The Spectrum of Personal Finance

About a year ago, I learned that an old colleague of mine had retired and become something of a “hermit.” He was living apparently completely off the grid and was building a cabin for himself on a piece of secluded land.

This gradually progressed into a conversation with another old colleague about that “hermit” and about how people can approach life in a very different way, so different that it feels almost alien.

I made the point that, in some ways, I appreciated the hermit’s life choices, and my friend responded by pointing out that I’m already halfway there. He’s aware, of course, that Sarah and I live far below our means and are aiming to retire when our youngest child leaves the nest (thereabouts).

I don’t think of our lives as being hermit-like at all, but I also see some differences between our life choices and those of most people our age. We’re still in our thirties. We have zero debt and a very, very healthy retirement savings. We don’t really engage in the more expensive hobbies and trends that many people our age fall into.

It occurred to me that the financial decisions that people make fall into something of a spectrum. At one end of that spectrum are people living paycheck to paycheck and accumulating debt. At the other end are people like my old hermit friend. We’re somewhere in the middle.

From the perspective of the paycheck to paycheck people, the hermit seems crazy. From the perspective of the hermit, the paycheck to paycheck people seem crazy. We’re somewhere in the middle and aren’t perfectly in sync with either group, but we can appreciate and get along with both.

I thought about this spectrum idea for days and eventually I started making up a list of traits of people at various points on this spectrum. At various times, I’ve lived at several spots on this spectrum myself, and I have friends and know people at virtually every point along it.

Here’s how I see that spectrum, with the chief dividing line amongst the band being that person’s savings rate. (Savings rate is the percentage of income that a person saves for the future.)

Red – Paycheck to Paycheck – 0% to 2% Savings Rate

People at this end of the spectrum tend to spend virtually all of their income each paycheck, with very little savings for the future for any reason. 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.

The exact lifestyle of people in this band varies a lot depending on their income, but in general their day-to-day lives are pretty expensive. They eat out a lot and fill their lives with as many perks and treats as they can fit in.

Often, people in this range live in the most expensive house they can possibly afford, drive the newest cars they can possibly afford, and have all of the latest stuff they can possibly afford. People in this range tend to treat their possessions as highly disposable, too, and don’t really think of them as long term investments.

In short, people in this part of the spectrum rarely think in a concrete way about their life beyond the next paycheck or two, at least in terms of how they’re going to pay for things. They just assume it’ll work out and that their “future self” will pay for it.

People in this section generally don’t read much at all, or if they do, it’s nothing having to do with personal finance. Fully 30% of Americans don’t read books, and many who do read only one or two books a year. It’s hard to really point to a personal finance book that describes this area of the spectrum.

I should know – this described my life for a few years in the 2000s. It’s a hedonistic lifestyle, one that involves a lot of daily short-term pleasures that cover up a great deal of underlying stress and worry.

This is the part of the spectrum where about 75% to 80% of Americans are. After all, the data shows that 78% of Americans live paycheck to paycheck.

Of course, there are people in this part of the spectrum due to life events and not necessarily by choice. If you’re in a cycle of minimum wage part time work, it can be very difficult to get out of this part of the spectrum, even if you want to.

Orange – “Normal” Retirement and Debt Freedom – 2% to 8% Savings Rate

Some people come to realize that living in the “red” part of the spectrum is a road to disaster, so they tweak their lifestyle a little bit. They don’t want to live paycheck to paycheck any more because it’s stressful and they want to have some semblance of retirement, but they also don’t want to radically change their lifestyle.

I call this the “orange” part of the spectrum.

People in this part of the spectrum generally don’t have a ton of debt. They pay off what debt they do have pretty quickly and generally don’t let it last too long. They’re usually saving for retirement at a pace that, if they save for 30 years, they’ll have a healthy retirement when they retire at a normal retirement age or a bit later.

They tend to go on nice trips and have some nicer possessions, and their day to day lives are a bit more frugal than the people in the “red” category. These people don’t eat out every day and keep a lot of things in the “splurge” or “treat” category to have on an irregular basis. However, they still live a fairly expensive day-to-day lifestyle and probably have some very consistent treats in their lives that have reached the point of feeling completely normal.

