I love reading The Simple Dollar, and Trent Hamm's articles in particular. He offers great insights into saving money in practical ways, which I appreciate as a mother to young children. Sometimes his articles are more philosophical, such as a recent one called 'The Spectrum of Personal Finance.' It got me thinking hard about my family's savings rate, which is something I need to do more often.
The idea of a savings spectrum, as described by Hamm, intrigues me. It makes it easier to understand the differences between households and how one can save so much more than another, and how lifestyle choices affect that. Seeing an actual savings rate portrayed in percentages is helpful too; it makes it easier to see where I fit in, relative to where I want to be -- and what I need to do in order to get there.
Hamm's finance spectrum consists of seven categories. These are differentiated by colors.
RED are those people living paycheck to paycheck, with a savings rate of 0% to 2%. These people usually have nice things, expensive homes and new cars, take swanky vacations, and treat their possessions as disposable. This comes with a downside:
'They’re usually carrying some debt and paying it down slowly. They typically struggle mightily to come up with money during an emergency and usually deal with emergencies with more debt by putting it on a credit card and then paying that debt off slowly.'
Shockingly, this describes 75 to 80 percent of Americans.
ORANGE has a savings rate of 2% to 8%. These people plan to retire at a normal age (around 65) and do not want to compromise their lifestyle. They still have nice vacations, new cars, big houses, but are a bit more frugal in day-to-day life. Hamm estimates that 10 to 15 percent of Americans fall into this category.
YELLOW folks save between 8% and 15%. They may plan to retire somewhat early, want a comfortable lifestyle, and so live slightly below their means (i.e. making coffee and meals at home instead of getting takeout).
'A large portion of the personal finance books you see in libraries and bookstores are written with this area of the spectrum as a destination.'
GREEN is the financial independence / early retirement crowd, with a 15-25% savings rate. These people want to retire in their fifties, so they are frugal on a daily basis, although willing to splurge on high-quality, useful items. They do maintenance on their own and take rustic vacations.
BLUE are what Hamm calls the optimizers, saving up to 40%. These are the real frugality experts, who take pleasure in DIY projects and squeezing savings out of every possible place in their lives. These people are resilient: 'Their lifestyle can tolerate major twists and turns, and they’ve usually got a very healthy amount in savings to handle almost anything that might happen.'
INDIGO save up to 80% of their income. In order to do this, one has to spend a lot of time thinking and planning financial decisions. These are homesteaders, extreme DIYers, true minimalists.
'There’s usually a development of a set of strong internal principles which that person tries to live by to the best of their ability, and those principles often aren’t in line with what’s 'mainstream' in society.'
Finally, VIOLET are the 'Walden' crowd, the hermits and recluses willing to remove themselves from ordinary society, and saving more than 80 percent. This sounds a bit like my parents, living in the forest with no internet or TV, chopping firewood for their cookstove, and eating their meals by lamplight.
'They often try to avoid wasting anything, which can end up making their homes look like a shack or a rust-bucket on wheels, but those homes and vehicles are usually incredibly functional and they can explain every square inch and detail of them. They tend to have a deep understanding of how almost everything works that they own, but they’ll eschew a lot of things that people in America usually take for granted, like internet or some utilities.'
I'd have to put my family in the yellow group, which doesn't make me terribly proud. I'd rather be green, or even blue, but I think it's hard with young children. (Not that I'm trying to make excuses -- there definitely are places where we could tighten things up significantly.)
I liked one point Hamm made, that one's place on the spectrum is not static or permanent; we will sit at different points throughout our lives, according to our circumstances. This reassures me somewhat; for example, once my youngest kid is in school, I won't have to pay for childcare anymore. As our kids grow older, we'll be able to travel off the beaten track more easily. (Camping with diapers is not fun.)
Having a spectrum makes it easier to set goals, too. Every percentage point increase in savings moves one closer to a more desirable category. Where do you fall along this spectrum, and where would you like to be?