thoughts on: My deprived life, How we Saved..., yearly budgets, blog in general

[clearview]

I discovered this blog a few days ago and i've been reading it for a few hours a day now. (If you are interested in how I discovered it: I saw "how to make it on Craigslist" on the priceonomics site, which led me to the site of the author of that article, recraigslist, which then led me to MMM)

first off, i'd like to say that I admire what MMM has accomplished, and respect his work-ethic and do-it-yourself attitude. Although I haven't been able to do what he as done, and I don't do things myself as much as he does, I do think a lot like him. In fact when I was in school my plan was very similar to his. I planned to work and buy up real estate, then live off the rent when i got the mortgages paid off. I also wondered why households with 6-figure incomes couldn't save any money. I mean there are families of 4 getting by on under $30k a year, why can't you live on $40k or $50k? Sometimes when I would ask one, they would say that "as your income rises your expenses rise", which I disagreed with.

This was in the early 2000s. The real estate market was booming and the job market was great. I was optimistic and had a great outlook on life. I even bought a condo during my second year of college because it was cheaper than renting, and got roommates, who paid me rent. by the time I finished college and law school, the real estate market and economy crashed, and I couldn't find a decent job, and couldn't sell the condo.
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So now to the "complainypants" portion..

While what MMM has accomplished is exceptional, and puts him in the top 5%, but, I think if you look at it in simple terms, what he did along with Mrs. MMM,  in 9 and half years was to live off of less than $50k a year and save and invest the rest, which enabled them to save and invest over $100k a year during the last 6 and half years of if, which amounted to about $800k with the favorable gains on investing in the tech and dotcom boom and real estate. Since then he has been retired and living off of the returns on his investments. As long as the assets return at least 4% they won't be diminishing their capital. 4% of $800k is $32,000 a year.

I guess what's amazing about his strategy is its simplicity. There wasn't really any magic. The problem isn't living on $30,000, the problem is that not very many households can pull in $150k+ each year, or even a quarter of that ($38,000 after taxes). Someone who could only save $10-20k a year wouldn't be able to retire until social security kicked in. (you'd have to save $25k a year for 32 years to save $800k)

The other thing, I'd like to point out is something he touched upon in his article about "forcing cash flow" and such, and that is the opportunity cost of living in a paid-off, $400k-house. For example, you could buy some rental-property and make over $24,000 a year from the $400k. (If you used the 1% rule, you should get $4,000 a month in rent, and half of that (according to 50% rule) is $2,000 month). And with MMM managing and maintaining the property with his own hands, he'd probably make much more.

A $400k 30-year mortgage at 7% would add over $32k a year to your expenses, plus private mortgage insurance (PMI) if the bank required it, and when you add the $28k you are spending to that, you are really living on the equivalent of over $60,000 a year AFTER taxes, which is like $70,000 a year before taxes

I only point this out to say that I wouldn't say that you live on $28k a year when you live in a paid off home. In this case, $28k wouldn't even cover the mortgage.

[matchewed]

I think the claim that not very many households can pull 38k a year is erroneous. Given that the median income is 53k then more than half of the households in the US pull more than 38k. That is in fact very many. You seem to accept one of the major premises of the blog, we live a life of excess and life can be lived for quite little in the US but then miss the fact that we're a very rich country with high incomes. Sure bad things happen, sure a certain percentage of the population won't be able to replicate this exact scenario, but a large percentage can.

As to the rest of your objections in the real estate side of things I will have to defer to someone more knowledgeable than myself. The only thing I can say on that one is that why would you assume PMI, a frugal person would avoid that. There will be plenty of examples of people here who do not own homes free and clear who live on much less than 70k.

[clearview]

Please don't just focus on the numbers and examples, but the general idea, the big picture.

Even with $53k a year, and you don't own your home free-and-clear, lets say you pay only 15% in taxes, so you are left with $42,500 a year.. So, considering that MMM lives on $28k withOUT rent or a mortgage, can you save $20k a year with housing costs? Can you live on $22,500 with housing costs?  It will take you 40 years of saving $20k to save $800k. Most likely you will work until Social Security kicks in or at least until you pay off your house. (well, actually most likely you won't even be able to save $20k a year out of $42k to begin with)

And I haven't mentioned that a person working has lots more work-related expenses than a semi-retired person with a mostly passive income. Even if the expenses are deductible they just reduce your taxes (if your tax is 15% then each one dollar will save you only 15 cents in taxes), but most aren't deductible. These expenses, especially commuting, add up to a few thousand a year
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PMI isn't optional. Banks make you pay for it. It's insurance for them. Sometimes they'll waive it with a big down-payment (over 20% I believe).

Anyway, I wasn't making "objections" about the real estate, I was simply saying that living on $28k with a paid-off $400k-house, isn't living on $28k . Its like living on $60k after taxes. That's all i'm saying. (you could argue that its like 50 or 52, but that's missing the point)

you have to factor in the "cost" of sitting on that $400k that you would otherwise be investing, which, according to posts on MMM, 1%-rent rule is $4k a month in rent, and according to the 50% rule he would spend $2,000 on taxes, repairs and maintenance, months when the properties are vacant, legal costs, etc.. and keep the other $2,000

[the fixer]

Please don't just focus on the numbers and examples, but the general idea, the big picture.

Even with $53k a year, and you don't own your home free-and-clear, lets say you pay only 15% in taxes, so you are left with $42,500 a year.. So, considering that MMM lives on $28k withOUT rent or a mortgage, can you save $20k a year with housing costs? Can you live on $22,500 with housing costs?  It will take you 40 years of saving $20k to save $800k. Most likely you will work until Social Security kicks in or at least until you pay off your house. (well, actually most likely you won't even be able to save $20k a year out of $42k to begin with)

I would nitpick your numbers a bit, but yes you can live on this much. My wife and I come close to doing it if you don't account for our expensive outdoor activities and organic/free-range groceries (which we would replace with cheaper ones if we needed to). We don't own a house and rent a spartan 1-bedroom apartment in downtown Seattle, a place where driving a car is hardly ever needed. If we got rid of the vehicle, which for us is really just an outdoor expense, we'd save more. To get expenses this low takes a lot of lifestyle engineering, but it can be done if it's made a priority. Jacob from Early Retirement Extreme was truly extreme, engineering a lifestyle that cost only $7k per year. And he's not the only one, I've met full-time vandwellers and other types of vagrants-by-choice with ridiculously low expenses.