People in this group are basically forward-thinking versions of the “red” group. They want to have a very pleasure-filled day-to-day life, but they also recognize the need to protect their future a little.

If they pick up a book on personal finance, they’d probably look at something like You Need a Budget by Jesse Meacham or The Total Money Makeover by Dave Ramsey to move themselves from the “red” to the “orange” part of the spectrum.

I would estimate that 10% to 15% of Americans find themselves in this “orange” part of the spectrum, with the remaining 10% to 15% of Americans spread across the remaining “yellow” to “violet” portions. Let’s look at those.

Yellow – “Healthy” or Slightly Early Retirement – 8% to 15% Savings Rate

People in this group want to be able to retire a little early or with plenty of money in the bank. They like security and stability and they have some very nice visions about what their retirement will be like and they want to get there a little sooner than that.

To get there, people in this group consciously live a little below their means. They, too, have nice splurges like the “orange” group, but they tend to be rarer and their day to day lives are pretty frugal. They don’t go out to eat very often and most of their sources of entertainment are low cost or free. They’ll go on really amazing trips, but they’re irregular. They usually drive well maintained late model used cars when they could afford new and drive them until they’re worn out.

They tend to avoid day-to-day perks and lifestyle inflation. They make coffee at home rather than hitting Starbucks each day. They eat most of their meals at home, only going out when there’s a genuine reason to do so for a social occasion or to celebrate something notable.

I’ve noticed that people in this group tend to have read a few personal finance books, but they could be anything, because a lot of personal finance books orient themselves toward nudging people from the “red” and “blue” parts of the spectrum into this “yellow” part of the spectrum. 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 – Financial Independence or Early Retirement – 15% to 25% Savings Rate

These are people who want to either retire when they’re fairly young – 50 or 55 – or discovered these ideas a bit later in life or have a vision of doing something completely different with their life from their midlife onwards. I think this is the part of the spectrum that starts to seem “strange” to people at the “red” end of things.

People in this group do still splurge, but their splurges are often very practical and are directed toward useful things. They’re going to splurge on well-made versions of things that they use very frequently, for example. They tend to value reliability in the things they do have and don’t have a need to have tons and tons of possessions.

When they travel, it’s typically very experience-oriented and low cost. “Green” people are likely to do things like go backpacking in a national park or spend their vacation camping in a minimal way. They might do a big “once in a lifetime” trip, but even that won’t involve staying in five star hotels, but will instead involve staying off the beaten path in another land.

They own their own home and do as much of their own maintenance on it as possible. They drive used cars from reliable manufacturers, drive them until they’re worn out, and replace them with another used car from a reliable manufacturer – all paid for with cash, of course. They make almost all of their own meals, eating out only on the most special of occasions. They’re usually quite frugal with their day-to-day lifestyle, buying store brands almost exclusively and so on.

The types of books that would make the most sense to people in this group are books like The Millionaire Next Door by Thomas Stanley and William Danko or Meet the Frugalwoods by Elizabeth Willard Thames.

Blue – Optimizer (or High Wealth) – 25% to 40% savings rate

It’s at this “blue” stage where the actual process of optimizing one’s finances becomes a pleasure and a goal in and of itself. It’s also possible that people achieve this kind of savings rate simply through a high income, but find that they have more in common personality-wise with the “orange,” “yellow,” or “green” portions of the spectrum.

People in this group tend to love experimenting with frugality. They’ll take on all kinds of do it yourself projects for the joy of doing them and feeling in control of their property. They’ll build their own sheds and fix major home problems and even take a large role in constructing their own home, just because they enjoy the process. Rather than traveling, they’ll often plan “staycations” to take on projects like this.

They tend to live very frugally, but still would be making what would feel like roughly “normal” lifestyle choices. In terms of their day to day choices, they’d look a lot like people in the “green” band, but they’ve invested a lot of time and thinking into optimizing things and have squeezed out all kinds of nooks and crannies because they enjoy the process.

Early retirement and financial independence are not only on the horizon for these folks, it’s bordering on inevitable. 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.

