The FIRE movement is everywhere these days and at times it seems like every possible related topic has been covered. But somehow, I haven’t seen a lot of discussion of the topic I want to cover today. As a finance guy, I’m all too familiar with how taxes work. When I was younger, that was one of the reasons I wasn’t too keen on getting a high paying, high commitment job – although I eventually found myself in one anyway. What my younger self saw, and what will ultimately lead to my much earlier than average exit from such a situation, is that there is a diminishing return effect. And that is especially true when you consider that in most cases, making more money requires working more hours. Those hours are literally the building blocks that make up our lives.
The more you make, the more of your money is taken away. It can seem fairly innocuous when you’re working forty hours a week and making an income somewhere in the average realm. In fact, all things considered, many people are breaking even or even getting more than they put in to begin with. But someone has to pay the bills, and if you’re working closer to eighty hours a week and making six figures (or more), that someone is you. For some folks, the reality is that when all taxes are considered, about half the money they earn is gone before they ever see it. So in another way of looking at the situation, they’re working twice as much, but only being paid for half the time.
Why would anyone take that deal? Sure, some people are workaholics. Some truly love what they’re doing to such an extent that they would be doing it even if it paid nothing. But for the vast majority of us, we do it because we want the money because we have expensive lifestyles to pay for. But what good is an expensive lifestyle if you’re spending well over half your waking hours working? What good is it if you don’t even get paid for a lot of those hours when all is said and done?
The cheaper your lifestyle, the less you have to work for free. Let’s say you only spend about $20k a year, as my ex-wife and I did when we were first out of school and clinging to the student lifestyle for a little longer so we could pay off our student loans quickly. If all you needed was $20k a year, you could work a job paying just a little more than that and live very nearly tax free (actually, you would almost certainly be getting back more than you paid in). In another way of speaking, your income efficiency would be at or around 100%. If you could tolerate that lifestyle, there would be an incredible upside in terms of having to invest very little in it. But now let’s say you spend $50k a year, which is actually still below average for United States households I believe. There’s no way you’re going to make that much without paying taxes. So your income efficiency goes down and your lifestyle costs you more of your life. And the trend continues until you’re well into the six figures and your income efficiency gets to be as low as roughly 50%. It can go even lower than that in places like California. And lifestyles tend to be a tad expensive there too, so it’s no surprise that those people are fleeing to Texas in droves.
It pays to keep your lifestyle expenses as under control as possible – quite literally. And remember, to the extent that more money correlates to more hours worked, you are literally paying for your lifestyle by working more hours (in other words, giving away part of your life) for free. This brings me back to the title of the post. How much of your life will you spend working for free? The foundation of the answer is in the cost of your lifestyle.
So next time you’re considering spending money on something, you may want to try framing the question this way. Would this purchase bring enough value into my life to compensate me for spending even more of it working for free than I am now? In some cases, the answer is going to be yes. Most of us have decided that being able to drive where we want, when we want, in a safe and reliable vehicle, is worth it. But you have to decide where to draw the line. Most of us aren’t driving Ferraris, for example. Today my suggestion is that you take the portion of your life you are literally giving away into account as you make these decisions. You only get so many hours before your time is up.