But you're missing something key here. If my wife and I only spent $22.5k per year, we wouldn't need $800k to retire. We would only need $562k (4% of $562k == $22.5k). With a 7% after-inflation return and without considering the effects of dollar cost averaging, it would only take 16 years to save this much. Thus the post about how it's all about the savings rate.

Anyway, I wasn't making "objections" about the real estate, I was simply saying that living on $28k with a paid-off $400k-house, isn't living on $28k . Its like living on $60k after taxes. That's all I'm saying. (you could argue that its like 50 or 52, but that's missing the point)

you have to factor in the "cost" of sitting on that $400k that you would otherwise be investing, which, according to posts on MMM, 1%-rent rule is $4k a month in rent, and according to the 50% rule he would spend $2,000 on taxes, repairs and maintenance, months when the properties are vacant, legal costs, etc.. and keep the other $2,000

You are correct that MMM's house at the time of the post you're referencing was pretty lavish. He's in the process of downsizing to a smaller place.

You're close to realizing something else about MMM that's important to keep in mind: many of his tactical suggestions come from an experience of homeownership and lots of space. For instance, building your own gym instead of having a gym membership makes perfect sense if you live in a giant house. For someone like me, space is at a premium so that becomes a less viable option (not impossible, but it's something he doesn't address because it's not his expertise). But just because MMM did it with a giant house doesn't mean that's required... it's just the way he happened to do it. Others of us are doing things differently.

He's said before that it's not about taking his life literally, it's about taking the lessons and applying them to your own life. You might be in a situation where it's impossible to do things as well as he did, or maybe you're in a situation where you can do even better than him. MMM's not perfect either.

[Cromacster]

If you put atleast 20%, you won't pay PMI. 

Anyways, I do agree with what you are getting at.  My spending is starting to reach MMM levels at around 32,000.....if I don't include my mortgage and interest.  If I include those items its at 43,000.  And while some include mortgage payments as savings rather than an expense, that doesn't make it any less optional.

But even MMM has stated in podcasts (and possibly in his blog) that his "plan" for retirement largely is focused at middle class high(er) wage earners.  Someone making 25,000/yr will not be able to have a 70% savings rate and retire in 7 years.  He is targeting people making a significant amount of money, but are caught up in the social norm and hardly saving any of it.

With that said, nothing shared on this blog excludes anyone.  Anyone and everyone can benefit from adopting ideas presented here.  Not everyone will be able to retire in 7-10 years, but it will put them on a better path than the status quo is.

[arebelspy]

Yes, MMM's spending is nothing to be impressed with.

I completely agree with you - he's living on 25k without housing costs, which is more like 50k with housing costs, which is after tax, so at least 60k pretax income to sustain that.

So shouldn't you be able to do even better?

The impressive part (during his owrking career) isn't his spending level.  It's his savings rate.  That is, he made six figures+ and saved most of it.  He didn't inflate his lifestyle, but lived on that 40-60k and banked 60-70% of his income.

Now he can live the luxurious life he's earned.  He certainly isn't depriving himself, and never claimed he was.  The opposite, in fact, he's constantly gushing about how much luxury they have.

Since, as you point out, he's spending so much fucking money, anyone else should be able to improve on it quite easily.  ;)

To address your other point (that people don't make as much as he did): Okay.  If someone doesn't make as much as he did, they should focus on their savings rate - make less than MMM, but spend proportionally less as well, and early retire.

The wife and I, combined, make less than half what he did (both teachers, so obviously we don't make a ton).  Yet we'll be able to FIRE in our early 30s due to our savings rate.  No, we don't make what he does.  But we also don't spend like he does (we spend about 25k including, rather than excluding, housing), so we should be able to FIRE in a similar time frame (even after a six-figure mistake).

I agree with your main point - the MMM family's spending is surprisingly average.

So do it better.

:)

[tooqk4u22]

A $400k 30-year mortgage at 7% would add over $32k a year to your expenses, plus private mortgage insurance (PMI) if the bank required it, and when you add the $28k you are spending to that, you are really living on the equivalent of over $60,000 a year AFTER taxes, which is like $70,000 a year before taxes

I only point this out to say that I wouldn't say that you live on $28k a year when you live in a paid off home. In this case, $28k wouldn't even cover the mortgage.

First - 7% assumption is rather high (haven't seen a rate like that in over a decade in the US - even for bad credit) but lets go with it.

I get where you are going and it is not entirely incorrect, but there is some other points to account for, and the after tax number is not $60k it is more like $44K based two different approaches:

1. The $400K house is optional and a luxury, I think there were posts by MMM where he bought a rental property and renovated it for under $200K - so there is $200k or more that is not needed at your 7% mortgage assumption that is $16k not $32K, a $16k difference hence $44K after tax income.

2.  With the $400K at fully financed at 7%/30years - sure you have a $32k per year mortgage.  The part you are ignoring is the 4% SWR on the $400k of investments that MMM now has - so the $32k is now reduced to $16K and your $60k after-tax number is reduced in kind to $44k. 

[clearview]

But you're missing something key here. If my wife and I only spent $22.5k per year, we wouldn't need $800k to retire. We would only need $562k (4% of $562k == $22.5k). With a 7% after-inflation return and without considering the effects of dollar cost averaging, it would only take 16 years to save this much. Thus the post about how it's all about the savings rate.

Can you point me to a calculator that does this calculation for you? if there isn't one, can you tell me what formula you used? I can understand that you are assuming that you are investing the $20k each year, (a CD calculator showed me that 20,000 compounded annually at 7% would be worth over $39k after ten years for example).

Because 16 years of $20k per year comes out to $320k, so you are adding $242k in investment gains to come to $562k

How long would it take to save the $800k then?