Books that would really appeal to this group include
The Complete Tightwad Gazette by Amy Dacyczyn and Your Money or Your Life by Joe Dominguez and Vicki Robin.

I’d probably put Sarah and I in this group, or possibly in the next group, “indigo” (or, sometimes, closer to the “green” group).

Indigo – Optimizer-Philosopher (or Very High Wealth or Income) – 40% to 80% Savings Rate

At this point, the question of “why” starts to become very paramount in terms of saving more, and that “why” often has sources that aren’t related directly to accumulation of wealth.

A person at this stage spends a lot of time thinking about their life’s purpose and how to live it. 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.

People in this group tend to be very interested in knowing how to build and maintain every aspect of their life. They’re probably doing things like building their own home, doing almost every possible repair on any automobiles that they own (and nursing those automobiles along to a very high mileage to extract every dime of value), practicing subsistence agriculture or producing some extra to sell or trade and probably doing it with very high food production standards, and so on. They enjoy homesteading.

People in this group tend to spend their free time reading and thinking and working on very hands-on projects. If they travel, it’s in a very “vagabond” fashion with minimal planning and extravagance.

Books that appeal to them are philosophical books. Specific titles might include books like Early Retirement Extreme by Jacob Lund Fisker and Shop Class as Soulcraft by Matthew Crawford.

Violet – Walden (or Extreme Wealth) – 80%+ Savings Rate

If you’ve ever read the book Walden, or can envision someone who would enjoy being a “mountain man” or doing extreme homesteading and has little need for many material possessions, you’re probably thinking of someone who might fall into this camp.

A person in this group is someone who gets great pleasure out of doing basic tasks, or they have deep internal philosophical disagreements with mainstream culture. People in this group are optimizer-philosophers – the “indigo” group – taken to an extreme. Their lifestyle probably makes little sense to someone in the “red” or “orange” group. They might do things like live in their self-maintained vehicle or live in a self-built cabin in the woods.

I know a few people who would fall into this category. They usually tend to be well-read and well-spoken, but have some very firm principles and ideas that they stick to and live by. They tend to really enjoy doing manual tasks for themselves, even down to simple things like chopping wood. 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.

My experience with people in this category is that they tend to read original philosophy, like, say, Walden’s Walden or Emerson’s Self Reliance or original works in other areas, as well as really challenging books on whatever topic interests them at the moment.

They tend to see people in the “red” and “orange” category as strange as the people in those categories tend to see them.

Again, as I mentioned earlier, there are people who would be in this group in terms of savings rate due to high income or high accumulated wealth, but their personality is closer to “orange” or “yellow” or “green” or “blue” folks. Also, you’ll find some people in this group who actually have very little money at all but spend virtually nothing.

Where Are You?

So, where would you put yourself on this spectrum? 85% to 90% of Americans fall into the “red” or “orange” categories, but I’m willing to bet that readers of this site spread along the spectrum.

As a family of five, I’d probably place us somewhere around “green” or “blue.” If Sarah and I were without children, we’d probably be “blue” most of the time. If I were single, I’d probably be “indigo,” as I think that most of my worst remaining financial habits are done out of time crunches because I spend so much time on family commitments, and that would decidedly change if I were single.

I would say that when our family is in the “green” area or, at our worst moments, even sliding toward “yellow,” I tend to feel like we’re in the wrong place on this spectrum and start nudging hard back toward “blue.” On the other hand, if I’m reading a lot and reflecting a lot, I’ll nudge toward “indigo,” which doesn’t always work with our family.

I find that having an “ideal” part of the spectrum for ourselves is a good thing to have, because it makes this kind of thinking an easy tool for figuring out when things are out of whack. Maybe we’re spending too much and inching in the red direction, or maybe we’re being too extreme and inching in the violet direction. Figure out where you currently are and where you want to be and you can always use it as a guide.

If nothing else, it’s an interesting way to think about finances. You may find that some elements of this spectrum, which is just my own perspective on it, are different from your perspective, and that’s a good thing. This is just food for thought for thinking about different approaches to personal finance.

Good luck!

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