Spend One, Save One
Financial independence is neat, but what if you're a regular person who wants to adopt an easy personal finance strategy?
After all, financial independence is a sprawling goal that comes with many implementation questions. Amassing enough monetary assets to stop working feels like a dream ever out of reach of typical people.
There's always expensive crises, employers that don't pay workers enough, perpetually rising rents, and other setbacks that make financial freedom feel out of reach.
Enter the "Spend One, Save One" strategy. In short, it's where you save half of what's left after you cover mandatory expenses. The rest you can spend freely.
The main points of the strategy are that it's easily communicated, and it builds resilience for people whose finances would otherwise be wire thin. The goal is not early retirement/optional retirement, but instead to be more free to handle emergencies.
For example, if you have $600 income and $400 mandatory expenses, then you should save half of what remains and spend the remaining half as you wish. That works out as $600 - $400 = $200 remainder, so half and half means saving $100 and using $100 on discretionary expenses.
Discretionary Expenses and Mandatory Expenses
To understand "Save One, Spend One" you need to know the difference between discretionary expenses ("fun" spending) and mandatory expenses (cost of living).
I have an introductory article here that can serve as a jumping off point:
In my view, mandatory expenses are things like housing costs, utility bills, healthcare, groceries, and transportation. They're the essentials that you cannot escape paying for.
On the other hand there are the discretionary expenses. Things like clothing, dining out, hobbies, and recreation. They're the things you can generally control spending over, hence they're "at your discretion."
What precisely constitutes mandatory or discretionary expenses depends on the context. A new car may be a discretionary luxury for one person, and a mandatory tool for getting to work for another person. You have to apply your own judgement to the situation.
Personal finances are personal, after all.
The thing about discretionary expenses is that they can be pruned down when times are lean. You should be familiar with how much money you spend at your discretion. When there's an emergency, you stop discretionary spending to wrest control of the situation back into your hands.
Emergency Funds and Safety in "FU Money"
This strategy is about dealing with emergencies before they arise.
The goal is to escape the cycle of living paycheck to paycheck, by forcing yourself to accrue savings. Even small amounts like $25 a month is enough to help you weather problems, such as unanticipated car repairs.
After securing a state of some stability via savings, the goal is then to develop "FU Money."
FU Money is having enough money saved up to be able to tell exploitative employers "Screw you, I'm not doing that." If they don't back down, and if they call you on that, then you'll feel comfortable walking away because you have enough savings to last a while.
FU Money doesn't need to be extravagant, it can be something like a year of expenses. The goal isn't necessarily to quit working forever, in contrast with money for Financial Independence/Optional Retirement. For a ballpark example, $40k vs. $600k for FU Money vs. FIRE assets.
It's for people who find FIRE unattainable or undesired. Yet it still affords some degree of freedom to do as you wish.
FU Money gives you negotiating power when it comes to employment, and the ability to vote with your feet. It only needs to support you between jobs during layoffs and resignations. It doesn't need to support you through retirement.
Discipline in When to Use Your E-Fund
There's a problem with building up FU Money though.
A large pile of money seated in an account is a temptation to folly.
It takes discipline to keep your hands from straying and spending that money. Especially if you have an expensive month or two or three or four...
Recently my grandmother and I discussed her estate planning for her children. One of her largest concerns – rightfully so! – was that if she dumped a pile of liquid assets on them, they would quickly find something they "needed" to spend it all on.
It amused her that I had trouble comprehending the mundane branch of my family. I've been so disciplined with finances for so long, and I've never known what it's like to be a spender.
I therefore have little practical advice for preserving your emergency fund.
It's up to you to learn when to deploy emergency funds, and when instead you should strap down to absorb costs with your normal cash flow.
Should Your E-Fund Be Invested?
Nope! Not unless you're talking about the excess of 2 years of mandatory expenses.
That is to say, your priority should be to fill up your emergency fund bucket to last you a long while. I know people who have spent two years unemployed or longer. For the kind of person who would benefit most from "Spend One, Save One," asking them to get into investing may be a bit much.
This might come as a surprise if you've read my article about my personal approach to finances with the war chest. I keep only a tiny amount of cash on hand for emergencies:
However, my situation is not the norm. I can compensate for my risky decisions with multiple streams of income.
If you start reaching excesses of $60k-$80k in your emergency fund, your savings bucket is overflowing. You should dump your money into investments then.
Investing in low cost index funds is easier than you may think, and provides a decent place to park the assets you need not touch for years to come.
It's just not a priority to invest until after you've secured a commanding position.
Dual Income Streams
What if you find yourself in a situation with two considerable income streams? For instance, having both a lucrative passive side hustle and a full time job.
In that case, you might take the "spend one, save one" adage literally and devote one stream of income towards savings and the other towards spending and living.
Having two income streams like this makes it easy to delineate their boundaries and calculate numbers such as your savings rate. For example, if your spending income stream is double your savings income stream, then you've got a one-third savings rate.
Why the Name "Spend One, Save One?"
Imagine your usual pay is a handful of coins every week, as if you lived in historic times.
Then you luck into a bonus of two gold coins, worth significantly more than your usual pay. The prevailing advice is to spend one and save one, as this affords you better quality of life now and later.
Hence the name, although "Spend One, Save One" can easily be called "Spend Half, Save Half" as well. Though this "half" terminology makes it sound like the goal is a 50% savings rate, when in reality the goal is much less than that due to the mandatory costs being taken out regardless.
A 50% savings rate is by all means great, but it's out of reach for many people. You can't just cut costs to achieve that, you need to grow your income somehow.
Keeping the "spend one" terminology clarifies that it's about bonus money and excess income, not total income.
What to do With a Windfall or Bonus Payout
Take half of any bonus money and save it. Dispense with the rest as you please. In short, spend half and save half.
The purpose of treating windfalls this way is clear. You get to enjoy a sudden influx of cash, whilst at the same time still ensuring that some wealth sticks to your hands. After all, riches come and go – wealth is what you keep:
Windfalls are yet another temptation to folly, so heed the "Spend One, Save One" advice and hold onto what wealth you may.