I don't think you would want to continue living on $22,500. It would become harder and harder with kids as they grow older as well.

that article math is kind of broad and assumes a constant rate of spending through-out your life. (also i could take the other extreme, if i made $100mil one year and saved only 1%, that would be $1 mil, then I retire after one year and could adjust my spending and live off of the 4%)

Personally, I wouldn't retire income of $22k. I don't think MMM would either. Park of the reason he retired too I think is because he knew he and his wife could still supplement their income..

he mentioned that if his wife does $1.6 million in real estate sales a year (which can be as few as four $400k houses), she would make over $40k in commissions.. He also does many income-generating projects

he also had started a business building houses

[clearview]

it is more like $44K based two different approaches:

1. The $400K house is optional and a luxury, I think there were posts by MMM where he bought a rental property and renovated it for under $200K - so there is $200k or more that is not needed at your 7% mortgage assumption that is $16k not $32K, a $16k difference hence $44K after tax income.

2.  With the $400K at fully financed at 7%/30years - sure you have a $32k per year mortgage.  The part you are ignoring is the 4% SWR on the $400k of investments that MMM now has - so the $32k is now reduced to $16K and your $60k after-tax number is reduced in kind to $44k.

1- but he is living in a 400k house, therefore living a $60k life
2- i don't agree with your logic here. what does the other $400k have to do with anything? yes he makes income from it, but what your saying is like but he makes 16k from another source of income so that reduces his spending to $44k ?

[clearview]

If you put atleast 20%, you won't pay PMI. 

Anyways, I do agree with what you are getting at.  My spending is starting to reach MMM levels at around 32,000.....if I don't include my mortgage and interest.  If I include those items its at 43,000.  And while some include mortgage payments as savings rather than an expense, that doesn't make it any less optional.

But even MMM has stated in podcasts (and possibly in his blog) that his "plan" for retirement largely is focused at middle class high(er) wage earners.  Someone making 25,000/yr will not be able to have a 70% savings rate and retire in 7 years.  He is targeting people making a significant amount of money, but are caught up in the social norm and hardly saving any of it.

With that said, nothing shared on this blog excludes anyone.  Anyone and everyone can benefit from adopting ideas presented here.  Not everyone will be able to retire in 7-10 years, but it will put them on a better path than the status quo is.

20% of $400k is $80k. So you are tying up $80k to save $200/month($2,400/year).

The rental value of that is $800/month according to 1% rule, with you keeping $400/month ($4,800/year) in profit according to 50% rule.

Or if you invested it and withdrew 4% a year you would get $3,200 a year.

So in some ways, paying down the PMI is like paying-off the house; there is an opportunity cost.

I'm not saying that its unwise or that I disagree with paying off your house or paying it down to avoid PMI, I am just saying there is a hidden cost that you should be accounting for in your yearly spending.
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I agree that he present great ideas and ways of analyzing things and looking at things with a certain perspective. He's also motivating, like motivating people to learn skills to fix and make and build things themselves and to travel by bike.
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But at the same time not everything he  says applies to everyone. Like living close to your work to have a short commute

first, it won't save everyone money. lots of people have jobs in very expensive areas, and the money they save on rent or mortgage interest from living far from their work (if they can even afford to live there at all) is more than it costs to commute.

and of course there are other reasons people may not want to or be able to live close. job could be in an industrial zone far from residential housing, better schools, safer neighborhoods, family, etc...

[thepokercab]

Personally, i don't really got bogged down by all of the numbers. I've always hated math. Some people seem to like it. Sure- you can probably critique a lot of the numbers and assumptions that MMM throws around about savings rates, investment returns, real estate, etc..  It seems like a lot of the criticism about MMM and the blog in general is some variation on "the numbers just don't add up".   

Sure- that might be true.  But for me, its about the philosophy of it all- and MMM helped that little light bulb go off for me, which is that its about how much your SPEND.  If you can get that number down, you're going to get closer to financial independence- period. Doesn't matter how much you make.  In the last year, since I found MMM, my net worth has gone from hovering around $5,000 for most of my adult life to suddenly being at $40,000 and it rises every day.  Just from making some life style adjustments.  By the end of this year- my goal is to have a net work of $100,000.  If you had asked me before I found MMM if I'd have $100,000 in net worth in 2 years WITHOUT getting a single additional dollar in pay, i'd say i won the lotto, because I knew for sure that I was going to have to work until I dropped dead. 

I think its these assumptions that MMM challenges, and that what he has to say would benefit a lot of middle to high income earners.  But I think its easier for some people to just rip on the numbers, then to have their own decisions challenged- not saying anyone here is doing that, but that's what it feels like when I look through some comment sections on other websites, etc.. 

[randymarsh]

Personally, I wouldn't retire income of $22k. I don't think MMM would either. Park of the reason he retired too I think is because he knew he and his wife could still supplement their income..

It's not like MMM and his wife are the only people who can earn income without a full time job! The point is that they don't HAVE to earn more income. Their investments generate all they need to live on.

[arebelspy]

Seems like just whining and complaining.

Is there a point to this thread?

[Jamesqf]

Can you point me to a calculator that does this calculation for you? if there isn't one, can you tell me what formula you used?

Your basic HP-12c financial calculator will do it.  (Lots of emulators out there.)  Just for a ballpark estimate, assume you start from zero and invest $1500 per month ($18000/year) in the market, with a historical average return of 7%.  After a mere 20 years, you'll have a bit over $781K.  30 years of just $1000/month gives you over $1.2 million, $660/month gets you more than that $800K stash.

But at the same time not everything he  says applies to everyone. Like living close to your work to have a short commute

first, it won't save everyone money. lots of people have jobs in very expensive areas, and the money they save on rent or mortgage interest from living far from their work (if they can even afford to live there at all) is more than it costs to commute.

Sure.  The point is being aware of those choices and the tradeoffs, and not just mindlessly accept a daily 2-hour commute because "everyone does it".  You might even be able to live in a not-so-expensive house in a scenic rural area, and telecommute :-)

[the fixer]

My calculator is a spreadsheet program. The formula for this example is NPER(0.07,20,0,-562). The minus sign in there is because financial functions assume you're working with a loan, but in this case we're talking about compound interest on an accumulating asset.

I agree with you that a safety margin is important. For me that's the ability/desire to work part time as a freelancer with very low hours. Some people don't have jobs in fields that allow that kind of flexibility, so they would be better off with something else.

At this point I kinda agree with ARS that you're throwing up generalizations about people and what they can/cannot do. That's not how this works... the point is to take away what best applies to you, and use it. If you need help applying it to your situation, post a case study under Ask a Mustachian.

If you try hard enough you'll be able to come up with a hypothetical type of person for whom ANY piece of financial advice doesn't apply; so what?

