to practice this sport is to ski uphill or walk up and then ski down which is generally free to do. I highly recommend you shop for gear off-season when the promotions will be greater or look into used gear.
When we go hiking, we generally keep expenses to zero and I think it is important to have a list of free activities you enjoy. The American way of spending to have fun is unsustainable and there is no formula that says that spending more with equal more fun and happiness. I drew a simple graph below to show exactly how money spent correlates with happiness.
Simple chart to show how money spent correlates with happiness.
As you can see above, free does not mean boring and expensive does not mean fun. Find what you like to do and then find a cheap way to do it. Having this ability will not only increase your saving rate but also lower your future expenses. If your goal is to retire one day, doing so while enjoying the many luxuries this world has to offer will probably cost you dearly. Either you will need to work much longer before retiring, or you will run out of money.
In the chart below from FIRECalc, I looked at the 116 possible, 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending $40,000 each year thereafter. This would be a healthy spending amount, in my opinion, that should let you enjoy a middle-class lifestyle without running out of funds.
For those of you that never tried this tool, FIREcalc is a retirement calculator that uses Monte Carlo simulations to see how your portfolio would have withstood the different periods of time throughout history. If your retirement strategy would have withstood the worst ravages of inflation, the Great Depression, and every other financial calamity the US has seen since 1871, then it is likely to withstand whatever might happen between now and the day you no longer have any need for your retirement funds. It assumes a 75% stock portfolio with an average expense ratio of 0.18% ad an inflation rate of 3% starting in 1900 and counting 30 years of retirement in 116 rolling periods.
In this scenario, the lowest and highest portfolio balance at the end of your retirement went from $-400,986 to $5,679,475, with an average at the end of $1,845,488. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 94.8% which I would be comfortable with in my own retirement. Failures, in this case, would happen if one retired just before a large drop in the market such as in 1929 or in 2000. To visualize the chart below, FIRECalc advises to not follow any individual line but to look at the mass of lines. You can get a clear visual representation of how frequently your strategy would have failed (dropped below zero) or succeed.
The objective of presenting the information this way is to allow you to get a “big picture” sense of the way your strategy would have performed historically.
Withdrawing $40,000 per year (with inflation) out of a $1,000,000 portfolio historically had a 94.8% success rate. Use it for yourself to see how your scenario plays out. Source: FIRECalc
Now in contrast, if you wish to own a jet-ski, have an ATV, and drink cocktails every night to entertain yourself, you might end up spending a little more than $40,000/year. To calculate this very basic example, let’s say you have a loan to pay for a $13,899 jet-ski, your monthly payments would be around $268.71 (assuming 6% APR for 5 years).
On top of that, you would finance a $16,599 ATV with a monthly payment of $320.91 and would spend $10 a day on a cocktail. You quickly see how this all adds up. On top of that, you would need to pay insurance, gas, maintenance, storage fees… Let’s just assume your lifestyle costs now $20,000 more than our simple middle-class example, do you think you would ever run out of funds?
Here is how your portfolio would have fared in each of the 116 cycles. The lowest and highest portfolio balance at the end of your retirement was $-3,316,154 to $3,868,324, with an average at the end of $210,483. FIRECalc found that 57 cycles failed, for a success rate of only 50.9%. It would basically be a flip of a coin.
Withdrawing $60,000 per year (with inflation) out of a $1,000,000 portfolio historically had a 50.9% success rate. Use it for yourself to see how your scenario plays out. Source: FIRECalc
Having the flexibility
As shown above, your withdrawal rate can greatly change the likelihood of your retirement. Discovering and developing low-cost hobbies will allow you to live on less, increase your savings rate, and ultimately, live on less in retirement. Having the flexibility in your budget is a huge advantage, not only in retirement but throughout your whole life.
Hiking was just my activity for the weekend but there is a ton of things to do for a very low cost, here is 15 easy ones fo you to try:
1. Learn New Things (free online or with friends)
2. Gardening (a few cheap packets of seeds, and a bit of dirt. You can even learn gardening online)
3. Camping (tent, snacks, drinks, maybe a small park entry fee)
4. Board Games (buy secondhand board games or lookout for sales)
5. Free Community Events
6. Yoga (use videos on Youtube to learn and master some yoga positions, no need for any membership)
7. Writing (from blogging to writing a book, there are lots of different ways to enjoy writing. You might even earn a few bucks!)
8. Learn To Dance (use Youtube videos and tutorials to teach yourself new dance moves)
9. Reading (great way to exercise your mind. Checkout your local library or keep reading blogs for free)
10. Explore Where You Live (every street, tunnels, and bridges in the area you live in, can be fascinating)
11. Visit Local Museums (museums usually offers free entry on certain days)
12. Listen To Podcasts (funny podcasts, educational podcasts, podcasts with celebrities, even financial independence podcasts!)
13. Cycling (If you don’t have a bike yet, borrow one or find a used one for half the price of new models)
14. Play a Ball Sport (sports like soccer, baseball, or tennis are all really cheap to play and you can find used equipment easily)
15. Geocaching (geocaching is a fascinating and exciting hobby that costs very little, all you need is a GPS capable device, they’re free apps for your phone and plenty of adventures to go on)
Find what you like to do and find a cheap way to enjoy it. You will live a long, low-cost, lifestyle full of excitement and savings. 🙂