Just in case you were wondering, yes I type in Spanish (because Goggle Translate showed me how). What does that beautiful Spanish sentence above mean? Of course it means Sexy Finance Notes. You are welcome. Notas de finanzas Sexys. Make sure you try to say it like three times in an Antonio Banderas’ accent, preferably to your spouse or significant other.

In this series (the Notas de finanzas sexys series) we discuss other important aspects you need to mentally grasp to make sure you are truly making large jumps in your financial goals. See, the sexy series title makes all the sense now, right? With this particular post, we are going to deep dive into how massively important having a low monthly budget is to your financial future and the speed for which you can retire.

Budgeting is the ugly step child of the any finance conversation. Most people would prefer not to talk about it. And for most people, the idea of budgeting makes them feel oppressed, and depressed. But we need to acknowledge how super powerful a budget is, and not only a budget, but also cutting expenses from your budget (at least for a while). So, bare with me in order to visualize something that can help you blow your financial goals out of the water once you use it.

There are actually two benefits of cutting your budget, even if by a small amount. The first is you can invest more money (and make more passive income from those investments) because you didn’t spend the money. The second is you can save less money for your eventual retirement. Think about that, between those two benefits working together, you can magnify the speed you become financially free by a large amount. Having to save less (total) and having your investments grow faster at the same time means your freedom comes much, much faster.

In this post, we are only going to look at cutting a tiny amount out of a budget to emphasize the importance of its power. Specifically, only $100 a month.

See, that is not so bad, right? I’m sure you and most everyone can find a way to cut $100 a month, especially if you are really focusing on your financial future and lowing any financial stress.

For this post, we are going to borrower some terms and examples from the F.I.R.E community (F.I.R.E stands for Financial Independence, Retire Early). We are going to introduce into this post the term “Financial Freedom Number”. This number is the amount of investment assets you need to be financially independent and put yourself in a position to be “work optional”, which of course means you can retire and not work, if you don’t want to. If you want to work still, more power to you.

In order to determine your financial freedom number, the F.I.R.E community works off of studies that help determine the mathematical “safe” amount of money a person could take out of their investments for living expenses every year (while not taking out too much where they run out of money at some point before 30 plus years of retirement). The initial study is called the “Trinity Study” and of course subsequent studies have come out since then. But the overall conclusion of the study was that someone could take out around 4% (often more) a year from their investments and have a very high chance they would not run out of money.

So, if you had $1,000,000 invested, you could take out $40,000 of yearly income (40,000/1,000,000 = .04 or 4%) and safely expect your investment dollars to last for your potential retirement or work optional years (with maybe some minor tweaks year by year). This calculation does not take into account your ability to receive social security benefits, pension benefits, or other income sources later in life. This is purely if you had your investments produce enough income for you to live off them.

On the flip side, you can reverse this and say “If my yearly expenses are X, how much would I need to have invested in order to cover those expenses so I can not have to work anymore?”. This amount is your Financial Freedom Number. That math would be that you take your expenses ($40,000 a year in the above example) and multiply it by 25 to figure out how much you need. You will notice that $40,000 multiplied by 25 is $1,000,000. So you can take what your investment balance is and multiply it by 4% and get $40,000, or your can take $40,000 of yearly expenses and multiply it by 25 to get to $1,000,000.

In short, if you know your yearly expenses (because you budget), you can multiply those yearly expenses by 25 and that will give you your Financial Freedom Number, which is the amount of investment assets you need to cover all your expenses so you do not have to work any more (if you do not want to).

How does this apply to us reducing $100 a month and show its importance?

Well, think about it, for every $100 you cut out of your monthly budget (and leave out), you need $30,000 less in your investment accounts to reach financial freedom. How did I get that? If you reduce $100 a month from your budgeted expenses, that equals $1200 a year. $1200 a year multiplied by 25 equals $30,000. Or $30,000 multiplied by 4% = $1200 ($100 a month).

BOOOOOOOOOOOOMMMMMM!!!!!!!!!!!!!

Think about this. Every, single, time you reduce your monthly expenses by $100 (and of course leave your expenses lower by that amount) you reduce how much you need saved by $30,000. If you cut $500 a month, permanently, from your budget (maybe you pay off a car loan, sell a rarely used camper, or whatever) you reduce how much you need in your investments by $150,000 (30k multiplied by 5 just like $100 multiplied by 5 equals $500). These are real numbers and could easily help you retire 5 years earlier or more just by cutting out regular expenses from your monthly budget, that you do not need.

Would you rather retire 5 years earlier or have 5 subscriptions to TV show platforms that you don’t use often? Just saying.

But on top of needing less saved, which is huge, we also then need to notice that $100 per month (in this example) is then invested instead of being spent. If you invest that extra $100 a month, let’s say for the next 30 years, and you get a rate of return of 8% (net), which may or may not be accurate to what you actually get depending on your investments, that extra savings would also grow to nearly $150,000. If you invested the extra $500 a month example with the same equation and timeframe, that would grow to over $700,000 over that time. MOST AMERICANS DO NOT HAVE $700k IN ASSETS. SO THIS ONE CHANGE PUTS YOU FAR AHEAD OF MOST PEOPLE.

Even at $100 a month savings, that would be a swing in your favor of almost $180,000 of benefit between investment growth and less investments needed for retirement. At the $500 a month scenario, that swings in your favor around $850,000 to the positive.

Conclusion. Focus on your budget. For your happiness and mine.