The Signal and the Noise

I finished reading The Signal and the Noise by Nate Silver this week.  Normally I am a staunch advocate of borrowing books from the public library, but this is a book I own.  Each year my employer reimburses each employee up to $50 spent on educational materials.  The items must be approved in advance and a receipt must be submitted.  Although this book is only vaguely related to my job responsibilities, I was able to make an argument for it and get the book for free through this “Professional Development Fund”.  This is the type of job perk I was talking about in a previous post.  Know your perks, and take advantage of them often.

I really like people like Nate Silver.  It takes a colorful personality and a way with words to take what essentially boils down to piles of spreadsheets and make the data come alive by telling a story.  Not many of us would have the patience or the creativity to analyze years of baseball data in order to make accurate predictions about player performance, but this is precisely how Nate Silver made a name for himself.  He developed his baseball model in Excel while he was working as an accountant, which is funny because nobody could tell he was working on a personal project by looking at his computer screen!  The moral of this story is that spreadsheets are your friend.  It is worthwhile to collect data because of how much can be learned from it, but you also have to be able to analyze it and “play” with the numbers to uncover the stories within.

So far my story is one of above average (but not quite extreme) savings.  I’ve been collecting data in a home-grown spreadsheet since late November 2011.  Since then I’ve paid off ALL of my debt (over $50k between student loans and a new car) and maxed out my (early) retirement accounts by saving just over 2/3 of my take-home income.

I’ve also discovered trends in my spending that have helped me influence my own behavior to boost that savings rate.  One month I spent more on video games than groceries.  Now I try to limit the amount of money (but not time!) that I spend on electronic entertainment by borrowing games and waiting for deals.  Another month I spent three times as much on alcoholic beverages at bars and restaurants for half the volume that I enjoyed at home and with my friends in their homes.  Now I drink water when I’m out (unless somebody wants to buy me a drink/pitcher) and save a bundle!  Plus everybody loves a designated driver (which is probably why they buy me drinks those other times).  I was only able to discover these trends and track my initiatives accurately through the data I maintain.

Of course, Nate Silver’s recent book is all about prediction.  One of my spreadsheets is a year by year analysis of my 401k account.  It includes columns for year-beginning amount, personal contributions, employer contributions, returns, fees, and year-end amount.  I only have data points for two years so far, but can play around with those and other variables to predict my future assets and make informed decisions about retirement.

When I mention I’m going to retire early, many people don’t believe that I’m making an accurate prediction about where I’m going to be financially in 10-15 years.  They tend to dismiss the fact that it is entirely dependent on one variable: your savings rate.  But I’ve done my homework and you should too.  You should have more than a vague idea of the direction you want your life to take.  If you can separate that signal from the noise of consumerism, you’ll find it easy to make the choices that will really make you happy and stress-free.

You don’t even have to geek out about it like I do.  Just write down how much money you save (earn minus spend) each month.  Calculate your savings rate.  Then do it again next month.

Go on!

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