[kendallf]

Seems like just whining and complaining.

Is there a point to this thread?

+1...

I'm in my late 40s, discovered MMM about a year ago, and set about righting my financial ship, plugging one leak at a time.  I have loads of areas where my expenses aren't optimized (dining out!) but I'm working on them.  Just establishing the mindset of looking for improvement in your recurring costs and divorcing your happiness from the stuff you buy is immeasurably valuable.

 You want to pick at housing costs, here's my example from the past year:  I bought a vacant, 65 year old house for $35k.  Over the past few months, I renovated it myself.  We moved into the house in October; my total outlay for renovations (including new plumbing, a new roof, and new A/C) was $12k thanks to a ton of sweat equity.  MMM's doing something similar (but more involved) right now. 

Do you want to lay out your situation and plan how to improve it?  Or keep on with being a complainypants?  :-)

[pachnik]

I'm in my late 40s, discovered MMM about a year ago, and set about righting my financial ship, plugging one leak at a time.  I have loads of areas where my expenses aren't optimized (dining out!) but I'm working on them.  Just establishing the mindset of looking for improvement in your recurring costs and divorcing your happiness from the stuff you buy is immeasurably valuable.

This is exactly where I am at too.  I am at a savings rate of 35% right now and am going to work on 40% once our move is done in mid-February.  I may never get to 50% savings.  But I am much happier having financial goals to work towards than not having any and just floating along spending money without much thought.   But I am lucky because I never got into debt and always put away at least 10-15% of my income.  Just sometimes wish I'd found MMM sooner  in life :)

Pokercab:  by the way, congratulations on your savings!  From $5,000 to $40,000.00.  WOW!!!

[oldtoyota]

I empathize with the OP here because I recall how mind blowing it was to read/learn about The Shockingly Simple Math to Early Retirement. If a person doesn't get that important point, then the big picture doesn't make as much sense. Obviously, IMO. Once I read that, all the other stuff I'd tried to do before fell into place.

My recommendation is to go read that blog post. Study it. Understand it.

[Cromacster]

Personally, I wouldn't retire income of $22k. I don't think MMM would either. Park of the reason he retired too I think is because he knew he and his wife could still supplement their income..

You're missing the big picture.  The whole idea of this isn't to bring your expenses down to nothing (or next to it) just for the sake of retiring.  It's about structuring your life in such a a way that allows you to truly do what you love.  Its challenging you to question why you are doing what you are doing.  Why are you driving 2 hrs to and from work?  Why do you have such a big house?  If you aren't making enough money, why don't you make more?

Then you also have to realize that his target audience is people who want to become financially independent and retire early (though his mantra could and should be used by everyone)

MMM went about this by making large sacrifices (debatable whether or not these were true sacrifices) while he was in his savings phase.  Much of this sacrifice is lost in his current blog postings.  He looks to be living a great life and he is, but you need to find and read blog posts about what he did in the early stages of his life.

With the perspective of what he did to get where he is, you need to look to yourself and look at what you are willing to give up, and what you truly value.  Will you just let inertia work and you keep driving 60 miles a day to work, stay in your current expensive house, keep dining out all because this is comfortable and the norm?

Or do you want to make changes, make some tough decisions, alter your life, in order to achieve a crazy savings rate that will allow you to live your life the way you see fit?

[coldcarryouts]

So, considering that MMM lives on $28k withOUT rent or a mortgage, can you save $20k a year with housing costs? Can you live on $22,500 with housing costs?

Last year my wife and I spent 29K, including housing costs. That 29K includes paying off a 6K auto loan, and paying 2K on our mortgage for a couple of months.

This can be done, but you have to actively find an approach that works for you. We have been very successful at trimming spending, and with the debts we've shed, we expect to be completely debt-free in 5 years, followed by a 65% savings rate.

We don't make a lot of money, but we're still able to look at where our money goes, locate the inefficiencies, and make changes to keep that spending as low as we can.

[lorne4664]

I'd say that this topic brings up a valid point.  mr. & mrs made 3-4 times the median household income over 9.5 years, and accumulated $800,000 between savings and investment gains during that period (over $233,000 of it from investment gains). It follows that it will likely take you 3-4 times as long to accumulate the same amount if you are only making the national average.

Mr. & Mrs. MMM are no doubt very remarkable and hard-working in that they saved this much and retired by Age 30(by working, not by winning the lottery or creating some business or product that took off)

I've done the math and come up with them spending over $66,000 a year during the nine and half years they worked. There was a new car and a new motorcycle, vacations to mexico, hawaii, new zealand, australia, etc..

Here is the math:

Year: Salary + investment gains
0 - 1: 90,300  (assuming $41,000 x 1.5 years  +  57,600 x .5 years =$61,500 + $28,800 )
2:  57,600
3:  77,000 + 7,000 ($3000 of stocks bought in year 2 sold for $10,000 in year 3)
4:  127,000  + 10,000 (employer matching $5,000 for each of them) (+ unknown investment gains)
5:  160,000  (+ employers probably still matching $5,000 for both + unknown investment gains)
6:  170,000 + 20,000 (+ employers probably still matching $5,000 each in both retirement accounts)
7:  170,000 + 30,000 (+ employers probably still matching $5,000 each in both )
8:  154,000 + 40,000 (+ employers probably still matching $5,000 each in both )
9:  110,000 + 135,000 (+ possible employer matching $5,000 in Mrs. MMM's retirement account)
10: 80,000 after spending

Salaries + Investment gains

$1,195,900 + $233,000 (not counting unknowns)

= $1,428,900 is how much they made in those 9.5 years not counting unknown investment gains and not counting $10,000 in 401k-matching in both of their jobs years 5 through 8 & Mrs. MMM in year 9

- $800,000 which is how much they had left of it

= $628,900  is how much they spent (again not counting unknown investment gains and employer-matching that they most likely had during years 5 through 9)

divided by 9.5 years

= $66,200/year was their average spending (plus the previously mentioned unknown income)

and $800,000 divided by 9.5 years = $84,210/year was their average savings + gains from investments + employer matching of their 401Ks

I also did not assume yearly raises when they weren't mentioned. I did make some conservative estimates when exact figures weren't given. For example, Mr. MMM stated that his salary with bonuses was $100,000 in year 5, while Mrs. MMM made $60,000, for a total of $160,000, so in year 6 and 7 when he said salary went up "slightly" and Mrs. MMM salary increased by $5,000, I conservatively estimated that they made $170,000. Also he said that he got a raise "some time" during year 1, so I assumed halfway through

Additional analysis:

***$1,428,900 of income divided by 9.5 years comes out to an average income of $150,410 a year, so they did in fact average over $150,000 a year during their working careers.

**** They spent about $66,000 a year, while accumulating about $84,000 a year from savings+investing+pensions
----------- $66,000 is 44% of $150,000 spending,  while $84,000 is 56% savings/gains

*** $800,000 - $233,000 investment gains (not counting unknown)  = $567,000 of direct savings
---------- that comes out to $59,684 per year of direct savings, while $24,526 came from from investment gains
------------ that comes out to 29.125% of the $800,000 net worth came from investment gains

***567,000 in savings comes out to 47% of the $1,195,900 they had earned in salaries. So, $567,000 or 47% is how much money they actually put away from their earnings, the rest was from favorable returns on investments and employer pensions

[matchewed]

Why are these things valid points? What is the dissection of MMM's finances via assumptions intended to do? It doesn't change the message nor the value of what he states.

The basic tenets are still applicable. High savings rate, minimize expenses...etc.

[arebelspy]

Yeah, I'm not getting what the point of the last post was.

Okay, so your math proves... he did it?

Awesome.

And the complaint is he did it while spending a lot (66k while working, the equivalent of 50k now, with 25k housing and 25k other)?  Great, should be easier for you.

Your complaint is that he made lots of money?  Okay, go out and earn more yourself.  Even if you don't, just by scaling down the spending you should be able to FIRE in the same amount of time.

He did it by age 30 with 160k income?  Well if you make half that (80k) but spend half what he did (33k), you should be able to do the same.

As I said above:

The impressive part (during his owrking career) isn't his spending level.  It's his savings rate.  That is, he made six figures+ and saved most of it.  He didn't inflate his lifestyle, but lived on that 40-60k and banked 60-70% of his income.

Now go and use his example to do it even better.  :)

[lorne4664]

Why are these things valid points? What is the dissection of MMM's finances via assumptions intended to do? It doesn't change the message nor the value of what he states.

The basic tenets are still applicable. High savings rate, minimize expenses...etc.

some of the points made were that it was the high income and favorable investment returns much more so than low spending that led to his wealth, or more like continuing to spend the same amount even as income increased (it's not difficult to live on a $66,000/year budget), and another of the points was that living on $28,000/year in a paid-off house can't be described as "living on $28,000 a year" period.

An analogy or simile might be
person A: makes $28,000/year and gets employer provided health insurance.
Person B: makes $28,000/year and pays $3,000 a year for the same health insurance.
It is as if Person A is making $31,000 a year.

now how about if person A got to live in a $400,000 house for free as a benefit? How do the two compare then?


The numbers aren't assumptions, the numbers are pulled directly from the blog-post.

(only some small blanks were filled in by very small & conservative assumptions. I left out potentially $45,000 in employer-matching and tens of thousands in investment gains in years which he didn't provide them. like assumption that sometime during year 1 meant halfway through, and the assumption that a "slight raise" to his 2005 salary of $100,000 due to a bigger bonus meant his salary went from $100,000 to $105,000 in years 6 and 7. then he said he took a 20% cut in exchange for a 4-day workweek in year 8, so i deducted 20% from his salary, even though he says he might have still ended up making as much as $125,000 that year)

I never said that it changes the message or value of what he says.

I never said the basic tenets aren't applicable. Even in the worst case, where you don't retire early at all, its better to retire with a nest-egg than not.

[lorne4664]

Yeah, I'm not getting what the point of the last post was.

Okay, so your math proves... he did it?

Awesome.

And the complaint is he did it while spending a lot (66k while working, the equivalent of 50k now, with 25k housing and 25k other)?  Great, should be easier for you.

Your complaint is that he made lots of money?  Okay, go out and earn more yourself.  Even if you don't, just by scaling down the spending you should be able to FIRE in the same amount of time.

He did it by age 30 with 160k income?  Well if you make half that (80k) but spend half what he did (33k), you should be able to do the same.

As I said above:

The impressive part (during his owrking career) isn't his spending level.  It's his savings rate.  That is, he made six figures+ and saved most of it.  He didn't inflate his lifestyle, but lived on that 40-60k and banked 60-70% of his income.

Now go and use his example to do it even better.  :)

Its seems that you interpret every comment, discussion,  or opinion as a complaint.

why do you consider every observation as a complaint?

Actually I find it more encouraging & inspiring that he was able to accumulate so much in so little time while spending generously/normally. 

It appears that you are the one who is critical. Perhaps you belong to the "complaint police", who are not unlike the "retirement police" ?


and your math is not sound.

160- 66 = 94
80 - 33 = 47

making half as much and spending half as much, you save half as much, not "the same".


and the math shows that he didn't save as much as you quoted yourself saying earlier ("but lived on that 40-60k and banked 60-70% of his income")

[arebelspy]

Its seems that you interpret every comment, discussion,  or opinion as a complaint.

why do you consider every observation as a complaint?

This whole thread is based around the idea that MMM's idea is not feasible for most people.

Did you even read the OP?  OP specifically said (for the section preceeding about half his post):

So now to the "complainypants" portion..

Your math, as I pointed out, just proves it's possible.

Then I went on to address the common complaints as to the math: MMM spends more than is admitted due to the imputed rent not mentioned in his spending (basically OP's complaint), and MMM made too much money.

and your math is not sound.

160- 66 = 94
80 - 33 = 47

making half as much and spending half as much, you save half as much, not "the same".

My math is sound, your reading comprehension is not.

I didn't say you would save "the same."  I said:

He did it by age 30 with 160k income?  Well if you make half that (80k) but spend half what he did (33k), you should be able to do the same.

You should be able to do the same (i.e. retire in a similar time frame).  Not save the same.  The reason why is because you will save half of what he does (as you point out), but you will need half of what he does.  It's proportional, and I promise you the math works out.   If you make half what he does, but also spend half what he does, you will be able to FIRE in the same amount of time, due to needing less.  :)

[lorne4664]

My math is sound, your reading comprehension is not.

I didn't say you would save "the same."  I said:

He did it by age 30 with 160k income?  Well if you make half that (80k) but spend half what he did (33k), you should be able to do the same.

You should be able to do the same (i.e. retire in a similar time frame).  Not save the same.  The reason why is because you will save half of what he does (as you point out), but you will need half of what he does.  It's proportional, and I promise you the math works out.   If you make half what he does, but also spend half what he does, you will be able to FIRE in the same amount of time, due to needing less.  :)

Interpretation of what "do the same" means aside, if you were living on $33,000 a year ($80,000 - $47,000), you need $800,000 to have a safe withdrawal rate (SWR) of $32,000 (4%) , so you would need to accumulate the same amount as them of 800,000 to live on. So regardless of what you really meant, either way, your math was not sound.

[arebelspy]

I haven't personally bothered to pick through every post looking for their exact numbers, because those aren't that interesting to me.

What you're saying then is that they have equivalent to an 8% SWR?

I actually believe they acquired 1.2MM, rather than 800k, because of the 400k paid off house, so it's likely lower than that

/shrug

The point of that part of my post, which you seem to be nitpicking on for some reason, is that you don't have to make as much as MMM - you can spend proportionally less, and thus you need to acquire proportionally less.

It's pretty simple math - spend half of what they did, you'll need half of what they do.  (This does rely on the assumption that you are comfortable with the same SWR as them, yes.)

The overall point of my post is that it seems like the math, for MMM, is pretty clean - it shows he did it.  It even shows it can be optimized more (and plenty here on the forums are doing so).

I guess I'm just confused as to the point of your post (I understand the OPs).  You clearly spent quite a bit of time to go through the posts and figure out MMM's path to ER, rather than just using the hypothetical "Math Behind Early Retirement" which works for any scenario.  Why, exactly?   What insights do you have for us, from that data? What can we learn from it?

I'm not trying to be critical, just confused as to what your point is with all those numbers.  :)

[lorne4664]

I haven't personally bothered to pick through every post looking for their exact numbers, because those aren't that interesting to me.

What you're saying then is that they have equivalent to an 8% SWR?

I actually believe they acquired 1.2MM, rather than 800k, because of the 400k paid off house, so it's likely lower than that

/shrug

The point of that part of my post, which you seem to be nitpicking on for some reason, is that you don't have to make as much as MMM - you can spend proportionally less, and thus you need to acquire proportionally less.

It's pretty simple math - spend half of what they did, you'll need half of what they do.  (This does rely on the assumption that you are comfortable with the same SWR as them, yes.)

The overall point of my post is that it seems like the math, for MMM, is pretty clean - it shows he did it.  It even shows it can be optimized more (and plenty here on the forums are doing so).

I guess I'm just confused as to the point of your post (I understand the OPs).  You clearly spent quite a bit of time to go through the posts and figure out MMM's path to ER, rather than just using the hypothetical "Math Behind Early Retirement" which works for any scenario.  Why, exactly?   What insights do you have for us, from that data? What can we learn from it?

I'm not trying to be critical, just confused as to what your point is with all those numbers.  :)

well he's now spending $28,000, not the $66,000 he spent when they were working, so that's part of the reason why he can do 4% rather than 8%. plus, 4% is the *safe* withdrawal rate (a rate that you can safely withdraw forever without ever diminishing the capital, as it is less than the gains on that capital, like living on the interest). Plus i believe he has a much higher actual return rate, it's just that he only spends about $28,000 a year. I think

I guess they are interesting to me. Why? I guess a study/research? I wanted to see how it added up and how it agreed with what is being said. like a statistical analysis..

I found some interesting things looking at it that way, as he had only provided the size of his "stache" at the end of each year, I wanted to analyze the other information..

There was more stuff I started to notice looking at the data this way that you can't tell otherwise..

In Year 1 he saved he was on a $41,000 salary for part of the year, and saved $5,000. but he had bought and paid off a $16,000 car, and "frequent bar-and-restaurant-hopping, purchases of computer equipment and furniture, accessories for my car, and a trip to a resort in Mexico"

But in year 2, with the $57,000 salary all year long, without buying a car or furniture,  he only added $18,000 to it. when you account even for just the $16,000 car, if he had spent exactly the same, he would have saved $21,000 (16 +5)


There are people who analyze all sorts of things, from sports stats to celebrities .. what one person is curious about, another isn't


I also wanted to see how the percentages reconciled with the claims. For example some claim that he saved 70%, but according to my analysis, he actually only saved/invested about 47% (567,000), but the rest (233,000) came from investment gains. for example his first house appreciated $100,000. Some stocks he purchased for $3,000 in year 2 sold for $10,000 in year 3 (more than tripled in one year)

When you analyze the raw data, you see the big picture.. A couple that spent about $66,000 a year and saved/invested the rest wisely, luckily and favorably.


As for being worth $1.2 million, I don't know about now, about 9 years after year 10, but he was counting his home equity before in 800,000. But the $400,000 house is today, he bought it for less, it appreciated due to time and improvements. He and his wife have had significant additional income in the nine years since. for example, Starting in year 10 itself, he bought a third house and rented the second in addition to the first already being rented out. He mentioned $2,400 a month in rent, i'm not sure if that is for one house or for both the first and second, but even if it's for both, that's alone is about $28,000 in rent a year. I think the house are worth around 200,000 each, so 28,000 is a return of 7% on the rentals alone, he also has other investment income (vanguard account i believe).. and he does carpentry and metalwork and building and construction and remodeling, his wife works part time as a real estate agent and had a part time job for some company, possibly working from home, i don't know how much she made, but it did pay for phone, internet, and health care.. also he makes money from this blog.. every year that he makes more than he spends, it adds to his NW.. he could very well be worth over $1.2 mil by now.

[arebelspy]

I guess I'm just confused as to the point of your post (I understand the OPs).  You clearly spent quite a bit of time to go through the posts and figure out MMM's path to ER, rather than just using the hypothetical "Math Behind Early Retirement" which works for any scenario.  Why, exactly?   What insights do you have for us, from that data? What can we learn from it?

I'm not trying to be critical, just confused as to what your point is with all those numbers.  :)

Okay, so my first question was answered: it's a hobby for you to look at their spending and run the numbers on it.

I'm still curious about the second two.  :)

Is there any way I can apply this knowledge?  I guess I'm a practical person.  The theoretical helps because I can instantly see how it applies to me.  I'm not sure how this does.

Thanks for answering though!

To me it's just an inspiration to be able to build upon and do it better.  Like you said earlier:

Actually I find it more encouraging & inspiring that he was able to accumulate so much in so little time while spending generously/normally. 

[lorne4664]

Okay, so my first question was answered: it's a hobby for you to look at their spending and run the numbers on it.

I'm still curious about the second two.  :)

Is there any way I can apply this knowledge?  I guess I'm a practical person.  The theoretical helps because I can instantly see how it applies to me.  I'm not sure how this does.

Thanks for answering though!

To me it's just an inspiration to be able to build upon and do it better. 

i'm guessing by the other two you mean

   What insights do you have for us, from that data? What can we learn from it?

??

I guess I think seeing how they did it can help us learn how to do the same thing. It can make it seem less challenging and more achievable, and as you said, maybe we can even improve on it. It makes it simple.

you can also learn the benefit and difference investing makes; if they had simply saved money in a savings account , they would have only had 567,000, and there would be no annual returns to live off of.

But the truth is, they have made far fewer mistakes and become much more frugal and financially savvy since they retired, and you will learn a lot more on the savings side of things by reading their blog and reading about their lives since retiring.

Being retired also gives them more time to shop around, plan, and find new ways to save money.

Also, a lot of times the biggest costs in a vacation are the transportation costs, so when you are retired you can take a much longer vacation for almost the same cost as the shorter ones working people have to take. In his case he also can rent out his house while on vacation and find someone to stay with for free at his destination in exchange for some of his skilled services

[Eric]

Here is the math:

Year: Salary + investment gains
0 - 1: 90,300  (assuming $41,000 x 1.5 years  +  57,600 x .5 years =$61,500 + $28,800 )
2:  57,600
3:  77,000 + 7,000 ($3000 of stocks bought in year 2 sold for $10,000 in year 3)
4:  127,000  + 10,000 (employer matching $5,000 for each of them) (+ unknown investment gains)
5:  160,000  (+ employers probably still matching $5,000 for both + unknown investment gains)
6:  170,000 + 20,000 (+ employers probably still matching $5,000 each in both retirement accounts)
7:  170,000 + 30,000 (+ employers probably still matching $5,000 each in both )
8:  154,000 + 40,000 (+ employers probably still matching $5,000 each in both )
9:  110,000 + 135,000 (+ possible employer matching $5,000 in Mrs. MMM's retirement account)
10: 80,000 after spending

Salaries + Investment gains

$1,195,900 + $233,000 (not counting unknowns)

= $1,428,900 is how much they made in those 9.5 years not counting unknown investment gains and not counting $10,000 in 401k-matching in both of their jobs years 5 through 8 & Mrs. MMM in year 9

- $800,000 which is how much they had left of it

= $628,900  is how much they spent (again not counting unknown investment gains and employer-matching that they most likely had during years 5 through 9)

divided by 9.5 years

= $66,200/year was their average spending (plus the previously mentioned unknown income)

I think you're missing taxes.  I'm under the impression that the salary figures he gives are gross.  So it looks like you're including taxes in your $66K of spending.  I personally don't classify taxes as spending, but your calculations may differ.

[dragoncar]

Here is the math:

[snip]

I think you're missing taxes.  I'm under the impression that the salary figures he gives are gross.  So it looks like you're including taxes in your $66K of spending.  I personally don't classify taxes as spending, but your calculations may differ.

I was also wondering about taxes

[arebelspy]

Good point.  If spending was 66k including taxes (or, in other words, it would take 66k pretax to sustain that lifestyle), one making less could scale a little better, as they'd pay less tax proportionally.

[fiveoh]

I'm still trying to figure out the point of this thread and if the OP is a troll or not. 

[Jamesqf]

Good point.  If spending was 66k including taxes (or, in other words, it would take 66k pretax to sustain that lifestyle), one making less could scale a little better, as they'd pay less tax proportionally.

Actually quite a bit better, as they'd be a tax bracket or two lower, they could put proportionately more in tax-advantaged things like IRA & 401k plans, etc.  And needing less to live on in retirement, less of their 4% withdrawal from stash would go for taxes.

[mm1970]

Please don't just focus on the numbers and examples, but the general idea, the big picture.

Even with $53k a year, and you don't own your home free-and-clear, lets say you pay only 15% in taxes, so you are left with $42,500 a year.. So, considering that MMM lives on $28k withOUT rent or a mortgage, can you save $20k a year with housing costs? Can you live on $22,500 with housing costs?  It will take you 40 years of saving $20k to save $800k. Most likely you will work until Social Security kicks in or at least until you pay off your house. (well, actually most likely you won't even be able to save $20k a year out of $42k to begin with)

And I haven't mentioned that a person working has lots more work-related expenses than a semi-retired person with a mostly passive income. Even if the expenses are deductible they just reduce your taxes (if your tax is 15% then each one dollar will save you only 15 cents in taxes), but most aren't deductible. These expenses, especially commuting, add up to a few thousand a year
___________________________________________________________________
PMI isn't optional. Banks make you pay for it. It's insurance for them. Sometimes they'll waive it with a big down-payment (over 20% I believe).

Anyway, I wasn't making "objections" about the real estate, I was simply saying that living on $28k with a paid-off $400k-house, isn't living on $28k . Its like living on $60k after taxes. That's all i'm saying. (you could argue that its like 50 or 52, but that's missing the point)

you have to factor in the "cost" of sitting on that $400k that you would otherwise be investing, which, according to posts on MMM, 1%-rent rule is $4k a month in rent, and according to the 50% rule he would spend $2,000 on taxes, repairs and maintenance, months when the properties are vacant, legal costs, etc.. and keep the other $2,000

PMI is optional.  You don't pay it if you put down more than 20%.

This used to be the norm.  Then banks started letting people get away without putting 20% down, people stopped waiting until they could put 20% down, which for most people is just downright stupid.

If you do not  put 20% down because you don't have the cash?  You really have no business buying a house.

[clearview]

PMI is optional.  You don't pay it if you put down more than 20%.

This used to be the norm.  Then banks started letting people get away without putting 20% down, people stopped waiting until they could put 20% down, which for most people is just downright stupid.

If you do not  put 20% down because you don't have the cash?  You really have no business buying a house.

I already addressed this

20% of $400k is $80k. So you are tying up $80k to save $200/month($2,400/year).

The rental value of that is $800/month according to 1% rule, with you keeping $400/month ($4,800/year) in profit according to 50% rule.

Or if you invested it and withdrew 4% a year you would get $3,200 a year.

So in some ways, paying down the PMI is like paying-off the house; there is an opportunity cost.

I'm not saying that its unwise or that I disagree with paying off your house or paying it down to avoid PMI, I am just saying there is a hidden cost that you should be accounting for in your yearly spending.

I don't know why people are arguing about this , and why they are focusing on the PMI, which is a fraction of what the mortgage would be.

MMM himself in one comment on the blog-post admitted that he considers living in a $400k house to cost him $24k a year in lost investment

"Mr. Money Mustache January 12, 2014 at 8:19 pm #

.... And my “rent” is hidden by the fact that I have a house with no mortgage. Really you could could add in $24,000 per year to these expenses to account for the value of living in this house, and the effect would be roughly the same if I sold the house, invested the money, and spent the $24,000 of investment cashflow on renting a house or apartment."

[arebelspy]

If you do not  put 20% down because you don't have the cash?  You really have no business buying a house.

I disagree with that blanket statement.  Sometimes putting down 3.5% and paying PMI over renting can be a very smart move.  :)

[mm1970]

If you do not  put 20% down because you don't have the cash?  You really have no business buying a house.

I disagree with that blanket statement.  Sometimes putting down 3.5% and paying PMI over renting can be a very smart move.  :)

Sorry, you are right about that. I was thinking more along the lines of the places that I've lived as an adult, where mortgages are always more expensive than rent.

I forget that there are places in the country where the opposite is true. Like my husband's home down (though NY state taxes are high enough, not sure if that evens it out).

[arebelspy]

Gotcha, makes sense!  :)

[oldtoyota]

But at the same time not everything he  says applies to everyone. Like living close to your work to have a short commute

first, it won't save everyone money. lots of people have jobs in very expensive areas, and the money they save on rent or mortgage interest from living far from their work (if they can even afford to live there at all) is more than it costs to commute.

True. So, just don't do it and ignore those you tell you to live close to work.

I've had people here tell me I'll develop CVD if I don't bike to work like them, that I am "not thinking" because I don't want to bike, and that I should move closer to work in DC or move away from DC (where, of course, I could find a lower paying job!).

Take what you can use and toss the rest. =-)

[foobar]

It is a bit of a troll but the main point is that when you add in the housing cost, MMM is living a pretty standard middle class lifestyle with a pretty standard middle class income.  How was he able to save the money to this? Because he and his wife had high paying jobs and they choose to live like middle class people instead of rich ones. Can the middle class person do the same thing by living like a poor person? To some extend sure but that is a lot different tradeoffs. 

I'm still trying to figure out the point of this thread and if the OP is a troll or not.

[MayDay]

It is a bit of a troll but the main point is that when you add in the housing cost, MMM is living a pretty standard middle class lifestyle with a pretty standard middle class income.  How was he able to save the money to this? Because he and his wife had high paying jobs and they choose to live like middle class people instead of rich ones. Can the middle class person do the same thing by living like a poor person? To some extend sure but that is a lot different tradeoffs. 

I'm still trying to figure out the point of this thread and if the OP is a troll or not.

This is my takeaway.  That and they have virtually zero medical expenses. 

[steveo]

It is a bit of a troll but the main point is that when you add in the housing cost, MMM is living a pretty standard middle class lifestyle with a pretty standard middle class income.  How was he able to save the money to this? Because he and his wife had high paying jobs and they choose to live like middle class people instead of rich ones. Can the middle class person do the same thing by living like a poor person? To some extend sure but that is a lot different tradeoffs.

I think that the lifestyle expenses that the MMM family have aren't really that high. I don't think they live a typical middle class life because they do without some stuff. For instance they do without eating out and they don't overspend on cars, clothes and housing. I also bet MMM doesn't have a brand new top of the line bike.

I think choosing to just minimise your spending can get you retired a lot earlier.

I've been on holidays from work for about 6 weeks. Prior to leaving a bunch of staff went out just before Christmas. One guy shouted expensive (at least to me) food and drink. That sort of spending will leave you broke.

[mamagoose]

I'm amazed at how little our family of three spends on going out to eat now that we have a little one in tow. As DINKs it was no big deal to go out to eat several times a day, several days a week. Subway cookies here, happy hour there, weekend brunches... now the logistical hurdle of bringing a baby has deterred us (it should really be code to install baby changing stations in restrooms!) and we eat at home most of the time, only going out maybe once or twice a week and it's usually if we're already out of the house like for a doctor's appointment. Maybe it's just one of those things that changes when you become parents, but I'm liking it a lot, bigger balances in the checking account at the end of the month are nice! :)

[foobar]

There income is about the same. MMM spends it on an expensive house (400k if i remember, average house is closer to 200k) and less on other things. Nothing wrong with that(you can argue the house is a quasi asset) but that is pretty much a personal choice. If eating at the outback gives you more joy than having an addef 1500 sq, your choice in my book.

The general point is that if you are living like MMM and making 60k/yr (i.e. somewhere around the national average), your not retiring anytime soon.  You either have to slash expenses or up your income.  And beyond a certain point people are loath to cut expenses.   

It is a bit of a troll but the main point is that when you add in the housing cost, MMM is living a pretty standard middle class lifestyle with a pretty standard middle class income.  How was he able to save the money to this? Because he and his wife had high paying jobs and they choose to live like middle class people instead of rich ones. Can the middle class person do the same thing by living like a poor person? To some extend sure but that is a lot different tradeoffs.

I think that the lifestyle expenses that the MMM family have aren't really that high. I don't think they live a typical middle class life because they do without some stuff. For instance they do without eating out and they don't overspend on cars, clothes and housing. I also bet MMM doesn't have a brand new top of the line bike.

I think choosing to just minimise your spending can get you retired a lot earlier.

I've been on holidays from work for about 6 weeks. Prior to leaving a bunch of staff went out just before Christmas. One guy shouted expensive (at least to me) food and drink. That sort of spending will leave you broke.